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Section 2: EQUITY

Chapter 1:

Share Market Basics


What are the basics of financial instruments? A: Let us understand the two fundamental types of investments, namely bonds and stocks with an example. Eg. Imagine you want to start your own grocery store. You will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond (IOU) by lending money to your company.

Thus a bond is a means of investing money by lending money to others. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates).

There are several Pro's and Con's to investing in bonds Pro's Bonds give higher interest rates compared to short-term investments. Bonds are less risky when compared to stocks. Con's Selling bonds before they're due, may result in a loss, known as a discount. If the issuer of the bond declares bankruptcy, you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.

Now, let us continue with the same example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company.

Thus, to explain stocks: Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends. Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings. This example covers the 2 major types of investments: bonds and stocks

Rewinding back to the Stock Market Trading history of India A: In the earlier days, stockbrokers kept scouting for 'natural' sites to conduct their trading activities, shifting from one set of Banyan trees to another. As the number of brokers kept increasing and the streets kept overflowing, they simply had no choice but to relocate from one place to another. Finally in 1854, trading in India found a permanent address, Dalal Street, now synonymous with the oldest stock Exchange in Asia, The Bombay Stock Exchange. With a heritage that goes back to over 130 years, BSE was the first stock exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The exchange has played a pioneering role in the development of the Indian Securities Market - one of the oldest in the world. After India gained independence, the BSE formulated a comprehensive set of guidelines adopted by the Indian Capital markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian Economy and finance is measured. The trading scenario in India then underwent a paradigm shift in 1993, when NSE or National Stock Exchange was recognized as a Stock Exchange. Within just a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment. Today, the Indian Securities market successfully keeps pace with its global counterparts through the use of modern day technology.

Stock market milestones A: 1875 BSE established as 'the native Share and Stock Brokers Association' 1956 BSE became the first stock exchange to be recognized under the Securities Contract Act. 1993 NSE recognized as a stock exchange. 2000 Commencement of Internet trading at NSE. 2000 NSE commences derivatives trading (Index futures) 2001 BSE commences derivatives trading

Primary and Secondary Markets

Primary Market A: An Issuer/Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor (buyer). If the Issuer is selling securities for the first time, these are referred to as Initial Public Offers(IPO's). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital. Eg. If the promoters of a private company, say XYZ makes its shares available to investors, company XYZ is said to have entered the primary market. Secondary Markets A: Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both

the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI). For eg. If one of the investors who had invested in the shares of company XYZ sold it to another at an agreed upon price, a Secondary Market transaction is said to have taken place. Normally investors transact in securities using an intermediary such as a broker who facilitates the process Introduction to SEBI A: The Government of India established the Securities and Exchange Board of India, the regulatory body of stock markets in 1988. Within a short period of time, SEBI became an autonomous body through the SEBI Act passed in 1992, with defined responsibilities that cover both development & regulation of the market while also giving the board independent powers. Comprehensive regulatory measures introduced by SEBI ensured that end investors benefited from safe and transparent dealings in securities. The basic objectives of the Board were identified as: To protect the interests of investors in securities To promote the development of Securities Market To regulate the Securities Market

A:

SEBI has contributed to the improvement of the Securities Market by introducing measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders (including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc) transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD has been a real landmark.

What are Stock Exchanges? A Stock Exchange is a place that provides facilities to stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier Stock Exchanges are the Bombay Stock Exchange and the National Stock Exchange.

Chapter 2:Getting Familiar with Market Related Concepts


Once you enter the Stock market, you will frequently come across terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks and Large-Cap Stocks. In this section you will get an understanding of what these terms mean in the context of stock markets.

Let us first understand MARKET CAPITALIZATION

MARKET CAPITALIZATION A: "Cap" is short for capitalization, the market value of a stock, indicating the size of the stock available. Calculating a stock's capitalization

Market Capitalization = Market Price of the stock x The number of the stock's outstanding* shares

*Outstanding means the shares held by the public For example, if Stock A has a Current Market Price of Rs 20 per share, and there are 1,00,000 shares in the hands of public investors, then Stock A has a capitalization of 20,00,000. The company's capitalization is an effective parameter to group corporate stocks. In the US, mid-cap shares are those stocks that have a market capitalization ranging from Rs 9,000 crore to Rs 45,000 crore. In India, these shares would be classified as largecap shares. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in that particular country. The total market capitalization of US markets is $15 trillion. In India, the market capitalization of listed companies is around $600bn.

SMALL-CAP STOCKS A: The stocks of small companies that have the potential to grow rapidly are classified as small-cap stocks. These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. Generally companies that have a market Capitalization in the range of upto 250 Corores are small cap stocks As many of these companies are relatively new, it is difficult to predict how they will perform in the market. Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring. On the other hand, the stocks of these companies tend to be volatile and may decline dramatically. Most Initial Public Offerings are for small-cap companies, although these days large companies do tend to source the capital markets for expansion plans. Aggressive mutual funds are also enthusiastic about adding small-cap stocks in their portfolios. Because they have the advantage of being highly growth oriented, small-cap stocks can forego paying dividends to investors, which enables the profits earned to be reinvested for future growth.

MID-CAP STOCKS A: Mid-cap stocks are typically stocks of medium-sized companies. These are stocks of well-known companies, recognized as seasoned players in the market. They offer you

the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Generally companies that have a market Capitalization in the range of 250-4000 crores are mid cap stocks Mid-cap stocks also include baby blue chips; companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack their size. These stocks tend to grow well over the long term.

LARGE-CAP STOCKS A: Stocks of the largest companies (many being blue chip firms) in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities. The sheer volume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time. Investors, however gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks while also ensuring the long-term preservation of their capital.

What drives bull and bear markets? A: The uses of "Bull" and "bear" to describe markets have been derived from the manner in which each of these animals attacks its opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a Bull market. And if the trend is down, it is considered a Bear market. The supply and demand for securities largely determine whether the market is in the Bull or Bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.

How can you qualify the market as bull or bear? A: Bull and Bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements, lasting days, as they may only indicate corrections or shortlived movements.

