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Development Bank of India Act, as a wholly owned Subsidiary of the Reserve Bank of India. In terms of the public Financial Institutions Laws (Amendment) Act, 1975,the ownership of the IDBI has been transferred to the Central Government with effect from 16th February 1976. It is deal with all the problems of Industrial financing and development and to enforce a system of priorities in promoting industrial growth. Unlike commercial banking, which had a fairly long history in must development countries, development banking is of a comparatively recent origin. The role played by Government and the central banks in establishing development banks in Asian Countries has bees much more comprehensive than the institutions in the developed countries of the west. In India after independence, many financial and development institutions the Industrial finance corporation, the Industrial Credit and investment corporation, the National Industrial Development Corporation, the Refinance corporation and the National and state small Industries corporations have been established to serve the needs of Indian Industry. But all their institutions have not been able to make substantial contributions to the Industrial progress as envisaged in our five-year plans. The Industrial Development Bank of India (IDBI) was established on July 1, 1964 as a wholly owned subsidiary of the Reserve Bank of India (RBI - the Central Bank of the country) under an Act of Parliament. In view of the manifold increase in its activities and diverse
responsibilities, the ownership of IDBI was transferred to Government of India (GoI) in February 1976 and it was made the principal financial institution for co-ordination the activities of institutions engaged in financing, promotion or development of industry in the country as also for providing credit and other facilities for the development of industry. Later, in 1995, IDBI made its first public offering of equity shares, after the IDBI Act was amended in 1994 to permit public ownership up to 49% of its issued capital. Government of India’s shareholding in IDBI today stands at around 58%. IDBI played a pioneering role, particularly in the pre-reform era (1964-91), in catalyzing broad-based industrial development in the country in keeping with its Government-ordained 'development banking' charter. IDBI’s activities were not confined merely to long-term project lending to industry; instead, these covered a host of services undertaken in pursuit of broader development goals aligned to Government of India’s varied socio-economic objectives in the realm of industry. The latter encompassed, among others, balanced industrial growth through development of identified backward areas, modernization of specific industries, employment creation, identification and encouragement to new entrepreneurs along with support services for creating a deep and vibrant domestic capital market, including apposite institutional development. A slew of financial sector reforms unveiled by the Government since 1992, aimed at domestic deregulation and greater global integration, posed new challenges for DFIs like IDBI in pursuit of their DFI mandate. IDBI sought to address the environmental challenges and the opportunities they represent by evolving an array of fund and fee-based
services to provide an integrated solution to the entire gamut of financial and corporate advisory requirements of its clients, extending IDBI’s business platform to other geographical areas and related new business, besides undertaking innovative resource-raising initiatives in domestic and foreign markets, both wholesale and retail. Total assistance sanctioned under all products by IDBI aggregated Rs. 28.89 billion in 2002-03. Disbursements during the same year amounted to Rs. 39.24 billion. Cumulative assistance sanctioned and disbursed by IDBI since its inception upto end-March 2003 stood at around Rs. 2250 billion (USD 48 billion) and Rs. 1700 billion (USD 36 billion) respectively. IDBI is a fundamentally strong, consistently profit-earning and dividend-paying organization. The Bank continues to maintain a sound capital base as represented by the Capital Adequacy Ratio (CAR), based on the calculation of risk-weighted assets, as per RBI norms. As against the RBI stipulation of 9% for Total CAR, the CAR as at end-March 2003 was 18.7%. The reasons is that their institutions were neither intended nor equipped to carry the major burden of financing industrial expansion and growth in various directions. Their capital resources are relatively meager, and the statutory framework with which they operate is restrictive. The Industrial Development Bank of India was established mainly with a view to overamaking the limitations of these institutions.
