Merchant banking


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Merchant banking

  1. 1. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) MERCHANT BANKINGINTRODUCTION in India merchant bankers is a body corporate who carries on any activity of the issuemanagement, which consist of preparing prospectus & other information relating to the issue.Merchant banks in India are not allowed to conduct any business other than that related tosecurities market. There is no official category in investment banking.During the seventies, Indian banking witnessed metamorphic changes. From the basis function ofmobilizing deposit and money lending, the banking industry has grown into a catalytic agencyfor the promotion of economy development. With the ever-increasingly responsibility cast on it,its concept and attitude have also changed considerably to meet the challenges of the Indianeconomy.DEFINITION In banking, a merchant bank is a financial institution primarily engaged in offeringfinancial services and advice to corporations and wealthy individuals on how to use their money.The term can also be used to describe the private equity activities of banking. According to Cox, D. merchant banking is defined as, ―merchant banks are the financialinstitutions providing specialist services which generally include the acceptance of bills ofexchange, corporate finance, portfolio management and other banking services‖. The Notification of the Ministry of Finance defines a merchant banker as, ―any personwho is engaged in the business of issue management either by making arrangements regardingselling, buying or subscribing to securities as manager, consultant, advisor or rendering corporateadvisory service in relation to such issue management‖.In short, merchant bankers assist in raising capital and advice on related issues. PREPARED BY: PROF. CHHAYA PATEL
  2. 2. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)ROLE OF MERCHANT BANKS To promote the new issue market there is need for a qualitative improvement in the offerof new issues both in terms of time taken and the cost of floatation. At present the time taken fororganizing new issues is between 12 to 18 months and the cost of raising new capital varies from3% to 8 % and sometimes even 20%. This can be brought down relatively by specializedmerchant banking institution by catering to the requirement of both large and small businessunits. The new issue market has not succeeded fully in mobilizing saving partly due to thepreference of the public to company deposit and partly due to low yield on equities as comparedto those on fixed interest securities. There has been a decline in the proportion of share capital inthe total capital employed due to the steep rise in the cost of new issues.MERCHANT BANKING SERVICES1. Corporate Counseling2. Project Counseling And Pre-Investment Studies3. Credit Syndication4. Issue Management and Underwriting5. Bankers to issue6. Portfolio Management7. Venture Capital Financing8. Leasing9. Non-Resident Investment10. Acceptance Credit And Bill Discounting PREPARED BY: PROF. CHHAYA PATEL
  3. 3. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) 1. CORPORATE COUNSELINGIt includes a whole range of financial services provided by a merchant banker to a corporate unita view to ensure better performance, maintain steady growth and create a better image amonginvestors.It covers the entire field of merchant banking activities i.e., project counseling, capitalrestructuring, portfolio management and the full range of financial engineering including venturecapital, public issue management, loan syndication, working capital, fixed deposits, leasefinancing, acceptance credit, etc. However, the scope of corporate counseling is limited tosuggestions and opinions leaving to the client to take corrective actions for solving its corporateproblems.A merchant banker finds out the problems of enterprise, which shall include organizational goalsfor the enterprise, size of the organization and operational scales, choice of a product, pricing,etc, and suggests ways and means to solve those problems.2.PROJECT COUNSELINGProject counseling is an important merchant banking service which includes preparation ofproject reports, deciding upon the financing pattern to finance the cost of the project, appraisingthe project report with the financial institutions/banks.Project reports are prepared to obtain government approval of the project, for procuring financialassistance from financial institutions and banks, for ensuring market for the proposed product,for planning public issues, etc.Financing the project cost is an important aspect of project counseling. The two sources of fundsavailable to finance the project cost are internal sources of funds (or owners funds) whichincludes promoters contribution and retained earnings; and external sources of funds which PREPARED BY: PROF. CHHAYA PATEL
  4. 4. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)refers to the borrowed funds in the form of loans from banks, private investors and financialinstitutions and in the form of debentures from the public.Merchant banker has to decide the financing mix of the internal and external sources of fundskeeping in view the rules, regulations and norms prescribed by the government or followed bythe term lending financial institutions.While rendering project counseling services, the merchant banker has to ensure that theapplication forms for obtaining the funds from financial institutions are filled in with relevantand appropriate information and before submitting the application, the merchant banker has toappraise the project considering the various aspects as to the type of the project, location,technical, commercial and financial viability of the project.3.CREDIT SYNDICATIONOnce the client company has decided about the project proposed to be undertaken, the next stepis looking for the sources wherefrom the funds could be procured to implement the project.Merchant banker has to locate the sources of funds and comply the formalities required toprocure the funds. This service rendered by the merchant banker in arranging and procuringcredit from financial institutions, banks and other lending and investment organizations forfinancing the clients project cost or meeting working capital requirement is referred to as loansyndication or credit syndication.Credit syndication in case of domestic borrowings is with the institutional lenders and banks.Long and medium term funds are obtained from the All India Financial Institutions like IFCI,IDBI etc., state level financial bodies like SFC, SIDC etc., commercial banks, mutual funds etc.Short-term funds are also required by the firm for purchase of raw materials, payment of wages,salaries etc. Sources of financing these short term requirements or working capital needs can befrom internal sources like internal accruals from working or operations and short term loans fromfriends and relatives; or from external sources like short term borrowings from banks etc. PREPARED BY: PROF. CHHAYA PATEL
  5. 5. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)4.ISSUE MANAGEMENT AND UNDERWRITINGManagement of capital issues is a professional service rendered by the skilled and experiencedmerchant bankers. Previously, the managing agents for a particular corporate used to managepublic issues. The abolition of the managing agency system, the growth in the public limitedcompanies in number and size, the imposition of new rules and regulations regarding the publicissue of securities made it necessary for merchant bankers to play a definite role in themanagement of public issues.Public issue management involves marketing of corporate securities by offering the securities tothe public, procuring private subscription to the securities and offering securities to existingshareholders of the company.As a manager to the public issue, the merchant banker, before the public issue has to obtain theconsent of the stock exchanges to the memorandum and articles of association, appoint othermanagers, bankers, underwriters, brokers etc. ,advice the company to appoint auditors, solicitorsand board of directors, draft the prospectus and obtain consent from the companies legaladvisors, board of directors and other concerned parties, file the prospectus with registrar, makean application for enlistment with stock exchanges and finally advertise for the issue.A merchant bankers post issue activities include final allotment and/or refund of subscriptionamount, calculation of underwriters liability in case of under subscription and complying thenecessary statutory requirements for listing of securities on the stock exchange. PREPARED BY: PROF. CHHAYA PATEL
  6. 6. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)a.Under writing of public issueA fully underwritten public issue spells confidence to the investing public, which ensures a goodresponse to the issue. Keeping this in view companies, which float a public issue usually, desirea full underwriting of the issue.Underwriting is only the guarantee given by the underwriter that in the event of undersubscription, the amount underwritten would be subscribed in proportion by the underwriter. Anunderwriter of the issue gets the following benefits: It earns a commission of the commitment given. It earns the right to be appointed as bankers of that issue. It expands its clientele by underwriting more and more issues.5.BANKERS TO THE ISSUEThe merchant banker can automatically become the banker to the issue in the following cases: The bank is a broker to the company It has given underwriting commitments. It acts as a manger to the issue The function of a banker to the issue is to accept application forms from the publictogether with subscription money and transfer them to the account of the controlling branch.6.PORTFOLIO MANAGEMENTPortfolio refers to investment in different types of marketable securities or investment papers likeshared, debentures and debenture stocks, bonds etc. from different companies or institutions heldby individuals firm or corporate units.Portfolio management refers to managing efficiently the investment in the securities held byprofessionals to others. PREPARED BY: PROF. CHHAYA PATEL
