Professional Documents
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Vysya Bank Limited - Risk and Return
Vysya Bank Limited - Risk and Return
Pro+essional management of your money $ho have the e/perience and resources
to thorou"hly analy?e the economy and financial markets. and spot "ood
opportunities0
8i;uidity and con#enience of "ettin" ack your money easily $henever you
$ant and there is very less paper $ork to do0 -asy to track your investments0
/ell>,egulated All 2utual Funds are re"istered $ith S-(I and they function
$ithin the provisions of strict re"ulations desi"ned to protect the interests of
investors0 1he operations of 2utual Funds are re"ularly monitored y S-(I0
G5H
In#estment a#enues o+ mutual +unds
Stoc-s1 mutual funds invest into stocks. $hich represent o$nership or e>uity in a
company. popularly kno$n as shares0
Bonds , these represent det from companies. financial institutions or "overnment
a"encies0
Money mar-et instruments , these include shortCterm det instruments such as treasury
ills. certificate of deposits and interCank call money0
7here are di++erent ty%es o+ mutual +unds. 7he chart belo0 0ill sho0
them
M=7=A8 .=2:S
Mutual Funds invests into
Stoc-s Bonds
Money mar-et instruments
Open-Ended
funds
Close-Ended
Funds
!;uity
+unds
Inde"
.unds
Money
Mar-et
+unds
3lobal/
Internationa
l .und
S%ecialty
.unds
Interval
funds
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By structure1
*%en>ended .unds1 An openCend fund is one that is availale for suscription all
throu"h the year0 1hese do not have a fi/ed maturity0 Investors can conveniently
uy and sell units at #et Asset 'alue GJ#A'JH related prices0 1he key feature of
openCend schemes is li>uidity0 2ost of the funds in India are openCended funds0
Inter#al +unds1 Interval funds comine the features of openCended and closeC
ended schemes0 1hey are open for sale or redemption durin" preCdetermined
intervals at #A' related prices0
!;uity +unds1
Funds that invest in stocks represent the lar"est cate"ory of mutual funds0 &enerally. the
investment ojective of this class of funds is lon"Cterm capital "ro$th $ith some income0
1here are. ho$ever. many different types of e>uity funds ecause there are many
different types of e>uities0 1hese funds invest a major part of their corpus in e>uities0 1he
composition of the fund may vary from scheme to scheme and the fund mana"er:s
outlook on various scripts0
In#estment in e;uity +unds can be di#ided into t0o ty%es1
1. In#estment style1
4alue +und1 1he term value refers to a style of investin" that looks for hi"h
>uality companies that are out of favor $ith the market0 )o$ P@- and priceCtoC
ook ratios characteri?e these companies and hi"h dividend yields0
G16H
1hese
funds invest in lar"e and midCsi?ed companies that appear to e
overlooked or out of favor0 1hese undervalued stocks tend to pay
dividends0
Blend +und1 1hese funds are a JlendJ of oth "ro$th and value stocks0
2. Si<e o+ In#estment1
8arge ca% +unds1 1hese funds uy shares of i" companies0 1hink I(20
1he stock prices for these companies tend to e relatively stale. and the
companies may pay a decent dividend0 In companies $hose market value
GK shares outstandin" L current market priceH is lar"e0 (y lar"e. I mean
"reater than M7 illion0 1hese JlueCchipJ funds tend to e $ellCestalished
corporations and tend to pay dividends0
Mid ca% +unds1 1hese funds uy shares of mediumCsi?e companies0 1he
stock prices for these companies are less volatile than the small cap
1=
companies. ut more volatile Gand $ith "reater potential for "ro$thH than
the lar"e cap companies0 1hese funds invest in midCsi?ed companies
$hose market value is more in the ran"e of M1 illion to M7 illion0
Small ca% +unds1 1hese funds uy shares of small companies0 1hink ne$
IPOs0 1he stock prices for these companies tend to e hi"hly volatile. and
the companies never GeverH pay a dividend0 Eou may also find funds called
micro cap. $hich invest in the smallest of pulically traded companies0
Inde" +unds1
A portfolio of investments that is $ei"hted the same as a stockCe/chan"e inde/ in order
to mirror its performance0 1his process is also referred to as "indexing". An inde/ is
simply a "roup of stocks chosen to represent a particular se"ment of the market0 Dsually
this is accomplished y purchasin" small amounts of each stock in a market0 1he
mana"er is not tryin" to find the hot stocks or "reat deals0 Instead. the mana"er is simply
tryin" to match a chosen inde"0 1he results are funds that are very cost efficient.
