Merchant banking

SMT.K.K.PATEL MBA/MCA COLLEGE,MEHSANA (818)

MERCHANT BANKING

INTRODUCTION
in India merchant bankers is a body corporate who carries on any activity of the issue
management, 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 to
securities market. There is no official category in investment banking.

During the seventies, Indian banking witnessed metamorphic changes. From the basis function of
mobilizing deposit and money lending, the banking industry has grown into a catalytic agency
for 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 Indian
economy.

DEFINITION
In banking, a merchant bank is a financial institution primarily engaged in offering
financial 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 financial
institutions providing specialist services which generally include the acceptance of bills of
exchange, corporate finance, portfolio management and other banking services‖.

The Notification of the Ministry of Finance defines a merchant banker as, ―any person
who is engaged in the business of issue management either by making arrangements regarding
selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate
advisory 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


ROLE OF MERCHANT BANKS

To promote the new issue market there is need for a qualitative improvement in the offer
of new issues both in terms of time taken and the cost of floatation. At present the time taken for
organizing new issues is between 12 to 18 months and the cost of raising new capital varies from
3% to 8 % and sometimes even 20%. This can be brought down relatively by specialized
merchant banking institution by catering to the requirement of both large and small business
units.

The new issue market has not succeeded fully in mobilizing saving partly due to the
preference of the public to company deposit and partly due to low yield on equities as compared
to those on fixed interest securities. There has been a decline in the proportion of share capital in
the total capital employed due to the steep rise in the cost of new issues.

MERCHANT BANKING SERVICES

1. Corporate Counseling
2. Project Counseling And Pre-Investment Studies
3. Credit Syndication
4. Issue Management and Underwriting
5. Bankers to issue
6. Portfolio Management
7. Venture Capital Financing
8. Leasing
9. Non-Resident Investment
10. Acceptance Credit And Bill Discounting



1. CORPORATE COUNSELING

It includes a whole range of financial services provided by a merchant banker to a corporate unit
a view to ensure better performance, maintain steady growth and create a better image among
investors.

It covers the entire field of merchant banking activities i.e., project counseling, capital
restructuring, portfolio management and the full range of financial engineering including venture
capital, public issue management, loan syndication, working capital, fixed deposits, lease
financing, acceptance credit, etc. However, the scope of corporate counseling is limited to
suggestions and opinions leaving to the client to take corrective actions for solving its corporate
problems.

A merchant banker finds out the problems of enterprise, which shall include organizational goals
for 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 COUNSELING

Project counseling is an important merchant banking service which includes preparation of
project reports, deciding upon the financing pattern to finance the cost of the project, appraising
the project report with the financial institutions/banks.

Project reports are prepared to obtain government approval of the project, for procuring financial
assistance 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 funds
available to finance the project cost are internal sources of funds (or owners' funds) which
includes promoter's contribution and retained earnings; and external sources of funds which



refers to the borrowed funds in the form of loans from banks, private investors and financial
institutions and in the form of debentures from the public.

Merchant banker has to decide the financing mix of the internal and external sources of funds
keeping in view the rules, regulations and norms prescribed by the government or followed by
the term lending financial institutions.

While rendering project counseling services, the merchant banker has to ensure that the
application forms for obtaining the funds from financial institutions are filled in with relevant
and appropriate information and before submitting the application, the merchant banker has to
appraise the project considering the various aspects as to the type of the project, location,
technical, commercial and financial viability of the project.

3.CREDIT SYNDICATION

Once the client company has decided about the project proposed to be undertaken, the next step
is 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 to
procure the funds. This service rendered by the merchant banker in arranging and procuring
credit from financial institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is referred to as loan
syndication 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 be
from internal sources like internal accruals from working or operations and short term loans from
friends and relatives; or from external sources like short term borrowings from banks etc.



4.ISSUE MANAGEMENT AND UNDERWRITING

Management of capital issues is a professional service rendered by the skilled and experienced
merchant bankers. Previously, the managing agents for a particular corporate used to manage
public issues. The abolition of the managing agency system, the growth in the public limited
companies in number and size, the imposition of new rules and regulations regarding the public
issue of securities made it necessary for merchant bankers to play a definite role in the
management of public issues.

Public issue management involves marketing of corporate securities by offering the securities to
the public, procuring private subscription to the securities and offering securities to existing
shareholders of the company.

As a manager to the public issue, the merchant banker, before the public issue has to obtain the
consent of the stock exchanges to the memorandum and articles of association, appoint other
managers, bankers, underwriters, brokers etc. ,advice the company to appoint auditors, solicitors
and board of directors, draft the prospectus and obtain consent from the companies legal
advisors, board of directors and other concerned parties, file the prospectus with registrar, make
an 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 subscription
amount, calculation of underwriters liability in case of under subscription and complying the
necessary statutory requirements for listing of securities on the stock exchange.



a.Under writing of public issue

A fully underwritten public issue spells confidence to the investing public, which ensures a good
response to the issue. Keeping this in view companies, which float a public issue usually, desire
a full underwriting of the issue.