  7. 7. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Merchant bankers take up management of a portfolio of securities on behalf of their clients,providing special services with a view to ensure maximum return by such investments with aminimum risk of loss of return on the money invested in securities.A merchant banker while performing the services of portfolio management has to enquire of theinvestment needs of the client, the tax bracket, ability to bare risk, liquidity requirements, etc.they should study the economic environment affecting the capital market, study the securitiesmarket and identify blue chip companies in which money can be invested. They should keeprecord of latest amendment in government guidelines, stock exchange regulations, RBIregulations, etc.7.VENTURE CAPITAL FINANCINGFinancing an emerging high-risk project is called venture capital financing. Many merchantbankers are entering into this area by also financing viable upcoming projects. The financing isby subscription to the equity capital, while repayment is by selling the equity through stockmarket when the shares are listed.8.LEASINGIs there another lucrative area of financing where merchant bankers are turning? Leasing is aviable source of financing while acquiring capital assets. The services include arrangement forlease finance facilities for leasing companies, legal; documents and tax consultancy.9.NON RESIDENT INVESTMENTTo attract NRI investments in the primary and secondary markets, the merchant bankers provideinvestment advisory services to the NRIs in terms of identification of investment opportunities,selection of securities, portfolio management, etc. they also take care of operational details likepurchase and sale of securities securing the necessary clearance from RBI under FERA forrepatriation of dividends and interest, etc. PREPARED BY: PROF. CHHAYA PATEL
  8. 8. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)10.ACCEPTANCE CREDIT AND BILL DISCOUNTINGThough merchant bankers world over specialize in acceptance credit and bill discounting, theseservices are not currently provided by merchant bankers in India the principal reasoning beingthe lack of an active market for commercial bills.SET UP OF MERCHANT BANKING IN INDIA Merchant banking division Foreign banks Indian banks Financial Private institution merchant bankers Subsidiary A division institution within the banks1.FOREIGN BANKSAlong with the grindlays bank, Citibank ,charted bank and Hong Kong are also active inmerchant banking.2. INDIAN BANKSState bank of India took the lead among Indian banks and is at present well-established in themerchant banking field. The other banks that followed suit are bank of India, central bank ofIndia, bank of Baroda, Punjab national bank.3. FINANCIAL INSTITUTIONIndustrial credit and Investment Corporation of India has a well established merchant bankingoffice. Recently, industrial reconstruction corporation of India has also started its merchantbanking operation though its main concentration and attention is on merger, amalgamation andtakeovers PREPARED BY: PROF. CHHAYA PATEL
  9. 9. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)4. PRIVATE MERCHANT BANKERSLeading private broker firms were already doing consultancy for portfolio investment .they tookadvantage of the situation and started ‗merchant banking and consultancy‘ service in a big way.MAIN FUNCTIONSMerchant bankers can have the following function 1. Issue management to act as lead manager or co-manager, which involve a host of services like preparation of draft prosperous, appointment of other intermediaries for issue and co- ordination of all their activities etc. 2. Underwriting which is assigned by the lead manger or is accepted voluntarily as part of the agreement with the company. 3. Project appraisal-technical and financial feasibility studies as desired by the company. 4. Corporate counseling and repotting- this includes counseling on financial structure, operational efficiency or assist a sick units with a package of solution. 5. Arranging for merger and acquisition, revaluation of assets and valuation of share etc. 6. Arranging for appointment of underwriters or sub- underwriters, broker and sub brokers, advertising and marketing, printing of stationery, appointment of registrars and co- ordination of all their activities. 7. Post issue service like listing arrangements, loans from banks, financial institution and preparing the necessary papers and do the necessary spade work. 8. Flotation of commercial paper. 9. Money market operations. 10. Operation in P.S.U bonds, UTI units, government securities etc. PREPARED BY: PROF. CHHAYA PATEL
  10. 10. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) OTHER FUNCTION OF MERCHANT BANKING Merchant banking functionProject Corporate Project Capital Portfolio Stockpreparati counselling counselling structuring managment exchon & nageappriasal mem bersh ip IssueLead managmentmanagers & Credit Working Venture Lease Fixed Markco- syndication capital capital finance deposite etmanagers opre ation underwritingConsultancy & resident Non-advice resident & Acceptance Consu foreign credit ( biils Merger & tancy isues discounting ) acquisation to sick units In overseas Rupee loans Foreign india currency loans Objectives of merchant banking Guidness O Project Formation B J E Implementation C T Modernisation I V E Diversification S Mobilizing Resources Raising Working Capital PREPARED BY: PROF. CHHAYA PATEL
  11. 11. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)PROJECT COUNSELINGIf it consist of mere technical appraisal ,the department makes use of the services of the technicaland industrial consultancy division. Once convinced of the technical feasibility and commercialviability of the project, the merchant bankers next job is to prepare a structure of finance . todetermine the structure of finance on the basis of different available sources, the departmentkeeps in view: 1. The norms laid down by term- lending institution regarding the debt- equity ratio and promoters minimum contribution to the total cost of the project 2. The available of various backward area subsidies: and 3. In case of equity issue, the norms laid down by the stock exchange for the listing of shares. The structuring of finance also covers advise on setting up units in the ‗joint sector‘, where state level fianancial institution contribute 26% of the equity share capital, while the private promoter contributes 25% and the balance of 49% of the shares are made available to the public. PREPARED BY: PROF. CHHAYA PATEL
  12. 12. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) CREDIT RATINGLesson Objectives· To understand the concept of credit rating,· Advantages and disadvantages of credit rating,· Credit rating indicators, terminology,· Government and SEBI regulations related to credit rating agency.IntroductionWith the increasing market orientation of the Indian economy, investors value a systematicassessment of two types of risks, namely ―business risk‖ arising out of the ―open economy‖ andlinkages between money, capital and foreign exchange markets and ―payments risk‖. With aview to protect small investors, who are the main target for unlisted corporate debt in the form offixed deposits with companies, credit rating has been made mandatory. India was perhaps thefirst amongst developing countries to set up a credit rating agency in 1988. The function of creditrating was institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP)and subsequently by SEBI. In June 1994, RBI made it mandatory for Non-Banking FinancialCompanies (NBFCs) to be rated.Meaning and definitionCredit rating is the opinion of the rating agency on the relative ability and willingness of tileissuer of a debt instrument to meet the debt service obligations as and when they arise. Rating isusually expressed in alphabetical or alphanumeric symbols. Symbols are simple and easilyunderstood tool which help the investor to differentiate between debt instruments on the basis oftheir underlying credit quality. Rating companies also publish explanations for their symbolsused as well as the rationale for the ratings assigned by them, to facilitate deeper understanding.In other words, the rating is an opinion on the future ability and legal obligation of the issuer tomake timely payments of principal and interest on a specific fixed income security. The ratingmeasures the probability that the issuer will default on the security over its life, which dependingon the instrument may be a matter of days to thirty years or more. In fact, the credit rating is asymbolic indicator of the current opinion of the relative capability of the issuer to service its debtobligation in a timely fashion, with specific reference to the instrument being rated. PREPARED BY: PROF. CHHAYA PATEL
