NISM SERIES XA - INVESTMENT

ADVISER LEVEL - 1 EXAM

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NISM XA – INVESTMENT ADVISER LEVEL 1 EXAM

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I. Introduction to Financial Markets

The Indian Economy

The Indian economy has gone through phases of growth and change that has transformed it from being a primarily
agriculture-oriented economy to one where services and manufacturing contribute to 3/4th of its gross domestic
product. The banking sector provides credit at efficient costs, secure systems for transactions and transfer of funds
and the means to channelize savings of the economy in productive ways. Securities markets allow businesses seeking
funds to reach out to a wider group of institutional and retail investors by issuing different types of securities, such
as equity and debt securities, with different features of risk and return. The foreign exchange markets provide a
platform for trading in the currencies of countries which in turn determines the costs of import of funds and
commodities essential for production and enables global investing. The commodity markets enable mitigating the
risk of adverse price movements in commodities to producers and users. A well-developed insurance market is
necessary to ensure adequate insurance cover for people. Insurance is important to protect people’s finances from
emergencies of large expenses or loss of income. This enables higher savings and investments. All these markets
need to be well developed in terms of systems and regulations to enable economic growth.

Structure of Financial Markets

Financial
Market

Securities
Money Market
Market

Organised Unorganised Secondary

Primary Market
Money Market Money Market Market

Short Term Moeny Lenders/

Lending/ Indigeneous
Borrowing Bankers
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Structure of Financial Markets in India

Banking System
The banking system is at the core of the financial structure of an economy. It enables capital growth and formation
through financial intermediation by accumulating savings. The Indian banking has a multi-tier structure. The Reserve
Bank of India is the regulator of the banking system and the monetary authority. The primary function of the banking
system is to accept deposits and make credit available to those entities that qualify for it. The banks also provide a
secure system for settling financial transactions of their customers through a system of cheques and electronic
payment systems.

Securities Market
The securities market provides an institutional structure that enables a more efficient flow of capital in the economy.
This basic arrangement in the securities markets enables flow of capital from households to business, in a regulated
institutionalized framework. Securities are issued by companies, financial institutions or the government. They are
purchased by investors who have the money to invest. Security ownership allows investors to convert their savings
into financial assets which provide a return.

Commodities Market
A commodity market facilitates transactions between buyers and sellers of commodities. These could be agriculture
based commodities, commodities for industrial use such as metals and minerals, gas and oil for consumption or
production and precious metals for investment or industrial use. Forwards and futures in commodities help
producers and consumers of the commodity to hedge against the risk of adverse price movements in the future. It
helps them streamline and accurately estimate the demand and supply of commodities

Foreign Exchange Markets

The growth of international trade made it necessary to be able to determine the relative value of currencies given
the differences in their purchasing power. The need for exchanging one currency to another for settling trades in
goods and services brought about the term foreign exchange. The RBI publishes a reference rate for each currency
pair based on the bid and offer rates of a set of banks. The reference rate is available for every week day.

Insurance Markets
The Indian insurance market consists of the life insurance segment and the general insurance segment. The life
insurance sector was opened to private service providers in 2001. The Insurance Regulatory and Development
Authority of India (IRDAI) regulates the insurance sector including registering insurance companies, clearing
insurance products, licensing and establishing norms for the intermediaries and protecting policy holders’ interest.

Pension Market
A growing elderly population and a large unorganized employment market are two primary factors that define the
pension industry in India. The government’s pension plan has moved from defined benefit structure to a defined
contribution structure, where the employee and the employer contribute to the pension fund and the pension
received on retirement will depend upon the fund accumulated. The retirement benefits in the private sector are
primarily covered by the Employee Provident Fund administered and supervised by the Employee Provident Fund
Organization with contributions made both by the employee and the employer. The Pension Fund Regulatory and
Development Authority (PFRDA) is the regulator of the pension market.
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Role Of Participants In Securities Market:

 Securities Exchanges provide the infrastructure for trading in securities that have been issued at prices that
reflect its current value. The existence of the stock exchange system helps the stakeholders
(investors/corporates) in getting a fair valuation on their investment. It also provides liquidity to the
investors when they require funds and encourages investors to invest when issuers raise funds.
 Depository participants enable investors to hold and transact in securities in the dematerialised form.
Demat securities are held by depositories, where they are admitted for dematerialisation after the issuer
applies to the depository and pays a fee. DPs open investor accounts, in which they hold the securities that
they have bought in dematerialised form.
 Custodians typically work with institutional investors. They hold securities and manage bank accounts on
behalf of the institutional investors. They manage the transactions pertaining to delivery of securities and
money after a trade is made through the broker, and also keeps the accounts of securities and money.
 Stock brokers are registered trading members of stock exchanges. They sell new issuance of securities to
investors. They put through the buy and sell transactions of investors on stock exchanges. All secondary
market transactions on stock exchanges have to be conducted through registered brokers.
 Investment Banks are financial entities that provide strategic advice to companies, governments and others
on their capital requirements and investment decisions and arrange raising such funds on terms that are
most suitable to the company. Their activities include advisory services for business expansions, project
financing, mergers and acquisition, among others.
 Commercial Banks provide banking services of taking deposits, providing credit and enabling payment
services. They provide efficient cash management for businesses and meet their short-term financing needs
through facilities such as over drafts and bills discounting. They also provide term financing for projects.
 Insurance Companies provide service of insuring against unexpected and large charge. Life insurance
companies deal with insuring the life of individuals while general insurance covers other areas, where a
sudden large expense can derail the financial situation of a household or business.
 Pension Funds who are authorized to take contributions from eligible individuals and invest these funds
according to the directions of the contributors to create a retirement corpus. These funds provide different
options for investment of the contribution, such as debt, equity or a combination.
 Asset Management Companies and Portfolio Managers are investment specialists who offer their services
in selecting and managing a portfolio of securities (‘Portfolio’ is the collective noun for securities. A portfolio
holds multiple securities). Asset management companies are permitted to offer securities (called ‘units’) that
represent participation in a pool of money, which is used to create the portfolio of a mutual fund.
 Investment Advisers and distributors work with investors to help them make a choice of securities that they
can buy, based on an assessment of their needs, time horizon return expectation and ability to bear risk.

Regulators of Financial Markets

Ministry Of Finance: The Ministry of Finance through its Department of Financial Services regulates and overseas the
activities of the banking system, insurance and pension sectors. The Department of Economic Affairs regulates the
capital markets and its participants.
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Ministry Of Corporate Affairs: The Ministry of Corporate Affairs regulates the functioning of the corporate sector.
The Companies Act, 2013 is the primary regulation which defines the setting up of companies, their functioning and
audit and control. The issuance of securities by companies is also subject to provisions of the Companies Act.

Registrar Of Companies: The Registrar of Companies (RoC) is the authority appointed under the Companies Act to
register companies and to ensure that they comply with the provisions of the law.

Reserve Bank of India: The Reserve Bank of India regulates the money market segment of securities market. As the
manager of the government’s borrowing program, RBI is the issue manager for the government. It controls and
regulates the government securities market. RBI is also the regulator of the Indian banking system and ensures that
banks follow prudential norms in their operations.

Securities and Exchange Board of India: The Securities and Exchange Board of India (SEBI), a statutory body
appointed by an Act of Parliament (SEBI Act, 1992), is the primary regulator of securities markets in India. The main
objective of SEBI is to facilitate growth and development of the capital markets and to ensure that the interests of
investors are protected.

Insurance Regulatory and Development Authority of India: IRDAI regulates the insurance sector in India in
accordance with the terms of the IRDA Act of 1999. IRDAI is the licensing authority for insurance companies and
defines the capital and net worth requirements for insurance companies. It regulates the distribution of insurance
products by laying down the qualification and training requirements of intermediaries and the payment of
commission to distributors.

Pension Fund Regulatory and Development Authority: The PFRDA is the authority entrusted to act as a regulator of
the pension sector in India under the PFRDA Act, 2013. It is responsible for registering the various constituents such
as the fund managers, custodians, and central recordkeeping agency and trustee banks and to define the parameters
of their roles and responsibilities.

II. Securities Market Segments

Primary Market

The capital of a company is brought in by the promoters and their associates in the initial stages. As the requirement
for additional funds go up, it may be necessary to source funds from a wider group of investors. The primary market
refers to the market where equity or debt funds are raised by companies from ‘outside’ investors through an offer of
securities. The issuance of securities in the primary markets expands the reach of an issuer and makes long-term
capital available to the issuer from a larger number of investors.
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Functions of Primary Markets:

 Access to wider markets and investors: A primary market issue enables participation of a wider group of
investors. Companies move away from known sources of funding that may be restrictive in terms of the
amount available or the terms at which capital may be made available.
 Transparent Pricing mechanism: Securities are issued for public subscription, at a price that is determined
by the demand and supply conditions in the market and the perceived fundamental strengths of the issuer
to honour their commitments.
 Ownership diversification: As new subscribers of equity capital come in, the stakes of existing shareholders
reduces and the ownership of the business becomes more broad-based and diversified.
 Better disclosures: A business that seeks to raise capital from new investors, who may not be familiar with
the history and working of the enterprise, has to meet higher standards of disclosure and transparency.
 Evaluation by investors: An issuer that raises money from outside investors is evaluated by a large number
of prospective investors.
 Exit for Early Investors: Primary markets provide an exit option for promoters, private and other investors
who subscribed to the initial capital issued by the company to fund the early requirements for capital.
 Liquidity for securities: A primary market issue opens up the secondary market where the securities can be
bought and sold between investors easily in small and large quantities.
 Regulatory supervision: Securities newly issued come under comprehensive regulatory supervision. The
objective is to protect the interest of investors

Types of Issue:

 Public Issue: Securities are issued to the members of the public, and anyone eligible to invest can
participate in the issue. This is primarily retail issue of securities.
 Private Placement: Securities are issued to a select set of investors who can bid and purchase the securities
on offer. This is primarily a wholesale issue of securities to institutional investors by an unlisted company.
 Preferential Issue: A private placement of securities by a listed company is called a preferential issue.
Securities are issued to an identified set of investors, on preferential terms, along with or Independent of a
public issue.
 Qualified Institutional Placement: A private placement of securities by a listed company to a set of
institutional investors such as qualified institutional buyers is a qualified institutional placement (QIP).
 Rights and Bonus Issue: Securities are issued to existing investors as on a specific cut-off date, enabling them
to buy more securities at a specific price (rights) or get an allotment of additional shares without any
consideration (bonus).