What are stock symbols? A: A stock symbol is a unique code that is given to all participating companies in securities trading. Once you know the stock code/symbol of the company (sometimes referred to as a ticker symbol) you can easily obtain information about the company. This is important, as a wise investor will always do a financial analysis before purchasing a stock. For ex- tcs stands for Tata Consultancy Services Infy stands for Infosys Note :- While placing orders with Kotaksecurities.com you need to type in just the first three alphabets of the company and our site will display all possible combinations, from which you may select the stock that you wish to invest in. Where do I find stock related information? A: The most accessible avenue to get stock information is the Internet, business news channels and print media. You could alternatively access theKotak Securities News Channel and get all the information that you wanted within a matter of seconds. Using Kotak Securities News Channel, you can get the latest news, on Equity, Derivatives,Mutual Funds & IPO's What are rolling settlements? A: Let us understand Rolling Settlements with an example. Supposing your friend agrees to buy a book for you from a bookshop, you will have to pay him for it eventually. Similarly, after you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is just the process whereby payment is made by all those who have made purchases and shares are delivered by all those who have made sales. A Rolling Settlement implies that all trades have to settled by the end of the day. Hence the entire transaction, where the buyer has to make payments for securities purchased and seller has to deliver the securities sold, have to completed in a day. In India, we have adopted the T+2 settlement cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 2 working days, when funds pay in or securities pay out takes place. 'T+2" here, refers to Today + 2 working days. For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on. Hence, a settlement cycle is the period within which the settlement is made. For arriving at the settlement day, all intervening holidays -- bank holidays, Exchange holidays, Saturdays and Sundays are excluded. From a settlement cycle taking a week , the Exchanges have now moved to a faster and efficient mode of settling trades within T+2 Days. What is the meaning of the term selling short? A: An investor sells short when he anticipates that the price of the shorted stock will fall from the existing price. He borrows a share and sells it. As the share price dips, he buys the same share at a lower price and returns it back, while pocketing a profit in the bargain. An adage that describes short selling is ("selling high and buying low'.) Selling Short(Shorting) is an effective tool for traders as it allows us to profit from declining stock and index prices. A definition of "Selling Short" Selling short implies establishing a market position by selling a security one does not own, in anticipation that the price of the security will fall. For eg. Trader anticipates stock ABC will decline Trader enters order to SELL 2000 shares of ABC at market price and later buys the 2000 shares of ABC at a much-reduced price. The difference in the prices of the selling and buying is his profit. However if the share prices increase after he has sold at a reduced price earlier, then he ends up with a loss. Hence Shortselling is something that is speculatory to a certain extent and is done in anticipation of quick profits.

What is margin trading? A: Margin trading is trading with borrowed funds/securities. It is almost like buying securities on credit. Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities it also subjects you to a number of unique risks such as interest payments charged for the borrowed money.Kotaksecurities.com offers its customers the facility of Margin trading. What are Circuit filters & trading bands? A: In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters. Under this, Sebi has specified the fixed price bands for different securities within which they can move on a given day. Recently, in a bid to check the rampant price manipulation in small-cap stocks (known as penny stocks), stock exchanges reduced the circuit filter maximum permissible rise in prices in a day to 5 per cent. Earlier, stocks were allowed to rise up to 20 per cent in a session. The NSE has also reduced the circuit filter in all the stocks, which are traded on a trade-to-trade basis to 5 per cent. As the closing price on BSE and NSE can be significantly different, this means that the circuit limit for a share on BSE and NSE can be different. What is Badla financing? A: As the term itself signifies, 'Badla' means 'something in return'. Badla is the charge, which the investor pays for carrying forward his position. This hedge tool lets the investor take a position in a scrip without actually taking delivery of the stock, thus carrying forward his position on the payment of small margin. The badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai and serves 3 needs of any stock exchange: A) Quasi-hedging: If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share. B) Stock lending: If a stock lender wishes to short sell without owning the underlying security, he employs the badla system and lends his stock for a charge. C) Financing mechanism: If he wishes to buy the share without paying the full consideration, the financier steps into the CF system and provides the finance to fund the purchase The scheme is known as "Vyaj Badla" or "Badla" financing. For example, X has bought a stock and does not have the funds to take delivery he can arrange a financier through this carrying-forward mechanism. The financier would make the payment at the prevailing market rate and would take delivery of the shares on X's behalf. X will only have to pay interest on the funds he has borrowed. Vis--vis, if you have a sale position and do not have the shares to deliver, you can still arrange through the stock exchange for a lender of securities. An investor can either take the services of a badla financier or can assume the role of a badla financier and lend either his money or securities. How the Badla system works? A: On every Saturday, a CF system session is held at the BSE. The scrips in which there are outstanding positions are listed along with the quantities outstanding. The CF rates are determined depending on the demand and supply of money. There is more demand for funds when the market is over bought, and consequently the CF rates tend to be high. However, when the market is oversold the CF rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same. The scrips that have been put in the Carry Forward list are all 'A' group scrips, which have a good dividend paying record, high liquidity and are actively traded. The scrips are not specified in advance, as it then gets difficult to get maximum return. The Trade Guarantee Fund of BSE guarantees all transactions; hence, there is virtually no risk to the badla financier except for broker defaults. Even if the broker through whom you have invested money in badla financing defaults, the title of the shares would remain with you and the shares would be lying with the "Clearing house". However, the risk of volatility of the scrip will have to be borne by the investor. What is Insider Trading? A: In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading is 'the trading of shares based on knowledge not available to the rest of the world. Insider trading has 2 connotations. Corporate personnel of a company buying and selling stock in their own company. When corporate insiders trade in their own securities, they must report their trades to the exchange. Illegal insider trading refers to buying or selling a security after receiving 'tips' of confidential securities information. Thus it is considered as a breach of confidence while in possession of non-public information about the company.