  13. 13. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Nature of Credit Rating 1. Rating is based on information:Any rating based entirely on published information has serious limitations and the success of arating agency will depend, to a great extent, on its ability to access privileged information.Cooperation from the issuers as well as their willingness to share even confidential informationis important pre-requisites. The rating agency must keep information of confidential naturepossessed during the rating process, a secret. 2. Many factors affect rating:Rating does not come out of a predetermined mathematical formula. Final rating is given takinginto account the quality of management, corporate strategy, economic outlook and internationalenvironment. To ensure consistency and reliability a number of qualified professionals areinvolved in the rating process. The Rating Committee, which assigns the final rating, consists ofspecialized financial and credit analysts. Rating agencies also ensure that the rating process isfree from any possible clash of interest. 3. Rating by more than one agency:In the well developed capital markets, debt issues are, more often than not, rated by more thanone agency. And it is only natural that ratings given by two or more agencies differ from eachother e.g., a debt issue, may be rated ‗AA+‘ by one agency and ‗AA‘ or ‗AA-‘ by another. It willindeed be unusual if one agency assigns a rating of AA while another gives a ‗BBB‘. 4. Monitoring the already rated issues:A rating is an opinion given on the basis of information available at particular point of time.Many factors may affect the debt servicing capabilities of the issuer. It is, therefore, essential thatrating agencies monitor all outstanding debt issues rated by them as part of their investor service.The rating agencies should put issues under close credit watch and upgrade or downgrade theratings as per the circumstances after intensive interaction with the issuers. 5. Publication of ratings:In India, ratings are undertaken only at the request of the issuers and only those ratings which areaccepted by the issuers are published. Thus, once a rating is accepted it is published andsubsequent changes emerging out of the monitoring by the agency will be published even if suchchanges are not found acceptable by the issuers. PREPARED BY: PROF. CHHAYA PATEL
  14. 14. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) 6. Right of appeal against assigned rating: Where an issuer is not satisfied with the rating assigned, he may request for a review, furnishingadditional information, if any, considered relevant. The rating agency will undertake a reviewand thereafter give its final decision. Unless the rating agency had over looked criticalinformation at the first stage chances of the rating being changed on appeal are rare. 7. Rating of rating agencies:Informed public opinion will be the touchstone on which the rating companies have to beassessed and the success of a rating agency is measured by the quality of the services offered,consistency and integrity.ROLE OF CREDIT RATING AGENCIESDistill complex financial structures into user-friendly symbols.Provide a common yardstick to evaluate default risk for investment decision making.Monitor and disseminate credit opinions on rated issuers/issues in a timely and efficient manner. Bridge the information gap between issuers and investors and a source of credit surveillance forinvestors.Assist regulatory authorities in developing and facilitate implementation of prudential guidelinesrequirements.Tracks and monitor performance of economy/industries, as well as default statistics. PREPARED BY: PROF. CHHAYA PATEL
  15. 15. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Functions of a Credit Rating AgencyA credit rating agency serves following functions: 1. Provides unbiased opinion:An independent credit rating agency is likely to provide an unbiased opinion as to relativecapability of the company to service debt obligations because of the following reasons: It has no vested interest in an issue unlike brokers, financial intermediaries. Its own reputation is at stake. 2. Provides quality and dependable information:A credit rating agency is in a position to provide quality information on credit risk which ismore authenticated and reliable because: It has highly trained and professional staff that has better ability to assess risk. It has access to a lot of information which may not be publicly available. 3. Provides information at low cost:Most of the investors rely on the ratings assigned by the ratings agencies while taking investmentdecisions. These ratings are published in the form of reports and are available easily on thepayment of negligible price. 4. Provide easy to understand information:Rating agencies first of all gather information, then analyze the same. At last these interpret andsummaries complex information in a simple and readily understood formal manner. Thus inother words, information supplied by rating agencies can be easily understood by the investors. 5. Provide basis for investment:An investment rated by a credit rating enjoys higher confidence from investors. Investors canmake an estimate of the risk and return associated with a particular rated issue while investingmoney in them. 6. Healthy discipline on corporate borrowers: PREPARED BY: PROF. CHHAYA PATEL
  16. 16. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Higher credit rating to any credit investment enhances corporate image and builds up goodwilland hence it induces a healthy/ discipline on corporate. 7. Formation of public policy:Once the debt securities are rated professionally, it would be easier to formulate public policyguidelines as to the eligibility of securities to be included in different kinds of institutional port-folio.Advantages of Credit RatingA. Benefits to Investors1. Safety of investmentsCredit rating gives an idea in advance to the investors about the degree of financial strength ofthe issuer company. Based on rating he decides about the investment. Highly rated issues givesan assurance to the investors of safety of Investments and minimizes his risk.2. Recognition of risk and returnsCredit rating symbols indicate both the returns expected and the risk attached to a particularissue. It becomes easier for the investor to understand the worth of the issuer company just bylooking at the symbol because the issue is backed by the financial strength of the company.3. Freedom of investment decisionsInvestors need not seek advice from the stock brokers, merchant bankers or the portfoliomanagers before making investments. Investors today are free and independent to takeinvestment decisions themselves. They base their decisions on rating symbols attached to aparticular security. Each rating symbol assigned to a particular investment suggests thecreditworthiness of the investment and indicates the degree of risk involved in it.4. Wider choice of investmentsAs it is mandatory to rate debt obligations for every issuer company, at any particular time, widerange of credit rated instruments are available for making investment. Depending upon his ownability to bear risk, the investor can make choice of the securities in which investment is to bemade. PREPARED BY: PROF. CHHAYA PATEL
  17. 17. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)B. Benefits of Rating to the Company1. Easy to raise resourcesA company with highly rated instrument finds it easy to raise resources from the public. Eventhough investors in different sections of the society understand the degree of risk and uncertaintyattached to a particular security but they still get attracted towards the highly rated instruments.2. Reduced cost of borrowingInvestors always like to make investments in such instrument, which ensure safety and easyliquidity rather than high rate of return. A company can reduce the cost of borrowings by quotinglesser interest on those fixed deposits or debentures or bonds, which are highly rated.3. Reduced cost of public issuesA company with highly rated instruments has to make least efforts in raising funds throughpublic. It can reduce its expenditure on press and publicity. Rating facilitates best pricing andtiming of issues.4. Rating builds up imageCompanies with highly rated instrument enjoy better goodwill and corporate image in the eyes ofcustomers, shareholders, investors and creditors. Customers feel confident of the quality ofgoods manufactured, shareholders are sure of high returns, investors feel secured of theirinvestments and creditors are assured of timely payments of interest and principal.5. Rating facilitates growthRating motivates the promoters to undertake expansion of their operations or diversify theirproduction activities thus leading to the growth of the company in future. Moreover highly ratedcompanies find it easy to raise funds from public through new issues or through credit frombanks and FIs to finance their expansion activities.C. Benefits to IntermediariesStock brokers have to make fewer efforts in persuading their clients to select an investmentproposal of making investment in highly rated instruments. Thus rating enables brokers anotherfinancial intermediaries to save time, energy costs and manpower in convincing their clients. PREPARED BY: PROF. CHHAYA PATEL
  18. 18. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Disadvantages of Credit Rating 1. Non-disclosure of significant informationFirm being rated may not provide significant or material information, which is likely to affect theinvestor‘s decision as to investment, to the investigation team of the credit rating company. Thusany decisions taken in the absence of such significant information may put investors at a loss. 2. Static studyRating is a static study of present and past historic data of the company at one particular point oftime. Number of factors including economic, political, environment, and government policieshas direct bearing on the working of a company. 3. Rating is no certificate of soundnessRating grades by the rating agencies are only an opinion about the capability of the company tomeets its interest obligations. Rating symbols do not pinpoint towards quality of products ormanagement or staff etc. In other words rating does not give a certificate of the completesoundness of the company. Users should form an independent view of the rating symbol. 4. Rating may be biasedPersonal bias of the investigating team might affect the quality of the rating. The companieshaving lower grade rating do not advertise or use the rating while raising funds from the public.In such a case the investors cannot get the true information about the risk involved in theinstrument. 5. Rating under unfavorable conditionsRating grades are not always representative of the true image of a company. A company mightbe given low grade because it was passing through unfavorable conditions when rated. Thus,misleading conclusions may be drawn by the investors which hamper the company‘s interest. PREPARED BY: PROF. CHHAYA PATEL