Underwriting is only the guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed in proportion by the underwriter. An
underwriter 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 ISSUE

The 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 public
together with subscription money and transfer them to the account of the controlling branch.

6.PORTFOLIO MANAGEMENT

Portfolio refers to investment in different types of marketable securities or investment papers like
shared, debentures and debenture stocks, bonds etc. from different companies or institutions held
by individuals firm or corporate units.

Portfolio management refers to managing efficiently the investment in the securities held by
professionals to others.



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 a
minimum 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 the
investment 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 securities
market and identify blue chip companies in which money can be invested. They should keep
record of latest amendment in government guidelines, stock exchange regulations, RBI
regulations, etc.

7.VENTURE CAPITAL FINANCING

Financing an emerging high-risk project is called venture capital financing. Many merchant
bankers are entering into this area by also financing viable upcoming projects. The financing is
by subscription to the equity capital, while repayment is by selling the equity through stock
market when the shares are listed.

8.LEASING

Is there another lucrative area of financing where merchant bankers are turning? Leasing is a
viable source of financing while acquiring capital assets. The services include arrangement for
lease finance facilities for leasing companies, legal; documents and tax consultancy.

9.NON RESIDENT INVESTMENT

To attract NRI investments in the primary and secondary markets, the merchant bankers provide
investment 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 like
purchase and sale of securities securing the necessary clearance from RBI under FERA for
repatriation of dividends and interest, etc.



10.ACCEPTANCE CREDIT AND BILL DISCOUNTING

Though merchant bankers world over specialize in acceptance credit and bill discounting, these
services are not currently provided by merchant bankers in India the principal reasoning being
the 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
banks

1.FOREIGN BANKS

Along with the grindlays bank, Citibank ,charted bank and Hong Kong are also active in
merchant banking.

2. INDIAN BANKS

State bank of India took the lead among Indian banks and is at present well-established in the
merchant banking field. The other banks that followed suit are bank of India, central bank of
India, bank of Baroda, Punjab national bank.

3. FINANCIAL INSTITUTION

Industrial credit and Investment Corporation of India has a well established merchant banking
office. Recently, industrial reconstruction corporation of India has also started its merchant
banking operation though its main concentration and attention is on merger, amalgamation and
takeovers



4. PRIVATE MERCHANT BANKERS

Leading private broker firms were already doing consultancy for portfolio investment .they took
advantage of the situation and started ‗merchant banking and consultancy‘ service in a big way.

MAIN FUNCTIONS
Merchant 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.



OTHER FUNCTION OF MERCHANT BANKING

Merchant banking function

Project Corporate Project Capital Portfolio Stock
preparati counselling counselling structuring managment exch
on & nage
appriasal mem
bersh
ip
Issue
Lead
managment
managers & Credit Working Venture Lease Fixed
Mark
co- syndication capital capital finance deposite et
managers opre
ation
underwriting
Consult
ancy & 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



PROJECT COUNSELING
If it consist of mere technical appraisal ,the department makes use of the services of the technical
and industrial consultancy division. Once convinced of the technical feasibility and commercial
viability of the project, the merchant bankers next job is to prepare a structure of finance . to
determine the structure of finance on the basis of different available sources, the department
keeps 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.



CREDIT RATING
Lesson 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.

Introduction

With the increasing market orientation of the Indian economy, investors value a systematic
assessment of two types of risks, namely ―business risk‖ arising out of the ―open economy‖ and
linkages between money, capital and foreign exchange markets and ―payments risk‖. With a
view to protect small investors, who are the main target for unlisted corporate debt in the form of
fixed deposits with companies, credit rating has been made mandatory. India was perhaps the
first amongst developing countries to set up a credit rating agency in 1988. The function of credit
rating 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 Financial
Companies (NBFCs) to be rated.

Meaning and definition
Credit rating is the opinion of the rating agency on the relative ability and willingness of tile
issuer of a debt instrument to meet the debt service obligations as and when they arise. Rating is
usually expressed in alphabetical or alphanumeric symbols. Symbols are simple and easily
understood tool which help the investor to differentiate between debt instruments on the basis of
their underlying credit quality. Rating companies also publish explanations for their symbols
used 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 to
make timely payments of principal and interest on a specific fixed income security. The rating
measures the probability that the issuer will default on the security over its life, which depending
on the instrument may be a matter of days to thirty years or more. In fact, the credit rating is a
symbolic indicator of the current opinion of the relative capability of the issuer to service its debt
obligation in a timely fashion, with specific reference to the instrument being rated.