Υ The Functions of the Industrial Development Bank of India are: + To grant loans and/or to subscribe to the debentures of Industrial concerns, with the provision that such loan, advances oz debentures may, if so desired by the bank; + To refinance loans given by specified financial institutions to Industrial concern. + To subscribe to or purchase stock, share or bonds of any Industrial concern or financial institution or to underwrite stocks, share, bonds, debentures, etc., of any of them; + To guarantee loans floated by industrial concerns, as also the deferred payment credits for exports; and + To undertake marketing and investment research and surveys or carry out techno-economic studies. As an open financial institution, the IDBI has been assigned a special role for planning, promoting and developing industries to fill vital gaps in the industrial structure; providing technical and administrative assistance for promotion, management and expansion of Industry; and undertaking market and Investment research and surveys as also techoeconomic studies in connection with development of industry. Beside its Head office at Mumbai, Calcutta, Guwahati, Chenndi and New Delhi and 49 branch offices in various states.
IDBI bank looks confidently into the future to face and thrive in the intense competitive environment that is emerging. The bank has now gained experience and has in place the strategies required for gaining a leadership position. With cutting edge relevant technology, aggressive marketing, innovation, tight control over costs and with its motivated workforce, the bank is all set to emerge as a model global corporate citizen in the days ahead. IDBI, the tenth largest development bank in the world has promoted world class institutions in India. A few of such institutions built by IDBI are The National Stock Exchange (NSE), The National Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) etc. IDBI is a strategic investor in a plethora of institutions, which have revolutionized the Indian Financial Markets. IDBI promoted idbi bank to mark the formal foray of the IDBI Group into commercial Banking. This initiative has blossomed into a major success story. IDBI bank, which began with an equity capital base of Rs.1000 million (Rs.800 million contributed by IDBI and Rs.200 million by SIDBI), commenced its first branch at Indore in November 1995. Thereafter in less than seven years the bank has attained a frontranking position in the Indian Banking Industry. IDBI bank successfully completed its public issue in February 99 which led to its paid-up capital expanding to Rs.1400 million. The promoters holding consequent to this public issue stood reduced to 71%
with IDBI holding 57% and SIDBI 14% of the paid up capital of IDBI Bank. This is in line with the requirement of RBI which stipulates that eventually the promoters holding should be brought down to 40%.
The present liberalized industrial and financial sector environment makes it imperative for the Development Financial Institutions (DFIs) to reinvent them in the changed business environment. One alternative is to diversify business activities so that dependence on industry sector is reduced. A strategic migration into a viable commercial banking model could be one way to achieve such diversification. Commercial banking would, inter alia, provide a wide retail reach, making it possible to raise low-cost funds, the benefits of which would be passed on to our clients. Such a transformation would also enable the Bank to acquire a wider array of assets, which would thereby facilitate maintaining overall asset quality at the required level. While advent of new technology has obviated the need to have a widespread branch network, it is important to build an appropriate technology platform to attract and retain customers. It would also be necessary to acquire a critical mass of banking assets to be able to expeditiously derive the benefits of diversification. In the immediate future, IDBI envisions a continued strategic focus on corporate and wholesale banking segments, building upon its secular core competence in term lending and project finance. This would also enable IDBI to offer an integrated financial solution to its corporate
clients. The Bank would strive to be a major player in the infrastructure finance area, besides retaining leadership status in industrial finance. IDBI would dedicate itself towards exploring new markets and industries (including constituents of the burgeoning services sector), offer new customized products and services, access newer sources of finance and generate innovative and gainful business solutions for its corporate clientele. IDBI would also consider entering into mutually beneficial alliances with financial players, both domestic and international. These business nuptials would centre around sharing of resources, markets, technology and skills to enhance shareholder value on both sides. IDBI’s diversification charter would emphasize ring fencing and adding synergy to its core competence in project finance. In view of the felt need to impart operational flexibility and diversified charter to IDBI, Government of India has sought to repeal the IDBI Act, 1964, by introducing the Industrial Development Bank (Transfer of Undertaking and Repeal) Bill 2002 in the Lok Sabha. The Bill, which is awaiting Parliamentary approval, is aimed at converting IDBI into a Company under the Companies Act and enabling it to undertake banking business. The corporate form is considered to be more appropriate as it would enable the Bank to operate in a flexible manner. These initiatives are in consonance with IDBI’s long-term strategy of achieving a top-drawer status in the emerging configuration of institutional finance and assuming a globally relevant character.
INTRODUCTION OF MUTUAL FUND
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.
