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A financial market is an organized trading platform for exchanging financial instruments under a regulated
framework[1]. The participants of the financial markets are borrowers (issuers of financial instruments or
securities), lenders (investors or buyers offinancial instruments) and financial intermediaries that facilitate
investment in financial instruments or securities. The financial markets comprise two markets[2] – (A) Money
markets, which are regulated by the Reserve Bank of India (RBI) and (B) Capital markets, which are regulated
by the Securities Exchange Board of India (SEBI) and.

Financial Markets

(A) Money Markets

Money markets is “… the collective name given to the various firms and institutions that deal in the various
grades in near money”[3]. The definition implies that the money market caters to short-term demand and supply
of funds. The major participants of the money market are as follows:

Lenders: Lenders include the regulator RBI, commercial banks and brokers. These participants facilitate the
expansion or contraction of money in the market

Borrowers: Borrowers include commercial banks, stock brokers, other financial institutions, businesses houses
and governments provide financial instruments to other investors depending upon the money borrowed from
Accordingly, the characteristics of money market include the following:

Short-term – The instruments in the money market have maturities mostly less than a year and cater to short-
term demand and supply of funds.

Highly liquid – The money market is considered highly liquid wherein securities (financial instruments) are
purchased and sold in large denominations to reduce transaction costs[4] (because they are a close substitute to
cash)[5]. The market distributes and redistributes cash balances in accordance to the liquidity needs of the

Safe – The instruments are considered safe with RBI playing a pivotal role in monitoring regulating and
managing monetary requirements of all participants.

Lower returns – The transactions are on a same-day-basis and the returns on these investments accordingly, are

Institutional investors – Retail or individuals investors cannot directly participate in money markets. The money
market mainly caters to institutional investors who require instant cash for running their operations in the
financial system. However, retail or individual investors indirectly participate in money markets by lending
money to institutions (large corporations and government) through bonds to gain high returns.

Monetary policy – The money markets are governed and influenced by changes in the monetary policy. For
example, changes in interest rates announced by RBI play a critical role in determining liquidity requirements in
the overall financial system

Interrelated sub-markets – The money market consists of the following interrelated markets[6]:

Call money market

Commercial bill or ‘Bill’ market

Treasury bill market

Commercial Paper (CP) market

Certificates of Deposits (CD) market

Each and every abovementioned sub-market is characterised with different money market instruments
with different maturities offered in mostly different trading platforms and cater to different borrowers/
lenders with the objective of maintaining different liquidity requirements. For example, in the call money
market, banks borrow call money / notice money from other banks and non-banks to maintain
CRR[7]requirements[8]. The exchange occurs in Over-the-Counter (OTC) market (without brokers) and the
maturity period of call money instruments vary between one day and a fortnight.

(B) Capital Markets

Capital market is an organized mechanism for effective and smooth transfer of long-term capital money or
financial resources from borrowers (corporates / government) to lenders. This market enables channelizing of
savings from investors to raise productive capital for borrowers, which in turn provides higher returns to
investors for their investments through relevant profits.

The securities or issues or instruments in capital markets include equity and debt securities. Capital markets
(equity and corporate debt) in India are predominantly regulated by the SEBI[9]. However, government
securities (in the debt market) are regulated by the RBI. Based on the aforementioned description, following are
some characteristics identified for the capital markets:

Primary and secondary securities – To raise productive capital, lenders issue and/or trade financial securities
(instruments) through primary and secondary markets. Primary markets deal with issuance of new capital (or
financial securities), whereas the secondary market (or stock market) deals with buying and selling of already
existing securities that are listed on the stock exchanges[10]. Primary and secondary markets are inter-
dependent and important for creation of long-term funds in the capital markets. For the new issues or securities
introduced and sold by the lenders in the primary markets, the proceeds of the same go directly to the lenders (to
raise capital). These proceeds are however, dependent upon favourable macroeconomic conditions of an
economy. Subsequently, these issues are traded in the secondary market (or stock exchanges) that also provide
the basis for determining possible prices of primary issues. Thus, depth and performance of the secondary
markets depends upon the new issues / securities in the primary markets because the larger number of new
securities issued in primary markets lead to availability of larger number of instruments for trading in secondary
markets. Thus, the primary markets facilitate liquidity in the secondary markets further leading capital
formation. The secondary market can also divert funds to the primary market for new issues of large size and
bunching of large issues also affecting the stock prices. Lenders can raise its capital in primary markets either
through any of the following – public issue, rights issue, bonus issue and private placement (Private placement
is securities to sold to few select investors like large banks, insurance companies, mutual fund companies, etc).
The interrelationship between primary and secondary markets lead to provision of long-term securities to raise

Risk-returns – Capital markets are characterised with equity and debt instruments that allow diversification of
risks between high-risk equity instruments and low-risk debt instruments. Nevertheless, capital markets are
considered as high-risk markets in comparison to money markets.
Low-information and transaction costs[11] – The capital markets are mostly transparent and information about
the trends in the market is available and accessible in comparison to money markets. Also, due to ease in
availability and accessibility of long-term securities, transaction costs are comparatively lower than money
markets. For example, retail investors can invest in stock markets through a dematerialised account provided by

Retail & institutional – The capital markets is an inclusive market that enables all kinds of investors to invest
and gain higher returns. The investors include – individual or retail investors, small-medium-large businesses,
financial or non-financial institutions and government

Capital allocation – Capital markets are a medium of efficiently allocating capital in the system through a
competitive pricing mechanism

(C) Linkages between money and capital markets

There are significant linkages between money and capital markets and are discussed as follows[12]:

Involvement of financial institutions (and regulators) exists in both the markets. Financial institutions act as
intermediaries and facilitators of short-term and long-term liquidity requirements of all kinds of investors
(individual, corporations and governments)

Capital and money markets involve trading of a variety of financial instruments for a specific time period and
investors depending upon the nature of investment and risks further leading to risk diversification

Short-term funds raised in the money market are used to provide liquidity for long-term investments and
redemption of funds raised in the capital market
For the development of financial markets, development of money markets generally precedes the development
of capital market

Characteristics of financial markets

Financial Markets

The description of capital and money markets leads to understanding the following characteristics of financial

Financial markets enable large volume of transactions and mobilize financial (short-term and long-term)
resources at real-time basis through investments in stocks, bonds and money

Financial markets generate a scope of arbitrage across different markets. This implies, that investors can take
advantage of price differences across different markets and diversify risks

Financial markets are characterised with volatility directed by trade of large volume of securities. Mostly, these
markets are influenced by macroeconomic and political changes in India and the world

Markets are dominated by financial intermediaries who take investment decisions as well as risks on behalf of
depositors (savers)

Financial markets are also characterised by externalities. An externality refers to cost or benefit that are not
transmitted by prices but influenced by a stakeholder’s actions in the financial markets leading to market
failures. For example, speculation in prices of stock markets could affect the workings of the money market

Domestic financial markets are also becoming integrated with global financial markets that not only enables
capital mobility at a global level but spread of risks across the globe

An economy consists of two kinds of economic structures that encompasses the financial system – Savings
structure and Borrowing Structure

Savings structure

The savings structure in an economy consists of savers or entities that save in the form of financial assets
(deposits, life insurance, etc) or cash balances. Savings can be estimated as the remainder or surplus from
incomes earned after expenditures (food, rent, home supplies, etc). This surplus or savings can be directed in
the form of financial assets or withheld as cash.