Nature of Credit Rating
1. Rating is based on information:
Any rating based entirely on published information has serious limitations and the success of a
rating 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 information
is important pre-requisites. The rating agency must keep information of confidential nature
possessed 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 taking
into account the quality of management, corporate strategy, economic outlook and international
environment. To ensure consistency and reliability a number of qualified professionals are
involved in the rating process. The Rating Committee, which assigns the final rating, consists of
specialized financial and credit analysts. Rating agencies also ensure that the rating process is
free 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 than
one agency. And it is only natural that ratings given by two or more agencies differ from each
other e.g., a debt issue, may be rated ‗AA+‘ by one agency and ‗AA‘ or ‗AA-‘ by another. It will
indeed 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 that
rating 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 the
ratings 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 are
accepted by the issuers are published. Thus, once a rating is accepted it is published and
subsequent changes emerging out of the monitoring by the agency will be published even if such
changes are not found acceptable by the issuers.



6. Right of appeal against assigned rating:
Where an issuer is not satisfied with the rating assigned, he may request for a review, furnishing
additional information, if any, considered relevant. The rating agency will undertake a review
and thereafter give its final decision. Unless the rating agency had over looked critical
information 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 be
assessed and the success of a rating agency is measured by the quality of the services offered,
consistency and integrity.

ROLE OF CREDIT RATING AGENCIES

Distill 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 for
investors.

Assist regulatory authorities in developing and facilitate implementation of prudential guidelines
requirements.

Tracks and monitor performance of economy/industries, as well as default statistics.



Functions of a Credit Rating Agency
A credit rating agency serves following functions:

1. Provides unbiased opinion:

An independent credit rating agency is likely to provide an unbiased opinion as to relative
capability 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 is
more 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 investment
decisions. These ratings are published in the form of reports and are available easily on the
payment of negligible price.

4. Provide easy to understand information:

Rating agencies first of all gather information, then analyze the same. At last these interpret and
summaries complex information in a simple and readily understood formal manner. Thus in
other 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 can
make an estimate of the risk and return associated with a particular rated issue while investing
money in them.

6. Healthy discipline on corporate borrowers:



Higher credit rating to any credit investment enhances corporate image and builds up goodwill
and 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 policy
guidelines as to the eligibility of securities to be included in different kinds of institutional port-
folio.

Advantages of Credit Rating
A. Benefits to Investors
1. Safety of investments

Credit rating gives an idea in advance to the investors about the degree of financial strength of
the issuer company. Based on rating he decides about the investment. Highly rated issues gives
an assurance to the investors of safety of Investments and minimizes his risk.

2. Recognition of risk and returns

Credit rating symbols indicate both the returns expected and the risk attached to a particular
issue. It becomes easier for the investor to understand the worth of the issuer company just by
looking at the symbol because the issue is backed by the financial strength of the company.

3. Freedom of investment decisions

Investors need not seek advice from the stock brokers, merchant bankers or the portfolio
managers before making investments. Investors today are free and independent to take
investment decisions themselves. They base their decisions on rating symbols attached to a
particular security. Each rating symbol assigned to a particular investment suggests the
creditworthiness of the investment and indicates the degree of risk involved in it.

4. Wider choice of investments

As it is mandatory to rate debt obligations for every issuer company, at any particular time, wide
range of credit rated instruments are available for making investment. Depending upon his own
ability to bear risk, the investor can make choice of the securities in which investment is to be
made.



B. Benefits of Rating to the Company
1. Easy to raise resources

A company with highly rated instrument finds it easy to raise resources from the public. Even
though investors in different sections of the society understand the degree of risk and uncertainty
attached to a particular security but they still get attracted towards the highly rated instruments.

2. Reduced cost of borrowing

Investors always like to make investments in such instrument, which ensure safety and easy
liquidity rather than high rate of return. A company can reduce the cost of borrowings by quoting
lesser interest on those fixed deposits or debentures or bonds, which are highly rated.

3. Reduced cost of public issues

A company with highly rated instruments has to make least efforts in raising funds through
public. It can reduce its expenditure on press and publicity. Rating facilitates best pricing and
timing of issues.

4. Rating builds up image

Companies with highly rated instrument enjoy better goodwill and corporate image in the eyes of
customers, shareholders, investors and creditors. Customers feel confident of the quality of
goods manufactured, shareholders are sure of high returns, investors feel secured of their
investments and creditors are assured of timely payments of interest and principal.