meanin" the operatin" costs are very lo$. and often eat most actively mana"ed funds0
G1<H
For e/ample. a stock inde/ fund ased on the +o$ Nones Industrial Avera"e $ould uy
shares in the 68 stocks that make up the +o$. only uyin" or sellin" shares as needed to
invest ne$ money or to cash out investors0 1he advanta"e of an inde/ fund is the very
lo$ e/penses0 After all. it doesnFt cost much to run one0
Bond/Income .unds1
An income fund invests in either corporate. "overnment. or municipal det securities0 A
det security is an oli"ation. $hich pays interest on a re"ular asis0 !ence. this type of
fund is desi"ned for investors $ho desire periodic income payments0 1here are. ho$ever.
sustantial differences and varyin" de"rees of risk amon" income funds dependin" on the
credit >uality of the det issuer. the maturity of the det instrument. and prevailin"
interest rates0
3ilt>+unds: Invest their corpus in securities issued y &overnment. popularly
kno$n as &ilt det papers0 1hese Funds carry ?ero +efault risk ut are associated
$ith Interest Rate risk0 1hese schemes are safer as they invest in papers acked y
&overnment0
Income +unds1 Invest a major portion into various det instruments such as
onds. corporate deentures and &overnment securities0
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MIPAs1 Invests around =8O of their total corpus in det instruments $hile the
rest of the portion is invested in e>uities0 It "ets enefit of oth e>uity and det
market0 1hese scheme ranks sli"htly hi"h on the riskCreturn matri/ $hen
compared $ith other det schemes0
Short>term Bond .unds1 usually means the holdin"s have up to t$o years left
to maturity0 1his includes ills. %+s. and commercial paper0
Intermediate>term Bond .unds1 usually means the holdin"s have et$een
t$o years to ten years until maturity0 1his includes notes.
8ong>term Bond .unds1 usually means the holdin"s have over ten years left to
maturity0
@ybrid/balanced +und1
!yrid mutual funds have een around since the late 1748s0 1hey are funds that are
invested in common stock. preferred stock. onds. and may have an international or a
cash component as $ell0
@ybrid mutual +unds may be suited +or1
10 Investors $ho are just startin" out and $ant diversification $ithin a sin"le fund.
and
40 1hose $ho $ant a simplified portfolio of only one or t$o funds0
60 One type of a hyrid mutual fund is called a Jalanced fundJ0 1hese funds
"enerally have lo$ volatility and are popular $ith investors seekin" current
income and "ro$th potential0
1he fund:s ojectives and the fund mana"er determine the ratio of stocks to onds0 Funds
$ith Balanced: or Bincome: in the name normally have a fi/ed ratio from $hich they
can:t deviate0 On the avera"e. their ratio of stocks to other investments is appro/imately
38,;80 2ana"ers of alanced funds can. ho$ever. shift this ratio one $ay or the other to
take advanta"e of hi"h interest rates or stock market "ro$th0 1hese funds may e e>uityC
oriented and ske$ed to$ard stocks. or incomeCoriented and ske$ed to$ard onds0
Money Mar-et +unds1
A money market fund is a type of mutual fund that is re>uired y la$ to invest in lo$Crisk
securities0 1hese funds have relatively lo$ risks compared to other mutual funds and pay
dividends that "enerally reflect shortCterm interest rates0 Dnlike a Jmoney market deposit
accountJ at a ank. money market funds are not federally insured0
2oney market funds typically invest in "overnment securities. certificates of deposits.
