Assingment A

8/6/2019 Assingment A

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SEMESTER-IV

ASSINGMENT- A

Q-1

What is an IPO?

In financial terms, IPO or initial public offering is the first issuance of a company's shares to the

general public. It is called as primary market. These shares are allowed to be transacted in thestock market where they can be brought and sold. It is called secondary market.In other

words,An IPO is defined as an exercise when an unlisted company makes either a fresh issue ofsecurities or an offer for sale of its existing securities or both for the first time to the public. One

thing to note is the shares allocated to the public do not constitute 100% of the company's shares.Only a certain percentage is allocated to the public. Usually the company owner or the board of

directors will still hold the majority of the shares.

What is the need of IPO?

Organisation offer IPO is to raise capital for their organisation. The main reason is because

companies plan to use the money gathered from IPO to further expand their business or toincrease their business operations.Legal compliance and financial regulations that needs to be

followed during IPO process.

Procedure for an IPO

step :1(Assigning Underwriter)

Company needs to set up underwriters. Underwriters are nothing but investment banks. The

purpose of underwriters is to assess the business. Underwriters are used to analyse operational

and financial background of the company in order to determine the value of the company's shares

to be sold to the public. The company will sign an agreement with the lead underwriter to sell

shares on the market and the underwriters can proceed to sell these shares to any interested

investors.For large corporations dealing with billions of dollars of shares, several large

investment banks may act as underwriters. These banks are paid commissions for shares that

they sell. The underwriters will also help the company deal with the legal and financial

regulations imposed by the country.

Step :2(Perfoming Legal procedures)

While launching IPO, they reserve some percentage shares for various catagories such as Retail

investors,Institutional Investors and Employees. As soon as the IPO is successfully launched,


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companies will need to submit their annual business earnings reports to the financial securities

board since the company's shares will be listed in the stock market. It changes based on the

country. In India, it is SEBI.

Step :3(Grading)

IPO-grading is nothing but Grade which assigned by a Credit Rating Agency registered with

Financial securities. Shortly, it is called as CRISIL . The grade represents a relative assessment

of the fundamentals of that issue in relation to the other listed equity securities in India. These

grading is generally assigned on a five-point benchmark

grade 1 : Poor fundamentals

grade 2 : Below-average fundamentals

grade 3 : Average fundamentals

grade 4 : Above-average fundamentals

grade 5 : Strong fundamentals

IPOs in India - Presentation Transcript

1. Initial Public Offerings(IPOs)2. Meaning and Benefits of IPOso An initial public offering is referred to as sale of equity of a company to the public by the promoters of the

company.o

ompanies prefer to go for Initial Public offering due to following reasons:o Additional Capital resources for funding of projects/expansion plans.o Dilution of existing promoters share holding or by venture capitalisto Liquidity for shareholders.o Enhances corporate image thus providing visibility.

3. Process for IPOo When a company wants to go public, the first thing it does is hire an investment banko You can think of underwriters as middlemen between companies and the investing publico The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the

amount of money a company will raise, the type of securities to be issued, and all the details in the underwritingagreement

4. Red Herringo The underwriter puts together what is known as the RED HERRING.o This is an initial prospectus containing all the information about the company except for the offer price and the

effective date, which aren't known at that time.o With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue.

They go on a road show - also known as the "dog and pony show" - where the big institutional

investors are courted.5. Issue Related Termso Bido Bid Amounto Issue Closing Dateo Bid-cum-Application Formo BRLMs (Book Running Lead Managers)o Cut-offo Red Herring Prospectus


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6.o Escrow Collection Bank (s)o Margin Amounto Prospectus.o Revision Form.o Escrow Account of the Company

Issue Related Terms

7. Types of Public Issueso Fixed Price Issue

Public Issue Private Placement Offer for Sale

o Book Building Issue8. Types of Issueso Fixed Price:- Wherein the price band of the issue is fixed. For e.gDwarikesh Sugar Industries Limited Public

