financial+services+management+2011 2

7/31/2019 Financial+Services+Management+2011 2

1/110

Presented by Saurabh Shah

Financial Services Management


2/110

Introduction to Financial Services

Chapter 1


3/110

Introduction to Financial Services

Financial intermediaries provide key financial services such as

merchant banking, leasing, hire purchase, credit-rating, and so on

which indirectly deals with the management of money.

These financial services are vital for creation of firms, industrial

expansion, and economic growth.

3


4/110

Fund Based v/s Non Fund based

4


5/110

Fund Based

Loans&

Advances

CASHCREDIT

OVERDRAFT

RETAILFINANCE

TERMFINANCE

BILLSFINANCE

5


6/110

Comparison

Fund Based Fee Based

Service provider invests or commits to invest his own funds.

Service provider does not investhis own funds.

Service provider is exposed to highrisk.

Service provider is exposed tominimal risk.

This is participative role.This is assistance or more of advisory role.

6


7/110

Non Fund Based

Letter of Credit

Bank Guarantee

Co Acceptanceof Bills

7


8/110

Agencies Providing Financial servicesCommercial Banks

Merchant Bankers

Leasing and Hire Purchase Companies

Mutual Funds

Venture Capital Funds

Rating Agencies

Other NBFCs

The Stock Exchanges

8


9/110

Financial Innovation and Engineering

Financial Engineering involves the design, the development andthe implementation of innovative financial instruments andprocesses and the formulation of creative solutions to problemsin finance.One of the essential characteristics of financial engineering

products is Financial Innovation .Factors that propagate need for financial engineering i.e.innovation are:

1. Competition2. Liberalization3. Technology4. Financial Awareness5. Matured Legal Processes

9


10/110

Process of Financial Engineering

The process of Financial Engineering is same as the process for developing new value added product and services.Stages in Financial Engineering

1. Need Identification2. Idea formation of the Product3. Product development, Model Building4. Product Testing5. Product Improvement based on test feedback6. Product Pricing

7. Restructuring the product to suit pricing idea8. Test Marketing9. Launching of the Product

10


11/110

Types of Financially Engineered Products

11

Financial Return

Risk

Debt Equity Proportion

Strategic Goals

High Low

Moderate Strategic


12/110

Types of Financially Engineered Products

Preference SharesConvertible Debentures

Call & Put OptionWarrantsDerivatives

Non Voting SharesESOPsSweat Equity Shares

12

Read explanation from Text Book


13/110

Securitization of Debt

Chapter 4

f b


14/110


Securitization is the process of conversion of existing assets or future cash

flows into marketable securities.In other words, securitization deals with the conversion of assets which are notmarketable into marketable ones.The segments that dominated the securitization market are:

1. Asset-backed securities (ABS) such as commercial vehicle, car, two-

wheeler and personal loans;2. Mortgage-backed (home loan) securities (MBS)

Securities issued by the SPV in a securitization transaction are referred to as Asset Backed Securities (ABS) because investors rely on the performance of the assets that collateralize the securities.

They do not take an exposure either on the previous owner of the assets (theOriginator), or the entity issuing the securities (the SPV).

Clearly, classifying securities as asset -backed seeks to differentiate them fromregular securities, which are the liabilities of the entity issuing them.

14


15/110


In practice, a further category is identified securities backed by mortgageloans (loans secured by specified real estate property, wherein the lender hasthe right to sell the property, if the borrower defaults). Such securities arecalled Mortgage Backed Securities (MBS).

All securitized instruments are either MBS or ABS.

IllustrationSuppose Mr. X wants to open a multiplex and is in need of funds for the same.To raise funds, Mr. X can sell his future cash flows (cash flows arising fromsale of movie tickets and food items in the future) in the form of securities toraise money.

This will benefit investors as they will have a claim over the future cash flowsgenerated from the multiplex. Mr. X will also benefit as loan obligations will bemet from cash flows generated from the multiplex itself.

15


16/110

INVESTORS GIC

LIC

Barclays

Banks

Arcil as a Trust100

Principal + Interest300 + 400

Purchase Consideration(100)

Borrower

NAV is declared Quarterly andcrystallization( M to M) is done atthe end of the year.

Cash Realization20

Payment of SRs80

16

P i I l d


17/110

Parties Involved

Securitization programmes usually involve several participants, each carrying out

a specialist function such as creating and analyzing the asset pool, administration,credit rating, accounting, legal negotiation, etc. These include:

Primary Parties

1. The Originator also interchangeably referred to as the Seller is the entity

on whose books the assets to be securitized exist. It is the prime mover of thedeal i.e. it sets up the necessary structures to execute the deal. It sells theassets on its books and receives the funds generated from such sale. In a truesale, the Originator transfers both the legal and the beneficial interest in theassets to the SPV.

