What is meant by stock market?

A stock market is a private / public market where securities of companies and their derivatives are traded at a predefined / agreed price. Usually these securities are listed on stock exchanges. A stock market consists of few stock exchanges where the listing and trading takes place. All stock markets are regulated by some organization designated by the Govt.

How does a stock market function?

A stock market has many members who co ordinate for various activities in the process of placing orders, their execution and settlement etc. A person who desires to buy / sell shares in the stock market, can place his order through the broker either in the traditional manner or can place an online order himself through the terminal provided by the broker.

When an order is placed, the order is sent to the exchange and then the order resides in the Exchange system till all conditions of the order have been met with. When the conditions of the order are fulfilled, the order is executed and the shares purchased / sold are delivered to the buyer / obtained from seller through the broker. The whole settlement process takes place through NSCCL (National Securities Clearing Corporation limited), the official clearing agent for the stock market in India.

Who regulates the stock market?

In India, the stock markets are regulated by SEBI (Securities and Exchange Board of India). There are several stock exchanges in the country out of which the two most prominent exchanges are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). The signature index for BSE is Sensex while for NSE, it is NIFTY.

What is Rolling Settlement?

Rolling Settlement is the mechanism adapted by the Indian Stock markets for faster settlement of trades. In Rolling Settlement, trades executed during the day are settled on net obligations basis. In India, settlement of trades executed is done on T+2 basis where T stands for Trading day and +2 stands for two working days excluding the trade day. Net the effect of shares bought or sold is on the third day from trade day.

In this kind of settlement, two trading days are considered for settlement where Saturday, Sunday, Bank Holidays and trading holidays are not considered as working days for settlement. Hence, a trade done on Monday will get settled on Wednesday.

What is dematerialization?

Dematerialization is the process by which an investor can get the physical share certificates converted into electronic shares of equivalent number and value. Dematerialization takes place though a depository participant who assists an investor to get the shares dematerialized.

In this process, once the physical shares have been converted into electronic shares, they are credited to the clients demat account which is with the depository participant. An investor can get those shares dematerialized into his / her account only if those share certificates are registered on his / her name.

Why invest in shares?

Investing in shares is like investing into ownership of a company which no other investment instrument can give you. Unlike any other investment instrument which either give you fixed income or meager returns and no owned share in the same, equity investment gives you an opportunity to become a part of the company ownership and also gives you regular returns on your investment as dividend income or through price changes.

Investing in equity also allows you to enjoy the flexibility of staying invested as long as you wish to, take advantage of the price movements and thus utilize the liquidity. In an overall view, equity investment is better than any other investment.

Can I invest in any share?

By the virtue of investing in shares, you can invest into any share but since investing in equity is like owning a part of the company, you should be careful about which share are you investing your money. The profits that you earn from such investment will largely depend on the shares that you have purchased. If you have invested in a low earning share, no matter how much you invest, it is not going to fetch you the same kind of return as a high earning share.

How do I buy / sell shares?

In order to buy / sell a share, you need to first become a client of one of the stock market members who are commonly known as stock brokers. But before you sign up with a stock broker / financial services provider, you need to understand the importance and sensitivity of the relationship between the stock broker and yourself so that you are familiar with the rules and regulations abiding in the relationship.

Once you have chosen your stock broker / financial services provider, you need to open an account with the same, get quotes for the share that you wish to buy and place orders either by calling up or online.

When am I ready to buy shares?

Before you put your money into shares, you need to be aware that investing in shares is not only rewarding but also risky so you need to make sure that the surplus money available with you at hand may not be required in near future. This is so because to reap the benefits of investing in shares, you need to stay invested for a considerable time period.

Once you are clear about the above mentioned facts, you are ready to buy your first share.

How much does a share cost?

The price of a share is preset by the exchange. The demand and supply factors of the market determine the price at which a share is bought or sold. A share can cost anywhere from less than Rs. 10 to an amount even above Rs. 2000.

If you are keen on buying a share of a company, you can either refer to any of the news papers that provide such information or find it online thorough online trading platforms provided by your broker or even calling up to your broker in order to assist you in the same.

Can I put all my surplus money in shares?

The answer to this is all dependent on your age, your financial requirements and future goals. If you are young, surplus money at hand that is not likely to be required in near future, can stay invested for few years, then you can invest all that in shares.

But if you are retired / likely to retire soon / old, have no other source of income or earn meager income, surplus money at hand that is not likely to be required in near future, you should not resort to investing all that in shares, instead you can diversify your investments into bonds, fixed deposits, Govt. securities etc. and a lesser exposure in equity investment.

Always consult a professional

In order to avoid any mistakes in your investment decisions, you should always consult a professional to plan out your investments and to get qualified investment Advice. It is advisable to get a specialist s help where your money matters are concerned.

Keep yourself updated with latest market news

If you are investing in equity, it is advised that you keep yourself updated about the latest market news as there are a lot of announcements that take place from day to day such as mergers, acquisition, dividends, Annual Meetings etc. This helps you to get a clue as to what is the effect of such news on your investments and what is the expected return from your investment.

Assess the extent of risk involved

Before you put your money in some share, try to access the extent of risk and rewards involved in that investment opportunity so that it doesnt turns out to be a Losing opportunity rather than a winning one. This will keep you informed as to what can be the impact of any adverse movement on your investment.

Stock market introduction

What is meant by stock market?

A stock market is a private / public market where securities of companies and their derivatives are traded at a predefined / agreed price. Usually these securities are listed on stock exchanges. A stock market consists of few stock exchanges where the listing and trading takes place. All stock markets are regulated by some organization designated by the Govt.

How does a stock market function?

A stock market has many members who co ordinate for various activities in the process of placing orders, their execution and settlement etc. A person who desires to buy / sell shares in the stock market, can place his order through the broker either in the traditional manner or can place an online order himself through the terminal provided by the broker.

When an order is placed, the order is sent to the exchange and then the order resides in the Exchange system till all conditions of the order have been met with. When the conditions of the order are fulfilled, the order is executed and the shares purchased / sold are delivered to the buyer / obtained from seller through the broker. The whole settlement process takes place through NSCCL (National Securities Clearing Corporation limited), the official clearing agent for the stock market in India.

Who regulates the stock market?

In India, the stock markets are regulated by SEBI (Securities and Exchange Board of India). There are several stock exchanges in the country out of which the two most prominent exchanges are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). The signature index for BSE is Sensex while for NSE, it is NIFTY.

What is Rolling Settlement?

Rolling Settlement is the mechanism adapted by the Indian Stock markets for faster settlement of trades. In Rolling Settlement, trades executed during the day are settled on net obligations basis. In India, settlement of trades executed is done on T+2 basis where T stands for Trading day and +2 stands for two working days excluding the trade day. Net the effect of shares bought or sold is on the third day from trade day.

In this kind of settlement, two trading days are considered for settlement where Saturday, Sunday, Bank Holidays and trading holidays are not considered as working days for settlement. Hence, a trade done on Monday will get settled on Wednesday.

What is dematerialization?

Dematerialization is the process by which an investor can get the physical share certificates converted into electronic shares of equivalent number and value. Dematerialization takes place though a depository participant who assists an investor to get the shares dematerialized.

In this process, once the physical shares have been converted into electronic shares, they are credited to the clients demat account which is with the depository participant. An investor can get those shares dematerialized into his / her account only if those share certificates are registered on his / her name.

Basics of Equity Investment

Why invest in shares?

Investing in shares is like investing into ownership of a company which no other investment instrument can give you. Unlike any other investment instrument which either give you fixed income or meager returns and no owned share in the same, equity investment gives you an opportunity to become a part of the company ownership and also gives you regular returns on your investment as dividend income or through price changes.