5. Rating facilitates growth

Rating motivates the promoters to undertake expansion of their operations or diversify their
production activities thus leading to the growth of the company in future. Moreover highly rated
companies find it easy to raise funds from public through new issues or through credit from
banks and FIs to finance their expansion activities.

C. Benefits to Intermediaries
Stock brokers have to make fewer efforts in persuading their clients to select an investment
proposal of making investment in highly rated instruments. Thus rating enables brokers another
financial intermediaries to save time, energy costs and manpower in convincing their clients.



Disadvantages of Credit Rating
1. Non-disclosure of significant information

Firm being rated may not provide significant or material information, which is likely to affect the
investor‘s decision as to investment, to the investigation team of the credit rating company. Thus
any decisions taken in the absence of such significant information may put investors at a loss.

2. Static study

Rating is a static study of present and past historic data of the company at one particular point of
time. Number of factors including economic, political, environment, and government policies
has direct bearing on the working of a company.

3. Rating is no certificate of soundness

Rating grades by the rating agencies are only an opinion about the capability of the company to
meets its interest obligations. Rating symbols do not pinpoint towards quality of products or
management or staff etc. In other words rating does not give a certificate of the complete
soundness of the company. Users should form an independent view of the rating symbol.

4. Rating may be biased

Personal bias of the investigating team might affect the quality of the rating. The companies
having 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 the
instrument.

5. Rating under unfavorable conditions

Rating grades are not always representative of the true image of a company. A company might
be 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.



VENTURE CAPITAL
Venture capital is a type of private equity capital typically provided by
Professionals, outside investors to new growth businesses.

A venture capitalist (VC) is a person who makes such investments, these
include wealthy investors, investment banks, other financial institutions
other partnerships.
Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential. Venture capital is money
provided by professionals who alongside management invest in young,
rapidly growing companies that have the potential to develop into significant
economic contributors.
Venture capital firms specialize in providing equity financing for firms that
are in an early stage of development Examples of companies that received
venture capital funding in their early development include Apple, Federal
Express, Microsoft, Genentech, and Google.
Venture capital (a.k.a. private equity) is a pool of capital most commonly
organized as a limited partnership. The venture capital firm serves as the
general partner and investors are the limited partners. Limited partners can
include pension funds, university endowment funds, wealthy individuals,
and other financial institutions and corporations.
Managers of venture capital firms (venture capitalists) closely follow the
technology 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 an
investment. To diversify risk, they create a venture fund that is a portfolio of
investments in young companies. Venture capitalists are not passive equity
investors. They structure a financing deal with great attention to creating the
right incentives and compensation for the start-up firm‘s owners. They are
also instrumental in raising additional financing during future stages of the
firm‘s lifecycle.



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:



Also called Mezzanine financing, this is expansion money for a newly
profitable company
6. Fourth-Round:
Also called bridge financing, it is intended to finance the "going public
―process



TASKS OF VENTURE CAPITALISTS

When venture capitalists invest in a business they
Become part-owners and typically require a seat on the company's 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.



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 EIR's 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.



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.



 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 WHILE
INVESTING?

A GROWING MARKET

A UNIQUE PRODUCT

IPO CANDIDATE OR ACQUISITION TARGET

SOUND BUSINESS PLAN

SIGNIFICANT GROSS PROFIT MARGINS

HOME RUN POTENTIAL

METHODS 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.



Conditional Loans:-
A conditional loan is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charged royalty
ranging between 2-15%.
Convertible Debentures & Cumulative Convertible Preference Shares:-
Convertible Debentures and Convertible Preference Shares require an active
secondary market to be attractive securities from the investors‘ point of view.
In the Indian context, both VCFs and entrepreneurs earlier favored a financial
package which has a higher component of loan.

PROCESS OF VENTURE CAPITAL

Deal origination

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan



Venture capital investment activity is a sequential process involving five steps:

1. Deal origination A continuous flow of deals is essential for the venture capital
business. Deals may originate in various ways. Referral system is an important
source of deals. Deals may be referred to the VCs through their parent
organizations, trade partners, industry associations, friends etc.

The venture capital industry in India has become quite proactive in its approach
to generating the deal flow by encouraging individuals to come up with their
business plans.

2. Screening VCFs carry out initial screening of all projects on the basis of some
broad criteria. For example the screening process may limit projects to areas in
which the venture capitalist is familiar in terms of technology, or product, or
market scope. The size of investment, geographical location and stage of financing
could also be used as the broad screening criteria.

3. Evaluation once a proposal has passed through initial screening, it is subjected to
a detailed evaluation or due diligence process. Most ventures are new and the
entrepreneurs 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 aspect

Investment Valuation The investment valuation process is aimed at ascertaining an
acceptable price for the deal. The valuation process goes through the following steps:

The pricing thus calculated is rationalized after taking in to consideration
various economic scenarios, demand and supply of capital, founder's/management



team's track record, innovation/ unique selling propositions (USPs), the
product/service size of the potential market, etc.