Savers or entities that save can be further categorised into the following:

Household sector – The household sector include individuals, unincorporated businesses, farm production units
and non-profit businesses. Savings for the household sector is mostly in financial such as includes deposits, life
insurance, shares & debentures, provident and pension fund, loans for durables and real estate.
Savings Structure: Household Sector

Savings are mostly considered synonymous to deposit accounts (offered by banks) though savings can be
directed towards life insurance, provident and pension funds or loans on durables / real estate that are regarded
as productive investments. Thus, household sector demand for financial assets to make productive use of their
savings. The household sector contributes to a majority of the savings in India in comparison to the private and
government sector

Private sector – This sector includes non-government, non-financial companies, private financial institutions
and co-operative institutions that are involved in production and/or distribution of goods and services. The
sector mostly includes profit-making companies that are driven by various social, political, economic,
technological, legal and demographic factors. Savings in this sector are in the form of net profit generated by

State and Government sector – This sector includes government, administrative departments and enterprises
both departmental and non-departmental. Savings for this sector is the difference between government receipts
and government expenditure. Receipts of government are classified into the following[13]:

Revenue receipts such as tax revenues (corporate tax, income tax, other taxes on incomes & expenditure, taxes
on wealth, customs, excise duties, service tax, other taxes / duties on commodities and services and surcharge
transferred to national calamity and contingency fund) and non-tax revenues (consisting of interest receipts[14],
dividends[15], profit from public enterprises and fees/charges for providing various services)

Non-debt capital receipts such as recoveries of loans and disinvestment of government’s equity holdings in
Public Sector Undertakings (PSUs)

Expenditures of government are classified into the following:

Non-plan expenditures that include interest, subsidies, defence, pensions, police, grants-in-aid, loans, etc
Plan expenditures include expenditures as per the Central plan and central assistance to state and Union
Territories’ (UT) plans

Borrowing structure

The borrowing structure in an economy comprises of “borrowers” or entities that finance their needs through
borrowing. The needs of borrowers could involve incurring expenditures on labour, plant and equipment,
constructing residential, industrial or commercial sites and building additions to inventories. The borrowers
include the government sector (central and state level), public sector and private sector corporations. The
borrowers provide or supply financial assets to savers by issuing primary securities in financial markets, which
in turn are reissued by financial intermediaries as secondary securities (in financial markets) for the savers as
investments. The flow of savings (from the savings structure) to the flow of investments (to the borrowing
structure) leads to capital formation or long-term investments

Capital Formation

Capital formation

The flow of money from savings to investments leads to formation of capital stock in the form of equipment,
buildings, intermediate goods and inventories. Capital formation reflects the country’s capability of producing
and distributing goods and services across different sectors and industries thus leading to an increase in the
country national incomes of economic growth. National income of a country or economic growth can be
measured by calculating the Gross Domestic Product (GDP) or Gross National Product (GNP) that comprises
economic activities in sectors like agriculture, industry and services requiring financial resources to allocate
labour, capital and other factors of production.
Economic Growth

Circular Flow of the Economy

The savings and borrowing structure converge to build up capital in the country, which in turn leads to
economic growth. The economic growth of an economy can be explained based on the association between
household sector and the private/government sector[16]. The household sector contributes to the market of
factors of production (land, labour and capital) which act as expenses for firms in private and government sector
incurred for production and distribution of goods and services in a market. This market is the common platform
where the household sector can purchase finished products / services for consumption. The returns from
consumption are translated as profits to the firms which in turn are redistributed as wages and/or rent in the
market of factors of production to the household sector. This circular flow of money between the household and
firms in private / government sector characterises the development of national incomes of an economy which is
measured as Gross Domestic Product or GDP that encompasses consumption, investments, government
spending or expenditures and net exports (exports minus imports). GDP can also be calculated as the sum of
capital formation, consumption expenditure and net exports.

For most of the investors throughout their life, they will be earning and spending money. Rarely, investor’s
current money income exactly balances with their consumption desires. Sometimes, investors may have
more money than they want to spend; at other times, they may want to purchase more than they can afford.
These imbalances will lead investors either to borrow or to save to maximize the long-run benefits from
their income. When current income exceeds current consumption desires, people tend to save the excess.
They can do any of several things with these savings. One possibility is to put the money under a mattress or
bury it in the backyard until some future time when consumption desires exceed current income. When they
retrieve their savings from the mattress or backyard, they have the same amount they saved. Another
possibility is that they can give up the immediate possession of these savings for a future larger amount of
money that will be available for future consumption. This tradeoff of present consumption for a higher level
of future consumption is the reason for saving. What investor does with the savings to make them increase
over time is investment. In contrast, when current income is less than current consumption desires, people
borrow to make up the difference. Those who give up immediate possession of savings (that is, defer
consumption) expect to receive in the future a greater amount than they gave up. Conversely, those who
consume more than their current income (that is, borrowed) must be willing to pay back in the future more
than they borrowed. The rate of exchange between future consumption (future rupee) and current
consumption (current rupee) is the pure rate of interest. Both people’s willingness to pay this difference for
borrowed funds and their desire to receive a surplus on their savings give rise to an interest rate referred to
as the pure time value of money. This interest rate is established in the capital market by a comparison of the
supply of excess income available (savings) to be invested and the demand for excess consumption
(borrowing) at a given time. An investment is the current commitment of rupee for a period of time in order
to derive future payments that will compensate the investor for (1) The time the funds are committed, (2)
The expected rate of inflation, and (3) The uncertainty of the future payments. The “Investor” can be an
individual, a government, a pension fund, or a corporation. Similarly, this definition includes all types of
investments, including investments by corporations in plant and equipment and investments by individuals
in stocks, bonds, commodities, or real estate. This study emphasizes investments by individual investors. In
all cases, the investor is trading a known rupee amount today for some expected future stream of payments
that will be greater than the current outlay. Definition of Individual investor: “An individual who purchases
small amounts of securities for themselves, as opposed to an institutional investor, Also called as Retail
Investor or Small Investor.” At this point, researcher has answered the questions about why people invest
and what they want from their investments. They invest to earn a return from savings due to their deferred
consumption. They want a rate of return that compensates them for the time, the expected rate of inflation,
and the uncertainty of the return. In today’s world everybody is running for money and it is considered as a
root of happiness. For secure life and for bright future people start investing. Every time investors are
confused with investment avenues and their risk return profile. So, even if Researcher focuses on past,
present or future, investment is such a topic that needs constant upgradation as economy changes. The
research study will be helpful for the investors to choose proper investment avenue and to create profitable
investment portfolio.

Investment is the employment of funds with the aim of getting return on it. In general terms, investment
means the use of money in the hope of making more money. In finance, investment means the purchase of a
financial product or other item of value with an expectation of favorable future returns. Investment of hard
earned money is a crucial activity of every human being. Investment is the commitment of funds which have
been saved from current consumption with the hope that some benefits will be received in future. Thus, it is
a reward for waiting for money. Savings of the people are invested in assets depending on their risk and
return demands. Investment refers to the concept of deferred consumption, which involves purchasing an
asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various
investment options are available, offering differing risk-reward tradeoffs. An understanding of the core
concepts and a thorough analysis of the options can help an investor create a portfolio that maximizes
returns while minimizing risk exposure. There are Two concepts of Investment: 1) Economic Investment:
The concept of economic investment means addition to the capital stock of the society. The capital stock of
the society is the goods which are used in the production of other goods. The term investment implies the
formation of new and productive capital in the form of new construction and producers durable instrument
such as plant and machinery. Inventories and human capital are also included in this concept. Thus, an
investment, in economic terms, means an increase in building, equipment, and inventory. 2) Financial
Investment: This is an allocation of monetary resources to assets that are expected to yield some gain or
return over a given period of time. It means an exchange of financial claims such as shares and bonds, real
estate, etc. Financial investment involves contrasts written on pieces of paper such as shares and debentures.
People invest their funds in shares, debentures, fixed deposits, national saving certificates, life insurance
policies, provident fund etc. in their view investment is a commitment of funds to derive future income in
the form of interest, dividends, rent, premiums, pension benefits and the appreciation of the value of their
principal capital. In primitive economies most investments are of the real variety whereas in a modern
economy much investment is of the financial variety. The economic and financial concepts of investment
are related to each other because investment is a part of the savings of individuals which flow into the
capital market either directly or through institutions. Thus, investment decisions and financial decisions
interact with each other. Financial decisions are primarily concerned with the sources of money where as
investment decisions are traditionally concerned with uses or budgeting of money.
AMFI & Its Role in Mutual Fund Industry

AMFI is the Short form Association Of Mutual Funds in India.Everyone is having a Question about AMFI & its
Role Of Mutual Fund Industry. This piece of Information may helpful those who want to know AMFI with clear
understanding.The Association of Mutual Funds in India (AMFI) is dedicated to developing the Indian
Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards
in all areas with a view to protecting and promoting the interests of mutual funds and their unit
holders. AMFI is established on the lines of the Investment Company Institute (ICI), the national association of
AMFI was incorporated on August 22, 1995 as a non-profit organization with an objective to:

 To Promote best business practices and code of conduct in all areas of operation of Mutual Fund
 AMFI should Maintain high professional and ethical standards in the Mutual Fund Industry.
 AMFI Should Interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI
on all matters concerning the Mutual Fund Industry.
 AMFI to Make a representation to the Government, RBI and other regulatory bodies in matters relating
to the Mutual Fund Industry.
 It has to Develop a well-trained agent distributors network for the Mutual Fund Industry.
 To Promote Nationwide investor awareness program to make the investors understand the concept and
working of Mutual Funds.
 To Disseminate information on Mutual Fund Industry and to undertake studies and research directly
and/or in association with other bodies.
AMFI has also set up the Committee on Valuation of Mutual Funds, Committee on Best Practices, Committee
on RBI Related Matters, and Committee on Registration of AMFI Certified Distributors for reviewing and
evolving standards in the Mutual Fund Industry.
Though technically not an SRO(Self Regulatory Organisation), AMFI, right from its inception, has performed
self regulatory functions like giving clarification on payment of brokerage to intermediaries, training the Mutual
Fund distributors, and educating the investors

AMFI guidelines

AMFI has revised code of conduct for mutual fund distributors by adding some of the new regulatory norms.
Fund distributors were earlier governed by AMFI Guidelines and Norms for Intermediaries (AGNI) which was
drafted in 2002.
Some of the areas like perpetrating fraud, providing anti-money laundering details, observing high standards of
ethics and integrity have been added in the revised code of conduct.
Most of the guidelines which were a part of AGNI are still present in the new code of conduct. Distributors are
required to send a self-certification form to AMFI every year attesting that they have adhered to these code of
Below are some of the new guidelines:
 No splitting of applications to earn higher transaction charges/commissions
 Intermediaries to keep themselves abreast with the developments relating to the mutual fund industry as also
changes in the scheme information and information on mutual fund / AMC like changes in fundamental
attributes, changes in controlling interest, loads, liquidity provisions, and other material aspects and deal with
the investors appropriately having regard to the up to date information.
 To protect the investors from potential fraudulent activities, intermediary to take reasonable steps to ensure that
the investor’s address and contact details filled in the mutual fund application form are investor’s own details,
and not of any third party. Where the required information is not available in the application form, intermediary
should make reasonable efforts to obtain accurate and updated information from the investor. Intermediaries to
abstain from filling wrong / incorrect information or information of their own or of their employees; officials or
agents as the investor’s address and contact details in the application form, even if requested by the investor to
do so. Intermediary should abstain from tampering in any way with the application form submitted by the
investor, including inserting, deleting or modifying any information in the application form provided by the
 Intermediaries including the sales personnel of intermediaries engaged in sales/marketing shall obtain NISM
certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN)
from AMFI apart from AMFI Registration Number (ARN). The Intermediaries shall ensure that the employees
quote the EUIN in the Application Form for investments. The NISM certification and AMFI registration shall
be renewed on timely basis. Employees in other functional areas should also be encouraged to obtain the same
 Intermediaries shall comply with the Know Your Distributor (KYD) norms issued by AMFI.
 Co-operate with and provide support to AMCs, AMFI, competent regulatory authorities, Due Diligence
Agencies (as applicable) in relation to the activities of the intermediary or any regulatory requirement and
matters connected thereto.
 Provide all documents of its investors in terms of the Anti-Money Laundering/Combating Financing of
Terrorism requirements, including KYC documents / Power of Attorney/investor’s agreement(s), etc. with
Intermediaries as may be required by AMCs from time to time.
 Be diligent in attesting/certifying investor documents and performing In Person Verification (IPV) of investor’s
for the KYC process in accordance with the guidelines prescribed by AMFI / KYC Registration Agency (KRA)
from time to time.
 Intimate the AMC and AMFI any changes in the intermediary’s status, constitution, address, contact details or
any other information provided at the time of obtaining AMFI Registration.
 Observe high standards of ethics, integrity and fairness in all its dealings with all parties – investors, Mutual
Funds/AMCs, Registrars & Transfer Agents and other intermediaries. Render at all times high standards of
service, exercise due diligence and ensure proper care.
 Intermediaries satisfying the criteria specified by SEBI for due diligence exercise shall maintain the requisite
documentation in respect of the “Advisory” or “Execution Only” services provided by them to the investors.
 Intermediaries shall refund to AMCs, either by set off against future commissions or payment, all incentives of
any nature, including commissions received, that are subject to claw-back as per SEBI regulations or the terms
and conditions issued by respective AMC.
 In respect of purchases (including switch-ins) into any fund w.e.f. January 1, 2013, in the event of any switches
from Regular Plan (Broker Plan) to Direct Plan, all upfront commissions paid to distributors shall be liable to
complete and / or proportionate claw-back.
 Do not indulge in fraudulent or unfair trade practices of any kind while selling units of schemes of any mutual
fund. Selling of units of schemes of any mutual fund by any intermediary directly or indirectly by making false
or misleading statement, concealing or omitting material facts of the scheme, concealing the associated risk
factors of the schemes or not taking reasonable care to ensure suitability of the scheme to the investor will be
construed as fraudulent/unfair trade practice.

To make it easier for foreign fund managers keen to relocate to India, markets regulator Sebi's board on Friday
approved a proposal to allow them to act as 'Portfolio Managers' under a relaxed regulatory regime.
The move assumes significance in the wake of the government already having announced taxation incentives for
the offshore fund managers willing to relocate to India.
At a meeting in Mumbai, Sebi's board approved issuance of a consultation paper for 'amendments to the Sebi
(Portfolio Managers) Regulations, 1993', which would make it easier for the overseas funds to relocate to Indian
The proposed amendments include a separate section on 'Eligible Fund Managers' that would specify conditions
that will apply to their activities as portfolio managers.
The new rules would also specify the procedure to be followed by a Sebi-registered Portfolio Manager to
function as an Eligible Fund Manager.
Besides, Sebi would lay out the procedure for registration of an existing foreign based fund manager desirous of
relocating to India or a fresh applicant to function as an Eligible Fund Manager.
While listing out the obligations and responsibilities of Eligible Fund Managers, Sebi would specify non-
applicability of certain provisions of Portfolio Managers Regulations on Eligible Fund Managers.
These provisions would include 'High Water Mark Principle' regarding calculation of fees, disclosure of fees,
obligation to act in a fiduciary capacity and audit of overseas fund.
Besides, the rules regarding mandatory agreement between the portfolio manager and overseas fund, reporting
about overseas fund and minimum investment requirements (Rs 25 lakh) would also not be applicable for such
overseas funds.
After the board meeting, Semi said the consultation paper would soon be put in public domain to seek
comments from all stakeholders. The final rules would be framed accordingly.
After the announcement in the Union Budget, a new section was added to the Income Tax Act to provide that
the fund management activity carried out through an Eligible Fund Manager (EFM) located in India and acting
on behalf of an Eligible Investment Fund (EIF) would not constitute business connection in India of such a fund.
Following the issuance of notification by the tax department in this regard, Semi held meetings with various
stakeholders to discuss the registration framework for EFMs, during which several impediments were pointed
out in the existing regulations for Investment Advisers and Portfolio Managers.
Subsequently, Semi has now decided to initiate a consultation process for changes to its norms for Portfolio
Managers while putting in place a framework for allowing EFMs to act as Portfolio Managers to their EIFs.

Managing, and more crucially growing, money is not easy. If it were we would all be a lot richer than we are.
Even professionally trained active fund managers at the top of their profession notoriously often fail to beat the
market. That can be attributed in large part to fee structures draining profits, but still highlights the scale of the
challenge that faces portfolio managers. However, there are many successful investment portfolio managers,
private and professional, that do consistently outperform markets. This is especially true when fund managers
crippled by their fund’s fee structure are taken out of the equation.