Investing in equity also allows you to enjoy the flexibility of staying invested as long as you wish to, take advantage of the price movements and thus utilize the liquidity. In an overall view, equity investment is better than any other investment.

Can I invest in any share?

By the virtue of investing in shares, you can invest into any share but since investing in equity is like owning a part of the company, you should be careful about which share are you investing your money. The profits that you earn from such investment will largely depend on the shares that you have purchased. If you have invested in a low earning share, no matter much you invest, it is not going to fetch you the same kind of return as a high earning share.

How do I buy / sell shares?

In order to buy / sell a share, you need to first become a client of one of the stock market members who are commonly known as stock brokers. But before you sign up with a stock broker / financial services provider, you need to understand the importance and sensitivity of the relationship between the stock broker and yourself so that you are familiar with the rules and regulations abiding in the relationship.

Once you have chosen your stock broker / financial services provider, you need to open an account with the same, get quotes for the share that you wish to buy and place orders either by calling up or online.

When am I ready to buy shares?

Before you put your money into shares, you need to be aware that investing in shares is not only rewarding but also risky so you need to make sure that the surplus money available with you at hand may not be required in near future. This is so because to reap the benefits of investing in shares, you need to stay invested for a considerable time period.

Once you are clear about the above mentioned facts, you are ready to buy your first share.

How much does a share cost?

The price of a share is preset by the exchange. The demand and supply factors of the market determine the price at which a share is bought or sold. A share can cost anywhere from less than Rs. 10 to an amount even above Rs. 2000.

If you are keen on buying a share of a company, you can either refer to any of the news papers that provide such information or find it online thorough online trading platforms provided by your broker or even calling up to your broker in order to assist you in the same.

Can I put all my surplus money in shares?

The answer to this is all dependent on your age, your financial requirements and future goals. If you are young, surplus money at hand that is not likely to be required in near future, can stay invested for few years, then you can invest all that in shares.

But if you are retired / likely to retire soon / old, have no other source of income or earn meager income, surplus money at hand that is not likely to be required in near future, you should not resort to investing all that in shares, instead you can diversify your investments into bonds, fixed deposits, Govt. securities etc. and a lesser exposure in equity investment.

Concepts & Terms you should familiarize with

Margin trading

Margins are collected to safeguard against any adverse price movement and it is usually a percentage of the transaction value. In share trading, you can buy shares only up to the margin amount existing in your account. i.e. you cannot exceed your margin limit to place an order.

I order to take advantage of price movements, even though you do not have enough margin in your account, Margin trading has been introduced for the facility of investors. Margin Trading is a facility provided by a broker to the client where a client can place orders for a value exceeding the margin amount available in the account. In margin trading, a part of the required margin is given by the client while the rest is funded by the broker.

Different types of orders that can be placed

There are various types of orders that can be placed in equity investment; such orders have been listed below:

• Delivery order: order where shares are delivered into the clients demat account for settlement and they cannot be sold on the same day of order placement. Once can only sell such shares once their delivery has been received.
• Intra day order: order where shares are bought and sold on the same trading day and there is not delivery of shares into the clients demat account for settlement. For such orders, settlement is done on net payment basis where only monetary effects are given to the clients account.
• Market Order: An order placed at current market price of a share in order to get instant execution of the order. This order is placed when an investor expects the share price to rise sharply and is thus keen on buying it. Such orders may get executed at market price when your order is placed but there can be some difference in the price at which your order was executed as there could be a price change while you placed your order.
• After Market Order: An order that can be placed to buy or sell a share even when the market session is over. Such orders are executed when the next market session opens for trading. After Market orders can be placed within a specific time period which varies between different brokers.
• Limit Order: An order that is placed to buy or sell a share with a price limit in it so that your order gets executed at a price level favorable to you. In a Buy order; limit has to be lesser than the current price and in sell order, it has to be more than the current price.For example, you wish to place an order for a share whose current price is Rs.125 and you want to buy it at any price lower than the current price, then the limit for your order should be Rs.124 at least so that your order gets executed only after the limit has been achieved and gets executed at Rs. 124 or any lower price.But if you wish to sell the same share, you would always prefer to get the best price for it to make maximum possible profit out of it. So, in the sell order, your limit should be Rs.126 at least so that your order gets executed only after the limit has been achieved and gets executed at Rs. 126 or any higher price.
• Stop Loss Order: An order that allows you to decide the maximum loss that you are ready to bear in intra day trading. As in intra day trading, you enter and exit the position within the same trading session, Stop Loss order is placed to safe guard against potential losses that may occur once your order is executed.Suppose you place a buy order at Rs.125 and it gets executed, in order to minimize the losses if any adverse price movement takes place; you need to place a reverse stop loss order. This order will be a sell order with the same quantity of stock that you have received as a result of the buy order. Now you need to specify the price at which you think you would like to exit the position which can be Rs. 120 and also the price at which your order should enter the market which can be Rs.123. This price (Rs.123) is called trigger price. If you think that the price may fall, from the current market price, then you can put this trigger in stop loss order to make sure that it enters the market only after the trigger price has been reached.

Circuit Filters

A circuit filter is a measure introduced by SEBI to determine fixed price bands for different securities within which they can move in a day. If there is any breach beyond / below these price bands, it will result in temporary halt in trading for those securities.

Circuit filters are based on the previous close price of the security and as previous close price of the same can be different on BSE and NSE; so can be the circuit filters.

Short selling:

The concept of short selling simply means selling a share that you do not own. In short selling, an investor sells a share that he / she does not own but is expecting the price of the same to decline.

It is generally practiced in intra day trading & FNO trading where the sell position is covered by buying a stock so that the net monetary benefit gets affected in the account and no delivery of shares is required.

Auction of shares:

Auction of shares is a methodology adapted by the exchanges to make sure that the buyers get delivery of the shares due to them as a result of short delivery. Short delivery of shares generally takes place due to short selling by sellers who do not possess the required number of shares.

In this process, the exchange buys shares from the sellers broker who lends such shares to the seller and delivers it at an agreed price to the buyer. The seller in such case has to bear the monetary loss / expenses incurred in the auction.

Insider Trading:

Insider Trading is basically trading / investing in any particular security based on unpublished information which is price sensitive for that security. Usually such information comes from people who are associated with the source of such information and want to make profit from such information. Insider trading is prohibited and an offense punishable by law.

Guidelines to Equity Investment for beginners

Understand the rules and regulations of equity investment

Before you invest in equity, read through different information sources such as broker websites, articles available online regarding equity investment, newspapers, magazines etc. to get as much information about equity investment rules and regulations as possible.

This will equip you with information and you will be in a better position to take wiser decisions; also it will help you to avoid any mistakes that may take place due to lack of information on rules and regulations to be fulfilled.

Know about the different ways you can invest in Equity

As you start your investment in equity, you should also be updated with the latest news on the different ways you can invest, keep in touch with your investments, place your orders and get updates so that you do not miss out on an investment opportunity while you are on the move. For example, you can get quotes, place your orders, get market & your investment updates through Online, Email, Phone Call, Mobile Trading and SMS.

DOs and DONTs

Always consult a professional

In order to avoid any mistakes in your investment decisions, you should always consult a professional to plan out your investments and to get qualified investment Advice. It is advisable to get a specialists help where you money matters are concerned.

Keep yourself updated with latest market news

If you are investing in equity, it is advised that you keep yourself updated about the latest market news as there are a lot of announcements that take place from day to day such as mergers, acquisition, dividends, Annual Meetings etc. This helps you to get a clue as to what is the effect of such news on your investments and what is the expected return from your investment.

Assess the extent of risk involved

Before you put your money in some share, try to access the extent of risk and rewards involved in that investment opportunity so that it does not turns out to be a Losing opportunity rather than a winning one. This will keep you informed as to what can be the impact of any adverse movement on your investment.