4. Deal structuring once the venture has been evaluated as viable, the venture
capitalist and the amount, form and price of the investment. This process is termed
as deal structuring.

The agreement also includes the protective covenants and earn-out
arrangements. Venture capitalists generally negotiate deals to ensure protection of
their 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 managerial
performance.

The investee companies would like the deal to be structured in such a way that
their interests are protected. The different instruments through which a Venture
Capitalist 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 and
agreement finalized, the venture capitalist generally assumes the role of a partner
and 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 informal
influence in improving the quality of marketing, finance Venture capitalists
typically aim at making medium-to long-term capital gains. They generally want to
cash-out their gains in five to ten years after the initial investment. They play a
positive role in directing the company towards particular exit routes. A venture
capitalist can exit in four ways:

Initial Public Offerings (IPOs)
Acquisition by another company
Repurchase of the venture capitalist? share by the investee company



VC player in India:
A. Govt. player.

1. APIDC venture capital ltd.: IT, bio. Tech

2. APFC.: food processing, pharmaceutical

3. Assume financial corporation:

4. Delhi fund corporation. Industrial development, marketing companies

5. Industrial IT, Hi tech. printing, construction, textile

6. Rajasthan IT, Retail

B. Private Player:

1. avishkar India micro ltd.-rural and semi urban development

2. BOA consultancy service. –it, retail, media

3. 2i capital- it, engineering

4. Hindustan finance ltd. – infrastructure, health care, hospital

5. Indian direct equity advice ltd.- communication

6. Tata investment ltd. - retail, pharmaceutical

C. bank players:

1. Can bank vs. fund- computer software, hardware

2. ICICI VC Management company- media, real estate

3. IDBI-

4. HDFC Bank

5. SBI Venture



MUTUAL FUNDS
The Indian financial system based on four basic components like Financial Market, Financial
Institutions, Financial Service, Financial Instruments. All are play important role for smooth
activities for the transfer of the funds and allocation of the funds. The main aim of the Indian
financial system is that providing the efficiently services to the capital market. The Indian capital
market has been increasing tremendously during the second generation reforms. The first
generation 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 fund
by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987
when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality
wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase, the
Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family
raised the AUM to Rs. 470 in in March 1993 and till April 2004, it reached the height of 1,540
bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than
the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian
banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it
is the prime responsibility of all mutual fund companies, to market the product correctly abreast
of selling.

The mutual fund industry can be broadly put into four phases according to the development of
the sector. Each phase is briefly described as under.



HISTORY OF MUTUAL FUND INDUSTRY IN INDIA

The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in
the year 1963. The primary objective at that time was to attract the small investors and it was
made possible through the collective efforts of the Government of India and the Reserve Bank of
India. The history of mutual fund industry in India can be better understood divided into
following phases:

First Phase – 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an
act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under
the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was
transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first
scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of
investors 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, Children's Gift Growth Fund and
India Fund (India's first offshore fund) in 1986, Master share (India‘s first equity diversified
scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the
end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993

The Indian mutual fund industry witnessed a number of public sector players entering the market
in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the
first non-UTI mutual fund in India. SBI Mutual Fund was later followed by can bank Mutual
Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual
Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80%
market share.



Phase III. Emergence of Private Sector Funds - 1993-96

The 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 fund
industry in 1993, provided a wide range of choice to investors and more competition in the
industry. 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 - 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the
year 1996. The mobilization of funds and the number of players operating in the industry reached
new heights as investors started showing more interest in mutual funds.

Inventors' interests were safeguarded by SEBI and the Government offered tax benefits to the
investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by
SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999
exempted all dividend incomes in the hands of investors from income tax. Various Investor
Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an
objective 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 a
trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual
fund players on the same level. UTI was re-organized into two parts: 1. The Specified
Undertaking, 2. The UTI Mutual Fund

Presently 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 Mutual
Fund is still the largest player in the industry. In 1999, there was a significant growth in



mobilization of funds from investors and assets under management which is supported by the
following data

Phase V. Growth and Consolidation - 2004 Onwards

The industry has also witnessed several mergers and acquisitions recently, examples of which are
acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and
PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund
players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29
funds as at the end of March 2006. This is a continuing phase of growth of the industry through
consolidation and entry of new international and private sector players



GROWTH IN ASSET UNDER MANAGEMENT

ORGANIZATION STRUCTURE OF MUTUAL FUNDS
Mutual 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 Asset
Management Companies. The objectives are to controlling, to promoted, to regulate, to protect the
investor‘s right and efficient trading of units. Operations of Mutual fund start with investors save
their money on mutual fund, than Mutual Fund manager handling the funds and strategic investment
on scrip. As per the objectives of particular scheme manager selected scrips. Unit value will become
high when fund manager investment policy generates the return on capital market. Unit return
depends 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 to
investors to earn returns. Mutual fund manager having high responsibility inside of return and how to
minimize the risk. When fund provided high return with high risk, investors attract to invest more
funds for same scheme.