2. Special Purpose Vehicle (SPV) - the SPV is the entity, which would typically

buy the assets (to be securitized) from the Originator against issue of securities. As one of the main objectives of securitization is to remove theassets from the balance sheet of the Originator, the SPV plays a very importantrole in as much as it holds the assets in its books and makes the upfrontpayment for them to the Originator.

17


18/110

The Investors The investors may be in the form of Individuals or institutional investors like FIs, Mutual funds etc. They buy a participatinginterest in the total pool of receivables and receive their payment in the form of interest and principal as per agreed pattern.

Parties Involved

18


19/110

Parties Involved

Other parties

The Obligor(s): The Obligor is the Originator's debtor (borrower of the originalloan). The amount outstanding from the Obligor is the asset that is transferredto the SPV. The credit standing of the Obligor(s) is of paramount importance ina securitization transaction.The Rating Agency: Since the investors take on the risk of the asset poolrather than the Originator, an external credit rating plays an important role. Therating process would assess the strength of the cash flow and the mechanismdesigned to ensure full and timely payment by the process of selection of loansof appropriate credit quality, the extent of credit and liquidity support providedand the strength of the legal framework.

Administrator or Servicer: It collects the payment due from the Obligor/s andpasses it to the SPV, follows up with delinquent borrowers and pursues legalremedies available against the defaulting borrowers. Since it receives theinstallments and pays it to the SPV, it is also called the Receiving and Paying

Agent.

19


20/110

Parties Involved

Agent and Trustee: It accepts the responsibility for overseeing that all theparties to the securitization deal perform in accordance with the securitizationtrust agreement. Basically, it is appointed to look after the interest of theinvestors.Structurer: Normally, an investment banker is responsible as structurer for bringing together the Originator, credit enhancer/s, the investors and other

partners to a securitization deal. It also works with the Originator and helps instructuring deals.

The different parties to a securitization deal have very different roles to play. Infact, firms specialize in those areas in which they enjoy competitiveadvantage. The entire process is broken up into separate parts with differentparties specializing in origination of loans, raising funds from the capitalmarkets, servicing of loans etc. It is this kind of segmentation of market rolesthat introduces several efficiencies securitization is so often credited with.

20


21/110

Pass Through &Pay Through Certificates

Pass through Certificates Pay through Certificates

It enable the investors to take a directexposure on the performance of thesecuritized assets.

On the other hand, Pay throughCertificates gives investors only acharge against the securitized assets,while the assets themselves are ownedby the SPV.

Payments as per obligors payments Payments are structured as per demanded by investors

Mostly Pass through are without anyrecourse to the originator in the case of default

Pay through are mostly with recourse tothe originator, ratings are enhance dueto originators guarantee.

21


22/110

What type of assetscan be securitized ?

Existing assets in the form of Long Term Receivables( E.g. Housing Loans)

Existing assets in the form of Short Term Receivables( E.g. Credit Card Receivables)

Existing physical assets in the nature of Current Assets (E.g. Stock)

Existing Fixed Assets (E.g. Aircraft Lease)

Future Receivables (Infrastructure projects)

22


23/110

The Procedure

Selection and pooling of assets

These assets are sold or pass throughanother orgn called Special Purpose Vehicle(SPV)

The SPV then splits the pool into units/securitiessells them to the investors at large and reimburses it.

23


24/110

Venture Capital

Chapter 3


25/110

25


26/110

WHAT IS VC FUNDING?

IS IT JUST THE STORY OF THE MAN WITH THE IDEA AND THE MAN WITH THE MONEY?

26


27/110

WHAT IS VENTURE CAPITAL ?

Venture Capital is the early financing of new and youngenterprises seeking to grow rapidly.

It is the support by investors of entrepreneurial talents withfinance and business skills to exploit market opportunitiesand to obtain capital gains

27


28/110

Features of Venture Capital

It is usually in the form of Equity or mix of Equity +Debt.Commercial success of the funded venture is nottested hence very risky, if successful VC can earnextraordinary profits.Venture capitalist are interested in capital gains andcash gains.VCs generally exit business after achieving desired

growth.It is not just a fund provider but also involved inmanaging the envisaged growth.

28


29/110

Stages of VC

Stop Gap or IntermediateStage

Concept & IdeaDevelopment

Stage

ImplementationStage

Expansion Stage

29


30/110

Initial screening

Presenting a detailed business plan

Valuation and structuring the deal

Monitoring the project

Exit

Investment Process

Due diligence

30


31/110

Investment Process

Initial Screening

Average rates of return on their investment. A majority of the proposal are screened out, after a very

brief initial review.