  19. 19. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) VENTURE CAPITALVenture capital is a type of private equity capital typically provided byProfessionals, outside investors to new growth businesses. A venture capitalist (VC) is a person who makes such investments, theseinclude wealthy investors, investment banks, other financial institutionsother partnerships.Venture capital means funds made available for startup firms and smallbusinesses with exceptional growth potential. Venture capital is moneyprovided by professionals who alongside management invest in young,rapidly growing companies that have the potential to develop into significanteconomic contributors.Venture capital firms specialize in providing equity financing for firms thatare in an early stage of development Examples of companies that receivedventure capital funding in their early development include Apple, FederalExpress, Microsoft, Genentech, and Google.Venture capital (a.k.a. private equity) is a pool of capital most commonlyorganized as a limited partnership. The venture capital firm serves as thegeneral partner and investors are the limited partners. Limited partners caninclude pension funds, university endowment funds, wealthy individuals,and other financial institutions and corporations.Managers of venture capital firms (venture capitalists) closely follow thetechnology and market developments in their area of expertise (e.g.,computer software, communications, computer hardware, medical/health,industrial/energy, biotechnology, retailing, restaurants, etc.)They screen entrepreneurs and their business concepts prior to making aninvestment. To diversify risk, they create a venture fund that is a portfolio ofinvestments in young companies. Venture capitalists are not passive equityinvestors. They structure a financing deal with great attention to creating theright incentives and compensation for the start-up firm‘s owners. They arealso instrumental in raising additional financing during future stages of thefirm‘s lifecycle. PREPARED BY: PROF. CHHAYA PATEL
  20. 20. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Stages of financing 1. Seed Money: Low level financing needed to prove a new idea. 2. Start-up: Early stage firms that need funding for expenses associated with marketing and product development. 3. First-Round: Early sales and manufacturing funds. 4. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit. 5. Third-Round: PREPARED BY: PROF. CHHAYA PATEL
  21. 21. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) Also called Mezzanine financing, this is expansion money for a newlyprofitable company6. Fourth-Round:Also called bridge financing, it is intended to finance the "going public―process PREPARED BY: PROF. CHHAYA PATEL
  22. 22. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)TASKS OF VENTURE CAPITALISTSWhen venture capitalists invest in a business they Become part-owners and typically require a seat on the companys board of directors. They tend to take a minority share in the company and usually do not take day-to-day control. Professional venture capitalists act as mentors and aim to provide support and advice on a range of management and technical issues. PREPARED BY: PROF. CHHAYA PATEL
  23. 23. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)ROLES WITHIN A VENTURE CAPITAL FIRM 1. Venture capital general partners: Also known in this case as "venture capitalists" or "VCs" are the executives in the firm. 2. Limited partners: Investors in venture capital funds are known as limited partners. 3. Venture partners: Venture partners "bring in deals" and receive income only on deals they work on. 4. Entrepreneur in residence: EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by VC firms Some EIRs move on to roles such as Chief Technology Officer (CTO) at a portfolio company.FEATURES OF VENTURE CAPITAL The main features of venture capital are: Long-time horizon: In general, venture capital undertakings take a longer time say, 5-10 years at a minimum to come out commercially successful; one should, thus, be able to wait patiently for the outcome of the venture. Lack of liquidity: Since the project is expected to run at start-up stage for several years, liquidity may be a greater problem. High risk: The risk of the project is associated with management, product and operations. High-tech: However, a venture capitalist looks not only for high-technology but the innovativeness through which the project can succeed. Equity participation and capital gains: A venture capitalist invests his money in terms of equity. He does not look for any dividend or other benefits, but when the project commercially succeeds, then he can enjoy the capital gain which is his main benefit. Participation in management: Unlike the traditional financier or banker, the venture capitalist can provide managerial expertise to entrepreneurs besides money. PREPARED BY: PROF. CHHAYA PATEL
  24. 24. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) KEY FACTORS FOR THE SUCCESS The key factors for the success of any project under the consideration of a venture capitalist are: Clear and objective thinking; Operational experience, especially in a start-up; management skills people; Ability to spot technology and market trends; Wide network of contacts; Knowledge of all facets of business — marketing, Finance and HR; Judgment to evaluate them on the basis of integrity and ability; patience to pursue the final goal; Drive to guide budding entrepreneurs; and Empathy with entrepreneurs. ADVANTAGES OF VENTURE CAPITAL Economy Oriented- Helps in industrialization of the country Helps in the technological development of the country Generates employment Helps in developing entrepreneurial skills Investor oriented- Benefit to the investor is that they are invited to invest only after company starts earning profit, so the risk is less and healthy growth of capital market is entrusted. Profit to venture capital companies. Helps them to employ their idle funds into productive avenues. Entrepreneur oriented- Finance - The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. Business Partner - The venture capitalist is a business partner, sharing the risks and rewards. PREPARED BY: PROF. CHHAYA PATEL
  25. 25. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) Mentoring – Alliances - The venture capitalist also has a network of contacts in many areas that can add value to the company Facilitation of Exit - The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.WHAT DO VENTURE CAPITALISTS LOOK FOR WHILEINVESTING? A GROWING MARKETA UNIQUE PRODUCTIPO CANDIDATE OR ACQUISITION TARGETSOUND BUSINESS PLANSIGNIFICANT GROSS PROFIT MARGINSHOME RUN POTENTIALMETHODS OF VENTURE FINANCING Venture capital financing in India took four forms:- Equity Conditional Loan Convertible Debentures Cumulative Convertible Preference Share Equity:- All VCFs in India provides equity. The advantage of the equity financing for the company seeking venture finance is that it does not have the burden of serving the capital, as dividends will not be paid if the company has no cash flows. PREPARED BY: PROF. CHHAYA PATEL
  26. 26. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Conditional Loans:- A conditional loan is repayable in the form of a royalty after the venture is able togenerate sales. No interest is paid on such loans. In India, VCFs charged royaltyranging between 2-15%.Convertible Debentures & Cumulative Convertible Preference Shares:-Convertible Debentures and Convertible Preference Shares require an activesecondary market to be attractive securities from the investors‘ point of view. In the Indian context, both VCFs and entrepreneurs earlier favored a financialpackage which has a higher component of loan.PROCESS OF VENTURE CAPITAL Deal origination Screening Due diligence (Evaluation) Deal structuring Post investment activity Exit plan PREPARED BY: PROF. CHHAYA PATEL
  27. 27. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Venture capital investment activity is a sequential process involving five steps:1. Deal origination A continuous flow of deals is essential for the venture capitalbusiness. Deals may originate in various ways. Referral system is an importantsource of deals. Deals may be referred to the VCs through their parentorganizations, trade partners, industry associations, friends etc. The venture capital industry in India has become quite proactive in its approachto generating the deal flow by encouraging individuals to come up with theirbusiness plans.2. Screening VCFs carry out initial screening of all projects on the basis of somebroad criteria. For example the screening process may limit projects to areas inwhich the venture capitalist is familiar in terms of technology, or product, ormarket scope. The size of investment, geographical location and stage of financingcould also be used as the broad screening criteria.3. Evaluation once a proposal has passed through initial screening, it is subjected toa detailed evaluation or due diligence process. Most ventures are new and theentrepreneurs may lack operating experience.Following points are taken into consideration while performing due diligence.These include- background market and competitors technology and manufacturing marketing and sales strategy organization and management finance and legal aspectInvestment Valuation The investment valuation process is aimed at ascertaining anacceptable price for the deal. The valuation process goes through the following steps: The pricing thus calculated is rationalized after taking in to considerationvarious economic scenarios, demand and supply of capital, founders/management PREPARED BY: PROF. CHHAYA PATEL