While even the most adept portfolio manager will make the occasional bad call, the real secret to effective
portfolio management is in the consistent avoidance of costly errors. In an article for Forbes Magazine, Peter
Andersen, Chief Investment Officer at Congress Wealth Management, posits that cutting mistakes down to the
bare minimum is what separates consistently successful portfolio managers from the rest. He argues that most
mistakes can also be traced back to violations of several key money management rules. So let’s take a look at
some of those key rules for successful portfolio management. Some are those mentioned by Andersen and some
are not. While this is by no means a comprehensive list, hopefully they will get you thinking about the important
things to keep in mind when it comes to minimizing the mistakes that can be the difference between effective
portfolio management and disappointed clients, or even a disappointing performance for your own personal
investment portfolio.

Although it can be worded in different ways, from ‘trust the fundamentals’ to ‘long term investing’ ‘patience’ is,
with justification, the most commonly cited piece of advice when it comes to a successful investment strategy.

Especially in the news-hungry modern world which continuously updates us on our holdings, it is important to
block out all but the most important information and focus on the underlying, longer term fundamentals that
original decisions were based on. Markets have more and less volatile periods and while it is crucial to stay alert
for significant changes which could impact your holdings, it is just as crucial to cancel out most of the noise and
ignore short term volatility.

Groupthink may be harder to spot in investment trends than it is at the golf club or between a group of friends
but make no mistake, it permeates financial markets to a frightening extent. As a portfolio manager one of the
most fundamental pieces of advice you should heed is to ignore what the markets and media are saying and
always think for yourself. If you are a day or short-term trader the trend may well be your friend, but as a
portfolio manager it is more like peer pressure to skip school. You might gain short-term kudos but it isn’t going
to do anything positive for your long term prospects.
We have already mentioned that it is important to commit to portfolio holdings, to remember your original
reasoning, not to follow the crowd and not to be distracted by short-term volatility. However, that doesn’t mean
you should both blindly sail into the storm and then stay with a sinking ship when things don’t pan out in the
way you initially expected.

When you choose to invest in any holding, go through all of the potential scenarios, positive and negative, that
could significantly impact your initial suppositions. You will then know if conditions have changed in a pre-
empted way to mean your commitment is no longer be tenable, know the terms of divorce and be able to react.
And of course, you need to have Plans B and C in place so you are not scrabbling around trying to figure out
what to do when negative scenarios do come to pass.

If you have expert or in-depth knowledge in a particular industry or sphere, use that. Andersen cites the example
of an investment manager with particular knowledge of adolescent epilepsy, new medications and potentially
break-through treatments and how that had come in useful when it came to certain stock picks. If you are a
portfolio manager with a better track record in value-based picks rather than growth picks, focus on what you
are good at and bring in someone with complementary strengths, either in an official capacity or as an advisor.

There is a wealth of new technology out there that can help portfolio managers hugely when it comes to
screening different equities and other assets. They take a lot of the manual process out of value assessment by
different metrics and while they are restricted to data-based filtering can be an invaluable tool to flag options for
further attention. Embracing these kind of screening tools, and other technology out there, can help portfolio
managers make picks from a much vaster range of options than was previously possible.

Finally, with the best of intentions, impeccable approach, knowledge and skill, professional portfolio
management requires communication if the manager is to be successful. When a fund underperforms the market
investors are twice as disappointed as they are happy when it outperforms. The same is true of a portfolio
manager’s clients. There will always be times when a portfolio loses value, it is unavoidable. However, clear
communication with clients on the decision making process, correct expectation setting and regular updates will
reduce the chances of clients panicking when that does happen. Don’t try to make your skill set seem mysterious
and out-of-reach. Educate your clients as much as possible on investment principles and your approach. The
better they understand what you are doing the less likely they are to be phased by setbacks and appreciate
An investor is any person who commits capital with the expectation of financial returns. Investors utilize
investments in order to grow their money and/or provide an income during retirement, such as with an annuity.
A wide variety of investment vehicles exist including (but not limited to) stocks, bonds, commodities, mutual
funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold, silver, retirement plans and real
estate. Investors typically perform technical and/or fundamental analysis to determine favorable investment
opportunities, and generally prefer to minimize risk while maximizing returns.


Investors have varying risk tolerances, capital, styles, preferences and timeframes. For instance, some investors
prefer very low-risk investments that will lead to conservative gains, such as certificates of deposits and certain
Other investors, however, are more inclined to take on additional risk in an attempt to make a larger profit.
These investors might invest in currencies, emerging markets or stocks. A distinction can be made between the
terms "investor" and "trader" in that investors typically hold positions for years to decades (also called a
"position trader" or "buy and hold investor") while traders generally hold positions for shorter periods. Scalp
traders, for example, hold positions for as little as a few seconds. Swing traders, on the other hand, seek
positions that are held from several days to several weeks.

5.2 Meaning of investments

What is an 'Investment'

An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate
in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are
used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the
asset will provide income in the future or will be sold at a higher price for a profit.


The term "investment" can be used to refer to any mechanism used for the purpose of generating future income.
In the financial sense, this includes the purchase of bonds, stocks or real estate property. Additionally, the
constructed building or other facility used to produce goods can be seen as an investment. The production of
goods required to produce other goods may also be seen as investing.

Taking an action in the hopes of raising future revenue can also be an investment. Choosing to pursue additional
education can be considered an investment, as the goal is to increase knowledge and improve skills in the hopes
of producing more income.
Investment and Economic Growth

Economic growth can be encouraged through the use of sound investments at the business level. When a
company constructs or acquires a new piece of production equipment in order to raise the total output of goods
within the facility, the increased production can cause the nation’s gross national product (GDP) to rise. This
allows the economy to grow through increased production, based on the previous equipment investment.

Investment Banking

An investment bank provides a variety of services designed to assist an individual or business in increasing
associated wealth. This does not include traditional consumer banking. Instead, the institution focuses on
investment vehicles such as trading and asset management. Financing options may also be provided for the
purpose of assisting with the these services.

Investments and Speculation

Speculation is a separate activity from making an investment. Investing involves the purchase of assets with the
intent of holding them for the long-term, while speculation involves attempting to capitalize on market
inefficiencies for short-term profit. Ownership is generally not a goal of speculators, while investors often look
to build the number of assets in their portfolios over time.

Although speculators are often making informed decisions, speculation cannot usually be categorized as
traditional investing. Speculation is generally considered higher risk than traditional investing, though this can
vary depending on the type of investment involved.

5.3 Investors investment objectives

The options for investing savings are continually increasing, yet every investment vehicle can generally be categorized
according to three fundamental characteristics: safety, income and growth.

Those options also correspond to types of investor objectives. While an investor may have more than one of
these objectives, the success of one comes at the expense of others. Let's examine these three types of
objectives, the investments that are used to achieve them and the ways in which investors can incorporate them
into a strategy.

There is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet, we can
get close to ultimate safety for our investment funds through the purchase of government-issued securities in
stable economic systems, or through the purchase of the corporate bonds issued by large, stable companies.
Such securities are arguably the best means of preserving principal while receiving a specified rate of return.

The safest investments are usually found in the money market. In order of increasing risk, these securities
include: Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips, or
in the fixed-income (bond) market, in the form of municipal and other government bonds and corporate bonds.
As they increase in risk, these securities also increase in potential yield.

There's an enormous range of relative risk within the bond market. At one end are government and high-grade
corporate bonds, which are considered some of the safest investments around. At the other end are junk bonds,
which have a lower investment grade and may have more risk than some of the more speculative stocks. In
other words, corporate bonds are not always safe, although most instruments from the money market can be
considered very safe.

The safest investments are also the ones that are likely to have the lowest rate of income return or yield.
Investors must inevitably sacrifice a degree of safety if they want to increase their yields. As yield increases,
safety generally goes down, and vice versa.

In order to increase their rate of investment return and take on risk above that of money market instruments or
government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment
ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but generally also offer a
higher income return than AAA bonds. Similarly, BBB-rated bonds can be thought to carry medium risk, but
they offer less potential income than junk bonds, which offer the highest potential bond yields available but at
the highest possible risk. Junk bonds are the most likely to default.

Most investors, even the most conservative-minded ones, want some level of income generation in their
portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be
an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio
every month. A retired person who requires a certain amount of money every month is well served by holding
reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans.