Do not put blind faith in a stock tip from unofficial sources

It is important to do some homework on the investment that you are planning to make. Do n0t just believe everything that is said about any stock tip from your friends or near n dear ones. If your come across any such tips, you should first verify it for its authenticity and then take your investment decision.

Do not put all your money in one sector or stock

In equity investment, there are shares available for companies that cover almost every sector of the commercial sphere and thus provide you the opportunity to invest into a wide variety of sectors. Every sector or stock is affected by some or the other factors of the economy and as a result of it, affect your investment in these stocks / sector.

If you put all your money in one sector or stock, any bad news or adverse movement in the same can result in dragging your portfolio into losses all over; but if you diversify your investment in different sectors or stocks (belonging to different sectors), you can save your portfolio from going into deep losses.

Do not invest all that you have saved so far

Equity investment is equally risky and rewarding also. If it gives you the opportunity to earn profits from it, it also makes you suffer loses if not invested wisely. Hence, do not invest all that you have saved so far; keep some of your savings for liquidity requirements.

For Experts

Equity Investment in depth

What is the difference between Growth and Value stocks?

Growth stocks are basically stocks that have been there for a good number of years in their business, have performed well earlier and have excellent potential for growth of their business and earning in future.

Companies that have focus on what they are into and have some big plans for the future, have good management and are growing faster than other stocks from the same industry are termed as Growth stocks.

These companies usually do not pay much of dividend; they rather believe in reinvesting the same in business to generate more revenue. These stocks are meant to hold for long period of time to reap the benefits of long term investing.

Value Stocks are stocks which are not sought after by most of the investors but they may have good earning potential which are yet hidden in current scenario. These stocks may have had a bad fall in the price, or may belong to an industry that does not has a good performance record but it still has its fundamentals strong and has potential to improve. Once the volumes in such stocks start to pick up, their price rise is eminent and thus proves to be value picks.

How to identify a good investment pick?

When you think of buying a stock, you must have some clarity as to why you are buying it, what advantages does the stock carry over others etc. Before you decide to buy a stock, do you own study on the stock as an investment opportunity, whether it is a growth or value stock, how is the company performing as compared to its peer group in the same industry and performance against the whole industry.

If the company is performing at par with others in the same industry, try to find out about its management and whether they have some credentials to their benefit which are added advantage over the rest. Then gather information as to the kind of stock it is – growth or value. Try to compare the performance of corresponding industry and the company to check if the companys performance is in line with that of the industry. If these criterias are met according to your expectation, it can prove to be a good investment pick.

How to minimize the risk involved in Equity investment? (Diversify)

Though there is no sure shot solution to the risk involved in Equity investment but there are a few ways which can help you minimize it.

Diversify: One of the smartest ways to minimize the risk involved in Equity investment is to diversify your investment portfolio. Ever since you start your investment, you can invest in stocks from different industry and business operation cycles instead of concentrating on one single category / industry.

Hedging: You can also hedge your portfolio holdings against potential adversities by investing in Futures and Options (FNO) of the stocks in holding. By hedging your holdings in FNO, you can earn profits in FNO trading while the valuation of your holdings is going for a dip. This way, you nullify the negative impact of adversities on your portfolio.

Stay updated: At times being up to date with latest information about companies can come to your benefit as you can enter or exit into a stock position according to the potential impact of the news on your holdings or the earning potential of the stock.

Investment Follow up

How to track the performance of your investment?

You can track the performance of your investments by either using the information available in news papers, online information, calling up your broker and if you are tech savvy you can do it through the portfolio tools provided by brokers to their clients which help you to track if your portfolio is in profit or loss and what could be the potential profit or loss as compared to the market sessions.

Portfolio review

You should not stick to the stocks you have invested in earlier times. As time passes by, there are a lot of factors that affect the performance of your stocks and thus can affect your portfolio valuation. If you wish to keep you portfolio in profits and free from non performing holdings, you need to review your portfolio on regular intervals to keep it updated with what is in & out of the market and to get good returns from your investments.

Some tips to Equity investing

Common mistakes an investor should avoid.

Panic Selling: In your investment tenure, an investor will come through a phase where the stock prices will go down for a while; this may cause panic and the split second decision people generally take is to sell out your holdings. You should not panic in trouble times and do as this could be detrimental to your portfolio valuation where you could be waiting for long to buy the stock again at lower prices when you discover that you are selling out was baseless or just out of fears spreading from rumors. The key to successful investing is to stay invested and buy value stocks at their dips.

Never Selling: There are times when your stocks are performing well and have the potential of giving you high returns but you still want to hold on to them in good belief that there are better days to come and earn you can earn more than this opportunity. Make your decision to sell your stock based on the fact of how good is the scope for more price hike. Also, you need to consider that this might be your chance to make profits rather than just holding on to the stock.

Investing in Cheap Stocks: We often come across situations where there is lot of volatility in a cheap stock and giving many people opportunity to make profits out of the rapid price movements. Before investing in such stocks, you need to consider the fundamental reason supporting such price movement. Investing in cheap stocks can be risky because there can be situations where you can be the last person to enter in that stock buying spree but you are stuck with that stock later as they have started to tumble down and are usually not potentially strong stocks.

Kind of stocks one should pick to invest.

There are certain criterias that act as a base for any stock investment decision such as the targeted time frame for staying invested, kind of stocks one wishes to buy, intention behind buying a stock etc. Ideally if you are looking to invest for long term, you should go for stocks that are fundamentally strong, have good performance record, good management and potentially strong plans for future earnings. But if you are looking to invest in stocks just to make money in short term, you can buy buzzing stocks that are performing good, have good market recognition and have their technicals in place and are considered as good stock pick by most of the investors. Entry and exit timing

Whenever you take a decision of investing in to a stock, try to analyze the life cycle of the stocks performance and judge it against your entry timing into buying the stock. If a stock is at its lifetime high and still performing, you should probably not invest in the same at this time as it has already reached the peak of its performance life cycle after which there are few chances that it will continues to perform good in near future.

If you have invested in stock that as achieved its life time highs and has started to show the sign of coming down from the peak, you should probably exit from the position in such stock as it may keep coming down to unfavorable levels for your portfolio. Hence, it is very important that you analyze the time of entry and exit into any stock investment.

Myths about Equity Investment

Equity Investment is a short term investment plan

It is a wide spread myth that equity investment is a short term investment plan. Though it can be true when markets are at all time high levels, it is still held good that equity investment is not a short term investment plan, it requires time and the patience to stay invested and one cannot reap true benefits of equity investment in short term.

There is sure shot possibility of making losses in Equity Investment.

As always maintained, equity investment is as risky as it is rewarding for its investors. You do not make profits or losses in equity investment all the time. As everything else in life, it has its good and bad times which affect your investments but it is not true that equity investment is a sure shot way to make losses. If you have invested wisely and with caution, you are less likely make any losses than somebody who has invested in an ad hoc manner. Equity is not a good option for investment

Because of the ever changing behavior of the stock markets, most people consider equity investment as an unsafe option as compared to other investments which give you fixed income returns and carry less risk. However, if observed closely equity investments give you the best returns in good times & these are generally higher than what other fixed income investments can give you. Hence, you can see that equity is a good option for investment if you want more returns on your investments than just a fixed amount of return.

DOs and DONTs

Study the market direction

If you have been investing regularly and following the market closely, you would have observed that there are times when you can predict the market direction in near future. If you have slightest of clue as to which direction is the market headed; you can enter or exit the market accordingly and take better decisions about your investment in equity.

Evaluate an investment opportunity before you actually invest

Before you invest your money in any stock, evaluate it as an investment opportunity with its risk and reward potentials. Analyze the impact such investment on your portfolio valuation, how long you may have to hold it and how good do your find it for investment.