  28. 28. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)teams track record, innovation/ unique selling propositions (USPs), theproduct/service size of the potential market, etc.4. Deal structuring once the venture has been evaluated as viable, the venturecapitalist and the amount, form and price of the investment. This process is termedas deal structuring. The agreement also includes the protective covenants and earn-outarrangements. Venture capitalists generally negotiate deals to ensure protection oftheir interests. They would like a deal to provide for: A return commensurate with the risk Influence over the firm through board membership Minimizing taxes Assuring investment liquidity The right to replace management in case of consistent poor managerialperformance.The investee companies would like the deal to be structured in such a way thattheir interests are protected. The different instruments through which a VentureCapitalist could invest a company include: Equity shares, preference shares, loans,warrants and options.5. Post-investment Activities and Exit Once the deal has been structured andagreement finalized, the venture capitalist generally assumes the role of a partnerand collaborator. He also gets involved in shaping of the direction of the venture.This may be done via a formal representation of the board of directors, or informalinfluence in improving the quality of marketing, finance Venture capitaliststypically aim at making medium-to long-term capital gains. They generally want tocash-out their gains in five to ten years after the initial investment. They play apositive role in directing the company towards particular exit routes. A venturecapitalist can exit in four ways: Initial Public Offerings (IPOs) Acquisition by another company Repurchase of the venture capitalist? share by the investee company PREPARED BY: PROF. CHHAYA PATEL
  29. 29. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)VC player in India:A. Govt. player.1. APIDC venture capital ltd.: IT, bio. Tech2. APFC.: food processing, pharmaceutical3. Assume financial corporation:4. Delhi fund corporation. Industrial development, marketing companies5. Industrial IT, Hi tech. printing, construction, textile6. Rajasthan IT, RetailB. Private Player:1. avishkar India micro ltd.-rural and semi urban development2. BOA consultancy service. –it, retail, media3. 2i capital- it, engineering4. Hindustan finance ltd. – infrastructure, health care, hospital5. Indian direct equity advice ltd.- communication6. Tata investment ltd. - retail, pharmaceuticalC. bank players:1. Can bank vs. fund- computer software, hardware2. ICICI VC Management company- media, real estate3. IDBI-4. HDFC Bank5. SBI Venture PREPARED BY: PROF. CHHAYA PATEL
  30. 30. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) MUTUAL FUNDSThe Indian financial system based on four basic components like Financial Market, FinancialInstitutions, Financial Service, Financial Instruments. All are play important role for smoothactivities for the transfer of the funds and allocation of the funds. The main aim of the Indianfinancial system is that providing the efficiently services to the capital market. The Indian capitalmarket has been increasing tremendously during the second generation reforms. The firstgeneration reforms started in 1991 the concept of LPG. (Liberalization, privatization,Globalization).The origin of mutual fund industry in India is with the introduction of the concept of mutual fundby UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987when non-UTI players entered the industry.In the past decade, Indian mutual fund industry had seen dramatic improvements, both qualitywise as well as quantity wise. Before, the monopoly of the market had seen an ending phase, theAssets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund familyraised the AUM to Rs. 470 in in March 1993 and till April 2004, it reached the height of 1,540bn.Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less thanthe deposits of SBI alone, constitute less than 11% of the total deposits held by the Indianbanking industry.The main reason of its poor growth is that the mutual fund industry in India is new in thecountry. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, itis the prime responsibility of all mutual fund companies, to market the product correctly abreastof selling.The mutual fund industry can be broadly put into four phases according to the development ofthe sector. Each phase is briefly described as under. PREPARED BY: PROF. CHHAYA PATEL
  31. 31. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)HISTORY OF MUTUAL FUND INDUSTRY IN INDIAThe EvolutionThe formation of Unit Trust of India marked the evolution of the Indian mutual fund industry inthe year 1963. The primary objective at that time was to attract the small investors and it wasmade possible through the collective efforts of the Government of India and the Reserve Bank ofIndia. The history of mutual fund industry in India can be better understood divided intofollowing phases:First Phase – 1964-87Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by anact of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate underthe regulatory control of the RBI until the two were de-linked in 1978 and the entire control wastransferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its firstscheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number ofinvestors in any single investment scheme over the years.UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors.It launched ULIP in 1971, six more schemes between 1981-84, Childrens Gift Growth Fund andIndia Fund (Indias first offshore fund) in 1986, Master share (India‘s first equity diversifiedscheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By theend of 1987, UTIs assets under management grew ten times to Rs 6700 crores.Phase II. Entry of Public Sector Funds - 1987-1993The Indian mutual fund industry witnessed a number of public sector players entering the marketin the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became thefirst non-UTI mutual fund in India. SBI Mutual Fund was later followed by can bank MutualFund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC MutualFund and PNB Mutual Fund. By 1993, the assets under management of the industry increasedseven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80%market share. PREPARED BY: PROF. CHHAYA PATEL
  32. 32. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Phase III. Emergence of Private Sector Funds - 1993-96The permission given to private sector funds including foreign fund management companies(most of them entering through joint ventures with Indian promoters) to enter the mutual fundindustry in 1993, provided a wide range of choice to investors and more competition in theindustry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.Phase IV. Growth and SEBI Regulation - 1996-2004The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after theyear 1996. The mobilization of funds and the number of players operating in the industry reachednew heights as investors started showing more interest in mutual funds.Inventors interests were safeguarded by SEBI and the Government offered tax benefits to theinvestors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced bySEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999exempted all dividend incomes in the hands of investors from income tax. Various InvestorAwareness Programmes were launched during this phase, both by SEBI and AMFI, with anobjective to educate investors and make them informed about the mutual fund industry.In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as atrust formed by an Act of Parliament. The primary objective behind this was to bring all mutualfund players on the same level. UTI was re-organized into two parts: 1. The SpecifiedUndertaking, 2. The UTI Mutual FundPresently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes(like US-64, Assured Return Schemes) are being gradually wound up. However, UTI MutualFund is still the largest player in the industry. In 1999, there was a significant growth in PREPARED BY: PROF. CHHAYA PATEL
  33. 33. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)mobilization of funds from investors and assets under management which is supported by thefollowing dataPhase V. Growth and Consolidation - 2004 OnwardsThe industry has also witnessed several mergers and acquisitions recently, examples of which areacquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund andPNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fundplayers have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29funds as at the end of March 2006. This is a continuing phase of growth of the industry throughconsolidation and entry of new international and private sector players PREPARED BY: PROF. CHHAYA PATEL
  34. 34. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)GROWTH IN ASSET UNDER MANAGEMENTORGANIZATION STRUCTURE OF MUTUAL FUNDSMutual funds have organization structure as per their Security Exchange Board of India guideline;Security Exchange Board of India specified authority and responsibility of Trustee and AssetManagement Companies. The objectives are to controlling, to promoted, to regulate, to protect theinvestor‘s right and efficient trading of units. Operations of Mutual fund start with investors savetheir money on mutual fund, than Mutual Fund manager handling the funds and strategic investmenton scrip. As per the objectives of particular scheme manager selected scrips. Unit value will becomehigh when fund manager investment policy generates the return on capital market. Unit returndepends on fund return and efficient capital market. Also affects international capital market,liquidity and at last economic policy. Below the graph indicates how the process was going on toinvestors to earn returns. Mutual fund manager having high responsibility inside of return and how tominimize the risk. When fund provided high return with high risk, investors attract to invest morefunds for same scheme. PREPARED BY: PROF. CHHAYA PATEL