Issue of 50,00,000 equity shares of Rs 10/- each at a premium of Rs 55/- per share aggregating Rs 3250 lacs.o Book Building Issue:o -- Book Building is a price discovery mechanism which is undertaken to ascertain and determine the price of

the security proposed to be issued by a body corporate.o -- There is a price band which gives the bidder the facility to bid within a price band at different price levels.o -- e.g National Thermal Power Corporation Limited wherein the price band was fixed between Rs 52 to Rs 62/-

9. Category of Bidderso Retail Individual Investor :- means an investor who applies or bids for securities of or for face value of not more

than Rs 50,000/-o Non-Qualified Institutional Buyer : Any investor who bids for an amount above Rs 50,000 and does not fall in

the QIB category e.g HNI investors.o Qualified Institutional Buyer(QIB) shall mean:o a. public financial institution as defined in section 4A of theo CompaniesAct, 1956;o b. scheduled commercial banks;o c. mutual funds;o d. foreign institutional investor registered with SEBI;o Contd.

10. QIBs-categoryo e. multilateral and bilateral development financial institutions;o f. venture capital funds registered with SEBI.o g. foreign Venture capital investors registered with SEBI.o h. state Industrial Development Corporations.o i. insurance Companies registered with the Insurance Regulatory and DevelopmentAuthorityo j. provident Funds with minimum corpus of Rs. 25 crores

o k. pension Funds with minimum corpus of Rs. 25 crores11. Key Factors to keep in mind before applying in a IPOo Investors need to carefully go through the red herring prospectus(preliminary prospectus and is subject to

revision, the final is the one which is filed with ROC) that is available on the SEBI site.o Objects of the issue.o Risk factors related to the issue.o Promoters track record and their experience in running a particular business.o Financials.o Issue Price. contd.


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12. Key factorso Sector prospects.o Capital structure of the company.o Terms of the present offer.o Outstanding litigation & defaults.o Tax Benefits.o Any published reports that forecast the future earnings.

13. Prospectuso Information contained in this Prospectus relative to markets for the company's products and trends in net

sales, gross margin and anticipated expense levels, as well as other statements including words such as"anticipate," "believe," "plan," "estimate," "expect" and"intend" and other similar expressions, constitute forward-looking statements ...actual results ofoperations may differ materially from those contained in the forward-looking statements

14. Prospectuso "...risks for the company include, but are not limited to, an evolving and unpredictable business model

and the management of growth .... There can be no assurance that the company will be successful inaddressing such risks, and the failure to do so could have a material adverse effect on the company'sbusiness, prospects, financial condition and results of operations."

15. Recent IPO Performanceo Curr Priceo Gain are absolute returns

16. Indian v/s Overseas scenarioo In India the book is built directly while in the west the underwriter takes the shares on his books and then allots

shares to investors.o In India the book-building process is transparent while in US it is done confidentially.o Abroad, the book can be opened and closed anytime. In India, the book has to be kept open for a minimum of

five days;the period can be extended if price band is revised.17.o In India, 50 percent of the book is reserved for high net worth and retail individuals(25 percent each),the

allotment being proportional to the bid. The allotment to QIBs is discretionary and there are no reservations.

Retail investors account for barely 15 percent of the issue.o Overseas, the price band is often a soft band,in the sense the underwriter is allowed to bid at a price outside

the band;in India, we have a rigid price band,though it can be revised.o Retail investors here have to put in a cheque for the full amount, although QIBs pay no margins. Overseas,

neither segment pays any margin. (Source: Business Standard)

Indian v/s Overseas scenario

18. Required Changes in the current process-some thoughtso Bidding process to be made more convenient to retail.o Increasing the retail investor quota to 30 to 35% to promote retail participation in IPOs.o To increase the ceiling of investment for retail category from Rs 50,000 to Rs 1,00,000.

o Refund Process: currently sent in physical form; to be converted in ECSo Registrars to be more proactive in solving IPO related queries.o More Transparency in terms of QIBs Bidding.

19. Thank You

ASSINGMENT- B


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Q-1

i n t r o d u c t i o n t o v e n t u r e c a p i t a l

Venture Capital is a form of "risk capital". In other words, capital that is invested in a project (in thiscase - a business) where there is a substantial element of risk relating to the future creation of profitsand cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investorrequires a higher"rate of return" to compensate him for his risk.