Examples of insider trading Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers. What are the various types of the risks once I start trading? A: Market Risk This is the risk of investing in the stock market in general. It refers to a chance that a securitys value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are Affecting by market risk. Industry Risk This is risk that affects all companies in a certain industry. For eg. Utility companies, are often viewed as relatively low in risk because the utility industry is stable and operates in a predictable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. The dotcom bubble burst in the 90s affected the valuation of all stocks in that industry. All stocks within an industry are subject to industry risk. Regulatory Risk Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations, which will dramatically

affect a business. Business Risk These are the risks unique to an individual company. It refers to the uncertainty regarding the organizations ability to perform business or provide service Products, strategies, management, labor force, market share, etc.,Which are among the key factors investors consider in evaluating the value of a specific company.

Chapter 3:Stock Market FAQS


What are the instruments traded in the stock markets?

A: There are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options. Why would I choose stocks? A: Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company.You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.

How can I track stocks?

A: Tracking stocks lets you gain from the best stock opportunities available in the market while also letting you know how the stocks in your portfolio are performing. Our website is designed to empower you with all the tools you might require to invest wisely. The Portfolio Tracker Section lets you regularly monitor your portfolio. The Kotak securities News Channel enables you to keep pace with all market activities while our Research Section has India's finest financial analysts empowering you with intensive market related research reports.

Where do I buy stock?

A: Stock trading happens on Stock Exchanges, but one cannot individually buy stocks off the exchange. To do so, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission. You can easily buy stocks through Kotaksecurities.com, one of India's leading Stock Brokers, with services and products to cater to all your investment needs, at very reasonable brokerage rates. The Kotak Securities website offers you Internet Broking services while also giving you EASY access to invest in IPOs, Derivatives and Mutual Funds. Our Call & Trade facility also offers you the convenience of trading over the telephone. What are some of the orders I can place? A: As a customer of Kotaksecurities.com, you can place different orders such as Market orders, Limit Orders, Stop Loss Orders, Cover Orders, After Market Orders (AMO'S), Normal Orders etc. What is a Market Order? A: A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

What is a Limit Order? A: To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the scrip might not reach the desired price on that particular trading day owing to Market related factors.

What is a Stop Loss Order? A: A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defense mechanism- an amount at which you will be able to sustain yourself against such unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level the trigger price. Naturally, this price cannot be more than the price of the stock you are trading. For eg. If you bought a stock at Rs 10, you place a stop loss order with your broker to sell it, if it reaches Rs 8. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case. Good-till-canceled (GTC) or Day Order Or Normal Orders Day orders are orders given to your broker that hold true only during the period of the trading day for which the orders have been given. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus they are orders that are only "good until it is canceled" or "good for the day."

For eg. You place a stop loss order with your broker to sell a stock, if its price reaches to level X. Now, if it does not reach limit X, your broker will not sell the stock. However, the stop loss order given to your broker will not hold true for the next day. For, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again.

What are advances and declines? A: Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest ' advances' will inform you how the market has progressed. 'Declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical Analysis tool that indicates market movement. Advance Decline ratio is calculated using the formula: Number of stocks that advanced/number of stocks that declined. Generally, it is seen that in Bullish markets the number of stocks that advance is more than the ones that declined and the converse can be said to hold true in a bearish market. The breadth of market indicator is used to gauge the number of stocks advancing and declining for the day. 'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day. Advances and declines are calculated from the previous days closing results. However, a market that is significantly on one side either in terms of advances or declines, may have a hard time reversing out of that direction the next day.

Chapter 4:Annual Report


What is an annual report and why is it useful to investors?

A: An annual report provides a company's shareholders with information about its operations. This is an obligation stipulated by law. This is extremely beneficial to investors because it helps make informed decisions. The report tells you how well the company is doing while also forecasting its future earnings and dividends. The Chairman's letter in the report also profiles the company's future goals. Inside the Annual Report A: Here is what comprises an annual report: * A letter from the chairman on the high points of business in the past year with predictions for the next year. * The company philosophy: A section that describes the principles and ethics that govern a company's business. * An extensive report on each section of operations within the company, describing the company's services or the products. Financial information that includes the profit and loss (P&L) statements and a balance sheet. Depending on its income and expenses, the company will either make profits or show losses for a year. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations. * An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by independent accountants.

How do I obtain an Annual Report?

A: Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company web site, or search the Internet; as there are several sources on the Internet providing information on public companies. All publicly listed companies are required to submit the financial reports available in the public domain as per SEBI regulations.

What are quarterly and other financial reports? A: Besides the annual report, companies provide several other financial reports such as a quarterly reports (issued every three months) and statistical supplements. These however are not as comprehensive as the annual report of the company. Quarterly reports are very similar to the annual reports except they are issued every three months and are less comprehensive. They may be obtained in the same way as an annual report. What are Company Earnings?

A: Earnings are a company's net profit. It is the surplus left with the company after it has cleared all its expenses, i.e. Money paid to employees, utility bills, costs of production and other operating expenses The manner in which a company makes its earnings, is defined by the very nature of its business.

For eg., a cement manufacturer produces cement for sale to its customers. Two sources of company earnings are: Income from sales of goods or services Income from investment. Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of investment property. Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations. Why are Earnings important to you as an investor?

A: As an investor who holds shares of the company, you have part ownership of company. When you invest in a company's shares, you become a 'part owner' of the company and you get to share a part of the company's profit as dividend. Thus, if the company does well and earns more profit, you in turn to well. If the company reinvents its earnings towards future growth, you are assured of higher dividends in the future. Meanwhile, if you lend money to the company by investing in its bonds, the company uses part of its earnings to repay interest and principle on the bonds. The more earnings the company has, the more secure you can be that the company will be able to make your interest payments. So, company earnings are important to you because you make money when the business you invest in, makes money. How do you use earnings information to make an investment decision?