  35. 35. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)The Mutual fund organization as per the SEBI formation and necessary formation is needed forsooth activities of the companies and achieved the desire objectives. Transfer agent andcustodian play role for dematerialization of the fund and unit holders hold the account statement,but custody of the unit is on particular Asset Management Company. Custodian holds all thefund units on dematerialization form. Sponsor had decided the responsibility of custodian wheninvestor to purchase the fund and to sell the unit. Application forms, transaction slip and otherrequests received by transfer agent, middle men between investors and Assts ManagementCompanies. PREPARED BY: PROF. CHHAYA PATEL
  36. 36. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)ABOUT MUTUAL FUNDMutual fund is the pool of the money, based on the trust who invests the savings of a number ofinvestors who shares a common financial goal, like the capital appreciation and dividendearning. The money thus collect is then invested in capital market instruments such as shares,debenture, and foreign market. Investors invest money and get the units as per the unit valuewhich we called as NAV (net assets value). Mutual fund is the most suitable investment for thecommon man as it offers an opportunity to invest in diversified portfolio management, goodresearch team, professionally managed Indian stock as well as the foreign market, the main aimof the fund manager is to taking the scrip that have under value and future will rising, then fundmanager sell out the stock. Fund manager concentration on risk – return trade off, whereminimize the risk and maximize the return through diversification of the portfolio. The mostcommon features of the mutual fund unit are low cost.OBJECTIVES OF MUTUAL FUNDS  Income. Income funds focus on dividends and interest that provide income to investors. This is a relatively steady source of money, but the fund‘s NAV can still go up and down.  Growth. Growth funds focus on increasing the value of the principal or amount invested through capital gains and net asset values. Growth funds are usually more risky but offer greater potential return.  Stability. Stability funds focus on protecting the amount invested from loss so the fund‘s NAV does not go down. This is the least risky type of fund but may make the least amount of money.CHARACTERISTICS OF A MUTUAL FUND:  Investors own the mutual fund.  Professional managers manage the affairs for a fee.  The funds are invested in a portfolio of marketable  Securities, reflecting the investment objective.  Value of the portfolio and investors‘ holdings, alters with  Change in market value of investments PREPARED BY: PROF. CHHAYA PATEL
  37. 37. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)TYPE OF MUTUAL FUNDTypes of Mutual Funds Schemes in IndiaWide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risktolerance and return expectations etc. thus mutual funds has Variety of flavors, Being acollection of many stocks, an investors can go for picking a mutual fund might be easy. Thereare over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds incategories, mentioned below. PREPARED BY: PROF. CHHAYA PATEL
  38. 38. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL FUND CATEGORY:BY STRUCTUREOpen - Ended Schemes:An open-end fund is one that is available for subscription all through the year. These do not havea fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV")related prices. The key feature of open-end schemes is liquidity.Close - Ended Schemes:These schemes have a pre-specified maturity period. One can invest directly in the scheme at thetime of the initial issue. Depending on the structure of the scheme there are two exit optionsavailable to an investor after the initial offer period closes. Investors can transact (buy or sell) theunits of the scheme on the stock exchanges where they are listed. The market price at the stockexchanges could vary from the net asset value (NAV) of the scheme on account of demand andsupply situation, expectations of unit holder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fundthrough periodic repurchase at the schemes NAV; however one cannot buy units and can onlysell units during the liquidity window. SEBI Regulations ensure that at least one of the two exitroutes is provided to the investor.Interval Schemes:Interval Schemes are that scheme, which combines the features of open-ended and close-endedschemes. The units may be traded on the stock exchange or may be open for sale or redemptionduring pre-determined intervals at NAV related prices.RETURN RISK MATRIXThe risk return trade-off indicates that if investor is willing to take higher risk thencorrespondingly he can expect higher returns and vise versa if he pertains to lower riskinstruments, which would be satisfied by lower returns. For example, if an investors opt for bankFD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital PREPARED BY: PROF. CHHAYA PATEL
  39. 39. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)protected funds and the profit-bonds that give out more return which is slightly higher ascompared to the bank deposits but the risk involved also increases in the same proportion.Thus investors choose mutual funds as their primary means of investing, as Mutual fundsprovide professional management, diversification, convenience and liquidity. That doesn‘t meanmutual fund investments risk free. This is because the money that is pooled in are not investedonly in debts funds which are less riskier but are also invested in the stock markets whichinvolves a higher risk but can expect higher returns. Hedge fund involves a very high risk since itis mostly traded in the derivatives market which is considered very volatile.OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL FUND CATEGORY:BY NATUREEquity fund:These funds invest a maximum part of their corpus into equities holdings. The structure of thefund may vary different for different schemes and the fund manager‘s outlook on differentstocks. PREPARED BY: PROF. CHHAYA PATEL
  40. 40. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.Debt funds:The objective of these Funds is to invest in debt papers. Government authorities, privatecompanies, banks and financial institutions are some of the major issuers of debt papers. Byinvesting in debt instruments, these funds ensure low risk and provide stable income to theinvestors.Debt funds are further classified as:Gilt Funds:Invest their corpus in securities issued by Government, popularly known as Government of Indiadebt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. Theseschemes are safer as they invest in papers backed by Government.Gilt Funds at a glance  Gilts are government securities.  Maturity - Medium to long term.  Typically of over one year (less than one-year instruments are the money market securities).  Gilts invest in government paper called dated securities (unlike treasury bills that mature in less than one year).  Issuers – Government of India or State Government.  Risk – Little risk of default, offer better protection of capital.  Gilt securities face interest rate risk, like other debt securities.  Debt securities prices is having inverse relation with Interest Rates. PREPARED BY: PROF. CHHAYA PATEL
  41. 41. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)  Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.  MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.  Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.  Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.Balanced funds:As the name suggest they, are a mix of both equity and debt funds. They invest in both equitiesand fixed income securities, which are in line with pre-defined investment objective of thescheme. These schemes aim to provide investors with the best of both the worlds. Equity partprovides growth and the debt part provides stability in returns.Further the mutual funds can be broadly classified on the basis of investment parameterEach category of funds is backed by an investment philosophy, which is pre-defined in theobjectives of the fund. The investor can align his own investment needs with the funds objectiveand invest accordingly.By investment objective:Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemesis to provide capital appreciation over medium to long term. These schemes normally invest a PREPARED BY: PROF. CHHAYA PATEL
  42. 42. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)major part of their fund in equities and are willing to bear short-term decline in value for possiblefuture appreciation.  Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.  Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).  Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.Other schemesTax Saving Schemes:Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time totime. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked SavingsScheme (ELSS) are eligible for rebate.Index Schemes:Index schemes attempt to replicate the performance of a particular index such as the BSE Sensexor the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute theindex. The percentage of each stock to the total holding will be identical to the stocks indexweight age. And hence, the returns from such schemes would be more or less equivalent to thoseof the Index.Sector Specific Schemes:These are the funds/schemes which invest in the securities of only those sectors or industries asspecified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance ofthe respective sectors/industries. While these funds may give higher returns, they are more risky PREPARED BY: PROF. CHHAYA PATEL
  43. 43. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)compared to diversified funds. Investors need to keep a watch on the performance of thosesectors/industries and must exit at an appropriate time.Concept of an Exchange Traded Fund (ETF)  ETF is a mutual fund scheme, which combines the best features of open end and close end funds.  ETF‘s track the market index & trades like a single stock on the Stock Exchange.  Its pricing is linked to the index and units can be bought/sold on the Stock Exchange.  ETF offers investors the benefit of diversification and cost efficiency of an index.THE RISK RETURNS GRAPHS FOR VARIOUS FUNDSThe above Graph shows the Risk and Returns generated by different Funds. Liquid Funds areless Risky and also generate less Returns where as Sector Funds are more Risky but generatemore Returns by the example of above two Funds it is clear that Risk and Returns are directlyproportional to each other. Other Funds like Equity Funds, Balanced Funds and Income Fundsare also gives the same percentage of Returns as the Risk involved. PREPARED BY: PROF. CHHAYA PATEL