The main sources of venture capital in the UK are venture capital firms and "business angels" - privateinvestors. Separate Tutor2u revision notes cover the operation of business angels. In these notes, weprincipally focus on venture capital firms. However, it should be pointed out the attributes that bothventure capital firms and business angels look for in potential investments are often very similar.

What is venture capital?

Venture capital provides long-term, committed share capital, to help unquoted companies grow andsucceed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in

which he works, turnaround or revitalise a company, venture capital could help do this. Obtainingventure capital is substantially different from raising debt or a loan from a lender. Lenders have a legalright to interest on a loan and repayment of the capital, irrespective of the success or failure of abusiness . Venture capital is invested in exchange for an equity stake in the business. As a shareholder,the venture capitalist's return is dependent on the growth and profitability of the business. This returnis generally earned when the venture capitalist "exits" by selling its shareholding when the business issold to another owner.

Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthyindividuals to back their projects on an ad hoc basis. This informal method of financing became anindustry in the late 1970s and early 1980s when a number of venture capital firms were founded. Thereare now over 100 active venture capital firms in the UK, which provide several billion pounds each yearto unquoted companies mostly located in the UK.

What kind of businesses are attractive to venture capitalists?

Venture capitalist prefer to invest in "entrepreneurial businesses". This does not necessarily mean smallor new businesses. Rather, it is more about the investment's aspirations and potential for growth,rather than by current size. Such businesses are aiming to grow rapidly to a significant size. As a rule ofthumb, unless a business can offer the prospect of significant turnover growth within five years, it isunlikely to be of interest to a venture capital firm. Venture capital investors are only interested incompanies with high growth prospects, which are managed by experienced and ambitious teams whoare capable of turning their business plan into reality.

For how long do venture capitalists invest in a business?

Venture capital firms usually look to retain their investment for between three and seven years ormore. The term of the investment is often linked to the growth profile of the business. Investments inmore mature businesses, where the business performance can be improved quicker and easier, areoften sold sooner than investments in early-stage or technology companies where it takes time todevelop the business model.

Where do venture capital firms obtain their money?


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Just as management teams compete for finance, so do venture capital firms. They raise their fundsfrom several sources. To obtain their funds, venture capital firms have to demonstrate a good trackrecord and the prospect of producing returns greater than can be achieved through fixed interest orquoted equity investments. Most UK venture capital firms raise their funds for investment fromexternal sources, mainly institutional investors, such as pension funds and insurance companies.

Venture capital firms' investment preferences may be affected by the source of their funds. Many fundsraised from external sources are structured as Limited Partnerships and usually have a fixed life of 10years. Within this period the funds invest the money committed to them and by the end of the 10 yearsthey will have had to return the investors' original money, plus any additional returns made. Thisgenerally requires the investments to be sold, or to be in the form of quoted shares, before the end ofthe fund.

Venture Capital Trusts (VCT's) are quoted vehicles that aim to encourage investment in smaller unlisted(unquoted and AIM quoted companies) UK companies by offering private investors tax incentives inreturn for a five-year investment commitment. The first were launched in Autumn 1995 and are mainlymanaged by UK venture capital firms. If funds are obtained from a VCT, there may be some restrictionsregarding the company's future development within the first few years.

What is involved in the investment process?

The investment process, from reviewing the business plan to actually investing in a proposition, cantake a venture capitalist anything from one month to one year but typically it takes between 3 and 6months. There are always exceptions to the rule and deals can be done in extremely short time frames.Much depends on the quality of information provided and made available.

The key stage of the investment process is the initial evaluation of a business plan. Most approaches toventure capitalists are rejected at this stage. In considering the business plan, the venture capitalistwill consider several principal aspects:

- Is the product or service commercially viable?- Does the company have potential for sustained growth?- Does management have the ability to exploit this potential and control the company through thegrowth phases?- Does the possible reward justify the risk?- Does the potential financial return on the investment meet their investment criteria?

In structuring its investment, the venture capitalist may use one or more of the following types ofshare capital:

Ordinary sharesThese are equity shares that are entitled to all income and capital after the rights of all other classesof capital and creditors have been satisfied. Ordinary shares have votes. In a venture capital deal theseare the shares typically held by the management and family shareholders rather than the venture

capital firm.