Growth of Capital
This discussion has thus far been concerned only with safety and yield as investing objectives, and has not
considered the potential of other assets to provide a rate of return from an increase in value, often referred to as
a capital gain.
Capital gains are entirely different from yield in that they are only realized when the security is sold for a price
that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as
a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of
investment returns from their portfolio, but rather those who seek the possibility of longer-term growth.

Growth of capital is most closely associated with the purchase of common stock, particularly growth securities,
which offer low yields but considerable opportunity for increase in value. For this reason, common stock
generally ranks among the most speculative of investments as their return depends on what will happen in an
unpredictable future. Blue-chip stocks can potentially offer the best of all worlds by possessing reasonable
safety, modest income and potential for growth in capital generated by long-term increases in corporate
revenues and earnings as the company matures. Common stock is rarely able to provide the safety and income-
generation of government bonds.

It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in
most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared
toward the growth plans of small companies, a process that is extremely important for the growth of the overall
economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower
rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that
help the economy grow.

Secondary Objectives
Tax Minimization: An investor may pursue certain investments in order to adopt tax minimization as part of
his or her investment strategy. A highly paid executive, for example, may want to seek investments with
favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to
an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy.

Marketability/Liquidity: Many of the investments we have discussed are reasonably illiquid, which means
they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however,
requires the sacrifice of a certain level of income or potential for capital gains.

Common stock is often considered the most liquid of investments, since it can usually be sold within a day or
two of making the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or
non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the
precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable
bonds aren't likely to be held in his or her portfolio.
The Bottom Line
Again, the advantages of one investment often comes at the expense of the benefits of another. If an investor
desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios
will be guided by one pre-eminent objective, with all other potential objectives carrying less weight in the
overall scheme.

Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that
depends on such factors as the investor's temperament, his or her stage of life, marital status or family situation.
Each investor can determine an appropriate mix of investment opportunities. But you need to spend the
appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your

5.4 Elements of Investment

Effective Diversification/Strategic Asset Allocation Strategy

Traditional views of diversification tend to focus on asset classes (e.g., equity, fixed income). Asset classes are
essentially just legal definitions, and while they help steer you towards diversification, they’re not the only thing
to focus on. Effective diversification requires you look at the underlying source of risk. Diversifying across the
underlying source of risk, whether it’s related to the yield curve, the performance of a company or the inflation
environment, is the core of a solid investment strategy.

For instance, if you had held Lehman Brothers stock in your equity portfolio and Lehman Brothers bonds in
your fixed-income portfolio, you would have held assets that belong to two different asset classes, but the risk
you held was not linked to the asset class—it was linked to Lehman Brothers. By implementing effective
diversification as a strategy, you may be able to stabilize your portfolio by minimizing company overlap
between your stocks and bonds.

While most portfolios are heavily exposed to the performance of companies (think equities and high-yield
bonds), inflation may actually be the greatest risk that you face in retirement. During periods of unexpected
inflation, equities and fixed-income investments may lose money; having assets in your portfolio that generally
rise along with inflation is a central element of effective diversification/strategic asset allocation strategy .

Active Allocations/Tactical Asset Allocation Strategy

Research shows that markets are relatively efficient (i.e., most information is already priced in), thereby making
the markets or individual stocks difficult to predict in the short term. Over three- to five-year periods, however,
Nobel Prize-winning research indicates that markets are actually somewhat predictable.
Markets that look expensive today will tend to perform worse than markets that appear cheap today and vice
versa. By monitoring global markets, investors may be able to avoid bubbles and take advantage of potential
growth opportunities.

Use this research with caution—a tactical asset allocation strategy based on valuation isn’t the same as near-
term market timing. There is no magic piece of evidence that tells you when to get in or out of the market. After
all, what looks cheap today can get cheaper. What the research tells us is that the patient are often rewarded, but
that’s not always the case.

Cost Efficiency

Whether you’re on your own or working with an advisor, paying fees is a fact of life when it comes to investing.
If you’re going to pay fees, make sure you’re getting good value. When you consider advisory and custodian
fees, investment expense ratios and transaction costs, you could be paying almost 3% in fees annually. That’s
too much!

Research from Vanguard (the powerhouse of indexing firms) shows that the value of a good financial advisor
may cover their fees over time. Advisors add value by managing their clients’ feelings of fear and greed,
building effectively diversified portfolios, monitoring markets for bubbles and opportunities, minimizing the
opaque costs embedded in investment products, reducing clients’ tax burdens, and the list goes on.

I do think it’s possible to do better than passive indexing by using a quantitatively enhanced indexing
strategy. Research shows that by having exposures like value and momentum in your portfolio, you have a
chance of outperforming a purely indexed approach over time. As a result, it may be worthwhile to pay a little
more for a research enhanced index than a passive fund.

Finally, if you can find a strategy that offers a positive expected return with a low, stable correlation to equity
markets, it might be worth paying a higher fee for the diversification benefits.

Tax Efficiency

The real measure of an investment strategy is how much of your money you actually get to keep. That’s where
incorporating tax efficiencies into the investment philosophy come in. Research has shown that comprehensive
tax planning can save investors 75 basis points annually. It might not sound like much, but with compounding,
it’s a big deal.

One way to achieve greater tax efficiency is by increasing your use of tax-advantaged vehicles. Another
approach is to use asset location strategies to minimize taxes by determining where assets should be held to take
advantage of the best tax treatments. Proactively harvesting losses also helps offset future gains and can further
bolster your bottom line.
While there are many ways to invest, there is no magic portfolio to be found. Even though building an
investment approach based on the above concepts doesn’t guarantee the outcome you want, you can know that a
portfolio built on the above concepts is rooted in a research-driven approach that, over time, has tended to
provide the outcomes investors need.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-
diversified portfolio, nor ensure a profit or protect against a loss.

No strategy assures success or protects against loss. Past performance is no guarantee of future results.

Stock investing involves risk including loss of principal.


Portfolio Management Services (PMS), service offered by the Portfolio Manager, is an investment portfolio in
stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional
money manager that can potentially be tailored to meet specific investment objectives. When you invest in
PMS, you own individual securities unlike a mutual fund investor, who owns units of the fund. You have the
freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although
portfolio managers may oversee hundreds of portfolios, your account may be unique.

 Discretionary:

Under these services, the choice as well as the timings of the investment decisions rest solely with the Portfolio

 Non Discretionary

Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the
timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the
portfolio manager.

 Advisory

Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the
execution of the investment decisions rest solely with the Investor. Note: In India majority of Portfolio
Managers offer Discretionary Services.
 Professional Management:

The service provides professional management of portfolios with the objective of delivering consistent long-
term performance while controlling risk.

 Continuous Monitoring

It is important to recognise that portfolios need to be constantly monitored and periodic changes made to
optimise the results.

 Risk Control

A research team responsible for establishing the client's investment strategy and providing the PMS provider
real time information to support it, backs any firm's portfolio managers.

 Hassle Free Operation

Portfolio Management Service provider gives the client a customised service. The company takes care of all the
administrative aspects of the client's portfolio with a periodic reporting (usually daily) on the overall status of
the portfolio and performance.

 Flexibility

The Portfolio Manager has fair amount of flexibility in terms of holding cash (can go up to 100% also
depending on the market conditions). He can create a reasonable concentration in the investor portfolios by
investing disproportionate amounts in favour of compelling opportunities.

 Transparency

PMS provide comprehensive communications and performance reporting. Investors will get regular statements
and updates from the firm. Web-enabled access will ensure that client is just a click away from all information
relating to his investment. Your account statements will give you a complete picture of which individual
securities you hold, as well as the number of shares you own. It will also usually provide: the current value of
the securities you own; the cost basis of each security; details of account activity (such as purchases, sales and
dividends paid out or reinvested); your portfolio's asset allocation; your portfolio's performance in comparison
toabenchmark; market commentary from your Portfolio Manager

 Customised Advice

PMS give select clients the benefit of tailor made investment advice designed to achieve his financial objectives.
It can be structured to automatically exclude investments you may own in another account or investments you
would prefer not to own. For example, if you are a long-term employee in a company and you have acquired
concentrated stock positions over the years and have become over exposed to few company's stock, a separately
managed account provides you with the ability to exclude that stock from your portfolio.