Do not ignore the caution signals

In equity investment, there are times when you get skeptical about the market movement in near future and these are indicated throughout the trading sessions. These are called caution signals that are to be observed and adhered to when you come across them. If you have noticed anything adverse about the market behavior, gather information about the same through the sources available and take necessary steps to shield you portfolio against the adversities.

Do not get married to stocks in your portfolio

In order to take advantage of the price movements, you need to track the valuation of your investments and take necessary action to earn profits out of it. Investing in equity is all about striking at the right opportunity. If you get attached to the stocks in your portfolio and do not sell them off at the right time, you are just going to keep them in your portfolio for ever and make no profits out of it.

Buying extremely volatile stocks

If you want to make quick money out of equity investment, you may follow the stock tips that you get to hear from different sources and make money; but at the same time, it is essential that you also consider the risk involved in such investments as there can be a possibility of you making more losses than you actually thought which might not be favorable to your risk taking profile. Investing in extremely volatile stocks is short lived and you may end up regretting over the investment idea if you are not prepared to for it

Introduction to Mutual Fund investment

What is a Mutual Fund?

A Mutual Fund is a professionally managed collective investment that pools money from many investors and invests the same in stocks, bonds, short-term money market instruments and other securities.

The mutual fund itself is a trust registered under the Indian Trust Act, and is initiated by a sponsor. The sponsor then appoints an asset management company (AMC) to manage the investment, marketing, accounting and other functions pertaining to the fund.

Every mutual fund has a fund manager who invests the money collected through subscription from different investors on behalf of the investors by buying / selling stocks, bonds etc. Various funds and schemes with different objectives can be introduced under the umbrella of a single Trust name.

What is an AMC?

The word AMC stands for Asset Management Company. An AMC is a company that runs and manages mutual funds. It is a company appointed by the trustees to manage the investors money for which the AMC charges a fee but the same is borne by the investors as it is deducted from the money collected from them.

Every AMC has to be approved by SEBI in order to manage a mutual fund. It is the AMC, which introduces new schemes and manages their operations in the name of the Trust. An AMC follows the rules and regulations laid down by SEBI and the terms of the agreement between Trustees and AMC. An AMC is responsible for preparing the Offer Document or schemes / funds floated under the Trusts name. The AMC also has the authority to appoint intermediaries for distribution of the funds / schemes floated by it.

Who regulates the AMCs?

All Mutual Funds in India are governed by SEBI under the 1996 Mutual Fund Regulation.

How do mutual funds operate?

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI), which is the market regulator and also the regulator for mutual funds.

On the checks performed by SEBI for integrity, experience in the financial sector and net worth, the sponsor can create a Public Trust as per the Indian Trusts Act, 1882. (Second Tier).

Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are entered into in the name of the Trustees.

Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. The Sponsor and the Trust are two different identities. It is the Trust which is the Mutual Fund.

The trust then appoints an Asset Management Company (AMC) that manages the investment of funds collected from different individual investors. (Third Tier)

Why invest in Mutual Fund?

Direct investment in shares requires investment of money and time in order to find out good, performing stocks, understanding their current financial strengths and future earning potential etc. One needs to do a lot of research before you invest which is quite cumbersome and time consuming for a lot of investors.

Investing in Mutual Fund is a lot easier for many investors as the responsibility to invest in stocks and other instruments is taken over by the AMC which takes a decision to invest after due diligence, research and analysis. One can leave the decision to utilize the funds on professional fund managers of the fund.

Mutual Fund investment also offers diversification of portfolio holdings. An investors money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investors portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio.

Also it is more economic to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 1000 or so). With Rs. 1000 an investor may be able to buy only a few stocks but not the desired diversification.

What are the advantages of investing in Mutual Fund over Equity?

Mutual Funds give investors best of both the worlds. Investors money is managed by professional fund managers and the money is invested in a diversified portfolio.

• Small investors cannot buy a diversified portfolio by investing in small amounts in direct equity investment but if they invest in a mutual fund, they can own such a portfolio.
• Mutual Funds help to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments.
• Time is a big constraint and all investors may not have the expertise to read and analyze balance sheets, annual reports, research reports etc. A mutual fund does this for investors as fund managers, assisted by research analysts have the resources to do such a detailed research and invest according to their research results.
• Investors can enter / exit schemes anytime they want (in open ended schemes). They can invest through SIP, where every month, a stipulated amount automatically goes out of their savings account into a scheme of their choice. Such hassle free arrangement is not available in case of direct investing in shares.
• As more and more AMCs keep coming in the market, investors will continue to get newer products and as a result of competition, costs will be kept at minimum levels. Initially when mutual fund investment was a novice, mutual funds could invest only in debt and equities.
• Then they were allowed to invest in derivative instruments also. As an ever evolving phenomenon, AMCs kept introducing various investments in different, non conventional instruments such as Gold ETFs, investing in international securities and real estate mutual funds.It is better for the investors to have a wide array of investment opportunity with minimum investment on regular basis.
• Mutual funds are for all kinds of investors. Investors can either invest with the objective of getting capital appreciation or regular dividends. Young investors who have regular monthly income would prefer to invest for the long term to meet various goals and thus opt for capital appreciation (growth or dividend reinvestment options), whereas retired individuals, who have a long saved kitty with them and need a monthly income, would like to invest with the objective of getting a regular income.
• Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type.
• All the Mutual Funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.

How much is required to invest in mutual fund?

There is no fixed amount of money that one should invest in Mutual Funds either through SIP or Lump Sum investment options. However there is a minimum requirement of Rs. 1000 to be invested for Mutual Fund investment through SIP. It makes more sense to invest in pretty good amount if you are opting for lump sum investment.

What are the different types of Mutual Funds available for investment?

There are various types of funds available for investment in Mutual Funds. They can be broadly classified according to their Investment Objectives, scheme structure and special schemes. A few of them have been listed below:

Investment Objectives

• Growth Funds : These funds have capital appreciation as their primary goals and dividend pay outs as secondary goal. They invest in well established companies where the company and the industry in which it operates are perceived to have good long-term growth potential.These funds generally incur higher risks than income funds in an effort to secure more pronounced growth. These funds can be concentrated on one sector or industry or a group of industries and sectors. These funds are suitable for investors who can take some risk on the valuation of their investments to get rapid gains but not for investors who must save their principal and need to earn maximum current income rather than awaiting for earning income in future.
• Growth and Income Funds : Growth and income funds seek long-term growth of capital as well as current income. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks.Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.
• Fixed-Income Funds : Fixed income funds primary goal is to provide consistent current income with preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities. Some fixed-income funds seek to minimize risk by investing exclusively in securities backed by Govt. of India. These funds are suitable for investors who want to maximize current income and can take capital risk. Balanced funds aim to provide best of both growth and income. These funds invest in both shares and fixed income securities in a proportion mentioned in their offer documents.Such funds are ideal for investors who are looking for a combination of income and moderate growth.Balanced Funds
• Money Market Funds/Liquid Funds :-These funds provide high stability of principal while ensuring a moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt securities of Govt. of India, banks and corporations and Treasury Bills.Such funds are able to keep their unit price constant while the yield keeps fluctuating.These funds invest only in highly liquid, short-term, top-rated money market instruments and are suitable for investors who want high stability of principal and current income with immediate liquidity.
• Specialty/Sector Funds : These funds invest in securities of a specific industry or sector of the economy such as health care, technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among many companies within an industry / sector. They follow a conservative approach than investing directly in one particular company. These funds offer the opportunity for quick capital gains when industry is "in favor" but also carry the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly diversified portfolio. Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or other broad stock market indices. They are not suitable for investors who must conserve their principal or maximize current income.
• Gilt Fund : These funds invest in securities created and issued by the central and/or the state government securities and/or other instruments permitted by the Reserve Bank of India.They generate returns which commensurate with zero credit risk. Since they ensure zero risk, they offer instant liquidity, tax-free income while their return is lower than income funds.
• Index Fund : Their goal is to match the performance of the markets by investing in stocks that constitute the benchmark indices. They work on passive fund management as they do not involve stock picking by the professional fund managers.