Types of Issuers:

 Central, State and Local governments

 Public Sector Units
 Private Sector companies
 Banks, Financial Institutions and NBFCs
 Mutual Funds
 Real Estate Investment Trusts
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Types of Investors:

 Resident individuals
 Hindu Undivided Family (HUF)
 Minors through guardians
 Registered societies and clubs
 Non-resident Indians (NRI) and Persons of Indian Origin (PIO)
 Banks and Financial institutions
 Association of persons
 Companies, Partnership firms (LLPs) and Trusts
 Foreign portfolio investors (FPIs)

Types of Public Issue of Equity Shares:

1. Initial Public Offer (IPO)

 Fresh Issue of Shares: New shares are issued by the company to public investors. The issued share capital of
the company increases. The percentage holding of existing shareholders will come down due to the issuance
of new shares.
 Offer for Sale: Existing shareholders such as promoters or financial institutions offer a part of their holding
to the public investors. The share capital of the company does not change since the company is not making a
new issue of shares.

2. Follow On Public Offer (FPO)

A follow-on public offer is made by an issuer that has already made an IPO in the past and now makes a further issue
of securities to the public. When a company wants additional capital for growth or to redo its capital structure by
retiring debt, it raises equity capital through a fresh issue of capital in a follow-on public offer.

Pricing a Public Issue of Shares:

Fixed Price Issue: In a fixed price issue of shares to the public, the company in consultation with the lead manager
(who is the merchant banker in-charge of the issue) would decide on the price at which the shares will be issued. The
company justifies the price based on the expected performance of the company and the price of shares of
comparable companies in the market.

Book Built Issue: The objective of a book building process is to identify the price that the market is willing to pay for
the securities being issued by the company. The company and its issue managers will specify either a floor price or a
price band within which investors can bid. When the issue opens, investors will put in bid applications specifying the
price and the number of securities (or total amount) bid at that price. The price bid should be above the floor price
or within the price band, as applicable. Retail investors can revise the bids in the period when the issue is open. The
issuer, in consultation with the book running lead manager will decide on the cut-off price which is the price at which
the issue gets subscribed.
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Regulatory Norms for Public Issue of shares

 A public issue will be open for a minimum of 3 working days and a maximum of 10 working days.
 An initial public offer shall be kept open for at 3t three working days and not more than 10 working days.
 If the issue size is equal to ten crores or more, then the securities will be issued only in dematerialized form.

Applying to a public Issue

 The prospectus/offer document lays down the process of applying to a public issue of securities.
 A public issue is open for subscription during a limited period as notified by the company.

Public Issue of Debt Securities

 Dematerialization: The issuer has to enter into an agreement with a depository for dematerialization of the
securities proposed to be issued.
 Coupon Rate: The issuer in consultation with the lead manager may fix the coupon payable on the
debenture. The coupon may be determined through a book building process also.
 Debenture Trustees: If the debentures are secured, they ensure that the property charged as security is
adequate to meet the obligations to the debenture holders at all times.
 Debenture Redemption Reserve: The Company will create Debenture Redemption Reserve and transfer a
portion of profits into it each year till the redemption of the debentures.
 Creation Of security: The Companies Act requires the creation of security in a public issue of debentures. A
charge against the assets of the issuer will have to be created. The issue of an unsecured debenture will be
treated as deposits rose by the company and will require adherence to the Companies (Acceptance of
Deposits) Rules.

Green Debt Securities are those where the funds raised from the issue are used for defined projects or assets such
as renewable and sustainable energy, clean transportation, sustainable water management, waste management
etc.

Private Placement of Equity & Debt:

A private placement of securities is an offer made by a company to a select group of investors such as financial
institutions, banks and mutual funds. The advantage of private placement as a way to issue securities and raise funds
comes from the following:

 Investors are better informed and there are less regulatory compliances in issuances to them.
 Issuing securities are less time consuming and cost-efficient since there are fewer procedures to be followed.

A private placement of shares or of securities that can be converted into shares at a future date, such as fully
convertible and partly convertible debentures and warrants, made by a listed company is called a preferential
allotment of securities.
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Qualified Institutional Placement

Qualified institutional placement (QIP) is a private placement of shares made by a listed company to certain
identified categories of investors known as Qualified Institutional Buyers (QIBs). QIBs include financial institutions,
mutual funds and banks among others. QIPs are made at a price derived from the share prices according to the
formula prescribed by SEBI. Shares allotted in a QIP can be sold only on a recognized stock exchange if the sale
happens within one year of allotment.

Institutional Placement Program

An Institutional Placement Program is an issuance of fresh shares by a company or an offer for sale by a promoter or
promoter group to QIBs to meet the minimum shareholding requirement specified by stock exchanges in their listing
requirements. As prescribed by SEBI, companies listed on the NSE, BSE and MSEI have to adhere to the listing
requirement of a minimum public shareholding of 25%.

Role and Function of Secondary Market

 Liquidity: Secondary markets provide liquidity and marketability to existing securities. If an investor wants to
sell off equity shares or debentures purchased earlier, it can be done in the secondary market.
 Price Discovery: Secondary markets enable price discovery of traded securities. The price at which investors
undertake buy or sell transaction reflects the individual assessment of investors about the fundamental
worth of the security.
 Information Signaling: Market prices provide instant information about issuing companies to all market
participants. This information-signalling function of prices works like a continuous monitor.
 Indicating Economic Activity: Secondary market trading data is used to generate benchmark indices that are
widely tracked in the country. A market index is generated from market prices of a representative basket of
equity shares.
 Market for Corporate control: Stock markets function as markets for efficient governance by facilitating
changes in corporate control. If management is inefficient, a company could end up performing below its
potential. Market forces will push down shares prices of underperforming companies, leading to their
undervaluation. Such companies can become takeover targets.

Secondary Market Participants

 The secondary market consists of the following participants:

 Market Infrastructure Institutions—stock exchanges, clearing corporations and depositories.
 Investors—individuals and institutions that buy and sell securities.
 Issuers—companies that issue securities.
 Financial intermediaries—firms that facilitate secondary market activity.
 Regulator—authority that oversees activities of all participants in the market.

Market Information

 Market capitalization (or market cap) of a company is the number of shares outstanding multiplied by the
market price per share. The market cap of a company measures the market value of its share capital. Traded
stocks are often categorized by market capitalization.
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 Market turnover of a stock indicates how much trading activity took place in it on a given business day.
Turnover can be represented in rupees or in number of trades. Higher the turnover in a stock, better the
liquidity.
 A market index tracks the market movement by using the prices of a small number of shares chosen as a
representative sample.


Risk Management Systems in Secondary Markets

Capital Adequacy Norms: In order to be eligible as trading and clearing members, individual and corporate entities
have to meet and maintain minimum paid-up capital and net worth norms prescribed by the stock exchanges and
SEBI.
Margins: A margin is the amount of funds that one has to deposit with the clearing corporation in order to cover the
risk of non-payment of dues or non-delivery of securities.
Circuit Breakers and Price Bands: If there is an abnormal price movement in an index, defined in percentage terms,
the exchange can suspend trading. This is called hitting the circuit breaker.
Price Bands: Stock exchanges also impose price bands on individual securities to limit volatility in prices. Daily price
bands applicable on securities are as follows
Pay-in Shortfall Penalties: If the trading member has a shortfall in the pay-in amount (i.e. the amount of shortage in
a settlement amount for a trading member) and the shortage exceeds the base minimum capital (BMC), then his
trading facilities are withdrawn and securities pay-out is withheld.
Settlement Guarantee Mechanism: The clearing house/corporation is the counterparty to all trades in the stock
exchange. This implies that it assumes counterparty risk completely, by settling all trades even if the trading member
defaults on pay-in or pay-out. Some of this counter party risk is managed through the levy of margins.
Inspection of Books: The stock exchange conducts an inspection of the books of trading members of each market
segment at least once a year. The purpose of the inspection is to check member compliance with the applicable rules
and regulations

Corporate Actions

Rights Issue - The rights shares are offered to the existing investors in a proportion as approved by the board of a
company.
Bonus Issue - A bonus issue of shares is made to the existing shareholders of a company without any consideration
from them.
Dividend - Dividends are the share of the profits of the company received by its shareholders.
Stock Split - A stock split is a corporate action where the face value of the existing shares is reduced in a defined
ratio.
Share Buyback - A company may buy back its shares listed on a stock exchange from the investors out of the
reserves and surplus available with the company.
Delisting of shares - refers to the permanent removal of the shares of a company from being listed on a stock
exchange.
Mergers and Acquisitions - The shareholding pattern of a listed company may change due to a substantial
acquisition of shares and voting rights by an acquirer and persons acting in concert with the acquirer.
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III. Mutual Funds

Mutual funds are investment products available to investors through which they can invest in an asset class of their
choice such as equity, debt, gold or real estate. Investors who may not want to invest directly in financial markets
may instead get exposure to the same securities through a mutual fund. Similarly, investors can diversify their
portfolio holdings even with small amounts, by investing in gold and real estate through mutual funds.

Concepts and Terms related to Mutual Funds

 Investment Objective: An investor’s decision to invest in a mutual fund scheme should be determined by the
suitability of the scheme to their needs. A mutual fund scheme is defined by its investment objective. The
investment objective will state what the scheme intends to achieve.
 Units: Each investor’s holding in a mutual fund is represented in terms of units which are derived from the
amount invested. Each unit represents one share of the fund. The number of units allotted is calculated as
amount invested/price per units
 Net Assets: The assets of a mutual fund scheme are the current value of the portfolio of securities held by it.
There may be some current assets such as cash and receivables. Together they form the total assets of the
scheme. From this, the fees and expenses related to managing the fund such as fund manager’s fees,
charges paid to constituents, regulatory expenses on advertisements and such are deducted to arrive at the
net assets of the scheme.
 Net Asset Value: The net asset per unit of a scheme is calculated as Net assets/Number of outstanding units
of the scheme. This is the Net asset value (NAV). The NAV of the scheme will change with every change in
the Net Assets of the scheme.
 Mark to Market: The current value of the portfolio forms the base of the net assets of the scheme and
therefore the NAV. It means that if the portfolio was to be liquidated, then this would be the value that
would be realized and distributed to the investors. Therefore the portfolio has to reflect the current market
price of the securities held. This process of valuing the portfolio on a daily basis at current value is called
marking to market.
 Open ended and close ended schemes: An open ended scheme allows investors to invest in additional units
and redeem investment continuously at current NAV. The scheme is for perpetuity unless the investors
decide to wind up the scheme. A closed-end scheme is for a fixed period or tenor. It offers units to investors
only during the new fund offer (NFO). The scheme is closed for transactions with investors after this.
 Interval funds: Interval funds are a variant of closed end funds which become open-ended during specified
periods. During these periods investors can purchase and redeem units like in an open ended fund.