The Mutual fund organization as per the SEBI formation and necessary formation is needed for
sooth activities of the companies and achieved the desire objectives. Transfer agent and
custodian 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 the
fund units on dematerialization form. Sponsor had decided the responsibility of custodian when
investor to purchase the fund and to sell the unit. Application forms, transaction slip and other
requests received by transfer agent, middle men between investors and Assts Management
Companies.



ABOUT MUTUAL FUND

Mutual fund is the pool of the money, based on the trust who invests the savings of a number of
investors who shares a common financial goal, like the capital appreciation and dividend
earning. 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 value
which we called as NAV (net assets value). Mutual fund is the most suitable investment for the
common man as it offers an opportunity to invest in diversified portfolio management, good
research team, professionally managed Indian stock as well as the foreign market, the main aim
of the fund manager is to taking the scrip that have under value and future will rising, then fund
manager sell out the stock. Fund manager concentration on risk – return trade off, where
minimize the risk and maximize the return through diversification of the portfolio. The most
common 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



TYPE OF MUTUAL FUND

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a
collection of many stocks, an investors can go for picking a mutual fund might be easy. There
are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in
categories, mentioned below.



OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL FUND CATEGORY:
BY STRUCTURE

Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do not have
a 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 the
time of the initial issue. Depending on the structure of the scheme there are two exit options
available to an investor after the initial offer period closes. Investors can transact (buy or sell) the
units of the scheme on the stock exchanges where they are listed. The market price at the stock
exchanges could vary from the net asset value (NAV) of the scheme on account of demand and
supply 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 Fund
through periodic repurchase at the schemes NAV; however one cannot buy units and can only
sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit
routes is provided to the investor.

Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended
schemes. The units may be traded on the stock exchange or may be open for sale or redemption
during pre-determined intervals at NAV related prices.

RETURN RISK MATRIX

The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors opt for bank
FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital



protected funds and the profit-bonds that give out more return which is slightly higher as
compared 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 funds
provide professional management, diversification, convenience and liquidity. That doesn‘t mean
mutual fund investments risk free. This is because the money that is pooled in are not invested
only in debts funds which are less riskier but are also invested in the stock markets which
involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it
is mostly traded in the derivatives market which is considered very volatile.

OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL FUND CATEGORY:
BY NATURE
Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the
fund may vary different for different schemes and the fund manager‘s outlook on different
stocks.



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, private
companies, banks and financial institutions are some of the major issuers of debt papers. By
investing in debt instruments, these funds ensure low risk and provide stable income to the
investors.
Debt funds are further classified as:
Gilt Funds:
Invest their corpus in securities issued by Government, popularly known as Government of India
debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These
schemes 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.



 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 equities
and fixed income securities, which are in line with pre-defined investment objective of the
scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter

Each category of funds is backed by an investment philosophy, which is pre-defined in the
objectives of the fund. The investor can align his own investment needs with the funds objective
and invest accordingly.

By investment objective:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes
is to provide capital appreciation over medium to long term. These schemes normally invest a



major part of their fund in equities and are willing to bear short-term decline in value for possible
future appreciation.

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

Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to
time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings
Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex
or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the
index. The percentage of each stock to the total holding will be identical to the stocks index
weight age. And hence, the returns from such schemes would be more or less equivalent to those
of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as
specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods
(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of
the respective sectors/industries. While these funds may give higher returns, they are more risky



compared to diversified funds. Investors need to keep a watch on the performance of those
sectors/industries and must exit at an appropriate time.
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 FUNDS

The above Graph shows the Risk and Returns generated by different Funds. Liquid Funds are
less Risky and also generate less Returns where as Sector Funds are more Risky but generate
more Returns by the example of above two Funds it is clear that Risk and Returns are directly
proportional to each other. Other Funds like Equity Funds, Balanced Funds and Income Funds
are also gives the same percentage of Returns as the Risk involved.



ADVANTAGES OF MUTUAL FUNDS

Professional Management: You avail of the services of experienced and skilled professionals
who are backed by a dedicated investment research team which analyses the performance and
prospects 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 of
industries and sectors. This diversification reduces the risk because seldom do all stocks decline
at the same time and in the same proportion.You achieve this diversification through a Mutual
Fund with far less money than you can do on your own.
Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you
avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with
brokers 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 a
higher 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 directly
investing in the capital markets because the benefits of scale in brokerage, custodial and other
fees translate into lower costs for investors.