A: Your investment goals determine how you use information about company earnings. If you are an income investor, interested in earning immediate income from your investments, you probably want to invest in a company that is paying dividends. If you have a long-term investment strategy, dividends may not be as important to you. The "financials" indicate whether a company is oriented for income, growth, or a bit of both. By comparing the financials for different companies in the same industry, you can find characteristics best suited to your investment goals. A convenient way to compare companies is through Earnings per share (EPS). EPS represents the net profit divided by the number of outstanding shares of stock. When you compare the EPS of different companies, be sure to consider the following: Companies with higher earnings are stronger than companies with lower earnings. Companies that reinvest their earnings, may pay low or no dividends but may be poised for growth. Companies with lower earnings, and higher research and development costs, may be on the brink of either a breakthrough or a disaster, making them a risky proposition. Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger. How do I use Fundamentals to make an investment decision?

A: Fundamental Analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. But this research can never accurately predict how the company will perform in the stock market. It can however be used as a good comparative framework to know which company will be a better investment choice. As an investor, you are interested in a corporation's earnings because earnings assure higher dividends and potential for further growth. You can use profitability ratios to compare earnings for prospective investments. These are measures of performance showing how much the firm is earning compared to its sales, assets or equity. You can quickly see the difference in profitability between two companies by comparing the profitability ratios of each. Let us see how ratio analysis works. What is Ratio Analysis?

A: The ratio analysis technique is also called cross-sectional analysis, providing you with important information about a company's financial strength. Cross-sectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business. Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are: 1) Price-Earnings Ratio((P-E ratio):

It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period. 2) EPS (Earnings Per Share):

It is that portion of a company's net income, which corresponds to each share of that company's common stock which is issued and outstanding. EPS gives an indication of the profitability of a company. It is calculated using the formula: EPS = Net Income-Dividends on Preferred Stock Average Outstanding Shares 3) Current Ratio: Companies need a surplus supply of current assets in order to meet their current liabilities. They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts. It is a type of Liquidity ratio. Current Ratio = Current Assets Current Liabilities Leverage Ratios:

A: Traditionally, leverage is related to the relative proportions of debt and equity, which fund a venture. The higher the proportion of debt, the more leverage. It is a ratio that measures a company's capital structure, indicating how a company finances their assets. Do they rely strictly on equity? Or, do they use a combination of equity and debt? The answers to these questions are of great importance to investors. Leverage= Long Term Debt Total Equity

A firm that finances its assets with a high percentage of debt is risking bankruptcy, higher borrowing costs and decreased financial flexibility; if its performance cannot help fulfill its debt payments. If a company is highly leveraged, it is also possible that lender's may shy away from providing further debt financing fearing the viability of their investment. The optimal capital structure for a company you invest in, depends on which type of investor you are. A bondholder would prefer a company with very little debt financing because of it lowers the risk of him losing his money. When a firm becomes over leveraged, bankruptcy can result.

Shareholder's Equity:

A: Shareholders' equity is calculated as the value of a company's assets less the value of its liabilities. It is the value of a business to its owners, after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners invested, plus any profits that the company generates. Bankruptcy Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer has the ability to meet its financial obligations. Both stock and bond fear bankruptcy. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible. When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. If a firm's liabilities exceed the liquidation value of their assets, (the value of assets converted into cash), creditors also stand to lose money on their investments.

Understanding the Balance Sheet

The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that the accounts are always in balance and all the company funds can be accounted for. It is reported to investors at least once a year. You may also receive quarterly, semiannually or monthly balance sheets. The contents of a balance sheet include: What the company owns (its assets) What it owes (its liabilities) The value of the business to its stockholders (the shareholders' equity).

Why should the Balance Sheet be important to you?

A: As an investor you need to ensure that the company you have invested in, has good potential for future growth and will yield good returns. The balance sheet helps you get answers to questions like: Will the firm meet its financial obligations? What amount of funds have already been invested in this company? Is the company overly indebted? What are the different assets that the company has purchased with its financing? These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance.

What are Assets?

A: Assets are any items of economic value owned by a corporation that can be converted into cash. Types of Assets: Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. Also incase the company goes bankrupt, assets can be easily liquidated into cash and help prevent loss of your investments. Current assets are important to most companies, as they are a source of funds for day-to-day operations. It is thus evident, that the more current assets a company owns, the better it is performing. Cash equivalents are not cash but can be converted into cash so easily that they are considered equal to cash. Cash equivalents are generally highly liquid, short-term and very safe investments. Accounts Receivable Accounts receivable is the money customers (individuals or corporations) owe the firm in exchange for goods or services that have been delivered or used but not yet paid for. As more and more business is being done today with credit instead of cash, this item is a significant component of the balance sheet. Accounts receivable is however recorded as an asset on the balance sheet as it represents a legal obligation for the customer to remit cash. Inventory A firms inventory is the stock of materials used to manufacture their products and the products themselves for future sale. A manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory generally will consist only of products purchased that are still to be stored. Inventory is recorded as an asset on a company's balance sheet. Long-term Assets:

A: Long-term assets are grouped into several categories like: A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture. Fixed assets are long-term, tangible assets held for business use and will not be converted into cash in the current or upcoming year. Eg. Items such as equipment, buildings, production plants and property. On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all, except land. Fixed assets are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the companys earnings. Depreciation gives you an estimate of the decrease in the value of an asset, caused by 'wear and tear' or obsolence. It appears in the balance sheet as a deduction from the original value of the fixed assets; as the value of the fixed asset decreases due to wear and tear. Intangible assets are non-physical assets such as copyrights, franchises and patents. Being intangible, it becomes difficult to estimate their value. Often there is no ready market for them. Sometimes however, an intangible asset can be the most valuable asset a company possesses.

What are Liabilities?

A: Liabilities are a company's debt to outside parties. They represent rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt. Eg. Bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into Current Liabilities and Long-Term Liabilities.

Types of Liabilities:

Current liabilities Current liabilities are debts currently owed for taxes, salaries, interest, accounts payable* and notes payable, that are due within one year. A company is considered to have good financial strength when current assets exceed current liabilities. *Accounts Payable Accounts payable is one of a series of accounting transactions covering payments to suppliers whom the company owes money for goods and services. Therefore, you will often see accounts payable on most balance sheets. Long-term debt is a long-term loan, for a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

Section 2: EQUITY

Chapter 5: Analysis And More


What is Technical Analysis? A: Technical Analysis is a method where one studies the market statistics to evaluate the worth of a company. Instead of assessing the health of the company by relying on its financial statements, it relies upon market trends to predict how a security will perform. It is a method of evaluating stocks by analyzing stock market related activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. They believe in the momentum that the scrips/markets gather over a period of time and cashing in on the same. Technical analysts believe that the historical performance of stocks and markets are indications of future performance. This method enables 'short-term' investors to gauge companies who have very good potential to gather increased earnings in the near future.