Business Plan

Business plan is the main vehicle for getting potentialinvestment. The business plan should mirror the clarity of thinking

and the business.

31


32/110

Investment Process

Due Diligence

Research conducted by the VC to verify the accuracy of the statements made by the entrepreneur.

Competence of management team.

Market potential.

Uniqueness of product.

32


33/110


34/110

Investment Process

Monitoring the project

Advise could be in areas of strategy, finance,technology, acquiring key executive personnel or negotiating contracts.

Exit

Buy back of shares by promoters or company. Sale of stock. Selling to a new investor.

34
http://images.google.co.in/imgres?imgurl=http://www.exitstrategytheplay.com/images/exit_logo_large.gif&imgrefurl=http://www.exitstrategytheplay.com/&usg=__HF3ibN9gG6vY3q2WR-7dWxxoUuw=&h=486&w=617&sz=13&hl=en&start=17&tbnid=OwIgLz8ulMKxwM:&tbnh=107&tbnw=136&prev=/images%3Fq%3Dexit%26gbv%3D2%26hl%3Den


35/110

EXIT OPTIONS:IPO'sMergers & Acquisitions

Management Buy-outSale to Another FundBuyback by Promoter/ CompanyStock Market

EXIT

OPTIONS

AVAILABLE

TO

VENTURE

CAPITALIST

Duration of Venture Capital Investmentnormally ranges from 3-7 years

In case of Buyback by Promoter/Company , the valueat which VC Fund would exit is IRR or market-basedand is pre decided at the time of investment on acertain valuation

35
http://images.google.co.in/imgres?imgurl=http://www.curemypiles.com/images/options.gif&imgrefurl=http://www.curemypiles.com/treatmentoptions.html&usg=___EM-0NJMpI-05nvYEtnwWJa9LlI=&h=319&w=450&sz=27&hl=en&start=1&tbnid=PvEaX2yfQC8JHM:&tbnh=90&tbnw=127&prev=/images%3Fq%3Doptions%26gbv%3D2%26hl%3Denhttp://images.google.co.in/imgres?imgurl=http://www.exitstrategytheplay.com/images/exit_logo_large.gif&imgrefurl=http://www.exitstrategytheplay.com/&usg=__HF3ibN9gG6vY3q2WR-7dWxxoUuw=&h=486&w=617&sz=13&hl=en&start=17&tbnid=OwIgLz8ulMKxwM:&tbnh=107&tbnw=136&prev=/images%3Fq%3Dexit%26gbv%3D2%26hl%3Den


36/110

Merchant Banking

Chapter 2


37/110

Merchant Banking In India

The Grindlays Bank initiated the merchant banking activity inIndian Capital Market in 1969.

Its business forms was on the management of Public Issues

and Financial Consultancy.

Citi Bank introduced its merchant banking division in 1970.

In the view of the widening industrial base of the country, the

Banking commission report in 1972, stressed the need for

merchant banking in India.

Following the recommendations of the banking Commission

(1972), the State Bank of India (SBI) established its Merchant

Banking Division in 1973, in the name of SBI Capital Markets

Ltd. (SBICAP).


38/110

Merchant Banking In India

ICICI started merchant banking services in 1974.

Mid seventies onwards, there was a mushroom growth of

merchant banking sector.

Bank of Baroda, Canara Bank, Merchantile Bank, United Bank

of India, IFCI and IDBI also started merchant banking services.

M h B ki


39/110

Merchant Banking

Only a body corporate other than a non-banking financial

company shall be eligible to get registration as merchant

banker.

Without holding a certificate of registration granted by theSecurities and Exchange Board of India, no person can act as

a merchant banker.

The validity period of certificate of registration is 3 years from

the date of issue.

39

S i f M h B k


40/110

Services of Merchant Bankers

Managing of public issue of capital such as determining the type of

securities to be issuedDraft of prospectus and application forms

Appointment of Registrar to deal with share application andtransfers

Listing of SecuritiesProject Feasibility study

Assistance in ADR/GDR

Arrangement of underwriting

Placing of issuesSelection of brokers and bankers to the issue

Publicity and advertising agent

Private Placement of Securities

Management of Debenture issue and syndication of loan 40


41/110

Categories of Merchant Bankers

CAT I

Lead manager,adviser, consultant, underwriter, portfolio manager. Rs.5 cr

CAT II

Adviser, consultant,underwriter, portfolio manager. Rs 50 lacs

CAT III

Underwriter, adviser or consultant to an issue. Rs 20 lacs

CAT IV

Adviser or consultant to an issue. NIL

As per the new amendment, only one category exists, that is Category 1


42/110

Qualities required of Merchant Bankers

KnowledgeCapital Market Familiarity Liaisoning Ability

InnovationIntegrity


43/110

Fee based (non-fund based) . Public offers ( known as issue management ) + private

placement of securities in the capital market. Narrow term.