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 your
units on a stock exchange at the prevailing market price or avail of the facility of repurchase
Through Mutual Funds at NAV related prices which some close-ended and interval schemes
Offer you periodically.
Choice of Schemes: Mutual Funds offer a variety of schemes to suit your varying needs over a
lifetime.
Transparency: You get regular information on the value of your investment in addition to
Disclosure on the specific investments made by your scheme, the proportion invested in each
Class of assets and the fund manager‘s investment strategy and outlook.
Flexibility: Through features such as Systematic Investment Plans (SIP), Systematic
Withdrawal Plans (SWP) and dividend reinvestment plans, you can systematically invest or
withdraw funds according to your needs and convenience.
Well Regulated: All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The operations of
Mutual 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 value
of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors
encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on
their 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, financial
consultants, or financial planners. Even if you don't use a broker or other financial adviser, you
will 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 70
percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay
taxes 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 fund's manager to
make the right decisions regarding the fund's portfolio. If the manager does not perform as well



as you had hoped, you might not make as much money on your investment as you expected. Of
course, if you invest in Index Funds, you forego management risk, because these funds do not
employ managers.
A measurement of an option position or premium in relation to the underlying instrument. In
mutual fund also there is certain amount of risk-return factor associated according to the
investment option these are as follows,
RISK RETURN

Equity High High

Balanced Medium Medium

Debt Low Low

MUTUAL FUND & CAPITAL MARKET
Indian institute of capital market (IICM) aims is to educate and develop professionals for the
securities industry in India and other developing countries, other objectives like to function on a
centre for creating investors awareness through research & turning and to provide specialized
consultancy related to the securities industry.
Capital market play vital role for the growth of Mutual fund in India, capital market divided into
the two parts one is the primary market and another is secondary market, primary market concern
with issue management, as per the mutual fund concern the primary called as the NFO New
Fund Offer, all the AMC (Assets Management Company) are issuing all the funds all the way
through the NFO, Every NFO came with particularly investment objectives, style of investment
and allocation of the funds all that thing depend on the fund manager style of investment. The
other portion of the capital market is secondary market, as we have a discussion with reference
with mutual fund secondary market means when the market bull stage the investors sole the
units. Opposite when the bear stage the investor buy or some of the investor time wait for sale.

ROLE OF SEBI
A index fund scheme‘ means a mutual fund scheme that invests in securities in the same
proportion as an index of securities;‖ A mutual fund may lend and borrow securities in



accordance with the framework relating to short selling and securities lending and borrowing
specified by the Board.‖A mutual fund may enter into short selling transactions on a recognized
stock exchange, subject to the framework relating to short selling and securities lending and
borrowing specified by the Board.‖ ―Provided that in case of an index

Fund 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 scheme
including the investment and advisory fees shall not exceed one and one half percent (1.5%) of
the weekly average net assets.‖ Every mutual fund shall buy and sell securities on the basis of
deliveries and shall in all cases of purchases, take delivery of relevant securities and in all cases
of sale, deliver the securities: Provided that a mutual fund may engage in short selling of
securities in accordance with the framework relating to short selling and securities lending and
borrowing specified by the Board: Provided further that a mutual fund may enter into derivatives
transactions 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 Indian
Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain
standards in all areas with a view to protecting and promoting the interests of mutual funds and
their unit holders.

AMFI working group on Best Practices for sales and marketing of Mutual Funds under the
Chairmanship of Shri B. G. Daga, Former Executive Director of Unit Trust of India with Shri
Vivek Reddy of Pioneer ITI, Shri Alok Vajpeyi of DSP Merrill Lynch, Shri Nikhil Khattau of
Sun F & C and Shri Chandrashekhar Sathe, Formerly of Kotak Mahindra Mutual Fund has
suggested formulation of guidelines and code of conduct for intermediaries and this work has
been ably done by a sub-group consisting of Shri B. G. Daga and Shri Vivek Reddy.

SEBI GUIDELINE OF MUTUAL FUND SEBI REGULATION ACT 1996
Establishment 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



trustee company are represented by a board of directors. Board of Directors is appoints the AMC
and custodians. The board of trustees made relevant agreement with AMC and custodian. The
launch 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 of
units, again in accordance with the particular of the scheme, the scheme may be wound up after
the particular time period.
1. The sponsor has to register the mutual fund with SEBI
2. To be eligible to be a sponsor, the body corporate should have a sound track record and a
general 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 fund

LAUNCHING OF A SCHEMES

Before its launch, a scheme has to be approved by the trustees and a copy of its offer documents
filed 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.