A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations. A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the scheme.
What is Mutual Fund?
Invest / Pool Their money
Profit/Loss from Portfolio Of investments
Mutual Fund Co. (Pool of money)
Investing a Number of Stocks/Bonds
Profit/Loss from individual Of investments
A Mutual Fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc.
Benefits of Mutual Funds:-
1. Universal Benefits
Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. Diversification:The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives.
Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme. Professional Management:Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. When you buy in to a mutual fund, you are handing your money to an investment professional that has experience in making investment decisions. It is the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required. Tax Benefits Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a confessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax. Regulations:Securities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors. 1. Benefits of Open-ended Schemes Liquidity In open-ended mutual funds, you can redeem all or part of your units any time you wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period. Convenience: An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (“SIP”) or a Systematic Withdrawal Advantage Plan (“SWAP”). In addition to this an investor receives account statements and portfolios of the schemes.
Flexibility: Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time. Transparency : Open-ended mutual funds disclose their Net Asset Value (“NAV”) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.
Structure of Mutual Fund
SEBI Trustee AMC Operations Fund Manager Sponsor
Sponsor: Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the networth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation
of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
Trust: The Sponsor constitutes the Mutual Fund as a trust in accordance with the provisions of the Indian Trusts Act, 1882. The trust deed is registered under the Indian Registration Act, 1908.
Trustee:Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.
Asset Management Company (AMC):The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a networth of at least 10 crore at all times.
Registrar and Transfer Agent: The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.
TYPES OF MUTUAL FUNDS In the investment market, one can find a variety of investors with different needs, objectives and risk talking capacities. MUTUAL FUND
On the basis of Execution and Operation
On the basis of yield and investment pattern
Mutual Fund schemes can broadly be classified into many types as given below: Close-ended Funds:The unit capital of a close-ended product is fixed as it makes a onetime sale of fixed number of units. These schemes are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike
open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme. Features: - The main features of the close-ended funds are: The period and/or the target amount of the fund are definite and fixed beforehand. Once the period is over and/or the target is reached, the door is closed for the investors. They cannot purchase any more units. These units are publicly traded through stock exchange and generally, there is no repurchase facility by the fund. The main objective of this fund is capital appreciation. The whole fund is available for the entire duration of the scheme and there will not be any redemption demands before its maturity. At the time of redemption, the entire investment pertaining to a closed-end scheme is liquidated and the proceeds are distributed among the unit holders. Open-ended Funds:An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
Features: - The main features of the Open-ended funds are: There is complete flexibility with regard to one's investment or disinvestment. These units are not publicly traded but the Fund is ready to repurchase them and resell them at any time. The investor is offered install liquidity in the sense that the unit can be sold on any working day to the Fund. The main objective of this fund is income generation. The inventors get dividend, right or bonuses as rewards for their investment. Generally, the listed prices are close to their Net Asset Value. The Fund fixes a different price for their purchases and sales. On The Basis Of Income Income Funds:The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Features: - The main features of the Income funds are:
The investor is assured of regular income at periodic intervals, says Half- yearly or years and so on. The main objective of this type fund is to declare regular dividends and not capital appreciation. The pattern of investment is oriented towards high and fixed income yielding securities like debentures, bonds etc. This is best suited to the old and retired people who may not have any regular income. It concerns itself with short run gains only. Growth Funds:The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. Features: - The main features of the Growth funds are: The Growth oriented fund aims at meeting the investors' need for capital appreciation. The Investment strategy therefore, conforms to the Fund objective by investing the fund predominantly on equities with high growth potential. The Fund tries to get capital appreciation by taking much risk and investing on risk bearing equities and high growth equity shares.
The Fund may declare dividend, but its principal objective is only capital appreciation. This is best suited to salaried and business people who have high risk bearing capacity and ability to defer liquidity. They can accumulate wealth for future needs. Balance Funds:The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Specialised Funds: Index schemes:The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. An Index also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are
launched and managed for such investors. An example to such a fund is the HDFC Index Fund.