BNP Paribas Asset ManagementBNP Paribas Asset Management is the dedicated asset management business
line of BNP Paribas and backed by the financial strength of one of the best rated banks in the world.BNP
Paribas Asset Management manages and advises assets of over EUR 571* bn across 30 countries with
significant presence in Europe, Asia and the Americas. It is Europe's 6th largest asset manager and among the
leading asset managers in the world offering one of the widest range of investment solutions in the industry.


Our story is closely intertwined with that of our parent company, BNP Paribas, Europe’s leading financial
services Group operating today.

The BNP Paribas Group is deeply rooted in Europe’s economic history. In France, the predecessors of the BNP,
the Comptoirs nationaux d’escompte (discount banks) of Paris and Mulhouse, were created in 1848 to foster the
economy hit by crisis.

As soon as 1860, Comptoir national d’escompte de Paris set up a pioneering network of branches for financing
international trade. Paribas, created by several European bankers in 1872, soon became the great French
investment bank. Established in 1913, BNL joined the Group in 2006. It has been a key player of the Italian
economy, with a unique speciality for financing the cinema industry since 1935. Société Générale de Belgique,
born in 1822 and joined the Group under the name of Fortis in 2009, is the leading Belgian bank which invented
the “mixed” bank (deposit/investment) in the 1830s in Europe.

Since 2000, as well as growing organically, we’ve acquired a number of companies to enable us to reach new
markets and offer our clients a broader range of solutions. The result is that today we’re one of the world’s
leading asset managers. But throughout our history we’ve never lost focus on what really matters to us: our
passion for investing and for helping our clients meet their goals.


The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes
normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These
schemes provide different options like dividend option, capital appreciation, etc. to investors and investors may
then choose an option that suits their preferences.


These funds generate income through arbitrage opportunities emerging out of mis-pricing between the cash
market and the derivatives market. Arbitrageurs buy equity and sell equal volume of futures so that their net
position (in terms of risk) is zero. They remain unaffected by price movements in their arbitraged scrips. Any
upward movement will increase profits on their equity holdings and losses on futures positions and vice versa.


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, Government securities and money market
instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds.
The NAVs of such funds are affected by changes in the interest rates in the country. If the interest rates fall,
NAVs of such funds are likely to increase in the short-run and vice versa.


These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and
moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills,
certificates of deposit, commercial papers, inter-bank call money, etc. Returns on these schemes fluctuate much
less as compared to other funds. These funds are appropriate for corporate as well as individual investors as a
means to park their surplus funds for short periods.


These funds invest in both, stocks and bonds. Hybrid funds offer investors the opportunity to diversify their
portfolio with a single investment vehicle. Based on the percentage allocation to stocks and bonds, these funds
may be classified as equity or debt respectively. The ratio of stocks and bonds may remain fixed or vary over

The call money market is an essential part of the Indian Money Market, where the day-to-day surplus funds
(mostly of banks) are traded. The money market is a market for short-term financial assets that are close
substitutes of money. The most important feature of a money market instrument is that it is liquid and can be
turned into money quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of
lenders and the requirements of borrowers.

The loans are of short-term duration varying from 1 to 14 days, are traded in call money market. The money
that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15
days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Inter
Bank Market.

Banks borrow in this money market for the following purpose:

 To fill the gaps or temporary mismatches in funds

 To meet the Cash Reserve Ratio(CRR) & Statutory Liquidity Ratio(SLR) mandatory requirements as
stipulated by the RBI

 To meet sudden demand for funds arising out of large outflows.

Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Participants in the Call Money Market:

As the RBI guideline, the participants in call/notice money market currently include scheduled commercial
banks (excluding RRBs), Development Financial Institutions, Co-operative banks(other than Land
Development Banks) and Primary Dealers (PDs), both as borrowers and lenders.

Interest Rate:

Eligible participants are free to decide on interest rates in call/notice money market. Calculation of interest
payable would be based on the methodology given by the Fixed Income Money Market and Derivatives
Association of India (FIMMDA).

Note: FIMMDA is an association of Commercial Banks, Financial Institutions and Primary Dealers. It is a
voluntary market body for the bond, Money and Derivatives Markets.

What are Money Market Instruments?

Money market instruments are those instruments, which have a maturity period of less than one year. The most
active part of the money market is the market for overnight call and term money between banks and institutions
and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned
instruments are normally termed as money market instruments:

 Certificate of Deposit (CD)

 Commercial Paper (CP)

 Inter Bank Participation Certificates

 Inter Bank term Money

 Treasury Bills

 Bill Rediscounting

 Call/ Notice/ Term Money

What is a Money Market?

The term ‘Money Market’, according to the Reserve Bank of India, is used to define a market where short-term
financial assets are traded. These assets are a near substitute for money and they aid in the money exchange
carried out in the primary and secondary market. So, essentially, the money market is an apparatus which
facilitates the lending and borrowing of short-term funds, which are usually for a duration of under a year. Short
maturity period and high liquidity are two characteristic features of the instruments which are traded in the
money market. Institutions like commercial banks, non-banking finance corporations (NBFCs) and acceptance
houses are the components which make up the money market.

The money market is a part of the larger financial market and consists of numerous smaller sub-markets like bill
market, acceptance market, call money market, etc. Money market deals are not carried out in money / cash, but
other instruments like trade bills, government papers, promissory notes, etc. Also, money market transactions
cannot be done via brokers but have to be carried out via mediums like formal documentation, oral or written

Some Important Objectives Served By a Money Market

The money market serves several objectives in the overall economy. Listed below are some important

 The money market doesn’t only help in the storage of short-term surplus funds but also helps in lowering short
term deficits.
 They help the central bank in regulating liquidity in the economy.
 Money markets help short-term fund users to fulfill their needs at reasonable costs.
 The money market helps in the development of the capital market, trade and industry.
 To help design effective monetary policies.
 To facilitate streamlined functioning of commercial banks.
What Are Money Market Instruments?
As the name suggests, Money Market Instruments are simply the instruments or tools which can help one
operate in the money market. These instruments serve a dual purpose of not only allowing borrowers meet their
short-term requirements but also provide easy liquidity to lenders. Some of the common money market
instruments include Banker’s Acceptance, Treasury Bills, Repurchase Agreements, Certificate of Deposits and
Commercial Papers.

Characteristics of Money Market Instruments

Money market instruments allow governments, financial organizations and businesses to finance their short-
term cash requirements. Some of the notable characteristics of money market instruments are as follows.

 Liquidity – Money market instruments are highly liquid because they are fixed-income securities which carry
short maturity periods of a year or less.
 Safety – Issuers of money market instruments have strong credit ratings, which automatically means that the
money instruments issued by them will also be safe.
 Discount Pricing – Another important characteristic feature of money market instruments is that they are
issued at a discount on their face value.

Types Of Money Market Instruments

Treasury Bills (T-Bills)
Issued by the Central Government, Treasury Bills are known to be one of the safest money market instruments
available. However, treasury bills carry zero risk. I.e. are zero risk instruments. Therefore, the returns one gets
on them are not attractive. Treasury bills come with different maturity periods like 3-month, 6-month and 1 year
and are circulated by primary and secondary markets. Treasury bills are issued by the Central government at a
lesser price than their face value. The interest earned by the buyer will be the difference of the maturity value of
the instrument and the buying price of the bill, which is decided with the help of bidding done via auctions.
Currently, there are 3 types of treasury bills issued by the Government of India via auctions, which are 91-day,
182-day and 364-day treasury bills.

Certificate of Deposits (CDs)

A Certificate of Deposit or CD, functions as a deposit receipt for money which is deposited with a financial
organization or bank. However, a Certificate of Deposit is different from a Fixed Deposit Receipt in two
aspects. The first aspect of difference is that a CD is only issued for a larger sum of money. Secondly, a
Certificate of Deposit is freely negotiable. First announced in 1989 by RBI, Certificate of Deposits have become
a preferred investment choice for organizations in terms of short-term surplus investment as they carry low risk
while providing interest rates which are higher than those provided by Treasury bills and term deposits.
Certificate of Deposits are also relatively liquid, which is an added advantage, especially for issuing banks. Like
treasury bills, CDs are also issued at a discounted price and their tenor ranges between a span of 7 days up to 1
year. However, banks issue Certificates of Deposits for durations ranging from 3 months, 6 months and 12
months. They can be issued to individuals (except minors), trusts, companies, corporations, associations, funds,
non-resident Indians, etc.