commercial paper of companies. and other hi"hly li>uid and lo$Crisk securities0 1hey
attempt to keep their net asset value G#A'H at a constant M1088 per sharePonly the
dividend yield "oes up and do$n0 (ut a money market:s per share #A' may fall elo$
M1088 if the investments perform poorly0 9hile investor losses in money market funds
have een rare. they are possile0
48
Althou"h money market mutual funds are amon" the safest types of mutual funds. it still
is possile for money market mutual funds to fail. ut it is unlikely0 In fact. the i""est
risk involved in investin" in money market funds is the risk that inflation $ill outpace the
fundsF returns. therey erodin" the purchasin" po$er of the investorFs money0
7y%es o+ money mar-et mutual +unds are ,
Prime +unds
3o#ernment +unds
7a">e"em%t +unds
S%ecialty mutual +unds1
1his classification of mutual funds is more of an allCencompassin" cate"ory that consists
of funds that have proved to e popular ut donFt necessarily elon" to the cate"ories
$eFve descried so far0 1his type of mutual fund for"oes road diversification to
concentrate on a certain se"ment of the economy0
Sector +unds are tar"eted at specific sectors of the economy such as financial.
technolo"y. health. etc0 Sector funds are e/tremely volatile0 1here is a "reater
possiility of i" "ains. ut you have to accept that your sector may tank0
,egional +unds make it easier to focus on a specific area of the $orld0 1his may
mean focusin" on a re"ion Gsay )atin AmericaH or an individual country Gfor
e/ample. only (ra?ilH0 An advanta"e of these funds is that they make it easier to
uy stock in forei"n countries. $hich is other$ise difficult and e/pensive0 Nust
like for sector funds. you have to accept the hi"h risk of loss. $hich occurs if the
re"ion "oes into a ad recession0
Socially res%onsible funds Gor ethical fundsH invest only in companies that meet
the criteria of certain "uidelines or eliefs0 2ost socially responsile funds donFt
invest in industries such as toacco. alcoholic evera"es. $eapons or nuclear
po$er0 1he idea is to "et a competitive performance $hile still maintainin" a
healthy conscience0
7a" sa#ing schemes1 1he ojective of 1a/ Savin" schemes is to offer ta/ reates
to the investors under specific provisions of the Indian Income 1a/ )a$s0
Investments made under some schemes are allo$ed as deduction u@s == of the
Income 1a/ Act0
3lobal mutual +und1
1his type of mutual fund makes its investment in international markets0 1hey invest
eyond the national oundaries in forei"n lands0 1hey invest in forei"n companies0
Ban- de%osits1
Meaning1 9hen you deposit a certain sum in a ank $ith a fi/ed rate of interest and a
specified time period. it is called a ank Fi/ed +eposit GF+H0 At maturity. you are entitled
to receive the principal amount as $ell as the interest earned at the preCspecified rate
durin" that period0 1he rate of interest for (ank Fi/ed +eposits varies et$een ; and 11
41
per cent. dependin" on the maturity period of the F+ and the amount invested0 1he
interest can e calculated monthly. >uarterly. halfCyearly. or annually. and varies from
ank to ank0 1hey are one the most common savin"s avenue. and account for a
sustantial portion of an avera"e investorFs savin"s0 1he facilities vary from ank to ank0
Some services offered are $ithdra$al throu"h che>ues on maturityA reak deposit
throu"h premature $ithdra$al. and overdraft facility etc0
Interest income from (ank F+ >ualifies for e/emption under section =8). $hich means
the interest income is e/empt up to limit of Rs 78880
7here are t0o basic ty%es o+ +i"ed de%osit accounts1
1. 7ime de%osit C $here you a"ree to deposit money for a fi/ed period0 1he lon"er
the period and the "reater the amount. the hi"her the interest rate0 Fi/ed periods
ran"e from one month to one year0 7he interest rate is higher than call de%osit
2. Call de%osit C $here you a"ree to $ithdra$ money only after "ivin" a period of
notice to us0
1here is a minimum deposit for settin" up fi/ed deposit accounts0 It helps you to save
money y forcin" you to keep your money intact for a certain period0 !o$ever. if in any
case you need to $ithdra$ money efore the maturity date. you can al$ays come to us
and special arran"ements could e made0 Interest loss and an early $ithdra$al char"e
$ill result from such chan"es0
.eatures
(ank deposits are fairly safe ecause anks are suject to control of the Reserve (ank of
India GR(IH $ith re"ard to several policy and operational parameters0 1he anks are free
to offer varyin" interests in fi/ed deposits of different maturities0 Interest is compounded
once a >uarter. leadin" to a some$hat hi"her effective rate0
1he minimum deposit amount varies $ith each ank0 It can ran"e from as lo$ as Rs0 188
to an unlimited amount $ith some anks0
Ad#antages
(ank deposits are the safest investment after Post office savin"s ecause all ank deposits
are insured under the +eposit Insurance Q %redit &uarantee Scheme of India0 It is
possile to "et a loan up to5<C 78O of the deposit amount from anks a"ainst fi/ed
deposit receipts0 1he interest char"ed $ill e 4O more than the rate of interest earned y
the deposit0 One can "et a ank F+ at any ank. e it nationali?ed. private. or forei"n0
Eou have to open a F+ account $ith the ank. and make the deposit0
G
7he de%osit %eriod can #ary +rom 19 3D or 4 days to 39 $ months9 1 year9 1.