Tax Saving schemes: Investors (individuals and Hindu Undivided Families “HUFs”) are being encouraged to invest in equity markets through Equity Linked Savings Scheme (“ELSS”) by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched – out until completion of 3 years from the date of allotment of the respective Units. Money Market Funds: The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods. Load Funds A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.
Net Asset Value (NAV): The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.
Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets
Expenses accrued but not paid For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded For liquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation. Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date. Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued".
Financial Planing 1) Financial Planner - Generalist or Specialist?
It is useful to draw parallels between the family doctor and the Financial Planner. The family doctor takes care of your physical health. She is typically a general practitioner (GP), who recommends you to a cardiologist, surgeon, dentist, and ophthalmologist etc as per your needs. The Financial Planner takes care of the fiscal (financial) health of the investor, and ensures orderly bequeathing of wealth to the next generation. The skill set requirement include General awareness of various assets classes and financial products. Understanding of portfolio management principals. Understanding of economic cycles and their impact on markets. Knowledge of income tax. Knowledge of laws related to ownership of assets, estate planing etc. Reading of people and their comfort zones. Expecting a financial planner to be an expert in all the above skills is like expecting a person to jump between building like Superman, hypnotise people like Mandrake and shoot like Phantom- an idealistic
situation. A good financial planner would have all the above skill sets to an extent. She may also be an expert on some of these skills. Thus, we can view the financial planner as more of as generalist, who would fall back on a specialist as per the needs of the situation.
2) Steps to Financial Planing
The certified Financial Planner-Board of Standards (USA) recommends. The following six broad steps Establish and define the client planner relationship. Gather client data, define client goals. Analyse and evaluate client's financial status. Develop and present financial planing recommendations. Implement the financial planing recommendations. Monitor the financial planing recommendation.
3) Assets Classes
As seen earlier, investing the entire portfolio in debt is not necessarily a prudent option. Inflation and re-investment risks can wreak havoc to the life of such investors. Prudence therefore lies in investing in a mix of asset classes. The performance of different assets class hinges on how of economy performs. Economies tend move in cycles- often referred to as business cycles. From a trough the economy expands, then reaches a peak, and then contracts into a trough.
The financial planner's reading of the economic environment is important. For instance, while economy is becoming, equity investment would generate good returns. But in a contractionary phase in the business cycle, debt investments may be more prudent. Financial planners need to be able to anticipate the cycles. To draw an analogy, it is difficult the day to day temperature and rainfall- but the seasonal cycle can be predicted. So also financial planners may not be able to read the short-term fluctuations, but the long term business cycle need to be factored in the financial plans they make. One categorization of assets would be debt and equity. In India, even gold is an important asset category. Besides, real estate could be another component of a client's asset portfolio. An asset categorization relevant for a fund distributor is liquid schemes, Gilt Schemes, Balanced Schemes, Index Schemes, Bond Schemes, Diversified Schemes, Equity Schemes, and Sectoral or Focussed Schemes, etc. Every asset class and mutual fund type implies a risk- return tradeoff. Generally, one has to take a greater risk for a chance to earn a higher return. The AMFI Mutual Fund Testing Programme Workbook provides a useful comparison of investment alternatives. Return High Volatility Liquidity Conveniences High High or Moderate Low Moderate High Moderate Moderate High Moderate Moderate Moderate Low Low Moderate Low Low High Moderate High Low High Low Low Low Low
Equity FI Bonds Co. Debenture Co. FDs Bank Deposits PPF Life
Moderate High Low Moderate
Insurance Gold Real Estate Mutual Funds
Moderate High Moderate Moderate Low High Moderate High Low Low High High Moderate High High
Notes: - Table reproduced with permission of the Association of Mutual Funds of India.
4) Asset Allocation: The optimum asset allocation for a client would depend on her wealth cycle and life cycle. The Wealth Cycle People typically go through three-wealth cycle phasesAccumulation / sowing: Where the person's saving is much more than current needs. So she is in a position to set apart something for the future. Distribution / Reaping / Harvesting: Where the person's needs cannot be fully met by current savings. The gap would need to be met out of savings or loans.
Transition: This is a phase between the accumulation and distribution phases, when the distribution needs are very clearly in the person's radar, although the harvesting may not have commenced.