Merchant Banking :

Fund based and non-fund based. Merchant banking services as well as other capital market

activities such as, specialized corporate advisory servicesin the area of mergers and acquisitions etc.

Wider term.

Investment Banking:

M h t B k & C i l B k


44/110

Merchant Banks & Commercial Banks

44

Merchant Banks Commercial banks Assist in raising capital in theform of equity, preference shares,syndicated loan and workingcapital instruments.

Provide funds in the form of termloan and working capital.

Advisory is the main business. Financing is the main business.

Do not accept chequable deposits. Demand deposits is the key feature.

Mainly fee based business. Mainly fund based business.

They are mainly into managementof equity, pricing of issue, book running etc.

They are mainly into term lendingand bank deposits.


45/110

Credit Rating Agencies(CRAs)

Chapter 5


46/110

Introduction

Credit ratings are judgments of borrowers (Standard & Poor)

Credit rating is essentially the opinion of the rating agency of the

relative ability and willingness of the issuer of a debt instrument to

meet the debt service obligation as and when they arise (CARE)

It is mandatory for the issuance of Debt instruments, Debentures,

Commercial Paper issued by Corporate and Public deposits of all

NBFCs (Non Banking Financial Companies).

It is an independent assessment of the creditworthiness of a bond(note or any security of any indebtness) by a credit rating agency.

46


47/110

Functions of Credit Rating Agency(CRA)

CRAs reduce the informative asymmetry between lenders andinvestors, on one side, and issuers on the other side, about thecreditworthiness of companies or countries.

Credit Ratings determine the eligibility of debt and other financial

instruments for the portfolios of certain institutional investors due tonational regulations that restrict investment in speculative gradebonds.

CRAs assess creditworthiness of the issuer of bonds and financialinstruments.

In a way, regulators have outsourced to CRAs for assessing debtrisk.

CRAs role has expanded with financial globalization and hasreceived an additional boost from Basel II.

47


48/110

Supplementary Functions of CRAs

In addition to the main task of rating, CRAs carryout somesupplementary functions to assist the corporate:

The credit rating agencies in India offer varied services likemutual consulting services, companies up gradation, riskmanagement etc..CRAs carryout research and development work of theindustries.They provide training to the employees and executives of thecompanies for better management.They examine the risk involved in a new project, chalk out plansto fight with the problem successfully and thus improve thepercentage of risk largely.For this, they carry on thorough research into the respectiveindustry.CRAs have started offering services to the mutual fund sector through the application of fund utilization services.

48


49/110

Global Credit Rating Agencies

MOODYS

STANDARD & POORSCORPORATION [S & P]

DUFF AND PHELPS CREDITRATING CO [CDR]

JAPAN CREDIT RATING AGENCY [JCR]

IBCA LTD


50/110

Domestic Credit Rating Agencies

CRISIL [Credit Rating and

Information Services Of India]

ICRA [Investment Information

Services Of India]

CARE [Credit Analysis and

Research]

FITCH

SMERA [SME Rating Agency of India Ltd.]


51/110

Working of Credit Rating Agency Rating Request

Collection ofInformation

ManagementMeeting

Rating Committee/Assignment of

RatingAdvice to Issuer

Publication

Surveillance &Annual Review

51


52/110

Benefits to Investors

Safeguards against bankruptcy

Recognition of risk

Credibility of issuer

Easy understandability of theinvestment proposal

Saving of resources i.e. Energy

and time

Independence of investmentdecision

Good bye to thumb rule

Lower cost of borrowing

Wider audience for borrowing

Rating as marketing tool

Self discipline by companies

Benefits of Rating to

Company


53/110

Disadvantage of Credit Rating

Biased Rating and Misrepresentations

Static study

Concealment of Material information

Rating is no guarantee for soundness of the companyHuman Bias

Reflection of temporary adverse conditions

Down grade

Validity of Rating

Difference in Rating of two agencies


54/110

Mutual Funds

Chapter 10


55/110

Assessment of Investor Needs

Clarity of Purpose Purpose of investment has to be clear Liquidity Requirement Depending on purpose and cash

position

Risk Appetite Depending upon the risk taking capacity of an

investor

55


56/110

Assessment of Investment Avenues

Stock MarketsDebt MarketsMutual Funds

InsuranceMoney MarketsReal Estate Markets

BullionCommodities

56


57/110

Mutual Fund

The value associated with each of these units is known as (NAV). Mutualfund issue securities known as units to the investors known as unit holdersin accordance with quantum of money invested by them.