These funds just invest into the stock market in a way that is pre determined by benchmark indices and involves no further trading. Index funds are optimally diversified portfolios.

Scheme Structure

Open-ended schemes : Open-ended schemes do not have a fixed maturity period nor do they have fixed time period till you can stay invested.Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. There is no upper limit on the amount you can buy from the fund while the unit capital can keep growing.Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Any time entry option in an open-ended fund allows one to enter the fund at any time and even to invest at regular intervals.

Close ended schemes : Close-ended schemes have fixed maturity periods. Investors can buy units of these funds at the time of NFO. After NFO offerings, such schemes Cannot issue new units except in case of bonus or rights issue. Usually there is a high exit load if one wants to sell the units of a close ended scheme before the maturity time.

Special Schemes

Tax Plan schemes : These schemes are meant to provide tax relief. Also known as, they operate like any other growth fund which has the relative risk of growth fund with it. However, an investor in these schemes gets an income-tax rebate up to Rs 100,000 under section 80C & has a mandatory lock in period of 3 years.

Equity Linked Saving Schemes (ELSS)

Concepts & Terms you should familiarize with/

What is NFO? How do you invest in NFO?

When an AMC launches a new scheme, it is known as a New Fund Offer (NFO). An NFO is like an invitation to investors to put their money into the mutual fund scheme by subscribing to its units.

When a scheme is launched, the distributors get in touch with potential investors and collect money from them either through cheques or demand drafts. The investor has to fill a form, which is available with the distributor. The investor must read the Offer Document (OD) before investing in a mutual fund scheme. An investor should also read the Key Information Memorandum (KIM), which is available with the application form. Investors have the right to ask for the KIM/ OD from the distributor.

What is meant by NAV? How is it calculated?

NAV stands for Net Asset Value of a single unit of Mutual Fund. NAV on a particular date reflects the realizable value of a mutual fund portfolio in per share or per unit terms. It is worth of an open ended mutual fund investment and also the amount an investor can expect if he/ she sells the units back to the AMC.

NAV is calculated by the formula = (Total Investment Value - Liabilities)/ Total no. of outstanding units

Use of NAV

• NAV tells you the extent to which, the securities that comprise the funds portfolio have outperformed or underperformed the index.
• The use of certain statistical measures can also tell you whether a fund was able to derive above-average risk-adjusted returns.

What is meant by SIP? How is it different from regular Mutual Fund Investment?

The term SIP stands for Systematic Investment Plan. This plan is different from regular mutual fund investment which used to be in lump sum amounts. SIP allows you to invest in mutual funds in small amounts and on regular basis. You can choose to invest as low as Rs.1000 every month and stay invested in Mutual Funds.

SIP is different from regular Mutual Fund investment based on the following:

• In regular mutual fund investment, you need lump sum money to start investing while in SIP you can invest in small amount such as Rs.1000.
• Once you have invested in lump sum, you only track the performance of your mutual fund while in SIP, you can take your decision whether to continue investing in future in the same scheme and monitoring the fund performance at the same time.

One cannot take advantage of price dips in Lump Sum investment while in SIP, you can take advantage of the same by accumulating more number of units while there is a price dip.

SIP brings disciplined investment into practice while there may not be any discipline followed in lump sum investing.

What is systematic withdrawal plan (swp)?

SWP stands for Systematic Withdrawal Plan. Here the investor invests a lump sum amount and withdraws some money regularly over a period of time which is pre defined by the investor.

Such type of withdrawal results in a steady income for the investor while at the same time his principal also gets drawn down gradually.

Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20 = Rs. 1,00,000 per annum. This will turn into Rs. 8,333 per month. (The investor will also get return on his investment of Rs. 20 lakh, depending on where the money has been invested by the mutual fund). With the effect of compounding being considered, he will be able to either draw some more money every month, or he can get the same amount of Rs. 8,333 per month for a longer period of time.

What is meant by Entry and Exit Load?

Loads are basically charges levied on your mutual fund investments which are basically recovery of sales, distribution & processing charges related to your investments.

An Entry load is a charge levied at the time of making investments so as to cover the expenses for sales, distribution and processing costs. It is the expense an investor has to bear while entering into mutual fund investment. However, not all funds have entry load and the same expense every mutual fund is different. A major portion of the Entry Load is used for paying commissions to the distributor. Entry loads increase the cost of buying an investment opportunity.

An Exit Load is a charge levied at the time of exiting mutual fund investment. Not all schemes have an Exit Load nor are the exit loads same for all schemes. Exit Loads depend upon the time period for which an investor stayed invested.

Generally, if the investor exits early, he will have to bear more Exit Load and if he remains invested for a longer period of time, his Exit Load will reduce. Thus the longer the investor remains invested, lesser is the Exit Load. After some time the Exit Load reduces to nil; i.e. if the investor exits after a specified time period.

What is meant by Switch option in Mutual Fund Investment?

Switch is a facility allowed by some mutual funds to their investors where the investors can switch between two schemes of the same fund. This facility is an added liquidity advantage for investors who wish to opt out of one scheme and invest in another without withdrawing the invested amount.

Switching allows the Investor to alter the allocation of their investment among schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime. The fund may levy a switching fee for allowing the investor to switch between two schemes and making arrangements for the same.

Investing in Mutual Fund

How do I select a Mutual Fund for my investment?

You can select a mutual fund for investment based on the following criterions:

• Past performance : Though past performance is not an indicator of the future, it does indicate to the investment philosophies of the fund, how it has performed in the past and the kind of returns it has offered to the investor over a period of time.Also check the performance in the recent past years for consistency. How did these funds perform in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.
• Know your fund manager : The success of a fund to a great extent depends on the fund manager. A single fund manager can manage several funds and it follows that the funds managed by successful fund managers are successful as well.
• Find out before investing, whether the fund manager or the investment strategy of the fund have changed recently as it may happen that the portfolio manager who generated the funds successful performance may no longer be managing the fund due to which investing in that fund may not prove to be a rewarding opportunity.
• your risk profile?Does it suit : Before investing, you need to make sure that the fund you are investing into should match your risk taking capacity. If you have some risk taking capacity, you may go for a sector-specific scheme that comes with high-risk high-return.If you are totally risk averse and do n0t want to suffer losses, you may opt for pure debt schemes with little or no risk.You need to do your own study before you invest into any fund.
• Reading a funds prospectus is a must in order to learn about its investment strategy and the risk involved in such investment. Most of your questions about the fund can be answered through the prospectus itself.Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk.Matching the strategies and investment goals of the fund with your long-term investment strategies and tolerance for risk can help you decide what type of fund is bestRead the prospectus
• Analyze your financial plan In order to find the right mutual fund to invest, you need to determine whether you completely believe in equity or are you more worried about safety of your capital. How long do you intend to stay invested?

Can I withdraw my Mutual Fund investment any time?

You can withdraw your investment in mutual fund any time you want to. There is no such lock in period for mutual fund investments except for few schemes which are related to tax rebates. For all other schemes, you can exit from your investment any time. While investing & exiting in mutual fund investments, always remember that you may be charged high exit load on your investments if you exit soon after your entry into the fund which may reduce the return on your investment.

Hence, analyze the potential returns and reduction in return that you may have to face if you are exiting early from your mutual fund investment.

How do I know about current status of my Mutual Fund Investment?

You can keep track of your investments in mutual fund by either checking the NAV regularly through news papers, online websites. Also, you should get physical statements of your investments on quarterly basis and you can opt to receive digital statements of your investments and their current valuation.