Windfall: This is a phase that touches people's lives occasionally. It could be winning from a lottery, super- normal profits booked on investments, inheritance etc. The risk-based asset allocation would be different foe each phase. The AMFI Mutual Fund Testing Programme Workbook proposes the following mix: Accumulation: Asset Diversified equity, sector and balanced funds Income and gift funds Liquid funds and bank deposits Distribution: Asset Diversified equity and balanced funds Income funds Cash funds Allocation 15-30% 65-80% 5% Allocation 65-80% 15-30% 5%
Note: - Tables reported with permission of the Association of Mutual Funds of India.
A thumb-rule often followed is that age of the client would determine the share of debt in the portfolio. Thus, a 30-year old person would have 30% debt, an 80-year old person would have 80% debt in her portfolio. The thumb rule should not be stretched too much- else a person who lives beyond 100 would end up short-selling equity-hardly an age for such all portfolio management style! The approach is referred to as strategic asset allocation. During the transaction stage, the investor would be well advised to park increasing proportions of money in liquid assets. Once the expected goals have passed, the investor can go back the distribution suggested by strategic asset allocation. The windfall situation is interesting. When the client wins a lottery, she realise there are so many so- called friends or relatives - including many who have not bothered to maintain contact for several years. Money in the bank is always a temptation for a splurge (person accustomed to travel by train, deciding to buy a Mercedes Benz!) or altruism. It would be prudent not to blow up the money, nor invest all the moneys at the same time. The moneys could first be invested in a safe and liquid avenue (liquid schemes for instance). Progressively, the moneys can be invested in equity or other investments, as per the preferred asset allocation. Through progressive investments, the investor can avail of the benefits of SIP.
Thus, during the transition and windfall stages, the investor's asset allocation would be temporary at variance from that suggested by the strategic asset allocation approach.
The Life Cycle Birth, childhood, graduation, early employment, marriage, children, education/ marriage of children and retirement - these are the phases that people normally go through. The asset allocation and investment choices that are made would need to keep the life cycle in mind. Thus in the early stages of one's professional career, the investment mix would be more like that set our above for the 'Accumulation' phase in the wealth cycle. Towards retirement, it would be more like the 'Distribution' phase in the wealth cycle. The investment mix would need to specifically provide for expected spikes in expenses in between ('Transition' phase), such as for buying house, marriage of children etc. An aggressive growth fund would find a place in the portfolio of younger investors with a propensity to take risk.. Older investors would find the equity portion of their portfolio dominated by equity income funds. As seen earlier, close to a large and sure fund outflow for people who are in the transition phase (some requirement of funds in the radar), moneys would be transferred to money market or other debt funds. Thus, scheme selection becomes a function of both risk profile and cash flow needs of an investor.
A financial plan sets out a complete road map for the investor to realize her dreams. It would consider the requirement of funds at various points of time in future, current wealth, expected earnings in future, and mix of investments, the return on which would help realize the dreams. By combining all dreams and funding possibilities, a financial plan optimizes the dream fulfillment. It provides the investor a cockpit view of her entire financial landscape. She knows right the dreams that are likely to be fulfilled, and the dreams that are only 'day dreaming exercises'. If required, she can review her future before failed dreams become a nightmare. Similarly, on the investment side, she gets the complete picture in terms of her debt-equity exposure. The alternative to investing as per financial plan is goal- oriented investment. In a goal oriented investment process, each dream is viewed in isolation and investments are made to fulfill the dream. Thus each dream has an identified set of investments made the intention of funding the dreams. For instance, it is decided that the daughter's marriage would be funded out of gold, while the extra land would be sold to fund the son's education.
6) Scheme selection: The parameters to compare scheme were set out in above. Risk profile, asset allocation and relative risk levels in different investments were discussed earlier in this chapter. Based on these, the financial
planner would advise the investor on distribution of investment across different schemes. In effect, the financial planner would recommend a model portfolio most appropriate for the investor.