Preferred ordinary sharesThese are equity shares with special rights.For example, they may be entitled to a fixed dividend orshare of the profits. Preferred ordinary shares have votes.

Preference sharesThese are non-equity shares. They rank ahead of all classes of ordinary shares for both income andcapital. Their income rights are defined and they are usually entitled to a fixed dividend (eg. 10%


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fixed). The shares may be redeemable on fixed dates or they may be irredeemable. Sometimes theymay be redeemable at a fixed premium (eg. at 120% of cost). They may be convertible into a class ofordinary shares.

Loan capitalVenture capital loans typically are entitled to interest and are usually, though not necessarily

repayable. Loans may be secured on the company's assets or may be unsecured. A secured loan willrank ahead of unsecured loans and certain other creditors of the company. A loan may be convertibleinto equity shares. Alternatively, it may have a warrant attached which gives the loan holder theoption to subscribe for new equity shares on terms fixed in the warrant. They typically carry a higherrate of interest than bank term loans and rank behind the bank for payment of interest and repaymentof capital.

Venture capital investments are often accompanied by additional financing at the point of investment.This is nearly always the case where the business in which the investment is being made is relativelymature or well-established. In this case, it is appropriate for a business to have a financing structurethat includes both equity and debt.

Other forms of finance provided in addition to venture capitalist equity include:

- Clearing banks - principally provide overdrafts and short to medium-term loans at fixed or, moreusually, variable rates of interest.

- Merchant banks - organise the provision of medium to longer-term loans, usually for larger amountsthan clearing banks. Later they can play an important role in the process of "going public" by advisingon the terms and price of public issues and by arranging underwriting when necessary.

- Finance houses - provide various forms of installment credit, ranging from hire purchase to leasing,often asset based and usually for a fixed term and at fixed interest rates.

Factoring companies - provide finance by buying trade debts at a discount, either on a recourse basis

(you retain the credit risk on the debts) or on a non-recourse basis (the factoring company takes overthe credit risk).

Government and European Commission sources - provide financial aid to UK companies, ranging fromproject grants (related to jobs created and safeguarded) to enterprise loans in selective areas.

Mezzanine firms - provide loan finance that is halfway between equity and secured debt. Thesefacilities require either a second charge on the company's assets or are unsecured. Because the risk isconsequently higher than senior debt, the interest charged by the mezzanine debt provider will behigher than that from the principal lenders and sometimes a modest equity "up-side" will be requiredthrough options or warrants. It is generally most appropriate for larger transactions.

Making the Investment - Due Diligence

To support an initial positive assessment of your business proposition, the venture capitalist will wantto assess the technical and financial feasibility in detail.

External consultants are often used to assess market prospects and the technical feasibility of theproposition, unless the venture capital firm has the appropriately qualified people in-house. Charteredaccountants are often called on to do much of the due diligence, such as to report on the financialprojections and other financial aspects of the plan. These reports often follow a detailed study, or a


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one or two day overview may be all that is required by the venture capital firm. They will assess andreview the following points concerning the company and its management:

- Management information systems- Forecasting techniques and accuracy of past forecasting- Assumptions on which financial assumptions are based

- The latest available management accounts, including the company's cash/debtor positions- Bank facilities and leasing agreements- Pensions funding- Employee contracts, etc.

The due diligence review aims to support or contradict the venture capital firm's own initialimpressions of the business plan formed during the initial stage. References may also be taken up onthe company (eg. with suppliers, customers, and bankers).

Stages in Venture Capital FinancingThese are the 4 usual stages:

y Stage 1 Seed FinancingThis is money invested where the company is at its beginnings and

they have not yet launched.

y Stage 2 First Stage FinancingThis is where the company has commenced initial production and

marketing but needs additional capital in order to move onto the

market in a bigger way.

y Stage 3 Second Stage Financing

This is financing for the expansion of the operations.

y Stage 4 Mezzanine or Final Stage Financing

Here financing is needed for ongoing operations and expansions where

the company is already breaking even or running profitability but now

needs to move into major growth.