Regulatory Framework of Mutual Funds

The Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India. Apart from SEBI,
other regulators such as the RBI are also involved for specific areas which involve foreign exchange transactions such
as investments in international markets and investments by foreign nationals and the role of the banking system in
the mutual funds industry in India. The Association of Mutual Funds in India (AMFI) is the industry body that
oversees the functioning of the industry and recommends best practices to be followed by the industry members.
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Mutual Fund Products

SEBI has defined the process of categorizing open-end mutual fund products broadly as equity schemes, debt
schemes, hybrid schemes, solution oriented schemes and other schemes. Only one scheme per category is permitted
for each mutual fund. The exceptions are Index funds and Exchange Traded Funds (ETF) tracking different indices,
Fund of Funds with different underlying schemes and sectorial/thematic funds investing in different sectors or
themes.

Equity Funds

 Passive and Active Funds

 Diversified Equity Funds
 Based on Market Capitalization- Large, Mid and Small Cap Funds
 Based on sectors and Industries- Banking, Healthcare Funds
 Based on Themes- Financials, Infrastructure Funds
 Based on Investment Styles- Contra, Growth and Value Funds
 ELSS (Equity Linked Savings Schemes)

Debt Funds

 Overnight Funds- Securities with maturity of one day

 Liquid Funds- Maturity less than 91 days.
 Ultra Short Duration Funds- Duration of portfolio between 3 and 6 months
 Low Duration Funds- Duration of portfolio between 6 and 12 months
 Money Market Funds- Invests in securities with maturity up to one year.
 Long Duration Funds- Duration of portfolio greater than 7 years
 Corporate Bond Funds- Corporate Bonds rated AA+ and above
 Credit Risk Funds: Invests instruments rated AA and below
 Gilt Funds: Invests in government securities of various maturities.
 Dynamic Bond Funds

Hybrid Funds

 Conservative Funds: Debt- 75%-90%, Equity- 10%-25%

 Balanced Funds: 40%-60% in debt and equity each.
 Aggressive Hybrid Funds: Debt- 20%-35%, Equity-65%-80%
 Dynamic Asset Allocation Funds
 Multi-Asset Allocation Funds
 Arbitrage Funds

Fixed maturity plans (FMPs) are closed-end funds that invest in debt securities with maturities that match the term
of the scheme. The debt securities are redeemed on maturity and paid to investors. FMPs are issued for various
maturity periods ranging from 3 months to 5 years.
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Monthly income plan (MIP) is a close-end debt-oriented hybrid. Though typically most debt-oriented hybrids invest
maximum of 15% in equity, there are quite a few variants. Aggressive MIPs invest up to 30% in equity, while
conservative MIPs invest only up to 5% equity.

Capital Protection Funds are closed-end hybrids funds. In these types of funds the exposure to equity is typically
taken through the equity derivatives market. The portfolio is structured such that a portion of the principal amount
is invested in debt instruments so that it grows to the principal amount over the term of the fund.

Solution Oriented Schemes

 Retirement Fund
 Children’s Funds

A Fund of Funds (FoF) is a mutual fund that invests in other mutual funds. It does not hold securities in its portfolio,
but other funds that have been chosen to match its investment objective. These funds can be either debt or equity,
depending on the objective of the FoF.

Exchange Traded Funds (ETFs) hold a portfolio of securities that replicates an index and are listed and traded on the
stock exchange.

Gold ETFs have gold as the underlying asset so as to provide investment returns that, closely track the performance
of domestic prices of gold. Each ETF unit typically

The PAN is a prerequisite for investment in a mutual fund for all categories of investors including NRIs and
guardians investing on behalf of minors.

SEBI requires investors to ensure compliance with the KYC norms when they initiate a transaction with an entity
registered with them such as a mutual fund, stock broker, depository participant, portfolio managers or venture
capital funds.

Types of Transactions in Mutual Funds

 Fresh purchase of mutual fund units

 Purchase of units in a NFO
 Purchase of units in the continuous offer period

The Scheme Information Document (SID) and Key Information Memorandum (KIM) provide information on the
minimum application amount.

Payment Instruments in Mutual Funds

 Cheques
 Net Banking, NEFT, RTGS, ECS, ETS, Direct Transfer
 Cash Investments (Only upto Rs. 50,000)
 E-Wallets
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Other Important Points

 Investments in open-ended schemes of mutual funds can be realized at any time by redeeming the units. A
redemption request can be for all the units held or for a part of it.
 Nomination is a facility offered to individual investors to choose the person(s) entitled to receive the
benefits of the investment made in the event of the death of the investors. Such persons are called
nominees.
 The investment account or folio of the mutual fund investor contains the personal information and
operational specifications that the investor has provided in the initial application for units made. All
transactions of the investor with the mutual fund, financial and non-financial, are recorded in the folio.
 A mutual fund folio can be held jointly by up to three holders. The first holder is the primary investor and all
financial transactions including payment for the investment, credit of redemption proceeds and dividends
will be made through the account of the first holder.
 The bank account details of the first holder has to be mandatorily provided since dividend and redemption
payments can only be paid to the bank account of the first holder.
 Some folios may be operated by persons authorized to do so by the investor by executing a power of
attorney (PoA). The certified copy of the PoA has to be registered with the mutual fund and the signature of
the investor as well as the PoA holder is recorded.
 In the event of the death of a mutual fund investor, the units held have to be passed on to the persons
entitled to receive them. AMCs use the way the folio was held and operated to decide the entitlement.
 The statement of account (SoA) is the proof of investment for an investor who has purchased units in a
mutual fund scheme. It is computer generated and unsigned and is not a certificate that can be traded.

Systematic Transactions

Systematic Investment Plan: In a systematic investment plan, investors commit to invest a fixed sum of money at
regular intervals over a period of time in a scheme. It enables investors to build a corpus over time even with small
sums invested. Through SIP, investment is made at different prices over the term chosen, it benefits from the
volatility in the market. Overtime, the average cost of acquisition comes down. This rupee cost averaging and is the
primary advantage that SIPs provides investors.
Systematic Withdrawal Plan: Investors can structure a regular payout from the balance held in a fund investment by
registering for a SWP. An SWP enables recurring redemptions from a scheme over a period of time at the applicable
NAV on the date of each redemption. It is a facility that provides a defined payout from a fund for investors.
Investors seeking to redeem units from a scheme can also use this facility to eliminate the price risk associated with
redeeming all the required units at one point.
Systematic Transfer Plan: A systematic transfer plan combines redemption from one scheme and an investment to
another scheme of the same mutual fund for a defined period of time. The scheme from which units are redeemed is
called the source scheme and the scheme into which investments are made is called the target scheme. For example,
an investor who has been accumulating funds in an equity fund may decide to transfer it over a period of time to a
less risky fund such as a short term debt fund as the time to use the corpus comes near. Instead if the units were
redeemed at one point, there is a risk of the NAV being low at that point in time and the resultant fall in the value of
the corpus.
Switch: A switch is a single transfer from one scheme or option of a scheme to another mutual fund scheme, or
option of the same scheme. The investor redeems units from scheme and simultaneously invests it in another
scheme of the same mutual fund in an inter-scheme switch.

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Benefits of Investing in a Mutual Fund

 Access to various asset classes

 Professional Management
 Flexibility to invest
 Easy and efficient investing

IV. Investment Products

Small Savings Instruments

The Indian government has instituted a number of small saving schemes to encourage investors to save regularly.
The main attraction of these schemes is the implicit guarantee of the government, which is the borrower. The saving
schemes currently offered by the government are:

 Public Provident Fund (PPF)

 Senior Citizen Savings Scheme (SCSS)
 National Savings Certificate (NSC)
 Post Office Schemes and Deposits
 Kisan Vikas Patra (KVP)
 Sukanya Samriddhi Account
 Gold Monetisation Scheme, 2015
 Sovereign Gold Bond Scheme

1. Public Provident Fund

Instituted in 1968, the objective of the PPF is to provide a long term retirement planning option to those individuals
who may not be covered by the provident funds of their employers or may be self-employed. PPF is a 15-year
deposit account that can be opened with a designated bank or a post office. It can also be opened online with a few
banks. Minimum amount that needs to be deposited in this account is Rs.500 per year. The maximum limit is
Rs.1,50,000. Subscription should be in multiples of Rs.5 and can be paid in one lump sum or in installments not
exceeding 12 in a financial year. Contribution to PPF is eligible for deduction under sec 80C of Income tax Act 1961.
Interest is completely tax free. Unlike other instruments which are eligible for tax deduction under Section 80C, PPF
enjoys an exempt-exempt-exempt (EEE) status, where withdrawal on maturity is also not taxed.

2. National Savings Certificate

National Savings Certificates are issued by the government and available for purchase at the post office. NSCs are
issued with a tenor of 5 years. Interest is compounded annually and accumulated and paid on maturity. Certificates
are available in denominations of Rs. 100, 500, 1000, 5000, and 10000. The minimum investment is Rs.100 without
any maximum limit. Investments made in the NSC VIII issue enjoy tax benefits under section 80C. Accrued interest is
taxable, but is it deemed to be reinvested and therefore the interest becomes eligible for Section 80C benefits.
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3. Senior Citizen Savings Scheme

The Senior Citizens’ Saving Scheme is a product available to only citizens of age 60 years or above on the date of
opening the account. Proof of age and a photograph of account holder are required. The term for the scheme is 5
years. A one-time extension of three years is allowed, if applied within one year of its maturity. Maximum limit of
investment is Rs.15 lakhs. However, in case of retirees before the age of 60 years the limit is restricted to retirement
benefits or Rs.15 Lakhs, whichever is less. The interest rate applicable on the scheme is announced on a quarterly
basis. The benefit of section 80C is available on investment but interest is fully taxable.