57

Structure of Mutual Fund


58/110

Structure of Mutual Fund

Trustees arelegal owners

Investors arebeneficial owners

Mutual is a Trust

58

W ki f M l F d


59/110

Working of Mutual Fund

Investors

FundManagers

Securities

Returns

Pool their money

Invest inGenerates

Passed back to

59

f l d


60/110

Organization of Mutual Fund A mutual fund is set up in theform of a trust, which has

sponsor, trustees, AssetManagement Company (AMC) and a custodian.The trust is established by asponsor or more than one

sponsor who is like a promoter of a company.The trustees of the mutual fundhold its property for the benefit of the unit-holders.

The AMC, approved by SEBI,manages the funds by makinginvestments in various types of securities.

60

The custodian, who is registeredwith SEBI, holds the securities of various schemes of the fund in itscustody.

The trustees are vested with thegeneral power of superintendenceand direction over AMC.They monitor the performance andcompliance of SEBI Regulations by

the mutual fund.

Types of Mutual Funds


61/110

Mutual Fund

Structure

CloseEnded

OpenEnded

Investment

GrowthFund

IncomeFund

BalanceFund

IndexFunds

MoneyMarket

Types of Mutual Funds

61

Closed Ended


62/110

Open Ended Schemes

Accepts funds from investors oncontinuous basis.

Repurchase facility available.

No listing on the stock exchange.

Better liquidity due to continuous

repurchase.

Sale and Repurchase based on

NAV

62

Closed EndedSchemes

Schemes are opened for

specified time period.Corpus normally does not changethroughout the year.

Such schemes are normally listed

in the stock exchange. Otherwiserepurchase facility provided.

Liquidity normally at the time of redemption.

Long term investment strategiesdepending on the life of thescheme.

Market price may be below or above par.

G th F d


63/110

Growth FundsThe 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 inequities. Such funds have comparatively high risks.

These schemes provide different options to the investors likedividend option, capital appreciation, etc. and the investors maychoose an option depending on their preferences.

The mutual funds also allow the investors to change the options

at a later date.

Growth schemes are good for investors having a long-term

outlook seeking appreciation over a period of time .63

I F d


64/110

Income Funds

These funds provide regular and steady income to investors.

Such schemes generally invest in fixed income securities

such as bonds, corporate debentures and Government

securities.

Income Funds are ideal for capital stability and regular

income.

64


65/110

Balance FundsBalanced funds work particularly well during a downturn in equity

markets.These funds invest both in equity shares and fixed-income-

bearing instruments (debt) in some proportion.

While selecting a balanced fund, choose the conventional type

60:40 (equity: debt) with a steady track record.

Make sure the fund manager sticks to the 60:40 mandates even

during bullish times, when most balanced fund managers

succumb to the temptation of over-allocation to equities for higher

growth.

They are ideal for medium to long-term investors who are willingto take moderate risks.

65


66/110

Money Market Mutual Funds

These mutual funds would invest exclusively in money market

instruments.

RBI introduced to provide an additional short- term avenue for

investment and bring money market within reach of individuals.

66

Index Funds


67/110

Index Funds

Index Funds replicate the portfolio of a particular index such as

the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these

schemes invest in the securities in the same weight age

comprising of an index.

NAVs of such schemes would rise or fall in accordance with therise or fall in the index, though not exactly by the same

percentage.

There are also exchange traded index funds launched by the

mutual funds which are traded on the stock exchanges.

67


68/110

Diversification

Mutual funds invest in a number of companies across a broadcross-section of industries and sectors.

This diversification reduces the risk because seldom do allstocks decline at the same time and in the same proportion

One achieves this diversification through a mutual fund with far less money than you can do on your own.

Professional managementMutual funds provide the services of experienced and skilledprofessionals, backed by a dedicated investment research teamthat analyses the performance and prospects of companies andselects suitable investments to achieve the objectives of thescheme.

68

Ad t g f M t l F d


69/110

Advantages of Mutual FundsReturn potential

Over a medium to long-term, mutual funds have the potential

funds to provide a higher return as they invest in a diversifiedbasket of selected securities.

Reduction in transaction cost

Mutual funds are a relatively less expensive way to invest ascompared to directly investing in the capital markets becausethe benefits of scale in brokerage, custodial and other feestranslate into lower costs for investors.