 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.



MAJOR ASSET MANAGEMENT COMPANY



TWO MODE OF INVESTMENT IN MUTUAL FUNDS

 SIP
 LUMP SUM

Mutual fund investments can be done in two modes - lump sum or SIP (Systematic Investment
Plan).

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 and
the mutual fund scheme in which we want to invest, we can either give post-dated cheques or
ECS 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 owner
of the fund‘s asset. The entity which does the collection and investing on behalf of all investors
Mutually is called Asset Management Company (AMC).

Systematic Investment Plan (SIP) popularly called SIP works on the principle of regular and
continues investments. It is like bank recurring deposit where you put in a small prefixed
amount every month for a fixed tenure. . This is a systematic approach to build wealth over the
years 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 even
smaller intervals) investments of Rs 500 each in place of a one-time investment of minimum Rs
5,000 or more as per the scheme terms and conditions. It is true that SIP is for those who cannot
estimate the market and those who are having low/medium risk appetite; the fact remains that
anyone can become a SIP investor. All you need to do is plan your savings and set aside a small



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 be
given to the Mutual Funds, the investor being at liberty to redeem or stop SIPs at anytime as he
wishes. There is no specific condition that he needs to continue the SIP payment for specific
period of time. The gain you are going to get from the scheme is purely depending on the market
condition 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 opportunities
Benefits 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,



It is imperative to understand the concept of rupee cost averaging and the power of
compounding, to better appreciate the working of SIPs. SIP has brought mutual funds within the
reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs
1,000 on a regular basis in place of making a heavy, one-time investment. While making small
investments through SIP may not seem attractive at initial stages, it enables investors to get into
the habit of saving. SIP is also suggested to all who cannot afford to invest a lump sum in the
mutual fund schemes. It is suggested to select a good fund with good track record showing a
constant growth of at least 10% to 15% per annum over a period of 3 to 5 years, this reveals that
the fund has been through various stages of the market and has survived all of them, hence the
chances of such a fund performing well over the coming years are better versus new fund which
was launched recently. It is not recommended to invest in Mutual Fund IPOs. And over the
years, it can really add up and give you handsome returns. A monthly SIP of Rs 5,000 at the rate
of 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 buy
depends on their prevailing scheme‘s Net Asset Values (NAV). Therefore, with the money you



invest each month, you can buy fewer units when the market moves up and more units when the
market comes down. This means you are averaging out your cost. If you invest Rs 2,000 a month
at a price of Rs 12 per unit, you will have bought 166.6667 units (2000/12). However, if the price
is Rs 15.00 per unit, you will get only 133.3333 units (2 000/15). Investing a fixed sum regularly
means averaging out the cost, as you get fewer units when the price goes up and more when the
price comes down. This scheme is basically for those who cannot watch or track the market
regularly 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, the
value of your investments falls and you may have to wait for the market to go up to make a gain
on your investment. But, if you invest via a SIP, you do not buying units when the market is at
its peak. Since you are buying small amounts continuously, your investment will average out
over a period of time. You will end up buying some units at a high cost and some units a lower
price. 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 cost
of Rs. 12,000.00.



ADVANTAGES OF SIP

Disciplined Investment

Through a sip in mutual fund, an investor pledges to invest a fixed amount of money on a
monthly basis in a mutual fund scheme for a predetermined time period. Sip investment also
provides the investor with the flexibility to increase the amount of his monthly installment at any
time.

Affordable

Investments do not necessarily mean that one has to collect a substantial chunk of money to
invest. One can start investing with a very small amount through an SIP.

Easy to Invest

When we think monthly installments, we generally think of one more date to remember apart
from the bill payment dates. That is not the case with an SIP. You have the convenience of direct
debit of your SIP installments through Electronic Clearing Service (ECS) facility. Your SIP
amount automatically gets debited from your bank account on the predetermined date.

Helps in Compounding Your Wealth

Getting rich is simpler than you think, here's a simple formula to get rich:

Start Early + Invest Regularly = Create Wealth

START EARLY

Systematic investing has a compounding effect on your investments. In the long term, an
investment as low as Rs 5000/- per month swells up into a huge corpus. This can be best
explained by the following graph. The graph shows advantages of starting early. If an investor
starts early, even with lower invested amount he can create a large corpus.



Invest Regularly - Fights Market Volatility

Every 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 investors
try to judge the market movements and endup losing their monies in the long term. A more
successful strategy is 'Rupee Cost Averaging' wherein you invest a fixed amount regularly. Thus



you purchase more when the prices are low and purchase less when the prices are high. SIP
investments take advantage of this strategy:

The above example is merely an illustration of 'Rupee Cost Averaging'. The NAVs and returns
generated 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.


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