Do I get any statement with details of my investment? What is the frequency of such statement?

Yes you are provided with regular updates of your investment on quarterly basis and if you opt for receiving such statements through email, you can get updates on your investment on monthly basis.

What are the different modes used to dispatch investment statements?

Currently there are two modes (physical and digital) used to dispatch investment statements.

How do I inform the AMC about any change in my contact details?

If there is any change in your contact details, you can contact your AMC through email, write a letter or call up your AMC to communicate the same. Once you have communicated the same, you will get a confirmation from the AMC for registration changes in your contact details.

Taxation & Charges

Are there any taxes levied on Mutual Fund Investment?

There are no taxes levied on Mutual Fund Investments while there are some tax rebates applicable on the same. But there taxes to be paid on mutual fund investment returns according to certain criteria.

Is there any tax relief allowed on Mutual Fund Investment?

Only investment made in Tax Plan Schemes (ELSS) qualifies under section 80 © for tax rebate up to Rs 100,000. Are there any taxes levied on Mutual Fund Investment returns?

Income earned by any mutual fund registered with SEBI is exempt from tax. Dividends to unit holders from a close ended fund or a debt fund pays a dividend distribution tax as per the government stipulation. Please note open ended equity oriented schemes (More than 50% in equity) are exempted from dividend distribution tax.

Dividend Taxation

Yes there are taxes levied on Dividend Income from Mutual Fund investment as well as sales proceeds of mutual fund investment which may not be payable directly by the investor.

Dividend income at the investors end is not taxable for any of the schemes but for dividend distribution of schemes other than Equity schemes, there is a distribution tax on dividend @12.81% payable by the distributor.

Capital Gains taxation

The gain earned from price difference at the time of purchase and selling any kind of investment is called capital gains. If an investor sells his units and earns capital gains on the same, he is liable to pay capital gains tax.

Capital gains are of two types:

Short Term Capital Gains:

If an investor holds the units for a period less than or equal to 12 months from the date of purchase, then the gains earned from selling the units are called shot term capital gains. The taxation for the same is as per the latest changes in taxation rates. The gains will be added to the total income of the investor and then taxed on the applicable rates.

Long Term Capital Gains:

If an investor holds the units for a period more than 12 months from the date of purchase, then the gains earned from selling the units are called long term capital gains. There are two ways in which taxes can be charged on long term capital gains – either with indexation or without indexation.

Guidelines to Mutual Fund Investment

Understand the rules and regulations of Mutual Fund investment

It is of utmost importance that you are aware and clear about the rules and regulations governing the investment instrument that you aim to invest in. It is better to be aware of the facts related to your investment than be in awe with the situations facing your investment decision.

Be aware of the rights and obligations of investing in Mutual Fund.

When investing in mutual funds, do not find yourself in a situation where you seem to be lost with no one to help / direct you. The following can be helpful to you in ascertaining what you can do when you find yourself in discomfort:

Rights

• Investors have a right to receive the dividend within 30 days of declaration.
• On redemption request by investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations.
• Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end.
• Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of schemes assets pass a resolution to that respect.
• Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue.
• Lastly, investors can approach the investor relations officer for grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. The investor can also sue the trustees.

Obligations

• In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds.
• The offer document is a legal document and it is the investors obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision.
• It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund managers experience, historical performance of other schemes of the fund and a lot of other vital information.

For Experts

Mutual Fund investment in depth

Which investment option (SIP / Lump sum) is better for Mutual Fund Investment?

None of the options is bad to invest in mutual funds. It is only a matter of your current financial position, future financial goals, your age and which option suits you better. If you have lump sum money to invest in one go an do not prefer to invest in small amount through month on month basis; you can opt for Lump sum investment option. Lump sum investment will fetch you good returns when it comes to dividends or withdrawing your investments in profit.

If you do not have lump sum money to invest and would rather prefer to invest through month on month basis; you can opt for SIP which allows you to invest even in small amounts such as Rs.1000 a month. By opting for SIP, you can follow disciplined investing and can enjoy the benefits of compounding of your investments. Unlike lump sum investment, you can take advantage of market dips where you can accumulate more units which is not available in lump sum investment.

Which investment plan (Growth / Dividend pay out / Dividend reinvestment) is better for Mutual Fund Investment?

Many a times investors feel that the dividend reinvestment option is better than growth as they get more number of units. Let us understand the three options :

Growth Plan

Growth plan is for those investors who are looking for capital appreciation and do not need to earn regular income from their investments.

Such as an investor aged 25 invests Rs 10 lakh in an equity scheme at an NAV of Rs.100. He would not be requiring a regular income from his investment as his salary can be used for meeting his monthly expenses.

He would want his money to grow in future rather than getting regular income out of it and opting for Growth plan will help in achieving the same if he remains invested for a long period of time. For the whole time period he stayed invested, his total no. of units will remain the same but the valuation of his investment will keep reflecting the performance of the fund he has invested in.

Dividend Payout Plan

In the above example, if he chooses Dividend Payout plan and his investments earn a dividend of Rs. 10 on every unit held after 1 year; he would receive Rs. 100000 as dividend. He may have got current income from his investment but this would deny him the benefit of compounding of this dividend amount into his portfolio as the NAV of his holdings will fall by Rs.10.

Hence, dividend payout will take away that Rs.100000 out of the scheme and thus will not continue to grow like it would have if the same had been kept invested.

Dividend Reinvestment Plan

In the above example, if he chooses Dividend Reinvestment plan, the dividend of Rs.100000 due to him is invested back in the scheme thus he gets Rs.100000/100(NAV after dividend)= 1000 units extra in his holding units. Though he as got extra units, the NAV of the scheme has gone down by Rs.10 to Rs.100 again which was his original buying price.

As you can see, the return in case of all the three plans would be same and there is no difference in either Growth or Dividend Reinvestment Plan.

It must be noted that for equity schemes there is no Dividend Distribution Tax, however for debt schemes, investor will not get Rs. 10 as dividend, but slightly less due to Dividend Distribution Tax.

In case of Dividend Payout option the investor will lose out on the power of compounding from the second year onwards.

What are the factors that affect the returns on my Mutual Fund investment?

The performances of Mutual funds are influenced by the performance of the stock market as well as the economy as a whole.

Equity Funds are influenced to a large extent by the stock market. The stock market in turn is influenced by the performance of the companies as well as the economy as a whole.

The performance of the sector funds depends to a large extent on the companies within that sector.

Bond-funds are influenced by interest rates and credit quality. As interest rates rise, bond prices fall, and vice versa. Similarly, bond funds with higher credit ratings are less influenced by changes in the economy.

What if I am unsatisfied by the performance of Mutual Fund investment?

If you are not satisfied by the performance of your mutual fund investment, you can consult a professional to suggest you whether you should stay invested or exit from the scheme. Accordingly you can either:

• Withdraw your investments from the scheme completely
• Switch your investments from one scheme to another under the same fund which is performing better than the scheme you are currently invested in.
• Switch to another plan (from dividend to growth or vice versa) as applicable to your risk and investment profile.

What if I stop my SIP payment?

You can stop your SIP payment when you wish to but in ELSS scheme ie tax saving schemes, you are not entitled to withdraw your funds as it has a lock in period of 3 years.

If a mutual fund scheme is winded up, what happens to my investment in the same?

In case of a mutual fund scheme being winded up, the mutual fund would pay the sum due to an investor according to the prevailing NAV and after adjusting other expenses from the same. The mutual fund would also issue a winding up report to all investors with necessary details about the winding up.