FlexibilityThrough features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans we cansystematically invest or withdraw funds according to our needs

and convenience.69

Ad f M l F d


70/110

Advantages of Mutual FundsChoice of schemes

Mutual funds offer a family of schemes to suit our varying needs over a life time.

LiquidityIn open-end schemes, the investor gets the money back promptly at

net asset value related prices from the mutual fund.In the closed-end schemes, the units can be sold on a stockexchange at the prevailing market price or the investor can avail of the facility of direct repurchased at NAV related prices by the mutual

fund.

Well regulated All mutual funds are registered SEBI and they function within theprovisions of strict regulations designed to protect the interests of investors.70


71/110

Portfolio Management ServicesPortfolio management involves deciding what assets to include inthe portfolio, given the goals of the portfolio owner and changingeconomic conditions.

Selection involves deciding what assets to purchase, how many topurchase, when to purchase them, and what assets to divest.

These decisions always involve some sort of performancemeasurement, most typically expected return on the portfolio, andthe risk associated with this return.

Typically the expected return from portfolios comprised of differentasset bundles are compared Portfolio management makes use of analytical techniques of analysis and conceptual theories regardingrational allocation of funds.

Portfolio management is a complex process which tries to makeinvestment activity more rewarding and less risky.

71

M l F d / PMS


72/110

Mutual Fund v/s PMSMany people get confused between Mutual Fund and PortfolioManagement Service, they think both are the same, one has to just

invest money in a particular fund and let the fund manager doinvesting on their behalf and give returns.But, in actual terms there is lot of difference between both theservices.

72

Mutual Funds PMS

Product Mass product Customized Product

Service Common service to all Personalized

Cost Entry & Exit Loads NO entry exit loads

Fee Structure FIXED Either Fixes or on Performance basis

Portfolio Profiling NO As per risk appetite of the customer

Sector/Stock limits YES NO

Updates MONTLY DAILY

Cross Subsidiary YES NO

Transparency NO YES

Tax Benefit YES (under section 80C) NO

Lock in period YES NO

Load Funds and No Load Funds


73/110

Load Funds and No Load FundsLoads are sales fees. Most common are front-end loads

and back-end loads.If you are in a fund with a back-end load, you'll be hit witha sales fee when you sell your shares.

Some funds claim to be "no load" but charge reinvestment

fees when distributions are reinvested in a fund.If youre a do-it-yourself investor, avoid funds that chargeloads.

No-load funds generally outperform load funds for the

simple reason that the sales fee adds to the cost, andtherefore lower returns.

73

Illustration


74/110

IllustrationCompare two mutual fund schemes, one with a low cost structure(say Fund A) and the other which isnt quite as charitable (sayFund B). Investments in Fund A attract an entry load of 1.0%,while the number is 2.5% for Fund B. Similarly, the recurringexpenses are 1.5% and 2.5% for fund A and fund B respectively.

Assume that Rs 100,000 (one-time investment) is invested in each

fund for a 10-Yr period and that both the investments grow at15.0% per annum.

74

Fund A Fund B

Entry load 1.00% 2.50%

Recurring expenses 1.50% 2.50%

Amount invested (Rs) 100,000 100,000

Growth rate (per annum) 15.00% 15.00%

Maturity amount (Rs) 344,331 306,217

On maturity (i.e. at the end of 10years), the investment in fund A

would be worth Rs 344, 331,while that in fund B would beworth Rs 306, 217. Thedifferential can be traced toFund As cost effectiveness.

Association of Mutual Funds


75/110

Association of Mutual Fundsin India(AMFI)

With the increase in Mutual Fund players in India, a need for Mutual Fund Association in India was generated to function as anon-profit organization.

Association of Mutual Funds in India (AMFI) was incorporatedon 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies(AMC) which has been registered with SEBI.Till date all the AMCs are that have launched mutual fundschemes are its members. It functions under the supervisionand guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the IndianMutual Fund Industry to a professional and healthy market withethical lines enhancing and maintaining standards.It follows the principle of both protecting and promoting theinterests of mutual funds as well as their unit holders.

75


76/110


in IndiaThe Association of Mutual Funds of India works with 30registered AMCs of the country. The objectives are as follows:This Mutual Fund Association of India maintains highprofessional and ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class businesspractices and code of conduct which is followed by membersand related people engaged in the activities of mutual fund andasset management.The agencies who are by any means connected or involved in

the field of capital markets and financial services also involvedin this code of conduct of the association. AMFI interacts with SEBI and works according to SEBIsguidelines in the mutual fund industry.

76



77/110

Association of Mutual Fundsin India

Association of Mutual Fund of India does represent theGovernment of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.It develops a team of well qualified and trained Agentdistributors. It implements a program of training and certificationfor all intermediaries and other engaged in the mutual fundindustry.