years to 1D years0 Gelo$ one croreH
:uration Interest rate 5E6 %er annum
5 C 1< days 40<8O
13 C ;8 days 60<8O
44
;1 ;; days ;088 O
;<C38 days <0<8O
31C78 days 5088O
71 117 days 50<8O
148 days 505<O
141 63; days 50<8O
63<C633 days =04<O
635 days to 18 years 504<O
3o#ernment Securities1
:e+inition1 &overnment onds are securities issued y the %entral and State
"overnments0 As anker to the "overnment. the Reserve (ank of India re"ularly services
the payment of interest and the principal on these securities0 Since these are soverei"n
paper. the onds are re"arded as the safest0 1he other advanta"es of the "overnment
securities are that they are tradale and can e used as collateral for loans0 1here is no
deduction at source G1+SH on interest payments on "overnment securities0 (ut for
individuals. interest income up to Rs 6.888 per annum is only e/empt from income ta/0
7he bene+its o+ in#esting in a go#ernment security are1
10 Sa+ety1 1he Rero +efault Risk is the "reatest attraction for investments in
&overnment Securities0 It enjoys the "reatest amount of security possile. as the
&overnment of India issues it0 !ence they are also kno$n as &iltC-d"ed Securities
orF&iltsF0
40 .i"ed Income1 +urin" the term of the security there is likely to e fluctuations in
the &overnment Security prices and thus there e/ists a price risk associated $ith
investment in &overnment Security0 !o$ever. the return on the holdin" of
investment is fi/ed if the security is held till maturity and the effective yield at the
time of purchase is kno$n and certain0 In other $ords the investment ecomes a
fi/ed income investment if the uyer holds the security till maturity0
60 Con#enience1 &overnment Securities do not attract deduction of ta/ at source
G1+SH and hence the investor havin" a nonCta/ale "ross income need not file a
return only to otain a 1+S refund0
;0 Sim%licity1 1o uy and sell &overnment Securities all an individual has to do is call
his @ her ->uity (roker and place an order0 If an individual does not trade in the
->uity markets. he @ she has to open a demat account and then can commence
tradin" throu"h any ->uity roker0
<0 8i;uidity1 &overnment Security $hen actively traded on e/chan"es $ill e hi"hly
li>uid. since a national tradin" platform is availale to the investors0
30 :i#ersi+ication1 &overnment Securities are availale $ith a tenor of a fe$ months
46
up to 68 years0 An investor then has a $ide time hori?on. thus providin" "reater
diversification opportunities0
7he +actors9 0hich a++ect the %rice o+ go#ernment securities1
1he price of a &overnment Security in the markets is determined y the forces of
demand and supply. as is the case in any market0 1he price of a &overnment Security in
the marketplace also depends on a numer of other factors and $ill fluctuate accordin"
to chan"es in,
-conomic conditions0
&eneral money market conditions includin" the position of money supply. in
the economy0
Interest rates prevalent in the market and the rates of ne$ issues0
%redit >uality of the issuer
Cor%orate Bonds1
(onds issued y a corporation are called corporate onds0 9hen a company needs to
raise funds for some type of investment or e/penditure. they often turn to the pulic
markets for fundin"0 One $ay to do this is to issue additional stock in the company. ut
this has implications on the value of the shares and dilutes o$nership0 1he other major
option is to sell onds to the pulic and take on det0 Sellin" onds is often more
attractive to companies than "ettin" a loan from a ank0
%orporate onds are dets issued y industrial. financial and service companies to
finance capital investment and operatin" cash flo$0 Investors in corporate onds have a
$ide ran"e of choices $hen it comes to ond structures. coupon rates. maturity dates.