What do Venture Capitalists Look for?Some of the factors that a venture capital firm will look for when they aremaking a decision on whether to invest in a company or not include:

y Management

Q-2

UNDERSTANDING MUTUAL FUND

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the

money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated

investment objectives of a mutual fund scheme generally forms the basis for an investor's decision to contribute


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money to the pool, a mutual fund can not deviate from its stated objectives at any point of time.

Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary

research works ensures much better return than what an investor can manage on his own. The capital appreciation

and other incomes earned from these investments are passed on to the investors (also known as unit holders) in

proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the

same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund

investor is also known as a mutual fund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is

reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund

scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets

by the total number of units issued to the investors.

For example:

A. If the market value of the assets of a fund is Rs. 100,000

B. The total number of units issued to the investors is equal to 10,000.

C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00

D. Now if an investor 'X' owns 5 units of this scheme

E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the

scheme)


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ADVANTAGES OF MUTUAL FUND

S.

No.Advantage Particulars

1.Portfolio

Diversification

Mutual Funds invest in a well-diversified portfolio of securities which enables investor

to hold a diversified investment portfolio (whether the amount of investment is big or

small).

2.Professional

Management

Fund manager undergoes through various research works and has better investment

management skills which ensure higher returns to the investor than what he can

manage on his own.

3. Less Risk

Investors acquire a diversified portfolio of securities even with a small investment in a

Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3

securities.

4.Low Transaction

Costs

Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser

transaction costs. These benefits are passed on to the investors.

5. LiquidityAn investor may not be able to sell some of the shares held by him very easily and

quickly, whereas units of a mutual fund are far more liquid.

6. Choice of Schemes

>Mutual funds provide investors with various schemes with different investment

objectives. Investors have the option of investing in a scheme having a correlation

between its investment objectives and their own financial goals. These schemes

further have different plans/options

7. TransparencyFunds provide investors with updated information pertaining to the markets and the

schemes. All material facts are disclosed to investors as required by the regulator.

8. Flexibility

Investors also benefit from the convenience and flexibility offered by Mutual Funds.

Investors can switch their holdings from a debt scheme to an equity scheme and vice-

versa. Option of systematic (at regular intervals) investment and withdrawal is also

offered to the investors in most open-end schemes.

9. Safety

Mutual Fund industry is part of a well-regulated investment environment where the

interests of the investors are protected by the regulator. All funds are registered with

SEBI and complete transparency is forced.

DISADVANTAGES OF MUTUAL FUND

S.

No.Disadvantage Particulars


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1.

Costs Control Not in

the Hands of an

Investor

Investor has to pay investment management fees and fund distribution costs as a

percentage of the value of his investments (as long as he holds the units), irrespective

of the performance of the fund.

2.No Customized

Portfolios

The portfolio of securities in which a fund invests is a decision taken by the fund

manager. Investors have no right to interfere in the decision making process of a fund

manager, which some investors find as a constraint in achieving their financial

objectives.

3.

Difficulty in

Selecting a Suitable

Fund Scheme

Many investors find it difficult to select one option from the plethora of

funds/schemes/plans available. For this, they may have to take advice from financial

planners in order to invest in the right fund to achieve their objectives.

TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds

Open-end Funds | Closed-end Funds

Open-end Funds

Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus)

of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from

the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but

is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated

every day.

Closed-end Funds

Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end

Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and

redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the

investors, SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other.

The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is

computed on a weekly basis (updated every Thursday)..

2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund

and its outstanding units do get changed.

Load Funds | No-load Funds

Load Funds


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Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager's salary

etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load

Funds. A load fund may impose following types of loads on the investors:

1. Entry Load - Also known as Front-end load, it refers to the load charged to an investor at the time of his

entry into a scheme. Entry load is deducted from the investor's contribution amount to the fund.

2. Exit Load - Also known as Back-end load, these charges are imposed on an investor when he redeems his

units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor.

3. Deferred Load - Deferred load is charged to the scheme over a period of time.

4. Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit load reduces as the

investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.

No-load Funds

All those funds that do not charge any of the above mentioned loads are known as No-load Funds.