AMFI undertakes all India awareness program for investors inorder to promote proper understanding of the concept andworking of mutual funds.

At last but not the least association of mutual fund of India alsodisseminate information on Mutual Fund Industry andundertakes studies and research either directly or in associationwith other bodies

77


78/110

Derivatives

Chapter 7

Derivatives


79/110

DerivativesIn recent years, financial markets have developed many new

products whose popularity has become phenomenal.

Derivative products initially emerged, as hedging devices against

fluctuations in commodity prices.

A derivative is an instrument whose value depends on the

values of one or more basic underlying variables called

bases. The underlying variables are forex, equity,

commodity, bonds, debentures etc.

Illustration : Wheat farmers may wish to sell their harvest at afuture date to eliminate the risk of a change in prices by that

date. The price of this derivative is driven by the spot price of

wheat which is the underlying .79

Derivatives


80/110

DerivativesIn derivative market when enter into a contract to buy or sell

particular underlying:

Long position means to have a buy position for particular

stock

Short position means to have a sell position for particular

stock

Bid price (buyers price) is the rate/price at which there is a

ready buyer for the stock.

Ask price (sellers price) is the rate/ price at which there is

seller ready to sell his stock.

80

Terminologies related to Futures


81/110

gSpot price: the price at which an asset trades in the spot market.

Futures price: the price at which the futures contract trades in thefutures market.

Initial margin: the amount that must be deposited in the margin

account at the time a futures contract is first entered into is known

as initial margin.Maintenance margin: This is somewhat lower than the initial

margin. This is set to ensure that the balance in the margin

account never becomes negative.

Marked-to-market (M to M): in the futures market, at the end of

each trading day, the margin account is adjusted to reflect the

investors gain or loss depending upon the futures closing price.

This is called marked-to-market.81


82/110

Option price/premium: Option price is the price which the

option buyer pays to the option seller. It is also referred to as

the option premium.

Strike price: The price specified in the options contract is

known as the strike price or the exercise price.

82

Options terminology


83/110

p gyIn-the-money option:

Spot price > Strike Price in case of

call option.

Spot price < Strike Price in case of

put option.

If exercised immediately it would

lead to positive cash flow.

E.g.: Spot value of Nifty is 2157. An

investor buys a one-month nifty2140 call option for a premium of

Rs.7. the option is?

83

Out-of-the-money option:

Spot price < Strike price in case

of call option.

Spot price > Strike price in case

of put option.

If exercised immediately it would

lead to negative cash flow.

E.g.: Spot value of Nifty is 2140.

An investor buys a one-monthnifty 2157 call option for a

premium of Rs.7. the option is?

Kinds of Derivatives


84/110

Derivatives

Forwards FuturesSwaps

Options

Kinds of Derivatives

84

Forward Contract


85/110

o wa d Co t act A forward contract is a customized contract between two entities,where settlement takes place on a specific date in the future at

todays pre-agreed price.No cash is exchanged when the contract is entered into.

IllustrationShyam wants to buy a TV, which costs Rs 10,000 but he has no cash tobuy it outright.

He can only buy it 3 months hence. He, however, fears that prices of televisions will rise 3 months from now.

So in order to protect himself from the rise in prices Shyam enters into acontract with the TV dealer that 3 months from now he will buy the TV for

Rs 10,000.What Shyam is doing is that he is locking the current price of a TV for aforward contract. The forward contract is settled at maturity.

The dealer will deliver the asset to Shyam at the end of three months andShyam in turn will pay cash equivalent to the TV price on delivery.

85

Features of Forward Contract


86/110

Features of Forward ContractThey are bilateral contracts and hence exposed to counter

party risk.

Each contract is custom designed, and hence is unique in terms

of contract size, expiration date and the asset type and quality.

The contract price is generally not available in public domain.

On the expiration date, the contract has to be settled by delivery

of the asset.

If the party wishes to reverse the contract, it has to compulsorily

go to the same counter-party, which often results in high prices

being charged.

86

Futures Contract


87/110

A future contract is similar to Forward account.

A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price.

Futures contracts are special types of forward contracts in the

sense that the former are standardized exchange-tradedcontracts.

Index futures are all futures contracts where the underlying is

the stock index (Nifty or Sensex) and helps a trader to take a

view on the market as a whole.