4. Post Office schemes and deposits

Post Office Monthly Income scheme (POMIS): The Post Office Monthly Income Scheme provides a regular monthly
income to the depositors. This scheme has a term of 5 years. Minimum amount of investment in the scheme is
Rs.1500, and the maximum amount is Rs.4.5 lakhs for a singly held account and Rs.9 lakhs if the account is held
jointly.
Post Office Term Deposits (POTD): Post Office Time Deposits are similar to fixed deposits of commercial banks. The
post office accepts deposits with terms of one year, two years, three years and five years. The account can be held
singly in individual capacity or jointly by a maximum of two holders. The minimum deposit amount is Rs.200. There is
no maximum limit.
Post Office Rcurring Deposit (PORD): Post Office Recurring Deposit (RD) accounts can be opened by resident
individuals, and a maximum of two people can hold an account jointly or on either or survivor basis. An individual
can hold any number of RD accounts, singly or jointly. Deposits can be made at a minimum amount of Rs.10 per
month and in multiples of Rs.5 thereafter for every calendar month.

5. Kisan Vikas patra

The KVP can be purchased by an adult for self or by two adults for a minor investor. NRIs HUFs and other entities are
not eligible to invest in the KVP. It can be purchased from any departmental post office or bank through cash, local
cheque or demand draft. KVP is available in denomination of Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The
minimum investment is Rs.1000 and there is no maximum investment. The instrument matures in 112-113 months

6. Sukanya Samriddhi Account Scheme

The Sukanya Samriddhi Account is a scheme launched for the benefit of girl children. The account has to be opened
in the name of the girl child by a natural or legal guardian. The account is opened with various authorized list of
banks. Only one account can be opened in the name of a child and a guardian can open a maximum of two accounts
in the name of two different girl children. The age of the child cannot be more than 10 years at the time of opening
the account. The minimuminvestment in the account is Rs.1000 in a financial year and a maximum of Rs. 1,50,000.
Investments can be made in a lumpsum or in tranches. There is no limit on the number of deposits that can be made
in a financial year in multiples of Rs.100. The account can be transferred to any place in India. The account will
mature on the completion of 21 years from the date of opening the account.
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7. Sovereign Gold Bond Scheme

The Sovereign Gold Bond Scheme (SGB) was launched in 2015 to provide an alternative way for investors to take
exposure to gold as an investment. The bonds are issued in denomination of one gram of gold and in denominations
thereof. The tenor of the bond is 8 years. Each bond investor buys the bonds in Indian rupees and on redemption is
paid the maturity value also in Indian rupees. The units grams) of gold bought by the investor and represented by
the bonds is protected. The value of the bond will reflect the price of gold. On maturity the value of the bond may be
higher or lower depending upon the prevailing price of gold. The bonds bear an interest rate of 2.50% per annum on
the initial investment and are paid semi-annually to the account of the bond holder.

8. Gold Monetisation Scheme

The Gold Monetization Scheme (GMS) is a scheme that allows eligible resident investors including individuals, HUFs,
Trusts and companies to monetize the gold held by them into interest earning deposits with all Scheduled
Commercial Banks, excluding RRBs. The gold can be in the form of coins, bars and jewelry. The gold deposited under
the scheme should be assayed by the Central Purity Testing Centre (CPTC) and converted in tradable gold bars of 995
purity after refining. The minimum gold that can be deposited under the scheme is 30 grams and there is no
maximum limit

Fixed Income Instruments

1. Government Securities

Government securities (G-secs) are issued by the RBI on behalf of the government. G-secs represent the borrowing
of the government, mostly to meet the deficit. Deficit is the gap between the government’s income and expenditure.
G-secs are issued through auctions that are announced by RBI from time to time. There is no cumulative option in a
G-sec. Interest is paid out on pre-specified dates into the designated bank account of the investor. Interest is not
subject to TDS but is fully taxable.

2. Inflation Indexed Bonds

Inflation Indexed Bonds (IIB) are a category of government securities issued by the RBI which provides inflation
protected returns to the investors. These bonds have a fixed real coupon rate which is applied to the inflation
adjusted principal on each interest payment date. On maturity, the higher of the face value and inflation adjusted
principal is paid out to the investor.

3. Corporate Bonds

Corporate bonds are debt instruments issued by private and public sector companies. They are issued for tenors
ranging from two years to 15 years. The more popular tenors are 5- year and 7-year bonds. Most corporate bonds
are issued to institutional investors such as mutual funds, insurance companies, and provident funds through a
private placement of securities. Companies may also raise funds from the public by making a public issue of bonds
where retail investors are called upon to invest.
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4. Infrastructure Bonds

The government announces from time to time, a list of infrastructure bonds, investment in which is eligible for
deduction under Section 80C of the Income Tax Act. Bonds issued by financial institutions like the Industrial
Development Bank of India (IDBI), India Infrastructure Finance Company Ltd. (IIFCL) and National Bank for
Agriculture and Rural Development (NABARD) are eligible for such deduction. The terms of the issue such as tenor,
rate of interest and minimum investment may differ across the bonds. What is common is that these bonds have a
minimum lock-in period (which could be three years, or five years) during which they cannot be transferred or
pledged.

5. Bank Deposits

A bank fixed deposit (FD) is also called as a term or time deposit, as it is a deposit account with a bank for a fixed
period of time. It entitles the investor to pre-determined interest payments and return of the deposited sum on
maturity. Fixed bank deposits offer higher returns than savings accounts as the money is available for use by the
bank for a longer period of time. Fixed deposits are preferred by investors who like the safety that a bank provides
and do not have an immediate need for the funds.

Alternative Investments

Alternate investments refer to those investments whose risk and return structures differ from the traditional asset
classes such as equity and debt. They could be linked to the real economy more strongly than other financial
instruments normally are. The low correlation of returns of such investments with that of traditional investments
enhances the diversification benefits in a portfolio in which these investments are included. The overall risk in the
portfolio reduces. However, such investments typically tend to have a higher risk and lower liquidity and do not
trade like other assets.

1. Derivatives and Structured Products

Hedging: When an investor has an open position in the underlying, he can use the derivative markets to protect that
position from the risks of future price movements.
Speculation: A speculative trade in a derivative is not supported by an underlying position in cash, but simply
implements a view on the future prices of the underlying, at a lower cost.
Arbitrage: Arbitrageurs are specialist traders who exploit the difference by borrowing and buying in the cash market,
and selling in the futures market at the same time.
Futures: A futures is a contract for buying or selling a specific underlying, on a future date, at a price specified today,
and entered into through a formal mechanism on an exchange. The terms of the contract are specified by the
exchange.
Options: Options are derivative contracts, which splice up the rights and obligations in a futures contract. The buyer
of an option has the right to buy (in case of “call”) or sell (in case of “put”) an underling on a specific date, at a
specific price, on a future date.
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2. Real Estate

Most investors tend to have a default alternate investment in the house in which they live in. Research shows that
about 50% of most investors’ wealth is in their homes. However, for purposes of wealth management, the self-
occupied house property is not considered as an investment asset. Since the scope for an income or realizable
capital gain is limited in a self-occupied property, it is not considered as part of the investment portfolio. Real estate
investments may be structured as income generating or growth oriented investment. Income generating
investments focus on rental income and interest income from securities. Additional vehicles for investor
participation in real estate/infrastructure investments are in the form of Real Estate Investment Trusts (REIT) and
Infrastructure Investment trusts.
Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT) are trusts registered with SEBI that
invest in commercial real estate assets infrastructure sector respectively

3. Gold

Gold is mostly bought by central banks as part of the reserves they like to keep. Indians are among the largest retail
buyers of gold in the world. In India, gold is seen as an asset that is suitable for long term wealth creation. It is also
used as collateral for loans and is therefore seen as an asset to fall back on when in need for funds. Traditional
allocation to gold among even middle- class households may be high due to the purchase of jewelry. Gold jewels
have limited investment value due to their high making costs, no income generating power, and limited sale to
realize the gain due to the emotional attachment to jewels. Investment in gold has the potential to beat inflation
over a long period. It is a safe haven when economic growth is slow and when traditional asset classes such as equity
and debt are underperforming. ETFs and gold funds (mutual funds that invest in gold ETFs) remove the issues of
storage, assurance of purity, liquidity and the facility for regular investment associated with physical holding in gold.

4. Commodities

When investors seek to move beyond the traditional asset classes, they look for asset classes with low correlation.
They also seek hedge against inflation, attractive returns and diversification benefits when traditional asset classes
underperform. Commodities have merged as a sought after asset class in this context. Commodities have a return
that is generated based on their demand and supply. Investors can earn returns either by a passive index replication
or from active management of a commodity portfolio. Investing in commodities can be done using ETFs, Stocks,
Bonds, Mutual Funds, and Hedge Funds

5. Private Equity and Venture Capital

Private equity refers to investments made into closely held companies, typically in the early stages of the company,
to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a
balance sheet or provide long term capital to scale up and grow in size. Private equity investment managers screen
such companies with significant growth potential and provide them capital. Each private equity investment is backed
by a strong investment thesis which plays out over a 5 year and more time horizon.
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6. International Investments

Investors can choose to invest in securities in international markets. The advantage of investing in such securities
comes from the portfolio diversification benefits from exposure to global markets. Investors also get access to
products that are still not available in India. For example, commodity ETFs are an efficient way to take exposure to
the commodities market which is currently not available in India.

7. Art and collectibles

Art objects, collectibles and precious stones are costly and illiquid investments that are difficult to value and
authenticate. The market is small, with collectors spread over a wide geographical area. Investors have to be
knowledgeable and well networked to know the market to be able to buy and sell these products. In the absence of
regulators and regulations, chances of fraud are high.