Tax-exempt Funds | Non-Tax-exempt Funds

Tax-exempt Funds

Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are

exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in

the hands of investors are tax-free.

Non-Tax-exempt Funds

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end

equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor

within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an

equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to

an investor.

BROAD MUTUAL FUND TYPES


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1. Equity Funds

Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher

returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term

i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of

decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital

appreciation and invest in less researched shares of speculative nature. Because of these speculative

investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other

equity funds.

b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but

they are different from Aggressive Growth Funds in the sense that they invest in companies that are

expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth

Funds invest in those companies that are expected to post above average earnings in the future.

c. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio comprises of

only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to


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invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier

than diversified funds.. There are following types of speciality funds:

i. Sector Funds:Speciality Funds have stated criteria for investments and their portfolio comprises of

only those companies that meet their criteria. Criteria for some speciality funds could be to

invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are

comparatively riskier than diversified funds.. There are following types of speciality funds:

ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or

more foreign companies. Foreign securities funds achieve international diversification and hence

they are less risky than sector funds. However, foreign securities funds are exposed to foreign

exchange rate risk and country risk.

iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization

than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization

of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but

more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs.

500 crores. Market Capitalization of a company can be calculated by multiplying the market price of

the company's share by the total number of its outstanding shares in the market. The shares of

Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to

volatility in share prices of these companies and consequently, investment gets risky.

iv. Option Income Funds*: While not yet available in India, Option Income Funds write options on a

large fraction of their portfolio. Proper use of options can help to reduce volatility, which is

otherwise considered as a risky instrument. These funds invest in big, high dividend yielding

companies, and then sell options against their stock positions, which generate stable income for

investors.

d. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified

equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are

well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified

equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is

Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS

should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up toRs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any

redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on

such income(s) for which he may have received any tax exemption(s) in the past.

e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock

market index. The portfolio of these funds comprises of the same companies that form the index and is

constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX

Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or

CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share

prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low

Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value(Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to

lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical

industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is

advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is

reduced.

g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds

is to generate high recurring income and steady capital appreciation for investors by investing in those

companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate


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comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are

generally exposed to the lowest risk level as compared to other equity funds.

2. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions,

governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt /Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital

appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large

fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to

credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default,

debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be

of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives,

there can be following types of debt funds:

a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of

the market are known as diversified debt funds. The best feature of diversified debt funds is that investments

are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of

default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

b. Focused Debt Funds* - Debt funds that invest in all securities issued by entities belonging to all sectors of

the market are known as diversified debt funds. The best feature of diversified debt funds is that investments

are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of

default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and

therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only

those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a

different strategy and prefer securities issued by those issuers who are considered to be of "below

investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns

from these issuers. These funds are more volatile and bear higher default risk, although they may earn at

times higher returns for investors.d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured

returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual

returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset

Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-

risk investment opportunity. However, the security of investments depends upon the net worth of the

guarantor (whose name is specified in advance on the offer document). To safeguard the interests of

investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate

net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e.

Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to

fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took

over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes toinvestors, though possible.

e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term

maturity period (of less than one year) that offer a series of plans and issue units to investors at regular

intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series

usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan

schemes is to gratify investors by generating some expected returns in a short period.


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3. Gilt Funds

Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities)

having medium to long term maturity period. Issued by the Government of India, these investments have little credit

risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are

exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the

interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These

securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest

investment option when compared with other mutual fund types. However, even money market / liquid funds are

exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by

governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

5. Hybrid Funds

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money

market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following

types of hybrid funds in India:

a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities,

and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are

to reward investors with a regular income, moderate capital appreciation and at the same time minimizing

the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term

investment horizon.

b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as

Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and

those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds

and higher than income funds.

c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market ornon-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable

asset allocation strategy that allows fund managers to switch over from one asset class to another at any

time depending upon their outlook for specific markets. In other words, fund managers may switch over to

equity if they expect equity market to provide good returns and switch over to debt if they expect debt market

to provide better returns. It should be noted that switching over from one asset class to another is a decision

taken by the fund manager on the basis of his own judgment and understanding of specific markets, and

therefore, the success of these funds depends upon the skill of a fund manager in anticipating market

trends.