What is a Fundamental Analysis? A: A method of evaluating a stock by attempting to measure its intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies. A fundamental analyst would most definitely look into the details regarding the balance sheets, profit loss statements, ratios and other data that could be used to predict the future of a company. In other words, fundamental analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.

What is an Overvalued Stock or an Undervalued Stock? A: An overvalued stock can be understood as an inflated hope that a company will do well. Thus, a stock is overvalued if its current price exceeds the intrinsic value of the stock. The market may temporarily price stocks too high or too low and that's how investors determine whether stocks are being overvalued or undervalued. If a stock is overvalued, the current price of the stock exceeds its earnings ratio (PE ratio*) and hence investors expect the price of the stock to drop. A high PE in relation to the past PE ratio of the same stock may indicate an overvalued condition, or a high PE in relation to peer stocks may also indicate an overvalued stock Thus the PE ratio is one of the many ways to determine whether a stock is overvalued. *A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings. For example, a P/E ratio of 10 means that the company has Rs1 of annual, per-share earnings for every Rs10 in share price A stock is undervalued when,if is selling at a much lower price than what it is actually worth.This can be determined based on fundamentals like earnings and growth prospects. One of the best-known measures for finding an undervalued stock is the price earnings ratio (P/E). Consider Colgate and Pepsodent, which are in the same industry and have similar fundamentals. If Colgate has a P/E of 15 and Pepsodent's is 20, Colgate could be an undervalued stock.

What does Value Investing mean? A: Value investing is an investment style, which favors good stocks at great prices over great stocks at good prices. Hence it is often referred to as "price driven investing". A value investor will buy stocks he believes the market is undervaluing, and avoid stocks that he believes the market is overvaluing. Warren Buffet, one of the world's best-known investment experts believes in Value investing. Value investors see the potential in the stocks of companies with sound financial statements that they believe the market has undervalued; as they believe the market always overreacts to good and bad news, causing stock price movements that do not correspond with their long-term fundamentals. Value investors profit by taking a position on an undervalued stock (at a deflated price) and then profit by selling the stock when the market corrects its price later. Value investors don't try to predict which way interest rates are heading or the direction of the market and the economy in the short term, but only look at a stock's current valuation ratios and compare them to their historical range. In other words they pick up the stocks as fledglings and cash in on them when they are valued right in the markets. For example, say a particular stock's P/E ratio has ranged between a low of 20 and a high of 60 over the past five years, value investors would consider buying the stock if it's current P/E is around 30 or less. Once purchased, they would hold the stock until its P/E rose to the 50-60 ranges before they consider selling it or even higher if they see further potential for growth in the future.

What is Contrarian Philosophy? A: Investing with a value philosophy can be considered as one form of contrarian investing. Buying stocks that are out of favor in the marketplace, and avoiding stocks that are the latest market fad is a contrarian investing strategy. Thus it is an investment style that goes against prevailing market trends, where investors buy scrips that are performing poorly now and sell them in future when they perform well. Contrarians believe in taking advantages that arise out of temporary set backs or other such reasons that have caused a stocks price to decline at the moment. A simple example of Contrarian Philosophy would be buying umbrellas in winter season at a cheap rate and selling them during rainy days

Futures Trading
What are Derivatives?

A: A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.

Let us try and understand a Derivatives contract with an example:


A: Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800. As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty. What are the different types of Derivatives? A: Derivatives are basically classified into the following: Futures /Forwards Options Swaps What are Futures? A: A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. The example stated below will simplify the concept of futures trading: Case1: Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today.However,he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery. Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into. What are Index Futures? A: As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole. What is meant by Lot size? A: Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scrip.For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time. Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions. What is meant by expiry period in Futures Trading? A: Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract. What are the uses of Derivatives? What are the various derivative strategies that I can use? A: Derivatives have a multitude of uses namely:

a) Hedging b) Speculation & c) Arbitrage

Chapter 1:OPTIONS
What are options? A: Before you begin options trading it is critical to have a clear idea of what you hope to accomplish. Only then will you be able to narrow down on an options trading strategy. Let us first understand the concept of options. An option is part of a class of securities called derivatives. The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option. Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date. Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security, a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date. Several individual investors find options useful tools because they can be used either as: A) A type of leverage or B) A type of insurance. Trading in options lets you benefit from a change in the price of the share without having to pay the full price of the share. They provide you with limited control over the shares of a stock with substantially less capital than would be required to buy the shares outright. When used as insurance, options can partially protect you from the specific security's price fluctuations by granting you the right to buy or sell shares at a fixed price for a limited amount of time. Options are inherently risky investment vehicles and are suitable only for experienced and knowledgeable investors who are prepared to closely monitor market conditions and are financially prepared to assume potentially substantial losses. What are the different types of Options? How can Options be used as a strategic measure to make profits/reduce losses? A: Options may be classified into the following types: a) Call Option b) Put Option As mentioned before, there are two types of options, calls and puts. A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally Call options increase in value as the value of the underlying instrument increases. By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid. Note that in newspaper and online quotes you will see calls abbreviated as C and puts abbreviated as P. The examples stated below will explain the use of Put options clearly: Case 1: Rajesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of 250 This contract allows Rajesh to sell 100 shares of Infosys at Rs 3000 per share at any time between the current date and the end of May.Inorder to avail this privilege, all Rajesh has to do is pay a premium of Rs 25,000 (Rs 250 a share for 100 shares). The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell. Case 2: If you are of the opinion that a particular stock say "Ray Technologies" is currently overpriced in the month of February and hence expect that there will be price corrections in the future. However you don't want to take a chance , just in case the prices rise. So here your best option would be to take a Put option on the stock. Lets assume the quotes for the stock are as under: Spot Rs 1040 May Put at 1050 Rs 10 May Put at 1070 Rs 30 So you purchase 1000 "Ray Technologies" Put at strike price 1070 and Put price of Rs 30/-. You pay Rs 30,000/- as Put premium. Your position in two different scenarios have been discussed below: 1. May Spot price of Ray Technologies = 1020 2. May Spot price of Ray Technologies = 1080 In the first situation you have the right to sell 1000 "Ray Technologies" shares at Rs 1,070/- the price of which is Rs 1020/-. By exercising the option you earn Rs (1070-1020) = Rs 50 per Put, which amounts to Rs 50,000/-. Your net income in this case is Rs (50000-30000) = Rs 20,000. In the second price situation, the price is more in the spot market, so you will not sell at a lower price by exercising the Put. You will have to allow the Put option to expire unexercised. In the process you only lose the premium paid which is Rs 30,000. what is open interest? A: The total number of option contracts and/or futures contracts that are not closed or delivered on a particular day and hence remain to be exercised, expired or fulfilled through delivery is called open interest.