Category of Funds

 Category I funds invest in start-ups, SMEs, social ventures, infrastructure or other sectors designated as
economically and socially desirable by the government or regulators. They are closed-ended funds with a
minimum tenure of three years.
 Category II funds are those that do not fall under categories I or III and do not take borrowings for other than
operational requirements. Category II funds will be closed-ended funds with a minimum tenure of three
years.
 Category III funds are those that undertake complex trading strategies including investment in listed or
unlisted derivatives. Category III funds may be open or closed-ended.

The constitution of the fund seeking registration under the AIF Regulations must allow it to carry on the activities
of an alternative investment fund. An AIF will have a corpus of at least Rs. 20 crores.

Direct Equity

Investors can invest in equity instruments either in the primary market or in the secondary markets. In the primary
market, investors can invest in Initial Public Offers (IPO) and Follow-on Public Offers (FPO) made by companies.
Equity instruments come with no guarantee of principal invested or income expected from it. The onus is on the
investor to evaluate the operational, financial and management strengths of the company before making an
investment. Constructing an equity portfolio involves selection of securities, determining the right time to buy and
sell stocks, decide on the proportion of the different securities and sectors in the portfolio and the trade-off between
holding a diversified portfolio

Benefits of Risk & Equity

 Ownership Rights
 Residual claim
 Reserves and Net Worth
 Limited Liability
 Returns not fixed
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Market Indicators and analysis

 Market Capitalization
 Stock Market Index
 Fundamental Analysis and EIC Framework
 Valuation Measures: PE Ratio, Price to Book Value Ratio, Dividend Yield
 Technical Analysis

V. Managing Investment Risk

Risk is usually understood as “exposure to a danger or hazard”. In investment decisions, risk is defined as the
possibility that what is actually earned as return could be different from what is expected to be earned. If the return
from an investment remains unchanged over time, there would be no risk. But there is no investment of that kind in
the real world. Even returns on government saving products change. All investments are subject to risk, but the type
and extent of risk are different. Thus, it is important to understand the common types of risk and evaluate
investments with respect to them.

Types of Risk

Inflation Risk: Inflation risk represents the risk that the money received on an investment may be worth less when
adjusted for inflation. Inflation risk is also known as purchasing power risk. It is a risk that arises from the decline in
value of security’s future cash flows

Default Risk: Default risk or credit risk refers to the probability that borrowers will not be able to meet their
commitment on paying interest and/or principal as scheduled. Debt instruments are subject to default risk as they
have pre-committed pay outs. The ability of the issuer of the debt instrument to service the debt may change over
time and this creates default risk for the investor.

Liquidity Risk: Liquidity or marketability refers to the ease with which an investment can be bought or sold in the
market. Liquidity risk refers to an absence of liquidity in an investment. Thus, liquidity risk implies that the investor
may not be able to sell his investment when desired, or it has to be sold below its intrinsic value, or there are high
costs to carrying out transactions. All of this affects the realizable value of the investment.

Re-investment Risk: Re-investment risk arises from the probability that income flows received from an investment
may not be able to earn the same interest as the original interest rate. The risk is that intermediate cash flows may
be reinvested at a lower return as compared to the original investment. The rate at which the re-investment of these
periodic cash flows is made will affect the total returns from the investment.

Business Risk: Business risk is the risk inherent in the operations of a company. It is also known as operating risk,
because this risk is caused by factors that affect the operations of the company. Common sources of business risk
include cost of raw materials, employee costs, introduction and position of competing products, marketing and
distribution costs.
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Exchange Rate Risk: Exchange rate risk is incurred due to changes in the exchange rate of domestic currency relative
to a foreign currency. When a domestic investor invests in foreign assets, or a foreign investor invests in domestic
assets, the investment is subject to exchange rate risk.

Interest Rate Risk: Interest rate risk refers to the risk that bond prices will fall in response to rising interest rates, and
rise in response to declining interest rates. Bond investments are subject to volatility due to interest rate
fluctuations. This risk also extends to debt funds, which primarily holds debt assets.
The relationship between rates and bond prices can be summed up as:
 If interest rates fall, or are expected to fall, bond prices increase.
 If interest rates rise, or are expected to rise, bond prices decline.

Market Risk: Market risk refers to the risk of the loss of value in an investment because of adverse price movements
in the market. The price of an asset/investment responds to information that impacts the intrinsic value of an
investment.

Unsystematic and Systematic Risk: Systematic risk or market risk refers to those risks that are applicable to the
entire financial market or a wide range of investments. Unsystematic risk is the risk specific to individual securities or
a small class of investments. Hence it can be diversified away by including other assets in the portfolio.

Measuring Risk

Standard Deviation and Variance: The standard deviation is the average deviation of observed returns from the
average return over a time period. It is computed using a statistical formula. Standard deviation and variance are
also called measures of dispersion, because they measure the extent to which observed values are scattered away
from the average. Higher is the standard deviation or variance, more is the dispersion of observed returns around
the average. The standard deviation of the returns from an investment can be used to develop some estimates
about how return and risk will behave in the future. Research has shown that many market returns series follow a
similar distribution pattern called the normal probability distribution.

Beta: Beta is a measure of the volatility in the price of an investment relative to the overall market as represented by
a benchmark. A Beta of 1 indicates that the investment will move in line with market movement. A Beta greater than
1 indicates the investment is more volatile than the market and less than 1 indicates less volatility. The Beta of a
portfolio is the weighted average of its individual components (securities).

VI. Measuring Investment Returns

Return on investment is a basic computation made to assess how an investment is performing. Every investment can
be represented as a set of inflows and outflows. Return is the comparison of the inflow and outflow and therefore
the benefit to the investor from making the investment.
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Return Concepts

1. Absolute Return: The concept of absolute returns is widely used in financial markets. Absolute return is not
an appropriate measure for comparing the performance of investments made for different holding periods.
That is because the computation of absolute return does not take into account the holding period of
investment.

Absolute Return: (End Value-Begin Value) /Begin Value*100

2. Annualized Return: Annualized return is a standardized measure of return on investments in which the
return is computed as percent per annum (% p.a.). The purpose of annualizing is to standardize the
investment period as though each investment was made only for one year. This enables easy comparison of
investments across time periods. It is calculated as

Annualized Return: (End Value-Begin Value) /Begin Value*100*(1/Holding Period (years)

3. Total Return: Total return is the return computed by comparing all forms of return earned on the
investment with the principal amount. Thus, total return is the annualized return calculated after including
all benefits from the investment. Thus, total return is the annualized return calculated after including all
benefits from the investment. For example, consider an equity share of face value Rs.10, which yields a
dividend of 30%. The share is purchased for 200, but sold for Rs.190 after one year. Dividends earned= 30%
of Rs.10 = Rs.3; Loss on sale= 10 Total return = 3 – 10 = -7 on investment of 200 Rate of return % p.a. = (-
7/200) x 100 = -3.5%

Concept of Compounding

Compound return is earned when the interest earned in one period is added back to the principal amount to
generate a new principal on which interest is computed for the next period. As a result, interest is reinvested in the
asset so that interest is earned on interest. The formula for compounding is

FV = PV (1+r)^n

Where FV= Future Value, PV= Present Value, r = rate of return for each compounding period,
n = number of compounding periods

Time Value of Money

The money available at the present time is worth more than the same amount in the future since it has the potential
to earn returns. The value associated with the same sum of money received at various points on the timeline is
called the time value of money. The time value of money received in earlier periods as compared to that received in
later time periods will be higher. Since most decisions in finance involve cash flows spread over more than one year,
the time value of money is a key principle in financial decision-making. Since money has time value, it is not possible
to compare cash-flows received in different time periods.
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Annuities

An annuity is a sum of money paid at regular periods, such as monthly, quarterly, annually. A common example of an
annuity is pension. Annuities can be of two types (1) Fixed annuity and (2) Flexible annuity. Fixed Annuity means that
fixed returns are received at regular periods. For instance, the Senior Citizen Saving Scheme pays 8.3% p.a. on the
investment for a predetermined term assured (for example, for the next 5 years). Floating annuities are those in
which the returns are benchmarked to inflation or index returns or any other return as specified in the indenture
agreement at the time of buying. So the annuities paid are not fixed, but change in line with the chosen benchmark.

CAGR

In financial markets, the time value of money is always taken into account. It is assumed that if an investment
provides a series of cash inflows, they can be re-invested to earn a positive return. Alternatively, an investment that
does not have intermediate cash-flows, is assumed to grow at an annual rate each year, to be compounded every
year to reach the final value. The compounded annual growth rate (CAGR) of an investment is the underlying
compound interest rate that equates the end value of the investment with its beginning value.

CAGR => r = ((FV/PV)^(1/n))-1

The XIRR function is particularly useful when CAGR has to be computed for a series of cash flows, rather than with
just a beginning and ending value of the investment. XIRR for a particular set of cash flows can be calculated in
EXCEL with the XIRR formula.

IRR

The Internal Rate of Return (IRR) is an alternative way to express compounded return from an investment. Assume
that an investment has a number of cash inflows (returns) over a period of time against a cash outflow (investments)
made at the start. IRR is the inherent rate at which all the cash outflows compound to become equal to the cash
inflows. Or, it is the discount rate at which the present value of future cash inflows from an investment exactly
equals the value of cash outflows.

NPV

The Net Present Value (NPV) uses the idea of time value of money to evaluate the viability of an investment option.
If an decision results in cash outflow at the initial stage and a series of cash inflows over a period of time, then the
net present value of the cash flows can be calculated as the difference between the present value of the cash
outflow and the sum of the present values of the inflows that accrue over a period. The discounting rate used in the
calculation of the NPV is the required rate of return from the investment and therefore can be customized to reflect
the risk in the market. A positive NPV implies that the investment is worthwhile and a negative NPV indicates that
the investment should be avoided. The constraint in using the NPV is that of determining the discounting rate.
Moreover, it is assumed to be constant over the life period of investment, which may not hold true.
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Holding Period Return

Holding period return is the return earned on an investment during a specific period when it was bought and held by
the investor. Such return computations use the portfolio value at two chosen points. A simple formula for holding
period return is:

HPR = (Cash Inflows during the period + Capital gains) /Beginning Value of investment

 The return on an investment is usually expressed as a nominal rate.

 When the nominal rate is adjusted for the effects of inflation, it is known as the real rate of return.

 Tax-adjusted return is the return earned after taxes have been paid by the investor. Since taxes actually
reduce the money in the hands for an investor, it is necessary to adjust for them to get a realistic view of
returns earned.