6. Commodity Funds

Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commoditycompanies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a

single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all

available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund.

"Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common

examples of commodity funds.

7. Real Estate Funds


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Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of

housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to

generate regular income for investors or capital appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund.

Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index

linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a

single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite

popular abroad.

9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by

different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual

fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market

instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into

different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks.

However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into

different mutual fund schemes.

* Funds not yet available in India

Risk Heirarchy of Different Mutual Funds

Thus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of

risks associated with these schemes before investing. The graphical representation hereunder provides a clearer

picture of the relationship between mutual funds and levels of risk associated with these funds:

Q-3

AMERICAN DEPOSITORY RECEIPTS (ADR) & GLOBAL DEPOSITORY

RECEIPTS (GDR)

Depository Receipts :

Depository Receipts are a type of negotiable (transferable) financial security, representing a

security, usually in the form of equity, issued by a foreign publicly-listed company. However,DRs are traded on a local stock exchange though the foreign public listed company is not traded

on the local exchange.

Thus, the DRs are physical certificates, which allow investors to hold shares in equity of othercountries. . This type of instruments first started in USA in late 1920s and are commonly known


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cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges.

ADRs are listed on the NYSE, AMEX, or NASDAQ.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed onexchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S.

dollars. The first GDR was issued in 1990.

ADVANTAGES OF ADRs:

There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective wayto buy shares of a foreign company. The individuals are able to save considerable money and

energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on eachtransaction. Foreign entities prefer ADRs, because they get more U.S. exposure and it allows

them to tap the American equity markets. .

The shares represented by ADRs are without voting rights. However, any foreigner can

purchase these securities whereas shares in India can be purchased on Indian Stock Exchangesonly by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt

without voting rights for the shares with voting rights (RBI permission required) but in practice,no one appears to be interested in exercising this right.

Some Major ADRs issued by Indian Companies :

Among the Indian ADRs listed on the US markets, are Infy (the Infosys Technologies ADR),

WIT (the Wipro ADR), Rdy(the Dr Reddys Lab ADR), and Say (the Satyam Computer ADS)

What are Indian Depository Receipts (IDR) :

Recently SEBI has issued guidelines for foreign companies who wish to raise capital in India by

issuing Indian Depository Receipts. Thus, IDRs will be transferable securities to be listed onIndian stock exchanges in the form of depository receipts. Such IDRs will be created by a

Domestic Depositories in India against the underlying equity shares of the issuing companywhich is incorporated outside India.

Though IDRs will be freely priced., yet in the prospectus the issue price has to be justified.

Each IDR will represent a certain number of shares of the foreign company. The shares will notbe listed in India , but have to be listed in the home country.

The IDRs will allow the Indian investors to tap the opportunities in stocks of foreign companiesand that too without the risk of investing directly which may not be too friendly. Thus, nowIndian investors will have easy access to international capital market.

Normally, the DR are allowed to be exchanged for the underlying shares held by the custodianand sold in the home country and vice-versa. However, in the case of IDRs, automatic

fungibility is not permitted.


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SEBI has issued guidelines for issuance of IDRs in April, 2006, Some of the major norms forissuance of IDRs are as follows. SEBI has set Rs 50 crore as the lower limit for the IDRs to be

issued by the Indian companies. Moreover, the minimum investment required in the IDR issueby the investors has been fixed at Rs two lakh. Non-Resident Indians and Foreign Institutional

Investors (FIIs) have not been allowed to purchase or possess IDRs without special permission

from the Reserve Bank of India (RBI). Also, the IDR issuing company should have good trackrecord with respect to securities market regulations and companies not meeting the criteria willnot be allowed to raise funds from the domestic market If the IDR issuer fails to receive

minimum 90 per cent subscription on the date of closure of the issue, or the subscription levellater falls below 90 per cent due to cheques not being honoured or withdrawal of applications,

the company has to refund the entire subscription amount received, SEBI said. Also, in case ofdelay beyond eight days after the company becomes liable to pay the amount, the company shall

pay interest at the rate of 15 per cent per annum for the period of delay.

Documents

Assingment A