What are Index Futures? A: As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock Index (Nifty or Sensex) and helps a trader to take a view on the market as a whole. What is meant by the terms Option Premium, strike price and spot price? A: The price that a person pays for a call option/Put Option is called the Option Premium. It secures the right to buy/sell that particular stock at a specified price called the strike price. In other words the strike price is the specified price at which the holder of a stock option may purchase the stock. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Premium of an option = Option's intrinsic value + Options time value The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract is called the Strike price. Spot Price is the current price at which a particular commodity can be bought or sold at a specified time and place. What is meant by settlement price? A: The last price paid for a contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries. How does one determine the price of an option? A: A variety of factors determine the price of an option. The behavior of the underlying stock considerably affects the value of an option. Investors have different opinions about how a particular stock will behave in the future and hence may disagree about the value of any given option. In addition, the value of an option decreases as its expiration date approaches. Thus, its value is also highly dependent on the amount of time left before the option expires. Intrinsic & Time Value An options price is composed of its intrinsic value and time value. What a particular option contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in the money or out-of-the-money at expiration. Intrinsic value is how far an option is 'in-the-money.' Thus, the phrase is an adjective used to describe an option with an intrinsic value. A call option is in- the-money if the spot price is above the strike price. A put option is in the money if the spot price is below the strike price. It is calculated by subtracting the options strike price from the spot price. An out-of-the-money option has an intrinsic value of zero. For example if XYZ is trading at Rs 58 and the June 55 call is trading at Rs 4, to calculate the intrinsic value subtract Rs 55 from 58, leaving you with Rs 3 of intrinsic value. The remaining Rs 1 is known as extrinsic or time value. Time value is the amount over intrinsic value that a buyer pays for the option. While buying time value, an options purchaser assumes that the option will increase in value before it expires. As the option nears expiration, its time value starts decreasing toward zero. Theoretical Value Theoretical value is the objective value of an option. It shows how much time-value is left in an option. The most commonly used formula to calculate the theoretical value of an option is known as the Black-Scholes model. This model considers the price of the stock, the options strike price, the time remaining before expiration, the volatility of the underlying stock, the stock's dividends and the current interest rate while arriving at the theoretical value of the option. Although an option may trade for more or less than its theoretical value, the market views the theoretical value as the objective standard of an option's value. This makes the price of all options tilt toward their theoretical value over time. The Components of Theoretical Value Volatility The volatility of the underlying stock is one of the key factors in determining the value of an option. Often, the options price increases as the volatility of the stock increases. The difficulty in predicting the behavior of a volatile stock permits the option seller to command a higher price for the additional risk. There are two types of volatility, historical and implied. As the term suggests, historical volatility is a measurement of the stocks movement based on its past behavior. By contrast, implied volatility is calculated using option prices. It is a measurement of the stocks movement as implied by how the market is currently valuing options. Dividends As an owner of a call option you can always exercise your right to the stock and receive any dividend it might pay. Interest Rate If you buy an option rather than a stock, you invest less money upfront. Days Until Expiration An option, being a wasted asset; wastes a little as each day lapses. Thus its value is calculated in accordance to the amount of days left in its life. What are swaptions? A: A swaption is an option on an interest rate swap. Swaptions are options contracts, which give you the right to enter into a swap agreement at the option expirati on, in return for a one-off premium payment. What is meant by Covered Call, Covered Put, In the Money, Out Of the Money, At the Money? A: In-the-money A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security. Out of the money A call option is out-of-the-money if the price of the underlying instrument is lower than the exercise/strike price. A put option is out-of-the-money if the price of the underlying instrument is above the exercise/strike price. At-the-money At the money is a condition in which the strike price of an option is equal to (or nearly equal to) the market price of the underlying security. Covered Call You can take a covered call if you take a long position in an asset combined with a short position in a call option on the same underlying asset.

Covered Put The selling of a put option while being short for an equivalent amount in the underlying security.

Section 5:

Chapter 1:Mutual Funds


What are Mutual Funds Mutual Funds in India Why Invest in Mutual Funds What are the types of Mutual Funds Who can invest in Mutual Funds How to choose a fund What is NAV Tax aspects of Mutual funds Risk Vs Reward What are Mutual Funds A: A mutual fund is a common pool of money into which investors with common investment objectives place their contributions that are to be invested, in accordance with the stated objective of the scheme. The investment manager invests the money collected into assets that are defined by the stated objective of the scheme. For example, an

Equity fund would invest in Equity and Equity related instruments and a Debt fund would invest in Bonds, Debentures, Gilts etc.