87

Features of Futures Contract


88/110

The standardized items in a futures contract are:

Quantity of the underlyingQuality of the underlying

The date and the month of delivery

The units of price quotation and minimum price changeLocation of settlement

88

Futures payoffs


89/110

89

Futures payoffs

Payoff for buyer of futures: Long futures

Payoff for seller of futures: Short futures


90/110

90

The figure shows the profits / losses for long futures position

2220

Profit

Loss

Figure 1. Payoff for a buyer of Niftyfutures


91/110

91

The figure shows the profits / losses for short futures position

2220

Profit

Loss

Figure 2. Payoff for a seller of Niftyfutures

Example 1


92/110

92

On 15th

Jan Mr. Aakash Mehta bought a Jan Niftyfutures contract which cost him Rs.2,40,000.Each Nifty Future Contract is for delivery of 100Nifties. On 25 th Jan, the Index closed at 2460.How much profit/loss did he make?

Ans: +6000 [(2460 2400) * 100]

Example 2


93/110

93

Amitabh Bachpan sold a Jan Nifty Futures contractfor Rs.2,40,000 on 15 th Jan. Each Nifty FuturesContract is for delivery of 100 Nifties. On 25 th Jan,the Index closed at 2450. How much profit/loss didhe make?

Ans: -5000 [(2450 2400) * 100]

Forwards v/s Futures


94/110

Forwards Futures

OTC in nature Traded on organized stockexchange

Contract terms are customized Contract terms are standardized

Requires no margin payment Requires margin paymentSettlement happens at end of period

Follows daily settlement

One delivery date which isspecified Range of delivery dates

Some credit risk No credit risk

Counterparties have to takeexposure

Clearing house takes the exposureon both the parties

94

Types of Futures


95/110

The different types of Futures are but different facets of the same

Futures.Currencies

Commodities.

Interest RatesStocks

Index

95

Options


96/110

Option, as the word suggests, is a choice given to the investor

to either honor the contract; or if he chooses not to walk awayfrom the contract.

An option gives its owner the right but not the obligation to

purchase or sell an asset on or before some date in future.

The date when option expires is known as the exercise date,

the expiration date or the maturity date.

The price at which asset can be purchased or sold is known as

strike price.

96

Types of Options


97/110

Call Option is the right, but not the obligation, to buy the

underlying asset by a certain date for a certain price.

Put Option is the right, but not the obligation, to sell the

underlying asset by a certain date for a certain price.

American options: are options that can be exercised at any

time up-to the expiration date. Most exchange-traded options

are American.

European options: are options that can be exercised only on

the expiration date itself.

97

Swaps


98/110

SWAPS have been termed as private agreement between the two

parties to exchange cash flows or payments which will take place inthe future.

SWAPS is also called as financial swap in global financial market.

There are different types of swaps such as interest rate swaps,

currency swaps, equity swaps etc.

98

Features of Swap


99/110

A swap is nothing but the combination of Forwards, so it has

all the properties of forward contract.It requires 2 parties with equal and opposite needs.

There is no exchange of principal on the other hand fixed

interest is exchanged for floating rate of interest.

Swaps are in the nature of long term agreement and they are

just like long dated forward contracts.

99


100/110

Leasing & Hire Purchasee

Chapter 6

Introduction


101/110

Cash Purchase outright purchase for cash

i.e. buyer gets unconditional ownership andpossession.Credit Purchase Ownership and possession

is established immediately after transaction.Leasing Its like rented asset. Ownership isnot with the user.

101


102/110

Credit Cards

Chapter 9

Introduction


103/110

A credit card system is a type of retail transaction settlement and

credit system using a small plastic card issued to users of the

system.

With a credit card, a person can make purchases without using cash.

The credit card company pays for the purchase, but the card user

has to repay the money borrowed to the card company at a later

time.

In addition to the amount of the purchase, the card user also has topay interest on the loan.

When purchase is made the user would indicate his/her consent to

pay, by signing a receipt with a record of the card details and103

Visual Features of Credit Cards


104/110

The shape and size of the credit card is specified by the ISOstandard usually 3 -1/8 inches by 2-1/8 inches in size.Front side contains following informationa) Printed

Name and logo of issuing BankName and logo of co branding Merchant establishment.

Name and logo of member affiliatePhoto of card holder / family (optional)Picture (any deity or scene of holders choice optional)

b) EmbossedPeriod of validity

Name of Card holder Card Number

104



105/110


Back sideMagnetic stripe often called as magstripeCredit card number in printContact number of issuing bankSpace for holders signature

Terms and disclaimer clause of the bank

105

Working of Credit Card


106/110

106

Clearing and Settlement


107/110

107

Financial Features of Credit Card


108/110

Annual Membership FeeMinimum PaymentRate of Interest

EMI ConversionBalance Transfer Personal LoansInsurance

ATM

108


109/110


110/110

financial+services+management+2011 2

Documents