Risk Adjusted Return

The relationship between the risk and return from an investment is a direct one implying that the investor who
invests in a high risk investment will expect to be compensated by higher returns. Risk adjusted return relates the
return from an investment to the risk taken to generate it.
 Sharpe Ratio = (Portfolio return- Risk free return)/ Standard deviation of portfolio
 Treynor Ratio = (Portfolio return- Risk free return)/ Beta of portfolio

VII. Concept of Financial Planning

Financial planning aims at ensuring that a household has adequate income or resources to meet current and future
expenses and needs. Financial planning is thus a process that enables better management of the personal financial
situation of a household. It works primarily through the identification of key goals and putting in place an action plan
to realign the finances to meet those goals. It is a holistic approach that considers the existing financial position,
evaluates the future needs, puts a process to fund the needs and reviews the progress.

Need for Financial Advisors:

 Financial Planning requires certain skills and is a timely activity

 Estimating financial goals, finding suitable products and arriving at suitable allocations
 Selecting the right investment products
 Arriving at the right asset allocation
 It requires consistent attention to changing market and product performances, dynamic changes in the
needs and status of the client
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Scope of Financial Planning Services

 Personal Financial Analysis

 Debt Counseling
 Insurance Planning
 Investment Planning and Asset Allocation
 Tax Planning
 Retirement Planning
 Estate Planning

Business models in the delivery of financial advice to clients

1. Fee Only Financial Planners: Some financial advisers choose to earn a primary component of their income
from enabling clients to plan their finances in a comprehensive manner. They engage closely with the client,
offer advice on most if not all aspects of their personal finance, and charge a fee for their services. The fee
may be of various types One-time fee for a financial plan, fee for on-going review and periodic revisions,
asset-based fee charged as a percentage of assets being advised, referral fee for engaging experts to take
care of specific aspects of the plan, referral fee for execution of plan through other agencies, selection and
portfolio construction fees, fees for assessment and analysis of financial position Fee only financial advisers
usually do not take on the execution of the plan or advice. They refer the client to other agencies who may
enable execution of the recommended investment transactions. This is to ensure that the commissions
earned on selling financial products, does not influence their advice to their clients.

2. Fee Based Financial Planners: Some financial advisers offer all the above services that are offered by a fee-
only planner, but they also execute client transactions in the financial products recommended by them. They
may therefore earn both a fee income for their advisory services and commissions and other incomes from
the products that they recommend.

3. Execution only services: Some advisers may not charge their clients for advice, if it is incidental to their core
function of distributing financial products. Their income comes from the commissions from selling the
product. They may also execute transactions advised by another financial adviser. Such advisers may also
distribute a range of products including investment products, insurance products, banking and loan
products, which are subject to regulations by multiple regulators apart from SEBI.

4. Wraps and Platform: Wraps and platforms are technology-based advisory solutions that are standardized
for execution. A client or an advisor associates with the platform, and can offer its financial products as
model portfolios that investors can buy. Advisors may also choose these platforms to execute transactions in
standardized model portfolios. Clients can view how their portfolios are performing. Advisors can monitor
and review the portfolios and holistically manage the money of clients across multiple products.

Assets, Liabilities and Net-worth

The savings of a household are put to work by investing them in assets. Assets are broadly classified as physical
assets and financial assets. Assets may be appreciating in value or depreciating. All assets have a resale value.
Investors hold assets for the returns they provide. The nature of return that an asset provides classifies them as
growth-oriented, income-oriented or a combination of the two.
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 Physical assets are tangible assets and include real estate, gold and other precious metals. Physical assets
have an intrinsic value though the actual price at which they trade is impacted by demand and supply.
 Financial assets represent a claim that the investor has on benefits represented by the asset. The assets may
be structured as growth or income oriented or a combination of the two, These assets are typical products
and controlled by the regulations in force at the point in time.

The 6 Step Financial Planning and Deliver Process

 Establish and define client-planner relationship:

The planning process begins when the client engages a financial planner and describes the scope of work to be done
and the terms on which it would be done.

 Gather client data, including goals:

The future needs of a client require clear definition in terms of how much money will be needed and when. This is
the process of defining a financial goal. All of this includes

1. Goal Value: The goal value that is relevant to a financial plan is not the current cost of the goal but the
amount of money required for the goal at the time when it has to be met.
2. Time to Goal or Investment Horizon: Financial goals may be short-term, medium-term or long- term. The
term to goal refers to the time remaining for the funds to be made available to meet the goals. The
investment horizon will determine the type of investment that will be selected for investing funds for the
goal.
3. Funding the goal: Funding goals will depend upon the existing investments and assets that are available to
meet future goals and the ability to save which will depend upon the current level of income and expenses
of the household, and the liabilities of the individual which are the obligations that have to be met out of
their available income.
4. Risk Profiling: Clients' financial risk tolerance - attitudes, values, motivations, preferences and experiences, is
measured with a risk profile. The risk profile questionnaire helps in understanding the risk tolerance levels of
a client. Risk tolerance is the assumed level of risk that a client is willing to accept.
5. Portfolio Construction: An individual creates a portfolio of investments to meet their various goals. The
investments selected have to balance the required return with an appropriate level of risk. Assets and
investments differ on their features of risk, return, liquidity and others.

 Analyze and evaluate financial status:

The current financial position of a client needs to be understood to make an assessment of income, expenses, assets
and liabilities. The ability to save for a goal and choose appropriate investment vehicles depends on the current
financial status.

 Develop and present financial planning recommendations:

The planner makes an assessment of what is already there, and what is needed in the future and recommends a plan
of action. This may include augmenting income, controlling expenses, reallocating assets, managing liabilities and
following a saving and investment plan for the future.
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 Implement the financial planning recommendations:

This involves executing the plan and completing the necessary procedure and paperwork for implementing the
decisions taken with the client.

 Monitor the financial planning recommendations:

The financial situation of a client can change over time and the performance of the chosen investments may require
review. A planner monitors the plan to ensure it remains aligned to the goals and is working as planned and makes
revisions as may be required.
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VIII. Asset Allocation and Investment Strategies

Every investment option can be described in terms of its risk and return characteristics. For example, the returns on
the equity shares of a company would depend upon the profits the company makes and the business risks that the
company faces. This translates into the possibility of a higher long term return if the company’s performance is good.
But in the short-term the holder of equity shares is likely to see a good amount of volatility in returns, as market
participants evaluate the impact of different factors on the expected performance of the company and incorporate
their view into the price of the share. The returns from the bonds of a company would depend on the ability to
generate enough cash to pay interest, even if the company would make losses or a minimal profit. This translates
into steady periodic return, with limited possibility for capital appreciation. A group of investments that exhibit
similar risk and return characteristics, and respond in a similar fashion to economic and market events are grouped
together as an asset class.

Broad Asset Classes

Asset Class Characteristics

 Generally held for meeting day to day and emergency requirements.

Cash
 Cash holds negligible value in terms of returns and hence, there is minimal risk.
 Bonds provide fixed return in the form of coupon/interest income.
 Bonds have the scope for capital appreciation when interest rates fall, but may
Bonds
be subject to interest rate risk when interest rates rise.
 Corporate bonds are subject to credit risk of the issuer.
 Government securities are considered to be risk-free as it is believed that a
government will not default on its obligations towards its own citizens.
 Debt securities are subject to inflation risk, interest rate risk, credit risk and re-
Debt Securities
investment risk, depending upon the type of bonds.
 Risk and return characteristics of bond are relatively lower than equity and
hence, suitable for an investor seeking regular income flows with minimal risk
 A stock represents ownership in a company.
 Empirical study suggests that this asset class provides higher returns if
invested for long run.
Stocks
 Volatility is higher in this asset class than cash and bonds as an asset class.
 Equity investments are subject to market risks and business risks

 A stock represents ownership in a company.

 Empirical study suggests that this asset class provides higher returns if
invested for long run.
Real Estate
 Volatility is higher in this asset class than cash and bonds as an asset class.
 Equity investments are subject to market risks and business risks
 Physical gold is preferred by Indian families as a secure and stable investment
and is also highly liquid.
 Gold also provides as an option of asset class for diversification within a
Precious Metals portfolio of assets, being directly/ indirectly correlated with other asset
classes.
 Gold is generally used as a hedge against inflation.
 Gold and commodities are susceptible to changes in demand and supply.
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Asset Allocation

A portfolio is made up of several investment options across asset classes to meet the diverse requirements from the
portfolio for growth, income and liquidity. The construction of the portfolio involves allocating money to various
asset classes. This process is called asset allocation.

Strategic Asset Allocation: Asset allocation that builds purely on the needs and preferences of the individual over
the long term is called strategic asset allocation (SAA). SAA is a long-term strategy where the choice of asset classes
that will be part of the investment portfolio is usually based on the short-term and long-term financial goals set in
place by the investor. The strategic asset allocation process is completely tuned to the investor needs and
constraints. The proportional allocation to each asset class is driven by investor objectives and constraints and is
rebalanced to the asset allocation that was determined to meet the desired goal.

Tactical Asset Allocation: We have seen that different asset classes perform well at different times. If the portfolio is
rebalanced based on a view about the relative performance of asset classes, it may actively manage the risk and
return, with the objective of outperforming the asset class indices. This strategy is called tactical asset allocation
(TAA). Tactical asset allocation involves active portfolio management with the aim of adding value through short
term adjustments in asset allocation based on the view for relative asset class performance.

Dynamic Asset Allocation: Dynamic asset allocation (DAA) works on the basis of a pre-specified model which does a
mechanical rebalancing between asset classes. The allocation to each asset class is not a fixed percentage, but varies
depending on the performance of chosen asset class variables. Several mathematical models have been proposed
and used in DAA. The main objective of these models is creating a mechanical system that triggers asset allocation
and rebalancing. Rebalancing may be done periodically.

Asset Allocation Linked to Life Cycle Stages

Asset allocation may also be linked to the stage of an investor’s life. The income levels, the ability to save and take
risks, investment horizon and requirements from their investment, are seen to vary with the stage of life at which
the investor is. The life cycle of any individual can be typically sub-divided into following stages:
-Childhood Stage
-Young Investor
-Young Couple in Mid 30’s
-Mature Couple with grown up children
-Retired Couple
The age at which each stage of the life cycle starts may vary from one individual to another, but in our society most
people would fall into a standard cycle.