Mutual Funds in India-Growing from very Modest Beginnings A: The Indian Mutual fund industry has started opening up many exciting investment opportunities for Indian investors. We have started witnessing the phenomenon of savings now being entrusted to the funds rather than in banks alone. Mutual Funds now represent perhaps one of the most appropriate investment opportunities for most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who can provide the required knowledge and professional expertise on taking informed decisions. The Indian Mutual fund industry has passed through three phases: The first phase was between 1964 and 1987 when Unit Trust of India was the only player. By the end of 1988, UTI had total assets worth Rs.6,700 crores. The second phase was between 1987 and 1993, during which period, 8 funds were established (6 by banks and one each by LIC and GIC). The total number of schemes went up to 167 and Assets Under Management saw the figures improving to over 61,000 crores. The third phase was marked by the entry of private and foreign sectors in the Mutual fund industry in 1993. The first entrant was Kothari Pioneer Mutual fund, launched in association with a foreign fund. The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund Regulation in 1996, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. Currently there are 34 Mutual Fund organizations in India. Today the AUM of the Mutual Fund Industry stands at over Rs.2 lakh crores, a growth of over 1 lakh crores since the last 5 years. Also the percentage of Equity assets in the overall AUM has increased from a shade under 5% to over 30% in the same period. Why Invest in Mutual Funds A: Investing in Mutual Funds through Kotaksecurities.com offers a multitude of benefits, these have been listed below

1. Professional Investment Management One of the primary benefits of investing in Mutual Funds is that an investor gets the advantage of professional management of his finances. Being full-time, high-level investment professionals, a good investment manager is more resourceful and more capable of monitoring the companies the Mutual Fund have chosen to invest in, rather than individual investors. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. 2. Diversification A crucial element in investing is asset allocation. It significantly contributes to the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques, which are usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 3. Low Cost A mutual fund enables you to participate in a diversified portfolio for as little as Rs.5000, and sometimes even lesser. And with a no-load fund, you pay little or no sales charges to own them. 4. Convenience and Flexibility Investing in Mutual Funds has its own convenience. With Kotaksecurities.com, you can truly experience the advantages of investing online in Mutual funds with the click of a button. Gone are the days when people used to fill up long and tedious forms for applying in Mutual Funds. Apart from this, you can also call us on 30305757 to place your orders in a particular Mutual Fund and we will execute orders on your behalf. Another big advantage is that you can move your funds easily from one fund to another, within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes. 5. Liquidity In open-ended schemes, you can get your money back at any point in time at the prevailing NAV (Net Asset Value) from the Mutual Fund itself. 6. Transparency Regulations for Mutual Funds established by SEBI, have made the industry very transparent. You can track the investments that have been made on your behalf to know the sectors/scrips into which your money has been invested. In addition to this, you get regular information on the value of your investment. With Kotaksecurities.com, you can check the status of your orders placed for Mutual Funds, online. 7. Variety Mutual funds offer you a whole range of industries/sectors to choose from. You can find a Mutual Fund that matches just about any investment strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. Infact, the greatest challenge can be sorting through the variety and picking the best for you. As a customer of Kotaksecurities.com , you can invest in about 14 different Mutual Fund Houses with over 560 schemes to choose from.

What are the types of Mutual Funds A:

(I) Mutual Funds Classification based on Investment Objective: 1.Equity Oriented a. General Purpose The investment objectives of general-purpose Equity schemes does not restrict these funds from investing only in specific industries or sectors. Hence these funds have a diversified portfolio of companies spread across a vast spectrum of industries. While these schemes are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. b. Sector Specific These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. They are best suited for informed investors who wish to take a view and risk on the concerned sector. c. Special schemes 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. Tax saving schemes Investors (Individuals and Hindu Undivided Families ("HUFs") are now 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. The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS. Investments in ELSS schemes are eligible for deduction under Sec 80C.An example of ELSS scheme is the Kotak ELSS scheme. Real Estate Funds Specialized real estate funds would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets. 2. Debt Based These schemes, (also commonly referred to as Income Schemes), invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable as compared to Equity schemes. Most of the returns to the investors are generated through dividends or steady capital appreciation in these schemes. These schemes are ideal for conservative investors or those not in a position to take higher Equity risks, such as retired individuals. However, when compared to the money market schemes they do have a higher price fluctuation risk.

a. Income Schemes These schemes invest in money markets, bonds and debentures of corporates with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. Hence they distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long-term investment horizon and are looking for regular income through dividend or steady capital appreciation. b. Liquid Income Schemes Liquid Income Schemes are similar to the Income schemes but have a shorter maturity period. c. Money Market Schemes These schemes invest in short term instruments such as commercial paper ("CP"), certificates of deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The schemes are the least volatile of all the types of schemes because of their investments in money market instruments with short-term maturities. These schemes have become popular with institutional investors and high net worth individuals having short-term surplus funds.

d. Gilt Funds These schemes primarily invest in Government securities. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. 3. Hybrid Scheme These schemes are commonly known as balanced schemes and invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. (II) Mutual Fund Investment Based on Constitution: 1. Open-ended schemes Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund, on any business day. These schemes have unlimited capitalization, do not have a fixed maturity date, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis. The advantages of open-ended funds over close-ended are as follows: An any time exit option, the issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. An any time entry option, an open-ended fund allows one to enter the fund at any time and even to invest at regular intervals. 2. Close-ended schemes Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that, such schemes cannot issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors' expectations and other market factors. 3. Interval schemes These schemes combine the features of open-ended and closed-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices.

Who can invest in Mutual Funds A: Mutual Funds in India are open to investment by 1. Residents including a. Resident Indian Individuals b. Indian Companies c. Indian Trusts / Charitable Institutions d. Banks e. Non-Banking Finance Companies f. Insurance Companies g. Provident Funds 2. Non-Residents including a. Non-resident Indians, and b. Other Corporate Bodies 3. Foreign entities, viz. a. Foreign Institutional Investors (FIIs) registered with SEBI.