Commercial Papers (CPs)

Commercial Papers are can be compared to an unsecured short-term promissory note which is issued by highly
rated companies with the purpose of raising capital to meet requirements directly from the market. CPs usually
feature a fixed maturity period which can range anywhere from 1 day up to 270 days. Highly popular in
countries like Japan, UK, USA, Australia and many others, Commercial Papers promise higher returns as
compared to treasury bills and are automatically not as secure in comparison. Commercial papers are actively
traded in secondary market.

Repurchase Agreements (Repo)

Repurchase Agreements, also known as Reverse Repo or simply as Repo, loans of a short duration which are
agreed upon by buyers and sellers for the purpose of selling and repurchasing. These transactions can only be
carried out between RBI approved parties Repo / Reverse Repo transactions can be done only between the
parties approved by RBI. Transactions are only permitted between securities approved by the RBI like treasury
bills, central or state government securities, corporate bonds and PSU bonds.

Banker's Acceptance (BA)

Banker's Acceptance or BA is basically a document promising future payment which is guaranteed by a
commercial bank. Similar to a treasury bill, Banker’s Acceptance is often used in money market funds and
specifies the details of the repayment like the amount to be repaid, date of repayment and the details of the
individual to which the repayment is due. Banker’s Acceptance features maturity periods ranging between 30
days up to 180 days.


Portfolio Management Services account is an investment portfolio in Stocks, Debt and fixed income products
managed by a professional money manager, that can potentially be tailored to meet specific investment
objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns
units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal
preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account
may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS
services can offer PMS to clients. There is no separate certification required for selling any PMS product. So
this is case where mis-selling can happen. As per the SEBI guidelines, the minimum investment required to
open a PMS account is Rs. 5 Lacs. However, different providers have different minimum balance requirements
for different products. For Eg Birla AMC PMS is having min amount requirement of Rs. 25 lacs for a product.
Similarly HSBC AMC is having minimum requirement of 50 lacs for their PMS and Reliance is having min
requirement of Rs. 1 Crore. In India Portfolio Management Services are also provided by equity broking firms
& wealth management services.
There are broadly two types of PMS
1. Discretionary PMS – Where the investment is at discretion of the fund manager & client has no intervention
in the investment process.
2. Non-Discretionary PMS – Under this service, the portfolio manager only suggests the investment ideas. The
choice as well as the timings of the investment decisions rest solely with the investor. However the execution of
the trade is done by the portfolio manager.
The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the
Fund Manager would ensure that those stocks are not bought in his portfolio. Majority of PMS providers in
India offer Discretionary Services.
Also Read(Article continues after links):
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How can investor invest in a Portfolio Management Services (PMS)?
There are two ways in which an investor can invest in a Portfolio Management Services:
1. Through Cheque payment
2. Through transferring existing shares held by the customer to the PMS account. The Value of the portfolio
transferred should be above the minimum investment criteria.
Beside this customer will need sign a few documents like– PMS agreement with the provider, Power of
Attorney agreement, New demat account opening format (even if investor has a demat account he is required to
open a new one) and documents like PAN, address proof and Identity proofs are mandatory. NRIs can invest in
a PMS. The NRIneeds to open a PIS account for investing in PMS. The documentation required for an NRI,
however, is different from a resident Indian. A checklist of documents is provided by each PMS provider.
Working of a Portfolio Management Services (PMS)
Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There
is no NAV for a PMS scheme; however the customer will get the valuation of his portfolio on a daily basis from
the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio
and all the investments for a particular investor are done in the Portfolio Management Services on the basis of
model portfolio of the scheme. However the portfolio may differ from investor to investor. This is because of:
Entry of investors at different time.
Difference in amount of investments by the investors
Redemptions/additional purchase done by investor
Market scenario – Eg If the model portfolio has investment in Infosys, and the current view of the Fund
Manager on Infosys is “HOLD”(and not “BUY”), a new investor may not have Infosys in his portfolio.
Under PMS schemes the fund manager interaction also takes place. The frequency depends on the size of the
client portfolio and the Portfolio Management Services provider. Bigger the portfolio, frequency of interaction
is more. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half yearly basis.
Portfolio Management Services (PMS) Charges
A PMS charges following fees. The charges are decided at the time of investment and are vetted by the investor.
Entry Load – PMS schemes may have an entry load of 3%. It is charged at the time of buying the PMS only.
Management Charges – Every Portfolio Management Services scheme charges Fund Management charges.
Fund Management Charges may vary from 1% to 3% depending upon the PMS provider. It is charged on a
quarterly basis to the PMS account.
Profit Sharing – Some PMS schemes also have profit sharing arrangements (in addition to the fixed fees),
wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund. For
Eg PMS X has fixed charges of 2% plus a charge of 20% of fees for return generated above 15% in the year. In
this case if the return generated in the year by the scheme is 25%, the fees charged by the PMS will be 2% +
The Fees charged is different for every Portfolio Management Services provider and for every scheme. It is
advisable for the investor to check the charges of the scheme.
Apart from the charges mentioned above, the PMS also charges the investors on following counts as all the
investments are done in the name of the investor:
Custodian Fee
Demat Account opening charges
Audit charges
Transaction brokerage

Taxation for Portfolio Management Services (PMS)

Any income from Portfolio Management Services account is a business income. Unlike MF, PMS is not
required to remain 65%+ invested in equity to get equity taxation benefit. Each Portfolio Management Services
account is in the name of additional investor and so the tax treatment is done on an individual investor level.
Profit on the same can be considered as business income.(i.e slabwise). Profit can be considered as Capital
gains. [STCG(15%) or LTCG(Taxfree)]. It depends on clients Chartered Accountant or the assessing officer
how he treats this Income. The PMS provider sends an audited statement at the end of the FY giving details of
STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or business income.
How is PMS different from a Mutual Fund?
Both PMS and Mutual Funds are types of managed Funds. The difference to the investor in a Portfolio
Management Services over a Mutual Fund is:
Concentrated Portfolio.
Portfolio can be tailored to suit the needs of investor.
Investors directly own the stocks, rather than the fund owning the stocks.
Difference in taxation
This article is written by guest author Madhupam Krishna. A Post Graduate in Finance, currently he heads sales
function for Rajasthan for Principal PNB Mutual Fund.


BNP Paribas Wealth Management is a leading global private bank, present in some 30 countries. Over 6,000
professionals, based in every major financial centre, provide a private investor clientele with solutions for
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What is Portfolio Management? Meaning

First let's understand the meaning of terms Portfolio and Management.

Portfolio is a group of financial assets such as shares, stocks, bonds, debt instruments, mutual funds, cash
equivalents, etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment.
Management is the organization and coordination of the activities of an enterprise in accordance with well-
defined policies and in achievement of its pre-defined objectives.
Now let's comprehend the meaning of term Portfolio Management.

Portfolio Management (PM) guides the investor in a method of selecting the best available securities that will
provide the expected rate of return for any given degree of risk and also to mitigate (reduce) the risks. It is a
strategic decision which is addressed by the top-level managers.
For example, Consider Mr. John has $100,000 and wants to invest his money in the financial market other than
real estate investments. Here, the rational objective of the investor (Mr. John) is to earn a considerable rate of
return with less possible risk.