credit >uality and industry e/posure0 Investors in corporate onds have a $ide ran"e of
choices $hen it comes to ond structures. coupon rates. maturity dates. credit >uality and
industry e/posure0
9hen you uy a ond. you are lendin" money to the corporation that issued it0 1he
corporation promises to return your money. or principal. on a specified maturity date0
Dntil that time. it also pays you a stated rate of interest. usually semiannually0 1he
interest payments you receive from corporate onds are ta/ale0 Dnlike stocks. onds do
not "ive you an o$nership interest in the issuin" corporation0
1he onds are fully ta/ale. and they are issued in maturities ran"in" from less than one
year to aout 68 years Galthou"h there are a fe$ corporate onds that mature in more than
68 yearsH0
4;
7y%es o+ Issuers
1here are five main classifications of issuers representin" various
sectors that issue corporate onds,
G43H
10 Pulic utilities
40 1ransportation companies
60 Industrial corporations
;0 Financial services companies
<0 %on"lomerates
Bene+its o+ In#esting in Cor%orate Bonds
Investors uy corporate for a variety of reasons,
Attracti#e yields %orporate usually offer hi"her yields than comparaleCmaturity
"overnment onds or %+s0 1his hi"hCyield potential is "enerally accompanied y
hi"her risks0
:e%endable income People $ho $ant steady income from their investments.
$hile preservin" their principal. include corporate in their portfolios0
Sa+ety %orporate onds are evaluated and assi"ned a ratin" ased on credit
history and aility to repay oli"ations0 1he hi"her the ratin". the safer the
investment0
:i#ersity %orporate onds provide the opportunity to choose from a variety of
sectors. structures and creditC>uality characteristics to meet your investment
ojectives0
Mar-etability If you must sell a ond efore maturity. in most instances you can
do so easily and >uickly ecause of the si?e and li>uidity of the market0
8i+e Insurance Policy
Meaning1 )ife insurance is a form of insurance that pays monetary proceeds upon the
death of the insured covered in the policy0 -ssentially. a life insurance policy is a contract
et$een the named insured and the insurance company $herein the insurance company
a"rees to pay an a"reed upon sum of money to the insuredFs named eneficiary so lon" as
the insuredFs premiums are current0
1he cost of life insurance varies dependin" on such factors as the insuredFs a"e. health.
and occupation0 For e/ample. the premium for a 4<CyearCold. male. nonCsmoker in
e/cellent health $ill e far less e/pensive than a similar policy for a 3<CyearCold male
smoker0 Similarly. a sky dive instructor $ould have to pay much hi"her premiums for life
insurance than $ould a lirarian0
4<
)ife insurance is availale in a numer of different forms to fit the tastes of the proposed
insured0 Some of the typical forms of life insurance policies include, $hole life. variale
life. and term life0 7erm li+e insurance %olicies e"in $ith lo$ premiums durin" the
initial sta"es of the policy and these premiums increase steadily as the insured "ro$s
older0 1here is no cash uildCup in a term policy and. accordin"ly. the death enefit $ill
not increase0
9ith $hole life and variale life insurance. a portion of each premium pays for the
insurance and the remainder serves as a ta/Cfree investment0 A 0hole li+e %olicy sets a
premium at the e"innin" of the policy and that premium does not chan"e over the life of
the policy0 1his form of insurance allo$s for a cash uildCup durin" the insuredFs life0
1his cash uildCup can e used durin" the course of the policy or it $ill simply serve to
increase the death enefit in the end0
In a #ariable li+e %roduct. the premium remains the same over the life of the policy. and
there should e a cash uildCup as lon" as the various mutual funds selected y the
insured perform $ell0
2eed +or a li+e insurance %olicy1
Protection> Eou need life insurance to e there and protect the people you love.