IX. Insurance Planning

Insurance is a basic form of risk management which provides protection against the loss of the economic benefits
that can be enjoyed from assets. Assets are subject to the risk that their ability to generate benefits could be lost or
reduced due to unforeseen or unexpected events. Insurance enables risk transfer from the beneficiary (insured) to
the insurance company (insurer), which undertakes to indemnify the insured for the financial loss suffered. In return,
the insured pays a periodic fee, called premium, to the insurer to receive this protection.
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Requirements of an Insurable risk

Large number of exposure units: Large group of similar, though not necessarily identical, units are subject to the
same peril or group of perils. An insurance company is able to offer the protection it does because it operates a
common pool in which only a few will suffer loss in any one year. The entire pool pays premium but the liability for
the insurance company will be only to a few in a year.

Insurable Interest: Insurable interest implies that the individual seeking insurance will face financial loss in the event
of loss or destruction of the subject matter of insurance.

Accidental and Unintentional: Loss must be accidental, unintentional and uncertain. The only exception is life
insurance where the event being insured against, namely death, is certain.

Determinable and measurable: Loss should be definite as to cause and amount.

No prospect of gain or profit: A further characteristic of the insurable risk is that it does not involve any prospect of
gain or profit. In other words, it must be pure risk with only the possibility of full or partial loss. Speculative risk is not
insurable.

Chance of loss must be calculable: Insurer must be able to calculate with some accuracy, average frequency and
average severity of future losses.

Premium must be economically feasible: Premiums should not only be affordable but also far less than the value of
the policy. Else the option to retain risk will be more feasible than transfer risk through insurance.

Steps in insurance planning

1. Identify Insurance need

2. Estimate the amount of insurance required
3. Evaluate the type of policies available for their cost and features
4. Evaluate insurance needs periodically since needs keep changing

Insurance Products

A. Life Insurance

Elements:

Death cover: Where the benefit is paid only on the death of the insured within a specified period. If death does not
occur, then no benefit will be paid.
Survival benefits: Where the benefit is paid when the insured survives a specified period.
Insured: This refers to the person, whose life is being insured and can be individuals, minors or joint lives.
Term of the contract: This is the period during which the insurance cover will be available to the insured.
Sum assured: This is the amount being insured.
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Payment of sum assured: The payment of sum assured will be on the occurrence of a specific event such as death of
the life insured or expiry of the term of the policy.
Premium payable: This will depend upon the sum assured and the term of the policy. The mode of payment of
premium, such as monthly, quarterly, half-yearly or annually will be included in contract.
Bonus: Bonus is an amount that is added to the sum assured, announced periodically as a percentage of the sum
assured.
Guaranteed bonus: Guaranteed bonus is paid for the first few years of the policy period, say, five years and is paid as
a percentage of the sum assured.
Reversionary bonus: This is based on the performance of the insurance company and is declared for policy holders
at the discretion of the insurer.

Types of Life Insurance Products

Term Insurance: Term insurance is a pure risk cover product. It pays a benefit only if the policy holder dies during the
period for which one is insured. Term life insurance provides for life insurance coverage for a specified term of years
for a specified premium. The premium buys protection in the event of death and nothing else. Term insurance
premiums are typically low because it only covers the risk of death and there is no investment component in it.
Endowment Plan: Endowment is a level premium plan with a savings feature. At maturity a lump sum is paid out,
equal to the sum assured plus any accrued bonus. If death occurs during the term of the policy then the sum assured
and any bonus accrued are paid out. Money Back Insurance Policies are a type of endowment policies that covers life
and also assures the return of a certain per cent of the sum assured as cash payment at regular intervals.
Whole Life Insurance: Whole Life insurance provides life insurance cover for the entire life of the insured person or
up to an upper age limit specified by the insurer, whichever is earlier provided the premiums are paid as contracted.

B. Variable Insurance Products

Variable Insurance Products (earlier known Universal Life Plans) are products that combine insurance and
investment but are not unit-linked. The premium paid will have a component for risk cover and another portion
which is the investment component (after accounting for expenses) which is credited to a policy account. Each policy
will have a policy account and it will hold the accruals due to the policy. All VIPs will define a minimum floor rate of
return for the policy. Additional return, over and above the floor rate, will depend upon the type of policy.

C. United Linked Insurance Plans

ULIP is an insurance product that combines protection and investment by enabling the policy holder to earn market-
linked returns by investing a portion of the premium money in various proportions in the equity and debt markets.

The returns on ULIPs are linked to the performances of the markets. The premium is bifurcated into the premium
used for providing the life cover and the rest is invested in the fund or mixture of funds chosen by the policy holder.
Since the fund chosen has an underlying investment—either in equity or debt or a combination of the two—the fund
value will reflect the performance of the underlying asset classes. Each fund has its own risk and return profile based
on the asset class that the fund has invested in. ULIPs may offer a single premium option where a lump sum
premium is paid once.

Riders are add-ons to the basic insurance policy to supplement the insurance cover provided. One can also
combine a set of riders and append it to the main policy.
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D. Non-Life Insurance Products

Property Insurance: Property insurance provides protection against most risks to property such as fire, theft etc.
Property insurance generally means insuring the structure and the contents of the building.
Health Insurance Policy: Health insurance policies reimburse the medical expenses incurred for the policy holder
and identified family members who are covered under the policy. This policy provides for reimbursement of
hospitalization or domiciliary treatment expenses for illness or accidental injury up to the sum insured under the
policy.
Motor Insurance: Under this insurance, the company indemnifies the insured in the event of accident caused by, or
arising out of the use of the motor vehicle, anywhere in India against all sums including claimant’s cost and expenses
which the insured shall become legally liable to pay
Personal Accidental Insurance: This type of policy provides that if the insured shall sustain any bodily injury resulting
solely and directly from accident caused by external violent and visible means, then the company shall pay to the
insured or his legal personal representative, as the case may be, the sum defined in the policy.
Critical Illness Insurance: This policy provides for a lump sum benefit to be paid if the named insured contracts
certain specified diseases such as cancer, heart attack, stroke, kidney failure or multiple sclerosis. It differs from life
insurance in that there is no payment on death.
Travel Insurance: Travel insurance provides medical, financial and other assistance in case of an emergency during
international travel.
Liability Insurance: The purpose of liability insurance is to provide indemnity in respect of damages payable under
law for personal injury to third parties or damage to their property.

Life Insurance Need Analysis

Income Replacement Method: Under the income replacement method, the human life value (HLV) is calculated as
the present value of the person’s future earnings. This is a method of calculating the amount of life insurance a
family will need based on the income that they would have to forego if the insured were to pass away today.

Need Based Approach: This is a method of calculating the human life value, and therefore the amount of life
insurance required by an individual or family, based on the amount required to cover their needs and goals in the
event of the demise of the earning member. These include things living expenses, mortgage expenses, rent, debt and
loans, medical expenses, college, child care, schooling and maintenance costs, emergency funds.
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X. Retirement Planning

Retirement planning is about ensuring that there is adequate income to meet the expenses in the retirement stage
of an individual’s lifecycle. The primary income at this stage will be a pension drawn from the employer, or the
income drawn from the retirement corpus that has been created during the earning period of the individual’s life, or
a combination of the two.

Retirement Planning:-

1. Estimating the Retirement Corpus

The retirement corpus that has to be created to provide retirement income will depend upon the income that has to
be generated from it to meet the expenses in retirement.

Estimating Income Requirement

Income Replacement Method – The income replacement ratio is the percentage of the income just before
retirement that will be required by an individual to maintain the desired standard of living in retirement.

Expense Protection Required - In the expense protection method, the focus is on identifying and estimating the
expenses likely to be incurred in the retirement years and providing for it.

2. Determining the Retirement Corpus

The income required in retirement can be estimated using either of the two methods described earlier. Once this has
been done, the next step in retirement planning is to calculate the corpus that will generate the income required in
retirement. The variables in this calculation are
 The periodic income required
 The expected rate of inflation
 The rate of return expected to be generated by the corpus
 The period of retirement, i.e. the period for which income has to be provided by the corpus.

Impact of Inflation: Inflation is a general rise in prices of goods and services over a period of time. Over time, as the
cost of goods and services increase, the value of one unit of money will go down and the same amount of money will
not be able to purchase as much as it could have earlier i.e. last month or last year. Inflation eats away the
purchasing power of money over time.

Expected Rate of Return: Higher the rate of return that the funds are expected to earn, lower will be the required
corpus. However, a higher return will come with a higher risk. Investors may be willing to take higher risk in the
accumulation period for higher return. But in the distribution stage of retirement the ability to take risk with the
savings will be low.

3. Saving and Investment Plan to Create Retirement Corpus

Once the retirement saving required is estimated, it has to be created over the working years of the individual by
setting in place a saving and investment plan. Retirement is one of the important goals for which an individual saves.
The amount of saving required will depend upon the corpus required, the time available to accumulate the savings
and the return that will be generated by the investment avenue into which the savings being made will be
channelized.
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4. Review and Monitoring

Retirement planning is an on-going process. The plan requires periodic review to make sure that the estimates for
income and expenses in retirement are relevant or need to be changed. Typically, every time there is a significant
change in current income and lifestyle or expenses that are likely to continue into retirement, it is necessary to make
changes to the plan. The change in income or expense will imply a change in the retirement corpus being
accumulated and the periodic savings and investments that have to be made to achieve the new target.

Retirement Products

Employee Provident Fund Scheme

Under this scheme, the employee and the employer each contribute 12% (10% in some special cases) of the basic
emoluments and allowances to the employee’s EPF account. Employees can contribute over and above the statutory
rate of 12%. However, employer’s contribution is fixed at 12%. Contributions are credited to individual employee
accounts. Each year the government declares the rate of interest applicable to the scheme.

Employee Pension Scheme

This scheme is run by the Employees Provident Fund Organization (EPFO) and is guaranteed by the government.
8.33% from the employer’s contribution of 12% to the Employee Provident Fund is diverted to the EPS.