So, the ideal recommended portfolio for investor Mr. John can be as follows:-

The main objectives of portfolio management in finance are as follows:-

1. curity of Principal Investment : Investment safety or minimization of risks is one of the most
important objectives of portfolio management. Portfolio management not only involves keeping the
investment intact but also contributes towards the growth of its purchasing power over the period. The
motive of a financial portfolio management is to ensure that the investment is absolutely safe. Other
factors such as income, growth, etc., are considered only after the safety of investment is ensured.
2. Consistency of Returns : Portfolio management also ensures to provide the stability of returns by
reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady
returns. The earned returns should compensate the opportunity cost of the funds invested.
3. Capital Growth : Portfolio management guarantees the growth of capitalby reinvesting in growth
securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order to
safeguard the investor from any erosion in purchasing power due to inflation and other economic factors.
A portfolio must consist of those investments, which tend to appreciate in real value after adjusting for
4. Marketability : Portfolio management ensures the flexibility to the investment portfolio. A portfolio
consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains too
many unlisted or inactive shares, then there would be problems to do trading like switching from one
investment to another. It is always recommended to invest only in those shares and securities which are
listed on major stock exchanges, and also, which are actively traded.
5. Liquidity : Portfolio management is planned in such a way that it facilitates to take maximum advantage
of various good opportunities upcoming in the market. The portfolio should always ensure that there are
enough funds available at short notice to take care of the investor’s liquidity requirements.
6. Diversification of Portfolio : Portfolio management is purposely designed to reduce the risk of loss of
capital and/or income by investing in different types of securities available in a wide range of industries.
The investors shall be aware of the fact that there is no such thing as a zero risk investment. More over
relatively low risk investment give correspondingly a lower return to their financial portfolio.
7. Favorable Tax Status : Portfolio management is planned in such a way to increase the effective yield
an investor gets from his surplus invested funds. By minimizing the tax burden, yield can be effectively
improved. A good portfolio should give a favorable tax shelter to the investors. The portfolio should be
evaluated after considering income tax, capital gains tax, and other taxes.
The objectives of portfolio management are applicable to all financial portfolios. These objectives, if
considered, results in a proper analytical approach towards the growth of the portfolio. Furthermore, overall risk
needs to be maintained at the acceptable level by developing a balanced and efficient portfolio. Finally, a good
portfolio of growth stocks often satisfies all objectives of portfolio management.


A portfolio manager is one who helps an individual invest in the best available investment plans for guaranteed
returns in the future.

Let us go through some roles and responsibilities of a Portfolio manager:

 A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as per his
income, age as well as ability to undertake risks. Investment is essential for every earning individual.
One must keep aside some amount of his/her income for tough times. Unavoidable circumstances might
arise anytime and one needs to have sufficient funds to overcome the same.
 A portfolio manager is responsible for making an individual aware of the various investment
tools available in the market and benefits associated with each plan. Make an individual realize why he
actually needs to invest and which plan would be the best for him.
 A portfolio manager is responsible for designing customized investment solutions for the clients. No two
individuals can have the same financial needs. It is essential for the portfolio manager to first analyze the
background of his client. Know an individual’s earnings and his capacity to invest. Sit with your client
and understand his financial needs and requirement.
 A portfolio manager must keep himself abreast with the latest changes in the financial market. Suggest
the best plan for your client with minimum risks involved and maximum returns. Make him understand
the investment plans and the risks involved with each plan in a jargon free language. A portfolio
manager must be transparent with individuals. Read out the terms and conditions and never hide
anything from any of your clients. Be honest to your client for a long term relationship.
 A portfolio manager ought to be unbiased and a thorough professional. Don’t always look for your
commissions or money. It is your responsibility to guide your client and help him choose the best
investment plan. A portfolio manager must design tailor made investment solutions for individuals
which guarantee maximum returns and benefits within a stipulated time frame. It is the portfolio
manager’s duty to suggest the individual where to invest and where not to invest? Keep a check on the
market fluctuations and guide the individual accordingly.
 A portfolio manager needs to be a good decision maker. He should be prompt enough to finalize the best
financial plan for an individual and invest on his behalf.
 Communicate with your client on a regular basis. A portfolio manager plays a major role in setting
financial goal of an individual. Be accessible to your clients. Never ignore them. Remember you have
the responsibility of putting their hard earned money into something which would benefit them in the
long run.
 Be patient with your clients. You might need to meet them twice or even thrice to explain them all the
investment plans, benefits, maturity period, terms and conditions, risks involved and so on. Don’t ever
get hyper with them.

Never sign any important document on your client’s behalf. Never pressurize your client for any plan. It is his
money and he has all the rights to select the best plan for himself.

 Growth Schemes

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation
over medium to long term. These schemes normally invest a major part of their fund in equities and are willing
to bear short-term decline in value for possible future appreciation.

 Income Schemes
Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady
income to investors. These schemes generally invest in fixed income securities such as bonds and corporate
debentures. Capital appreciation in such schemes may be limited.
 Balanced Schemes
Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and
capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion
indicated in their offer documents (normally 50:50).
 Money Market Schemes
Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money.

 Tax Saving Schemes :

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88
of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for
 Index Schemes :
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the CNX
S&P Nifty. The portfolio of these schemes will consist of only those stocks that constitute the index. The
percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the
returns from such schemes would be more or less equivalent to those of the Index.
 Sector Specific Schemes :
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the
offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks,
etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While
these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a
watch on the performance of those sectors/industries and must exit at an appropriate time.

There are few things more important and more daunting than creating a long-term investment strategy that can
enable an individual to invest with confidence and with clarity about his or her future. Constructing an
investment portfolio requires a deliberate and precise portfolio-planning process that follows five essential

Step 1: Assess Current Financial Situation and Goals

Planning for the future requires having a clear understanding of an investor’s current situation in relation to
where he or she wants to be. That requires a thorough assessment of current assets, liabilities, cash flow and
investments in light of the investor's most important goals. Goals need to be clearly defined and quantified so
that the assessment can identify any gaps between the current investment strategy and the stated goals. This step
needs to include a frank discussion about the investor’s values, beliefs and priorities, all of which set the course
for developing an investment strategy.

Step 2: Establish Investment Objectives

Establishing investment objectives centers on identifying the investor’s risk-return profile. Determining how
much risk that an investor is willing and able to assume, and how much volatility that the investor can
withstand, is key to formulating a portfolio strategy that can deliver the required returns with an acceptable level
of risk. Once an acceptable risk-return profile is developed, benchmarks can be established for tracking the
portfolio’s performance. Tracking the portfolio’s performance against benchmarks allows smaller adjustments
to be made along the way.

Step 3: Determine Asset Allocation

Using the risk-return profile, an investor can develop an asset allocation strategy. Selecting from various asset
classes and investment options, the investor can allocate assets in a way that achieves optimum diversification
while targeting the expected returns. The investor can also assign percentages to various asset classes, including
stocks, bonds, cash and alternative investments, based on an acceptable range of volatility for the portfolio. The
asset allocation strategy is based on a snapshot of the investor’s current situation and goals, and is usually
adjusted as life changes occur. For example, the closer an investor gets to his or her retirement target date, the
more the allocation may change to reflect less tolerance for volatility and risk.

Step 4: Select Investment Options

Individual investments are selected based on the parameters of the asset allocation strategy. The specific
investment type selected depends in large part on the investor’s preference for active or passive management.
An actively managed portfolio might include individual stocks and bonds if there are sufficient assets to achieve
optimum diversification, which is typically over $1 million in assets. Smaller portfolios can achieve the proper
diversification through professionally managed funds, such as mutual funds; through managed accounts; or with
exchange-traded funds. An investor might construct a passively managed portfolio with index funds selected
from the various asset classes and economic sectors.

Step 5: Monitor, Measure and Rebalance

After implementing a portfolio plan, the management process begins. This includes monitoring the investments
and measuring the portfolio’s performance relative to the benchmarks. It is necessary to report investment
performance at regular intervals, typically quarterly, and to review the portfolio plan annually. Once a year, the
investor’s situation and goals get a review to determine if there have been any significant changes. The portfolio
review then determines if the allocation is still on target to track the investor’s risk-reward profile. If it is not,
then the portfolio can be rebalanced, selling investments that have reached their targets, and buying investments
that offer greater upside potential.

When investing for lifelong goals, the portfolio planning process never stops. As investors move through their
life stages, changes may occur, such as job changes, births, divorce, deaths or shrinking time horizons, which
may require adjustments to their goals, risk-reward profiles or asset allocations. As changes occur, or as market
or economic conditions dictate, the portfolio planning process begins anew, following each of the five steps to
ensure that the right investment strategy is in place.

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