makin" sure that your family has a means to look after itself after you are "one0 It
is a thou"htful usiness concept desi"ned to protect the economic value of a
human life for the enefit of those financially dependent on him0 1hat:s a "ood
reason0 Supposin" you suffer an injury that keeps you from earnin"S 9ould you
like to e a financial urden on your family. already losin" out on your salaryS
9ith a life insurance policy. you are protected0 Eour family is protected0
,etirement> )ife insurance makes sure that you have re"ular income after you
retire and also helps you maintain your standard of livin"0 It can ensure that your
postCretirement years are spent in peace and comfort0
Sa#ings and In#estments> Insurance is a means to Save and Invest0 Eour periodic
premiums are like Savin"s and you are assured of a lump sum amount on
maturity0 A policy can come in really handy at the time of your child:s education
or marria"eT (esides. it can e used as supplemental retirement incomeT
7a" Bene+its> )ife insurance is one of the est ta/ savin" options today0 Eour ta/
can e saved t$ice on a life insurance policyConce $hen you pay your premiums
and once $hen you receive maturity enefits0 2oney saved is money earned0
Contract and Policy
An insurance contract cannot cover all conceivale risks0 An insurance contract that
violates a statute is contrary to pulic policy. or plays a part in some prohiited activity
$ill e held unenforceale in court0 A contract that protects a"ainst the loss of ur"lary
tools. for e/ample. is contrary to pulic policy and unenforceale0
Insurable Interest
1o >ualify for an insurance policy. the insured must have an insurale interest. meanin"
that the insured must derive some enefit from the continued preservation of the article
43
insured. or stand to suffer some loss as a result of that articleFs loss or destruction0 )ife
insurance re>uires some familial and pecuniary relationship et$een the insured and the
eneficiary0 Property insurance re>uires that the insured must simply have a la$ful
interest in the safety or preservation of the property0
Claims
1he most common issue in insurance disputes is $hether the insurer is oli"ated to pay a
claim0 1he determination of the insurerFs oli"ation depends on many factors. such as the
circumstances surroundin" the loss and the precise covera"e of the insurance policy0 If a
dispute arises over the lan"ua"e of the policy. the "eneral rule is that a court should
choose the interpretation most favorale to the insured0 An insurance company may deny
or cancel covera"e if the insured party concealed or misrepresented a material fact in the
policy application0 If an applicant presents an unacceptaly hi"h risk of loss for an
insurance company. the company may deny the application or offer prohiitively hi"h
premiums0 A company may cancel a policy if the insured fails to make payments0 A
company may refuse to pay a claim if the insured intentionally caused the loss or dama"e0
G61H
3old1
&old is the standard y $hich the value of anythin" is assessedA it is universally accepted0
India has een a traditional "oldChoarder0 Indians love "old0
Investment in "old can e done directly throu"h o$nership. or indirectly throu"h
certificates. accounts. shares. futures etc0 2ost investors $ould not recommend storin"
"old oneself Ge0"0 in oneFs home or uried in the "ardenH ut to use a ank or dealer0
&old prices have seen an up$ard trend in the past 6 years0 1hou"h the earlier decades
sa$ a relatively poor performance y the precious metal. "old prices are likely to rise
steadily over the lon"er term0 1his investment opportunity is sho$in" an ups$in" a"ain0
9ith uncertainty in the stock market and decline in the DS dollar. investors are takin" a
fresh look at "old as an investment option0 &old $orks as a perfect hed"e a"ainst
investment in other assets0 In fact. $hen other investments take a eatin". "old
investment tends to staili?e0 As a lon" term investor. holdin" on to "old investment is a
"ood tip0
.actors a++ecting the %rices o+ gold1
Gold Demand COviously the hi"her the demand for &old. the hi"her its
price0 %ertain nations hold the metal in hi"h re"ard and often use it for major
purchases or investments Gy purchasin" je$elry etcH0 %hina and India are very
important consumers $here there seems to e a emer"in" usiness population
lookin" to invest in some physical cash assets0 &old. Platinum and +iamonds are
also heavily used in industry0
:ollar Price> &old is typically >uoted in +ollars. and if the dollar e"ins to sink
then the value of &old tends to increase and viceCversa0
45
Mar-et .ear> 9henever the stock markets or political situations look ad then
people tends to fly to$ards &old0 Stock market crashes. terrorist attacks. or $ars
$ill all tend to push the value of &old up0