Prudential ICICI Asset Management Company, (55%: 45%) a joint venture between Prudential Plc, UK's leading insurance company and ICICI Bank Ltd, India's premier financial institution. The joint venture was formed with the key objective of providing the Indian investor mutual fund products to suit a variety of investment needs. The AMC has already launched a range of products to suit different risk and maturity profiles. Prudential ICICI Asset Management Company Limited has a networth of about Rs. 69.89 crore (1 crore = 10 million) as of March 31, 2002. Both Prudential and ICICI Bank LTD have a strategic long-term commitment to the rapidly expanding financial services sector in India.
PruICICI will conduct its business with
• • •
Honesty and trustworthiness in all interactions. A pioneering spirit and excellence in action. Collaboration and teamwork.
• • •
An understanding of customer needs and the desire to satisfy them. The highest service standards. A consistently above average performance.
SPONSORS: Prudential plc is a leading international financial services group providing retail financial products and services and fund management to many millions of customers worldwide. As a group Prudential plc has, as of 31 December 2002, over GBP155 billion of funds under management, more than 12 million customers and over 15,000 employees, worldwide. Prudential is focused on the Internet generation and is one of the first financial service organisations to use the Internet on a fully integrated basis. In October 1998, Prudential launched a "branches" bank based on the Internet. The bank has in a short span of its existence become a leading banking service provider in the UK. Infect in the first six months of its existence it garnered over £ 5 billion (US$ 8 billion) in deposits from over 500,000 customers. Development of superior products and services that offer value for money and security while producing superior financial returns, enables Prudential to maximise the value of its shareholder's investment and to establish lasting relationships with customers and policy holders. ICICI Ltd (Since Merged into ICICI Bank Ltd) was established in 1955 by the World Bank, the Government of India and the Indian Industry, to promote industrial development of India by providing project and corporate finance to Indian industry.
Since inception ICICI has grown from a development bank to a financial conglomerate and has become one of the largest public financial institutions in India. ICICI Bank is India’s second largest bank with an asset base of Rs.106, 812 crore. ICICI Bank provides a broad spectrum of financial services to individuals and companies. This includes mortgages, car and personal loans, credit and debit cards, corporate and agricultural finance. The Bank services a growing customer base of more than 7 million customers and 6 million bondholder accounts through a multichannel access network. This includes about 450 branches and extension counters, 1675 ATMs, call centers and Internet banking (Source: Press Release dated May 23, 2003 at www.icicibank.com ). ICICI Bank posted a net profit of Rs.1, 206 crore for the year ended March 31, 2003. ICICI Bank is the only Indian company to be rated above the country rating by the international rating agency Moody’s and the only Indian company to be awarded an investment grade international credit rating. The Bank enjoys the highest AAA (or equivalent) rating from all leading Indian rating agencies. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly owned subsidiary.
Prudential ICICI offer employees an ideal environment to progress their careers and enhance their skills. At Prudential ICICI, each person is given a great deal of independence and responsibility to manage their assignments and make their contributions count. We strive to provide our people with a professional work environment and a culture of respect, openness and trust. We seek to
reward our people commensurate with their contributions at a competitive standard compared to the industry. Our managers in PruICICI are measured on how they build an environment that engenders meritocracy and rewards contribution. Our salary plus bonus compensation framework provides each person a means of substantially benefiting through performance related pay.
Birla Sun Life Insurance Company
Birla Sun Life Financial Services offers a range of financial services for resident Indians and Non Resident Indians. Brought together by two large, powerful and reputed business houses, the Aditya Birla Group and Sun Life Financial, it is our aim to offer diverse and top quality financial services to customers. The Mutual Fund and Insurance companies provide wealth management and protection products to customers while the Distribution and Securities companies provide brokerage and trading services for investment in equities, debt securities, fixed deposits, etc. Birla Sun Life Asset Management Company Limited Birla Sun Life Mutual Fund follows a conservative long-term approach to investment, which is based on identifying companies that have good credit-worthiness and are fundamentally strong. It places a lot of emphasis on quality of management and risk control. This is done through extensive analysis that includes factory visits and field research. It has one of the largest team of research analysts in the industry. The company is one of India's leading, private mutual funds with a large customer base. It has been recognised nationally with coveted awards.