  44. 44. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)ADVANTAGES OF MUTUAL FUNDSProfessional Management: You avail of the services of experienced and skilled professionalswho are backed by a dedicated investment research team which analyses the performance andprospects of companies and selects suitable investments to achieve the objectives of the scheme.Diversification: Mutual Funds invest in a number of companies across a broad cross section ofindustries and sectors. This diversification reduces the risk because seldom do all stocks declineat the same time and in the same proportion.You achieve this diversification through a MutualFund with far less money than you can do on your own.Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps youavoid many problems such as bad deliveries, delayed payments and unnecessary follow up withbrokers and companies. Mutual Funds save your time and make investing easy and convenient.Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide ahigher return as they invest in a diversified basket of selected securities.Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directlyinvesting in the capital markets because the benefits of scale in brokerage, custodial and otherfees translate into lower costs for investors. PREPARED BY: PROF. CHHAYA PATEL
  45. 45. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Liquidity: In open-ended schemes, you can get your money back promptly at Asset Value(NAV) related prices from the Mutual Fund itself. With close-ended schemes, you can sell yourunits on a stock exchange at the prevailing market price or avail of the facility of repurchaseThrough Mutual Funds at NAV related prices which some close-ended and interval schemesOffer you periodically.Choice of Schemes: Mutual Funds offer a variety of schemes to suit your varying needs over alifetime.Transparency: You get regular information on the value of your investment in addition toDisclosure on the specific investments made by your scheme, the proportion invested in eachClass of assets and the fund manager‘s investment strategy and outlook.Flexibility: Through features such as Systematic Investment Plans (SIP), SystematicWithdrawal Plans (SWP) and dividend reinvestment plans, you can systematically invest orwithdraw funds according to your needs and convenience.Well Regulated: All Mutual Funds are registered with SEBI and they function within theprovisions of strict regulations designed to protect the interests of investors. The operations ofMutual Funds are regularly monitored by SEBI.DISADVANTAGES OF MUTUAL FUNDS:No Guarantees: No investment is risk free. If the entire stock market declines in value, the valueof mutual fund shares will go down as well, no matter how balanced the portfolio. Investorsencounter fewer risks when they invest in mutual funds than when they buy and sell stocks ontheir own. However, anyone who invests through a mutual fund runs the risk of losing money.Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses.Some funds also charge sales commissions or "loads" to compensate brokers, financialconsultants, or financial planners. Even if you dont use a broker or other financial adviser, youwill pay a sales commission if you buy shares in a Load Fund.Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70percent of the securities in their portfolios. If your fund makes a profit on its sales, you will paytaxes on the income you receive, even if you reinvest the money you made.Management risk: When you invest in a mutual fund, you depend on the funds manager tomake the right decisions regarding the funds portfolio. If the manager does not perform as well PREPARED BY: PROF. CHHAYA PATEL
  46. 46. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)as you had hoped, you might not make as much money on your investment as you expected. Ofcourse, if you invest in Index Funds, you forego management risk, because these funds do notemploy managers.A measurement of an option position or premium in relation to the underlying instrument. Inmutual fund also there is certain amount of risk-return factor associated according to theinvestment option these are as follows, RISK RETURNEquity High HighBalanced Medium MediumDebt Low LowMUTUAL FUND & CAPITAL MARKETIndian institute of capital market (IICM) aims is to educate and develop professionals for thesecurities industry in India and other developing countries, other objectives like to function on acentre for creating investors awareness through research & turning and to provide specializedconsultancy related to the securities industry.Capital market play vital role for the growth of Mutual fund in India, capital market divided intothe two parts one is the primary market and another is secondary market, primary market concernwith issue management, as per the mutual fund concern the primary called as the NFO NewFund Offer, all the AMC (Assets Management Company) are issuing all the funds all the waythrough the NFO, Every NFO came with particularly investment objectives, style of investmentand allocation of the funds all that thing depend on the fund manager style of investment. Theother portion of the capital market is secondary market, as we have a discussion with referencewith mutual fund secondary market means when the market bull stage the investors sole theunits. Opposite when the bear stage the investor buy or some of the investor time wait for sale.ROLE OF SEBIA index fund scheme‘ means a mutual fund scheme that invests in securities in the sameproportion as an index of securities;‖ A mutual fund may lend and borrow securities in PREPARED BY: PROF. CHHAYA PATEL
  47. 47. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)accordance with the framework relating to short selling and securities lending and borrowingspecified by the Board.‖A mutual fund may enter into short selling transactions on a recognizedstock exchange, subject to the framework relating to short selling and securities lending andborrowing specified by the Board.‖ ―Provided that in case of an indexFund scheme, the investment and advisory fees shall not exceed three fourths of one percent(0.75%) of the weekly average net assets.――Provided further that in case of an index fund scheme, the total expenses of the schemeincluding the investment and advisory fees shall not exceed one and one half percent (1.5%) ofthe weekly average net assets.‖ Every mutual fund shall buy and sell securities on the basis ofdeliveries and shall in all cases of purchases, take delivery of relevant securities and in all casesof sale, deliver the securities: Provided that a mutual fund may engage in short selling ofsecurities in accordance with the framework relating to short selling and securities lending andborrowing specified by the Board: Provided further that a mutual fund may enter into derivativestransactions in a recognized stock exchange, subject to the framework specified by the Board.‖ROLE OF AMFI (ASSOCIATION MUTUAL FUND IN INDIA)The Association of Mutual Funds in India (AMFI) is dedicated to developing the IndianMutual Fund Industry on professional, healthy and ethical lines and to enhance and maintainstandards in all areas with a view to protecting and promoting the interests of mutual funds andtheir unit holders.AMFI working group on Best Practices for sales and marketing of Mutual Funds under theChairmanship of Shri B. G. Daga, Former Executive Director of Unit Trust of India with ShriVivek Reddy of Pioneer ITI, Shri Alok Vajpeyi of DSP Merrill Lynch, Shri Nikhil Khattau ofSun F & C and Shri Chandrashekhar Sathe, Formerly of Kotak Mahindra Mutual Fund hassuggested formulation of guidelines and code of conduct for intermediaries and this work hasbeen ably done by a sub-group consisting of Shri B. G. Daga and Shri Vivek Reddy.SEBI GUIDELINE OF MUTUAL FUND SEBI REGULATION ACT 1996Establishment of a Mutual Fund: In India mutual fund play the role as investment with trust,some of the formalities laid down by the SEBI to be establishment for setting up a mutual fund.As the part of trustee sponsor the mutual fund, under the Indian Trust Act, 1882, under the PREPARED BY: PROF. CHHAYA PATEL
  48. 48. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)trustee company are represented by a board of directors. Board of Directors is appoints the AMCand custodians. The board of trustees made relevant agreement with AMC and custodian. Thelaunch of each scheme involves inviting the public to invest in it, through an offer documents.Depending on the particular objective of scheme, it may open for further sale and repurchase ofunits, again in accordance with the particular of the scheme, the scheme may be wound up afterthe particular time period.1. The sponsor has to register the mutual fund with SEBI2. To be eligible to be a sponsor, the body corporate should have a sound track record and ageneral reputation of fairness and integrity in all his business transactions.Means of Sound Track Records  The body corporate being in the financial services business for at least five years  Having a positive net worth in the five years immediately preceding the application of registration.  Net worth in the immediately preceding year more than its contribution to the capital of the AMC.  Earning a profit in the three out of the five preceding years, including the fifth year.  The sponsor should hold at least 40% of the net worth of the AMC.  A party which is not eligible to be a sponsor shall not hold 40% or more of the net worth of the AMC.  The sponsor has to appoint the trustees, the AMC and the custodian.  The trust deed and the appointment of the trustees have to be approved by SEBI.  An AMC or its officers or employees cannot be appointed as trustees of the mutual fundLAUNCHING OF A SCHEMESBefore its launch, a scheme has to be approved by the trustees and a copy of its offer documentsfiled with the SEBI.  Every application form for units of a scheme is to be accompanies by a memorandum containing key information about the scheme.  The offer document needs to contain adequate information to enable the investors to make informed investments decisions. PREPARED BY: PROF. CHHAYA PATEL