Employee Deposit Linked Insurance

Employer contributes 0.5% of the total wages. No contribution is made by the employee. The benefit provided under
the Employees' Deposit Linked Insurance Scheme is called assurance benefit. On the death of the member while in
service, the nominee or any other person entitled to receive the provident fund benefits will, in addition to the
provident fund, receive the assurance benefit under Employees' Deposit Linked Insurance Scheme.

Gratuity
The Payment of Gratuity Act, 1972 requires gratuity to be paid to an employee at the time of termination of
employment where the employee has been in continuous service for not less than five years. The condition of
completion of five years’ continuous service is not applicable where termination is due to death or disablement. The
benefit is paid in lump sum.

Superannuation Benefits
The existing mandatory retirement benefits are very often found to be insufficient to meet the income replacement
required at retirement. Employers provide superannuation plans to augment the benefits available by contributing
to a superannuation fund. The company has to appoint trustees to administer the scheme and get the scheme
approved by the Commissioner of Income Tax.

National Pension Scheme

All central government employees who joined service after January 1, 2004, are enrolled into the NPS which is a
defined contribution pension plan. 10% of the employee’s basic salary plus dearness allowance is credited to the
individual account along with the government contribution. The individual account is identified by a unique
Permanent Retirement Account Number (PRAN).
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Voluntary Retirement Schemes

The mandatory retirement benefits are available only to employees of covered establishments as defined in the
respective regulations. This leaves people in other establishments, self-employed persons and others out of the
coverage of the benefits. Retirement plans are available that an individual can subscribe to independently. Such
schemes can be used to save for retirement by people who do not have mandatory cover and also by persons who
are covered to augment their retirement benefits.
 Voluntary Provident Fund
 NPS

Annuity
An annuity is special type of insurance contract under which a corpus sum is created either as a lump sum or in
installments over a period of time, in return for which the insurance company undertakes to make a periodic
payment to the purchaser of the annuity. An annuity is useful in income and retirement planning as it can generate a
regular income over a long period of time, on investment of a corpus amount. The annuity paid will depend upon the
annuity rate applicable at the time of purchase of annuity. The annuity rate is guaranteed for the entire period.

XI. Tax and Estate Planning

Heads of Income
 Income from salary
 Income from house property
 Profits and gains from business and profession
 Capital Gains (Further categorized into long and short Term)
 Income from Other Sources
 Not all income earned by a person is taxable. Incomes described in section 10 of the Income Tax Act, are not
included in the calculation of total income of an individual, for the purpose of determining tax liability.
Section 10 of the Income Tax Act lists out the sources of income that are exempt from tax.

 The Income Tax Act allows certain deductions that can be claimed for certain expenses or payments made
by the assesse from his total income. Deductions that can be claimed by an assesse are covered under
chapter VI –A of the Income Tax Act.

 After income tax is computed, the actual tax payable is reduced, if a rebate is allowed on account of specific
investment that was made. In other words, based on a pre-defined formula, the amount of tax payable is
reduced, since the investor has made certain investments that are eligible for such rebate.

 For some investment avenues, investors would enjoy a tax deduction on their investments, earn a tax-free
income on the investment, but pay income tax on the investment when it is redeemed. Such a tax regime
would encourage long term saving, This falls under Exempt Exempt Taxable Regime (EET Regime)

 The actual income tax to be payable may be increased by imposing a surcharge or a cess. The effective rate
of Income Tax goes up when such charges are imposed.

 Dividends are exempt from tax in the hands of the investor. They are however subject to additional tax on
dividends which is paid directly by the company or the mutual fund before it distributes dividends to the
investor.
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Types of Assesse

 Individuals
 Hindu Undivided Family
 Company
 Firm
 Association of persons
 Local authority
 Other persons not included above

Certain items of income (namely commission, interest, professional fees, rent, contractors’ payments etc.) are liable
for TDS i.e. tax deduction at the prescribed rates at the time of payment thereof.

Every assesse should compute his/ her estimated taxable income for the year and discharge the tax liability thereon
(after considering the TDS credit, if any) in specified proportions, by way of advance tax payable on specified due
dates.

Estate Planning

 Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the interest of
the intended beneficiaries.

 The term ‘estate’ includes all assets and liabilities belonging to a person at the time of their death. This may
include assets as well as claims a deceased is entitled to receive or pay.

 If a person dies without making a will, he is said to have died “intestate” and in such case his property will be
inherited by his heirs in accordance with laws of succession applicable to him. The end result may not be
what the person would have intended.

Tools for Estate Planning

During Lifetime

 Trust
 Joint Holding
 Gift
 Family Settlement
 Power of attorney
 Mutation

After Death

 Will
 Nomination
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A family settlement is an instrument used to achieve peace and harmony in the family when there is a dispute or
rival claims to property that can lead to a long drawn out litigation. The dispute must be between members of the
same family and a settlement entered must be between persons having title, claim or interest in the property.

“A trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and
accepted by the owners, or declared and accepted by him, for the benefit of another or of another and the owner.
The trust is managed by trustees. The person(s) for whose benefit the trust is created is the beneficiary.

Types of POA

 General POA: Enables the donee to act on all matters for the donor. The general list of matters covered in
this category includes management of bank accounts, sale of property, dealings in court, etc.
 Specific POA: Restricts the donee’s authority to act only on a specific transaction, e.g. POA granted to a
person to deal with the renting out of an apartment only.

Mutation refers to a significant alteration or substitution of the name of a person by the name of another in relation
to the record showing the right or title to the property. Mutation helps in proper updation of the revenue records to
ensure proper collection of revenue from the person who is in possession of the property.

XII. Regulatory Environment and Ethical Issues

Regulation for Investment Advisers

Definition and Requirement to Register

 Certificate of Registration
 Investment advice and Investment adviser

Exemptions
Any person who provides investment advice to his clients is known as an investment adviser. However, the
investment adviser regulations have exempted certain categories of persons from the requirement of registration.

Qualification & Certification Requirements and Capital Requirement

 Qualification
 Certification Requirement
 Capital Requirement

Obligations and Responsibilities of Investment Advisers

General Obligations

1) Conflicts of Interest
2) Only Advisory Income
3) Segregation of Other Activities
4) Confidentiality
5) Own Transactions
6) KYC Compliance
7) Code of Conduct
8) Reporting to SEBI
9) Certification and Qualification
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Risk Profiling

1) Information
2) Risk Assessment
3) Risk Profiling Tools

Suitability
Disclosures to Clients
Record Maintenance
Segregation of Record Services
Segregation of execution services
Other Responsibilities

Code of Conduct for Investment Advisor

 Honesty and fairness

 Diligence
 Capabilities
 Information about clients
 Information to its clients
 Fair and Reasonable charges
 Conflicts of Interests
 Compliance
 Responsibility of senior management

Regulators in India

Ministry of Finance and its Departments

 Department of Economic Affairs

 Department of Expenditure
 Department of Revenue
 Department of Financial Services
 Department of Investment and Public Asset Management

Ministry of Corporate Affairs

It is mainly concerned with the administration of the Companies Act, 2013 and other allied acts, rules and
regulations pertaining to the corporate sector. The Ministry is also responsible for administering the Competition Act
2002 which is to replace the Monopolies and Restrictive Trade Practices Act, 1969.
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Role of Regulators

Reserve Bank of India

 To formulate, implement and monitor the monetary policy in a manner as to maintain price stability while
ensuring an adequate flow of credit to productive sectors of the economy.
 To prescribe broad parameters of banking operations within which India’s banking and financial system
functions.
 To administer the Foreign Exchange Management Act 1999, in a manner as to facilitate external trade and
payment and promote orderly development and maintenance of the foreign exchange market in India.
 To issue currency and coins and to exchange or destroy the same when not fit for circulation.
 To perform a wide range of promotional functions to support national objectives.
 It acts as a banker to the Government and manages issuances of Central and State Government Securities.
 It acts as a banker to the banks by maintaining the banking accounts of all scheduled banks.

Securities and Exchange Board of India

The Securities and Exchange Board of India (SEBI), a statutory body appointed by an Act of Parliament (SEBI Act,
1992), is the chief regulator of securities markets in India. SEBI regulates capital market intermediaries such as stock
exchanges, brokers, and trustees of trust deeds, merchant bankers, and bankers to an issue, underwriters, portfolio
managers, mutual funds, depositories, depository participants, venture capital funds, and alternative investment
funds, Foreign Portfolio Investors, custodians and Registrars & Transfer agents in the country. Market intermediaries
are regulated by SEBI by prescribing registration norms for intermediaries, issue of regulations, notifications and
circulars from time to time for compliance by the intermediaries, calling for information from the intermediaries,
carrying out inspections, and taking action against non-compliance.

 Regulating and Registering

 Prohibition of unfair trade practices
 Conduct inquiries/inspection

Insurance Regulatory and Development Authority of India

IRDAI’s mission is to regulate, promote and ensure orderly growth of the insurance sector, including the re-insurance
business, while ensuring protection of the interests of insurance policyholders. IRDAI was constituted by an act of
parliament and according to Section 4 of the IRDA Act 1999 the Authority comprises ten members who are all
government appointees.

Pension Fund Regulatory and Development Authority

The PFRDA is the authority entrusted under the PFRDA Act, 2013
 Regulating the National Pension System and any other pension schemes to which the act applies
 Approving the schemes and their terms and investment guidelines to manage the corpus.
 Registering and regulating intermediaries
 Protecting the interests of the subscribers by ensuring the funds are managed according to the mandate
received, costs of management are reasonable and establishing a mechanism for redressal.
 Educating subscribers and the general public on matters relating to retirement savings.
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Self-Regulatory Organizations
An SRO is a regulatory authority of an industry, appointed by the regulator to perform Specific functions. In the
developed world, it is common for market players to create Self-Regulatory Organizations, whose prime
responsibility is to regulate their own members. Wherever SROs exist, the statutory regulatory bodies set up by the
Government only lay down the broad policy framework, and leave the micro-regulation to the SRO.

Prevention of Money-Laundering Act, 2002

Money laundering involves disguising financial assets so that they can be used without detection of the illegal
activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived
from criminal activity into funds with an apparently legal source. The Prevention of Money-Laundering Act, 2002
(PMLA), is an act to prevent money laundering and to provide for confiscation of property derived from, or involved
in, money laundering and for related matters.

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