HDFC was incorporated in 1977 as the first Specialised housing finance institution in India. HDFC provides financial assistance to individuals, corporates and developers for the purchase or construction of residential housing. It also provides property related services (e.g. property identification, sales services and valuation), training and constancy. Of these activities, housing finance remains the dominant activity. HDFC currently has a client base of over 5,00,000 borrowers, 13,00,000 depositors, 1,00,000 shareholders and 52,000 deposit agents. HDFC raises funds from international agencies such as the World Bank, IFC (Washington), USAID, CDC, ADB and KfW, domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the eighth year in succession. HDFC Standard Life Insurance Company Limited, promoted by HDFC was the first life insurance company in the private sector to be granted a Certificate of Registration (on October 23, 2000) by the Insurance Regulatory and Development Authority to transact life insurance business in India.
EQUITY FUNDS Date of inception Corpus pr. Month in crs. Corpus Cur. Month in crs. % change in Corpus Top 10 Stocks ICICI 04-Oct-94 805.80 720.92 -10.53% SBI 8.66 Infosys 6.38 HCL Tech 5.01 Hughes S/W 4.91 RIL 4.43 Jai prakash Ind. 4.18 ABB 4.14 GE Shipping 4.10 BHEL 3.85 Siemens India 3.84 49.50 1.22 HDFC 23-Dec-94 977.98 986.98 0.82% Infosys 9.78 Grasim Ind. 9.76 SBI 9.10 Marutiudyog 6.57 BHEL 6.30 Satyam Com 6.13 RIL 5.68 Bharat Ele. 5.10 Zee Tel 4.46 Indo Rama Synth 3.54 66.42 2.23 BIRLA 25-Dec-94 810.62 886.32 0.70% SBI 8.65 Infosys 6.35 HCL Tech 6.01 Hughes S/W 3.91 RIL 5.43 Jai prakash Ind. 3.18 ABB 3.14 GE Shipping 3.10 BHEL 6.85 Siemens India 5.84 52.46 1.26
Total Total Debt/Cash/CA
Benchmark NAV as on 1-Jun-04 NAV as on 31-Jun04
NSE 50 30.75 28.87
NSE 500 52.29 51.26
NSE 500 53.46 53.26
Performance Ranking NOTE: - All returns bellow 1 yr. Are on simple annualized basis & above 1 yr. Are on a compound annualized basis. Last 180 days 110.56 115.95 120.6 Last 1 year 120.88 128.89 125.3 Last 2 year 60.37 62.70 63.2 Last 3 year NIL 37.28 35.32
ICICI HDFC BIRLA
140 120 100 80 60 40 20 0 180 days 1 year 2 year 3 year
ICICI HDFC BIRLA
Interpretation: In this chat determined the equity funds of ICICI, HDFC, and Birla for last 180 days, 1 years, 2 years, & 3 years. We see that in last 180 days ICICI, HDFC, and Birla has a Equity Funds i.e. 110.56, 115.55, 120.6 receptively. In last 180 days Birla has a
High equity funds i.e 120.6 as compares to ICICI, HDFC i.e. 110.56 & 115.55 receptively it is better for them In last 1st year H.D.F.C. has high equity funds as compared to ICICI & Birla i.e. 128.89. In last two years Birla has a High equity fund i.e. 163.2. Last three years ICICI has not equity funds which is not good for the firm and HDFC has a high equity funds i.e. 37.28.
Specific risk factor under Equity Oriented schemes of Mutual Funds.