Some tips to Mutual Fund Investment

Learn about the kind of investment portfolio Mutual Fund holds

You can learn about the kind of investment portfolio your mutual fund holds by referring to information available on the web which can give you a clue as to which are sectors that your fund is banking on for good performance and good returns to investors. This will also help you to analyze whether to stay invested in the same scheme or not; if it does not follows matches your risk profile and investment goals.

Check the NAV of your investment regularly

Checking the NAV of the fund you have invested in on regular basis will help you to analyze as to how is the fund performing in current scenario and then you can also compare it with other funds in order to check if it is performing at par with other funds of the same category.

Number of schemes you should invest in

There is no restriction on investing in no. of schemes. But from the point of view of manageability, ideally it should be not more than 8 to 10. Please note the manageability factor entirely depends on investor.

Myths about Mutual Fund investment Mutual Fund is not safe for investment

Just like any other financial instrument, mutual funds are not without risk. When defined in terms of chances of losing money, the risk in mutual funds is no different than any other financial instrument. But they are relatively safer and a more convenient way on investing. In mutual funds, you can control risk by choosing a fund that suits your risk profile. On the other hand, picking stocks individually that will both meet your objectives and match your profile can be tough. A mutual fund portfolio is easier to monitor than equity shares. They also come with less systemic risks. They offer quick liquidity. Most private mutual funds can be redeemed in three to four working days. This cuts the overall risk associated with investing in mutual fund. But the market risk or the risk that exists due to economy-wide factors remains. As there are many factors that affect the performance of a mutual fund and due to the very diversified nature of mutual fund investments, they provide a cushion to your portfolio which makes it more safer than direct equity investment.

It requires good sum of money to invest in Mutual Fund

As we have are now aware of the different ways one can invest in mutual funds, we also know that one can start to invest in mutual funds by just investing a small amount as Rs.1000 per month and stay invested on regular basis. Once can either invest through lump sum investment or go through SIP to invest in small amounts and get the benefits of investing as well. Hence, it is wrong to say that it requires good sum of money to invest in Mutual Fund. Fund Managers play with your money

It is completely untrue to say that Fund Managers play with your money. Fund managers are hired to take investment decisions on behalf of the clients and to maximize the returns on such investments. Their responsibility to act in the best interest of investors as per the investment objective of the fund mentioned in offer document. They are well qualified, experienced and trained in what they do. It is very unlikely that they will take any action detrimental to investors interest.

There is no Entry and Exit timing for Mutual Fund investment

Like every investment, mutual fund investments also have an appropriate entry and exit timings. Every mutual fund scheme has its own peak performance (best time) and bad time. I f you enter into a scheme when it is at its peak, you may not get he rewards of investing in the same as after the peak time, it will show sign of slow down which is not rewarding.

If you invest into a fund when it is on the falling end, it would make no sense to invest in it or stay invested. You would rather consider exiting the scheme at such a point. Hence, there is certain time to enter or exit the mutual fund schemes also.

DOs and DONTs

Be systematic in your investment

Every kind of investment requires a discipline that needs to be followed if one wants to reap the benefits of investing. If you are consistent, systematic and regular in your investment, you can enjoy the benefits of compounding and cashing on the investment opportunity in every market dip.

Read the offer document carefully

The offer document of every mutual fund holds the key information to its investment approach, investment objective, fund managers etc. It is therefore always advisable to read through the offer document carefully in order to be thorough with the terms and conditions governing such investment. Many investors often skip the minute details mentioned in the offer document.

Always try to understand your investment statements sent to you

If you wish to be up to date with the changes taking place in your portfolio, know whether it is in profit, what does your portfolio consists and what is expected out of the current status of your portfolio; it is necessary that you read through the investment statements sent to you and try to understand the same. Stay invested in a scheme to reap the benefits of long term investment

Investing is a matter of patience and wise investing decision. Every investment has its time period for maturity after which it will start giving you the fruits of your wise investment and staying invested. If you can hold on to your investments for a considerable time period, you will be able to reap the benefits of staying invested once you have crossed an appropriate time horizon. It is best advisable to remain invested in a scheme that matches your criterion and has growth & earnings potential.

Analyze the balance of risk and rewards involved.

Before you begin to invest in a scheme, you should understand other elements of mutual fund investing and analyze as to how they can affect the potential value of your investments over the years. The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment. There is potential of incurring loss in every investment and so is applicable to mutual fund investments also.

Risk refers to the volatility in the markets that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. It is this very volatility that is the exact reason that you can expect to earn a higher long-term return from these investments than from a savings account.

Every investment carries some risk with it and some rewards that can be enjoyed by investing in the same. The risk and reward ratio of investments may or may not suit some investors risk profile and hence, it is important for all investors to analyze the balance of risk and rewards involved in to any investment and whether it suits their risk profile. This can be done by consulting a professional.

Buy a good investment option in lower NAVs

It is often true that some people can still benefit from market dips & that could be yourself. Investing in mutual funds allows you to take advantage of market dips also through SIP option where you can at least accumulate more no. of units at lower NAVs and benefit from such investment in good times.

Do not just invest into any Mutual Fund

Always do your own analysis and have a strong reason to back your investment decision. Do not invest into just any of the mutual funds available in the market, analyze the investment opportunity and match it with your investment goals to arrive at a conclusion that is financially sound for you.

Do not get be fooled by the promotions

This happens mostly in case of New Fund Offers where the scheme is offered to public with all kinds of promotional means. Do not get carried away with such promotions as they may be misleading and might not suit your risk profile.

Do not sell out your holdings in panic

Just as the same is applicable to all investments, it applies to mutual fund investments also. Selling out of panic in the market without putting in a thought can be very detrimental to your portfolio valuation. It may happen at such times that you sell out of panic that the prices will fall further but you discover that from the next session onwards, the prices have regained their pace and your fear was just baseless. In such situations, you may find yourself at the losing end with not many options left to be exercised.

Do not invest in funds that charge you high costs on investment

A fund that is performing good may also carry a high entry & exit load with it while investing in the same. Analyze the impact of such loads as a cost on your investments and returns. A high entry load would make your investment more expensive over the current NAV of such scheme and it would also reduce your returns from the same when exiting the scheme as it has high exit load.

A high cost fund scheme has to work harder in order to perform at par with other low cost schemes which may not be the case with every scheme. Hence, it is better to analyze as to how much would your investment in that scheme cost you over the actual investment valuation.

What is an IPO?

IPO stands for Initial Public Offer. An IPO is open selling of securities of a company by the company itself for subscription by the public at large. When a company wants to raise money, one of the ways it can do so is by selling its equity shares to the public. When the company comes out with the issue for the first time, an IPO. Once an IPO is offered to public at large, it is subsequently subscribed and after the end of subscription period, it gets listed on the stock exchanges. After the IPO, the shares get listed on the stock exchange and shareholders can trade their shareholdings on the exchanges.

Why invest in IPO?

Investing in IPO makes a lot of sense as owning a share of a company is like owning a part of the company where you would be considered as a share holder and would be involved in company decisions as a shareholder. If you get to own a part of a company at a price which is the best possible price than buying in secondary market and be one of the first share holders of the company; why not utilize the opportunity. Besides this, you do not even need to follow up daily for a favorable price at which you would like to buy the share. If you have the resources, can gather information, analyze the risk and rewards involved in an investment opportunity and take an informed decision, it is best advised to invest in an IPO.

What is a FPO?

FPO stands for Follow on Public Offer. When a company raises capital either through fresh issue of securities to the public or an offer for sale to the public, through an offer document after an IPO has already been made, shares of the company are held by public and already listed on the stock exchange; it is called a FPO.

Why do companies come out with IPO?

Most companies are started privately by their promoters. However, the promoters capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. Thus companies invite the public to contribute to the companys equity capital by issuing shares to individual investors. The best way to do so is to invite share capital from the public through an IPO. An IPO is an open offer made to the public to subscribe to the share capital of the company. Once the shares so offered are subscribed, the company allots shares to the applicants as per the rules and regulations laid down by SEBI.