However some category of investors are not allowed to invest in particular schemes of certain funds. Besides the investors who are eligible to invest may still need to follow different procedures. CHOOSING THE RIGHT MUTUAL FUND: A: Kotaksecurities.com is your one-stop investment destination, offering you investment opportunities in a host of financial instruments; with products like Easy IPO, Easy Derivatives, Easy Equity, Easy Mutual Fund. Further more, our offerings are customized to suit your investment profile, hence you can meet your investment objectives.Added to this our , extensive research and wide range of products would cater to your needs and objectives. 1. Past performance While past performance is not an indicator of the future it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time. It would also make sense to check out the two-year and one-year returns for consistency. Statistics such as how 'these funds had performed in the bull and bear markets of the immediate past?' would shed light on the strength of a fund. Tracking the fund's performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls during a bearish phase. 2. Know your fund manager The success of a fund to a great extent, depends on the fund manager. Some of the most successful Funds are run by the same fund managers. It would be sensible to always ask about the fund manager before investing, knowing about changes in the Fund Manager's strategy or any other significant developments that an AMC may have undergone. For instance, if the portfolio manager who generated the fund's successful performance is No longer managing that particular fund, one would do well to look into the implications and analyze what the pros and cons of investing in that fund. 3. Does the scheme suit your risk profile? Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes in case the industry/sector loses the market's fancy. If the investor is totally risk averse, he can opt for pure debt schemes with little or no risk. Most investors prefer the balanced schemes, which invest in a combination of equities and debts. Growth and pure equity plans give greater returns than pure debt plans, but their risks are higher. 4. Read the prospectus The prospectus says a lot about the fund. Reading the fund's prospectus is a must to learn about its investment strategy and the risk that it is prone to. Funds with higher rates of return may carry a higher element of risk. Hence, it is of utmost importance that an investor always chooses a particular scheme after considering his financial goals and weighs them against the risk that a Mutual Fund may take while investing in a particular sector. However, all funds carry some level of risk. Just because a fund invests in Government or Corporate bonds does not mean that it does not have significant risk. 5. Fund Diversification While choosing a mutual fund, one should always consider factors like the extent of diversification that a Mutual Fund offers. Maintaining a diversified and balanced portfolio is a key to maintaining an acceptable level of risk. Generally the more diversified a fund; the lesser is its susceptibility to get affected by one particular sector/industry's fall. 6. Costs A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over a period of time. Finally, an investor must be careful not to pick a fund simply because it has shown a spurt in value in the current rally. It would be advisable to ferret out information regarding a fund for at least three years. The one thing to remember while investing in Equity funds is that it makes no sense to get in and out of a fund with each turn of the market. Like

stocks, the right Equity Mutual Fund will pay off big -- if you have the patience. Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year What is NAV A: Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in the securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The market value of securities of a scheme ______________________________________________ Total number of units of the scheme on any particular date.

NAV =

For example, if the market value of securities of a Mutual Fund scheme is Rs.200 lakhs and it has issued 10 lakh units of Rs.10 each, to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the Mutual Funds on a regular basis - daily or weekly - depending on the type of scheme. Tax Aspects of Mutual funds A: Tax Implications of Dividend Income Equity Schemes Equity Schemes are schemes, which have more than 50 per cent investments in Equity shares of domestic companies. As far as Equity Schemes are concerned, no Distribution Tax is payable on dividend. In the hands of the investors, dividend is tax-free. Other Schemes For schemes other than Equity, in the hands of the investors, dividend is tax-free. However, Distribution Tax on dividend @ 12.81% is to be paid by Mutual Funds. Tax Implications of Capital Gains The difference between the sale consideration (selling price) and the cost of acquisition (purchase price) of the asset is called capital gain. If the investor sells his units and earns capital gains, he is liable to pay capital gains tax. Capital gains are of two types: Short Term and Long Term Capital Gains. Short Term Capital Gains If the holding period of the Mutual Fund units is less than or equal to 12 months from the date of allotment of units, then short term capital gains is applicable. On Short Term capital gains, no Indexation benefit is applicable. Tax and TDS Rate (excluding surcharge) Resident Indians and Domestic Companies The Gain will be added to the total income of the Investor and taxed at the marginal rate of tax. No TDS. For NRIs: 10% TDS from the gain for equity schemes and 30% for debt schemes. Long Term Capital Gains The holding period of Mutual Fund units is more than 12 months, from the date of allotment of units. On Long Term capital gains Indexation benefit is applicable. Tax and TDS Rate (excluding surcharge) Resident Indians and Domestic Companies The Gain will be taxed A) At 20% with indexation benefit for debt funds Or At 10% without indexation benefit, whichever is lower for debt funds. This does not include TDS. B) No Long-term Capital Gain tax on equity funds. NRIs: A) 20% TDS from the Gain only for debt funds. B) No tax on Long-term Capital Gains for equity funds Surcharge applicable Resident Indians: If the Gain exceeds Rs.8.5 lakhs, surcharge is payable by investors @ 10%. Domestic Companies: Payable by the investor @ 2.5%. NRIs: If the Gain from the Fund exceeds Rs 8.5 lakhs, surcharge is deducted at source @ 2.5% Risk Vs Reward A: Having understood the basics of Mutual Funds, the next step is to build a successful investment portfolio. Before one begins to build a portfolio, one should understand some other elements of Mutual Fund investing and how they can affect the potential value of investments over the years. The first thing that has to be kept in mind while investing, is that there is no guarantee that one will end up with more money while withdrawing. In other words, the potential of loss is always there. The loss of value in investments, is what is considered risk in investing. At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Risk then, refers to the volatility - the up and down activity in the markets and individual issues that occur constantly over a period of time. This volatility can be caused by a number of factors - interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. But it is this very volatility that earns higher long-term returns from these investments, than from a savings account. Different types of mutual funds have different levels of volatility or potential price, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns. One might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run. Types of risks

All investments involve some form of risk. Mentioned below are the common types of risks. An investor would do well to evaluate them against potential rewards while selecting an investment. Market Risk At times, the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk". It is also known as systematic risk. Inflation Risk Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster than the earnings on your investment, one runs the risk of actually being able to buy less, not more. Inflation risk also occurs when prices rise faster than returns. Credit Risk In short, how stable is the company or entity to which one lends his/her money while investing? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures? Interest Rate Risk Changing interest rates affect both Equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go, is rarely successful. A diversified portfolio can help in offsetting these changes. Exchange risk A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. Investment Risks In sectoral fund schemes, investments will be predominantly in Equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of Equities