  49. 49. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818) All advertisements for a scheme have to be submitted to SEBI within seven days from the issue date. The advertisements for a scheme have to disclose its investment objective. The offer documents and advertisements should not contain any misleading information or any incorrect statement or opinion. The initial offering period for any mutual fund schemes should not exceed 45 days, the only exception being the equity linked saving schemes. An advertisement cannot carry a comparison between two schemes unless the schemes are comparable and all the relevant information about the schemes is given. All advertisements need to carry the name of the sponsor, the trustees, the AMC of the fund. All advertisements need to disclose the risk factors. All advertisements shall clarify that investment in mutual funds is subject to market risk and the achievement of the fund‘s objectives can not be assured. When a scheme is open for subscription, no advertisement can be issued stating that the scheme has been subscribed or over subscription. No advertisements can contain information whose accuracy is dependent on assumption. PREPARED BY: PROF. CHHAYA PATEL
  51. 51. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)TWO MODE OF INVESTMENT IN MUTUAL FUNDS  SIP  LUMP SUMMutual fund investments can be done in two modes - lump sum or SIP (Systematic InvestmentPlan).1. In lump sum investment an amount is investment in mutual fund in one go.2. While in SIP once we have decided on the amount we want to invest every month/quarter andthe mutual fund scheme in which we want to invest, we can either give post-dated cheques orECS instruction, and the investment will be made regularly.Each investor is given units of the mutual fund in exchange for cash – he then becomes an ownerof the fund‘s asset. The entity which does the collection and investing on behalf of all investorsMutually is called Asset Management Company (AMC).Systematic Investment Plan (SIP) popularly called SIP works on the principle of regular andcontinues investments. It is like bank recurring deposit where you put in a small prefixedamount every month for a fixed tenure. . This is a systematic approach to build wealth over theyears and the discipline relieves the investor of the risks and pressures of timing the market.Invest in a Mutual Fund Scheme by making smaller periodic (monthly or quarterly or evensmaller intervals) investments of Rs 500 each in place of a one-time investment of minimum Rs5,000 or more as per the scheme terms and conditions. It is true that SIP is for those who cannotestimate the market and those who are having low/medium risk appetite; the fact remains thatanyone can become a SIP investor. All you need to do is plan your savings and set aside a small PREPARED BY: PROF. CHHAYA PATEL
  52. 52. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)amount every month to be invested in a mutual fund that is either a diversified equity fund,balanced fund, debt fund, sector fund or liquid fund. Post-dated cheques, Debit Mandate, can begiven to the Mutual Funds, the investor being at liberty to redeem or stop SIPs at anytime as hewishes. There is no specific condition that he needs to continue the SIP payment for specificperiod of time. The gain you are going to get from the scheme is purely depending on the marketcondition and individual performance of the selected scheme.Systematic Investment Plan (SIP)  Spreads investment over the duration of SIP in small, manageable installments  Constant presence makes sure you don‘t miss out on any opportunitiesBenefits of SIP  Gives you a lower unit cost than the market average  It is a dynamic way to invest in fluctuating markets  Compounding gives you greater advantage  Additional Benefits  Dividends are tax free*  Your portfolio is managed by expert fund managers  Gives you complete transparency by way of disclosure of portfolio every month  You earn regularly,  You spend regularly, PREPARED BY: PROF. CHHAYA PATEL
  53. 53. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)It is imperative to understand the concept of rupee cost averaging and the power ofcompounding, to better appreciate the working of SIPs. SIP has brought mutual funds within thereach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs1,000 on a regular basis in place of making a heavy, one-time investment. While making smallinvestments through SIP may not seem attractive at initial stages, it enables investors to get intothe habit of saving. SIP is also suggested to all who cannot afford to invest a lump sum in themutual fund schemes. It is suggested to select a good fund with good track record showing aconstant growth of at least 10% to 15% per annum over a period of 3 to 5 years, this reveals thatthe fund has been through various stages of the market and has survived all of them, hence thechances of such a fund performing well over the coming years are better versus new fund whichwas launched recently. It is not recommended to invest in Mutual Fund IPOs. And over theyears, it can really add up and give you handsome returns. A monthly SIP of Rs 5,000 at the rateof 10% would grow to Rs 20.90 lakh in 15 years.In short the SIP mode of investment reduces the average purchase cost, even in volatile markets..When you invest a fixed amount every month, the number of mutual fund units you actually buydepends on their prevailing scheme‘s Net Asset Values (NAV). Therefore, with the money you PREPARED BY: PROF. CHHAYA PATEL
  54. 54. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)invest each month, you can buy fewer units when the market moves up and more units when themarket comes down. This means you are averaging out your cost. If you invest Rs 2,000 a monthat a price of Rs 12 per unit, you will have bought 166.6667 units (2000/12). However, if the priceis Rs 15.00 per unit, you will get only 133.3333 units (2 000/15). Investing a fixed sum regularlymeans averaging out the cost, as you get fewer units when the price goes up and more when theprice comes down. This scheme is basically for those who cannot watch or track the marketregularly or do not wish to take much of risks,Suppose if you buy the units of a fund, when the NAV is high, if the market dips after that, thevalue of your investments falls and you may have to wait for the market to go up to make a gainon your investment. But, if you invest via a SIP, you do not buying units when the market is atits peak. Since you are buying small amounts continuously, your investment will average outover a period of time. You will end up buying some units at a high cost and some units a lowerprice. Over time, your chances of making a profit are much higher when compared to an one-time investment.Total units bought by way of investing SIP - 1,625.3521 (average cost Rs. 7.38),Total units bought by way of one time investment - 1,284.11 (average cost 9.345) at a total costof Rs. 12,000.00. PREPARED BY: PROF. CHHAYA PATEL
  55. 55. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)ADVANTAGES OF SIPDisciplined InvestmentThrough a sip in mutual fund, an investor pledges to invest a fixed amount of money on amonthly basis in a mutual fund scheme for a predetermined time period. Sip investment alsoprovides the investor with the flexibility to increase the amount of his monthly installment at anytime.AffordableInvestments do not necessarily mean that one has to collect a substantial chunk of money toinvest. One can start investing with a very small amount through an SIP.Easy to InvestWhen we think monthly installments, we generally think of one more date to remember apartfrom the bill payment dates. That is not the case with an SIP. You have the convenience of directdebit of your SIP installments through Electronic Clearing Service (ECS) facility. Your SIPamount automatically gets debited from your bank account on the predetermined date.Helps in Compounding Your WealthGetting rich is simpler than you think, heres a simple formula to get rich:Start Early + Invest Regularly = Create WealthSTART EARLYSystematic investing has a compounding effect on your investments. In the long term, aninvestment as low as Rs 5000/- per month swells up into a huge corpus. This can be bestexplained by the following graph. The graph shows advantages of starting early. If an investorstarts early, even with lower invested amount he can create a large corpus. PREPARED BY: PROF. CHHAYA PATEL
  56. 56. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)Invest Regularly - Fights Market VolatilityEvery investor dreams of purchasing stocks at a low price and selling it at a higher price. But,how does one know whether any given time is the right time to buy or sell? Many retail investorstry to judge the market movements and endup losing their monies in the long term. A moresuccessful strategy is Rupee Cost Averaging wherein you invest a fixed amount regularly. Thus PREPARED BY: PROF. CHHAYA PATEL
  57. 57. SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)you purchase more when the prices are low and purchase less when the prices are high. SIPinvestments take advantage of this strategy:The above example is merely an illustration of Rupee Cost Averaging. The NAVs and returnsgenerated are purely indicative and do not depict the performance of any mutual fund scheme.In the long term, the SIP investor gains as his investments are unaffected by market volatility. PREPARED BY: PROF. CHHAYA PATEL