UNIT I

Pension Fund, Hedge fund & E

Banking
 Pension funds
 Definition: A pension plan is an asset pool that accumulates
over an individual’s working years and is paid out during the
nonworking years.
 Developed as Americans began relying less on children for
care during their later years.
 Also became popular as life expectancy increased.
 These are investment pools that pay for employee retirement
commitments. Funds are paid for by either employees,
employers, or both.
 The fund managers invest these contributions conservatively.
They must avoid losing the principal but still beat inflation.
 Pension funds
 Pension funds are collective investment undertakings
that manage employee savings and retirement.
 Their primary objective is to provide pensioners who
have reached retirement age with income in the form of
a lifetime pension or capital.
 When members reach retirement age, they are provided
with either an annuity or a capital paid by the fund.
 At the core of pension fund operations are three types
of activity: premium collection, investment of sums
collected, benefits paid.
 Types of Pensions
 The pension fund industry comprises two distinct sectors.
 1. Private pension funds: are those funds administered by a
private corporation ( e.g. (insurance company, mutual fund).
 Any pension plan set up by employers, groups, or
individuals
 2. Public pension funds: are those funds administered by a
federal, state, or local government (e.g., Social Security).
 Any pension plan set up by a government body for the
general public.
 Pension funds, different types of plans

 Pensions funds can also be distinguished by the way contributions are made and
benefits are paid.

 Defined Benefit Pension fund : A plan where the employer promises the
employee a specific benefit when they retire.
 Employers fund and guarantee a specific retirement benefit amount for each
participant that is based on factors such as the employee’s salary and years of
service.
 i. Flat benefit formula ii. Career average formula iii. Final
pay formula
 Employees have little control over the funds until they are received in retirement.
The company takes responsibility for the investment and for its distribution to the
retired employee. That means the employer bears the risk that the returns on the
investment will not cover the defined-benefit amount due to a retired employee.
 While they are rare in the private sector, defined-benefit pension plans are still
somewhat common in the public sector—in particular, in government jobs.
 Defined contribution Pension
Defined-contribution plans are funded primarily by the
employee. But many employers make matching contributions to a
certain amount.
The employee is responsible for making the contributions and
choosing investments offered by the plan. Contributions are
typically invested in select mutual funds and money market funds
A shift to defined-contribution plans has placed the burden of
saving and investing for retirement on employees.
These plans are for wage earners or self-employed, they do not
know the amount of benefits they will receive on retirement.
Benefits depend on market conditions and investment returns.
 Types of pension funds in India
 EPF- applicable to salaried class only.
 PPF- Private employees & self employed
 National Pension System- from 18 yrs-60 yrs.
6,000 Rs. Min. contribution per annum. NPS
account matures at the age of 60 yrs.
 Features & Benefits of Pension Plans

 Guaranteed Pension/Income
 Tax-Efficiency ( under section 80 C)
 Surrender value
 Payment Period
 Hedge Fund
 Hedge funds are alternative investments using pooled
funds that employ different strategies to
earn active return, for their investors.
 Hedge funds may be aggressively managed or make
use of derivatives and leverage in both domestic and
international markets with the goal of generating
high returns (either in an absolute sense or over a
specified market benchmark).
 One aspect that has set the hedge fund industry apart is
the fact that hedge funds face less regulation than
mutual funds and other investment vehicles.
 Hedge Fund
 Hedge Fund – a lightly regulated investment vehicle that may use a
variety of investment techniques and may invest in a vast array of assets
to generate higher returns for a certain level of risk when compared to
conventional investments
 A hedge fund is an investment vehicle that can employ a wide range of
investment and trading activities to maximize performance returns
while minimizing investment risk.
Hedge funds –
 pool of funds of the highly influential investors,
 open to limited number of investors
 require high investment
 include high expertise based investment strategies and Risk
management
 Features of hedge fund
 Reduced regulatory oversight
 Private in nature
 Often more aggressive investment strategies
 Greater investment flexibility
 Performance fees or incentive allocations
 Frequently substantial investment by advisers
and portfolio managers
 Hedge Fund-Regulatory framework

 The key regulations include the:

 AIF(alternative investment funds) Regulations.
 SEBI (Foreign Portfolio Investor) Regulations 2019.
 SEBI circulars, issued from time to time, prescribing additional compliance
and reporting requirements.
 Foreign Exchange Management Act 1999 and regulations and circulars issued
there under by Reserve Bank of India (RBI) from time to time, regulating
investments by offshore investors/hedge funds into onshore hedge funds.
 Regulatory bodies
 SEBI is the securities regulator, which was established under the SEBI Act
1992.
 RBI is the central bank of India, which was established under the RBI Act
1949.
 Regulatory Constraints
 Restricting participation: The Alternative Investment Fund shall not accept from an
investor an investment of value less than rupees one crore.
 Further, the AIF shall have a minimum corpus of Rs. 20 crore.
 Avoiding wealth concentration hazards: The fund or any scheme of the fund shall
not have more than 1000 investors
 Preventing Conflict of Interest: For a Hedge Fund, the continuing interest shall be
not less that 5% of the corpus or rupees ten crore, whichever is lower.
 Trading in Secondary Market: Units of AIF may be listed on stock exchange
subject to a minimum tradable lot of rupees one crore.
 Against Concentration : Hedge Funds shall invest not more than 10% of the corpus
in one Investee Company.
 Preventing Moral Hazard: AIF shall not invest in associates except with the
approval of 75% of investors by value of their investment in the Alternative
Investment Fund
 Proper disclosure: Category III Alternative Investment Funds shall ensure that
calculation of the net asset value (NAV) shall be disclosed to the investors at
intervals not longer than a quarter for close ended Funds and at intervals not longer
 Types of hedge funds
 Onshore hedge fund
 Offshore hedge fund- an onshore hedge fund
pools monies from any foreign investor or non-
resident Indians
E-banking
 Meaning
 E-banking refers to electronic banking. It’s like e-business
in the banking industry. Electronic banking is also known
as “Virtual Banking” or “Online Banking”. Electronic
banking is based on banking based on information
technology. Under this I.T system, banking services are
delivered through a computer-controlled system. This
system involves no direct interface with customers.
Customers do not have to visit the bank’s facilities.
 In other words, e-banking refers to all the financial
transactions undertaken by any financial institution over
the internet.
Popular services covered under E-banking
include : –

 ATMs,
 Credit cards,
 Debit Cards,
 Electronic Funds Transfer System (EFT)
 Mobile Banking,
 Internet Banking,
 Telephone Banking, etc.
 Advantages of E-Banking : –

 The cost of operation per unit of services is lower for

banks.
 Offers convenience to customers since they are not
required to go to the bank’s facilities.
 There is a very low incidence of errors.
 The customer can obtain funds at any time from
ATMs.
 Credit cards and debit cards allow customers to get
discounts at points of sale.
 The customer can easily transfer the funds from one
place to another place electronically.
 Disadvantages

 Difficult for Beginners

 Trust and Responsibility
 Inconvenience
 Inability to Handle Complex Transactions
 Financial Jargon
 Security Issues
 Technology Issues
 Virtual Assistance
 Complicated Websites
 Other Limitations