Tax Plan / Tax Saver Scheme: Credit Risk Higher Lower Market Interest Liquidity Risk Rate Risk Risk Higher Medium Lower Medium Higher Lower
Type of Investment Securities Pattern Equity and 90% Equity related instrument Debt and 10% Money Market instrument
Conclusion: Tax saver scheme would under normal conditions invest a minimum of 90% or more of its assets in equity and related instruments and maximum or less than 10% in debt, money market instrument, cash and cash equivalents. The investor's here have to note that the securities, which provide higher returns, typically, display higher volatility. Accordingly, the investment portfolio of the scheme would reflect moderate to high volatility in its equity and equity related investments and low to moderate volatility in its debt and money market investment. Tax plan option which is a make up of approximately 90% equity related securities & 10% debt securities offers a good amount of return and since
return expectation is high its volatility is also higher and so is the risk. Credit risk is definitely higher. Similarly, Market risk is high on account of 90% equity market risk. However interest rate risk is medium since the equity base is earning good returns and liquidity is not a problem since both equity debts are easily tradable in market. The overall risk involved by investing in Tax Plan is medium to higher risk. Growth Fund: Credit Risk Higher Lower Market Interest Liquidity Risk Rate Risk Risk Higher Medium Lower Medium Medium Lower
Type of Investment Securities Pattern Equity and 95% Equity related instrument Debt and 5% Money Market instrument Conclusion: -
Growth fund which is made up of approximately 95% Equity & Equity related securities & 5% of debt money market instruments offers good returns and since the return expectation is high, its volatility is also higher and so it the risk. According the investment portfolio of the scheme would reflect moderate to high volatility in its equity and equity related securities and low to moderate volatility in debt and money investment. Under this fund, Credit risk is higher. Similarly, Market risk is also high on account of 95% Equity market risk. However, Interest Rate Risk is medium since equity base is earning good return & liquidity is not at all problem as both Equity & Debt securities are easily
tradable in the market. Growth fund has an overall risk ranging from moderate to higher risk.
(3) Balanced Fund: Option 1: Type of Investment Securities Pattern Equity and 40% Equity related instrument Debt and 60% Money Market instrument Conclusion: Balanced Fund may invest approximately in 40% Equity related securities and 60% Debt & Money market securities. The investment portfolio reflects lower to moderate risk in its equity and equity related securities and moderate to higher risk in its Debt & money Market securities. Credit risk is lower. Similarly, Market risk is medium on account of 40% equity market risk. Interest Rate Risk is medium to lower since equity base is earning good returns and Liquidity is not at all problem as Equity and Debt Securities are easily tradable in the market. Credit Risk Lower Higher Market Interest Liquidity Risk Rate Risk Risk Medium Medium Lower Higher Lower Tedium
Option: - 2 Type of Investment Securities Pattern Equity and 60% Equity related instrument Debt and 40% Money Market instrument Conclusion: Since balance fund is a mixture of Equity and Debt securities it may invest approximately 60% in equity and related securities and around 40% in Debt and Money Market securities. Here 60% investment is made in equity securities the profolio runs higher to moderate risk and lower to moderate risk in 40% investment in Debt and money market security. Since the proportion of investment in equity securities is more it runs higher Credit risk and Market risk. Interest rate risk is medium to lower since equity bas is earning good returns and Liquidity is not at all problem in both equity and debt as both are easily tradable in the market. Credit Risk Higher Lower Market Interest Liquidity Risk Rate Risk Risk Medium Lower Medium Medium Medium Lower
In compassion to MFs people are more interested in investing in other instruments like bank deposits, post office saving schemes, PPF, NSC, LIC etc.
People with more good income are not investing in MFs because these do not know the concept of NF properly and more area thinks that MFs now a day's are becoming risky due to unstable equity market.
People are investing their money for regular income in post office, Bank Deposits and there sources but they don't
Considering the above findings the suggestion is: -
Due to lack or less awareness of people about MFS they are not
investing in it. Hence, it is necessary to educate them by arranging some educational seminar be on MFS to show them how to invest in MFS? What is the liquidity? What is the risk covered in MFS?
Most of people know only UTI MFs only. Hence, it is necessary to
increase advertisement effort for private MFs & public MFs.
They are have to increase their awareness advertisement campaign
as they do in cash of bonds and fixed deposits so that manned awareness of MFs increase and inventory can think before investity in bon do or fixed deposits or equity shares.
BIBLIOGRAPHY NO. 1 2 3 4 NAME OF BOOK Investment Management Investment Management Capital Market in India Investment Management EDITION 4th AUTHOR V.A.Avadhani V.K.Bhalla Gordon & Natarajan V.Gangadhar
Wed Site: www.idbibank.com www.hdfcfund.com www.pruicici.com www.birlasunlife.com
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