Who is a Registrar?

A Registrar is a company / organization that has been appointed by a company which has issued shares for public subscription and is assigned the task of accepting and processing share tholders applications, carrying out communications with share holders and helps to resolve their grievances. In addition, the registrar also receives and processes requests for dematerialization and re materialization. The Registrar also maintains an updated and accurate record of the shareholders of the designated company.

What is the role of a Registrar?

The role of a Registrar is to finalize the list of eligible allotments and to ensure that the corporate action to be credited to the demat accounts of the applicants is done and refunds are sent to those applicable in case of an IPO.

In an IPO, the Registrar works in close coordination with the Lead Manager to ensure that the flow of applications from collecting bank branches, processing of applications till the basis of allotment is finalized, and refund orders completed and securities listed.

What is meant by Primary and Secondary Market?

Primary Market is the market where securities are offered to public for subscription in order to raise capital by the company which issues shares for subscription by the public. In this market, there is no trading of securities that takes place and shares are issued for the first time.

Secondary market refers to a market where securities are traded after being initially offered to the public in primary market listed on the Stock Exchange. Most of the stock exchange trading takes place in the secondary market. Secondary market comprises of equity markets and the debt markets. Secondary market provides an efficient platform for trading of securities. For the management of a listed company,this market serves as a monitoring and control tool that enables aggregating of information that guides management decisions.

What is meant by the term Premium and Discount in a Security Market?

All securities that are issued to the Public for subscription are issued in certain denominations such as Rs.10 or Rs.100. These denominations are called face value of the concerned security. When a security is sold at a price above its face value, it is said to be at Premium and if it is sold at a price less than its face value, it is said to be at a Discount.

What is Cut-Off Price?

In a Book building issue, the issuer indicates (in the prospectus) either the price band in which the public can subscribe for the shares or a floor price which would be the lowest price the public can bid for that share. The actual issue price can be any price within the price band or any price above the floor price. This issue price is called "Cut-Off Price". The issuer and lead manager decide this price after considering the book build prices and the investors interest in the stock.

Investing in IPO

How do I apply in an IPO?

In order to apply in an IPO, you first need to have a following accounts:

• Bank account with any bank
• Demat Account
• Trading Account

Once you have these accounts, you can either get the application forms form your broker or directly purchase the same from authorized dealers near stock exchanges. You can also apply in IPO online through the online application platforms provided by your broker. This would save you the time to fill up the application forms, sign cheques and the hassle of going and submitting the forms.

What is meant by a Book Building Issue?

When the issue price of an IPO is discovered by gaging the demand for the shares in market at various price points, it is called a Book-Building issue. In such an issue, the issuer fixes a price band within which the public can apply for shares rather than a fixed price at which the shares can applied for.

The price band is fixed on the basis of the fundamentals of the company, the performance of share prices of other companies in the same sector on bourses and market survey conducted by issue managers. This kind of issue gives the issuer an opportunity to assess the demand for the said shares and thus helps to discover an appropriate price at which the shares should be issued.

How is Book Building different from regular IPO?

Book Building is a process by which the demand for the securities proposed to be issued by a company is built up and price of the security is assessed on the basis of bids obtained for the securities offered for subscription by the issuer.

Fixed Price issue or a regular IPO is that IPO where the company decides a particular price for the issue which is to be used for applying to those shares. These issues have a pre defined price at which the shares will be issued.

What is the maximum time period that I would be intimated about an allotment to me?

As per SEBI guidelines, an investor should ideally get to know the status of allotment of shares or refund in case of non allotment within a time period of 15 days from date of issue closure.

What if I do not get an allotment?

In case you do not get an allotment of shares in your favor, the application money that you had submitted along with the application form is refunded back to you either through a cheque or direct credit to your account with prior intimation about the same.

What are the common mistakes one should avoid while investing in IPO?

While investing in an IPO, you should consider the following facts before you make your investment decision Ignoring past performance of the company You can get the information about past performance of the company who is the issuer of such shares from any of the financial news papers, research provided by your broker, other online sources & red herring prospectus of the issue which is available with the application form. Also, the red herring prospectus contains key information about the business carried out by the company, how does it intends to utilize the funds so collected etc.

Ignoring key financial ratios Look for the key financial ratios that may have an impact on the performance of the company, find out how does the company intends to keep the balance of Equity and debt capital, what is the PE ratio etc. This will give a clue as to what is the general approach of the company, how much is the earning potential of the company etc.

Neglecting other factors that will affect the performance of the company. Other than the ratios and past performance, you also need to be aware of the economic, political and monetary factors that may affect the performance of the company.

Myths about IPO investment

Investing in IPO is a sure shot way to earn profits in short term

It can be true in good times but not in bad times. When there are volumes in the market, performance is at its peak, usually IPOs get oversubscribed and there is huge anticipation of a good opening. This leads to a high listing price which is more than the subscription price and thus gives you better returns on your investment even in short term.

It is better to invest in secondary market than invest in IPO

Many investors consider this to be true but this is a subjective matter which does not implies the same for everyone. Some investors may find it interesting to investing to IPO while others may find it more convenient to invest in secondary market than invest in IPO because of the fact that your money gets blocked for about a month with no surety of getting an allotment.

It is all dependent on an individual comfort level and thus there is no thumb rule for the same.

DOs and DONTs

Get a copy of prospectus and read it carefully

Many a times when you go to purchase an IPO form, you may not get the red herring prospectus unless you insist on getting one. Make sure that you receive the prospectus along with the form and read through the prospectus carefully to understand the terms and conditions of investing in the same. This will also give you a direction to the risk and reward involvement in such investments.

Analyze the investment opportunity before you invest

Before you actually invest your funds into an IPO, gather knowledge as to the whereabouts of the issue, promoters, past performance of the company which has come out with such issue, how is the allotment likely to take place and the risk - reward involvement in the same.

In a bid issue, bid at a price you think is appropriate for the IPO

Whenever it is a bid issue, do your own analysis and come to a conclusion as to what should be the right price of the IPO. Do not bid for the issue as per what other people are bidding. Sometimes an issue can be over priced than its actual worth and you may end up shelling more money than needed to acquire the same.

Do not put all your money into an IPO

Do not put all your lump sum money in to an IPO as your money gets blocked for a certain period of time which may extend up to a month. If you would require the money invested fro some other purpose, you may not be able to utilize it till the time settlement for the same has been done. Hence, do not all your surplus money into an IPO.

What are commodity futures?

Trading in commodity derivatives first started to protect farmers from the risk of the value of their crop going below the cost price of their produce. Derivative contracts were offered on various agricultural products like cotton, rice, coffee, wheat, pepper, etc.

commodity futures contract is a contractual agreement between two parties to buy or sell a specified quantity and quality of commodity at a certain time in future at a certain price agreed at the time of entering into the contract on the commodity exchange.

Expiry date for different contracts can vary from one contract to another. In commodity derivatives, a buyer and a seller agree upon a price where the buyer is obliged to buy the commodity and the seller is obliged to deliver the commodity on the pre - specified date and price.

Why trade in commodity futures?

Commodities are natural resources used in day to day life. Unlike financial futures; commodity futures do not carry the risk of investors going bankrupt or declaring losses. Commodities have upper and lower price bands. i.e. Beyond a certain price level commodity prices cannot fall as the producers will stop its production and commodity prices cannot raise beyond a certain price level as people will look for availability of substitutes.

Futures trading in commodities is transparent and facilitates fair price discovery on account of large scale participation of entities associated with different value chains and reflects views and expectations of wider section of people related to that commodity. This also provides effective platform for price risk management for all segments of players ranging from the producers, the traders, processors, exporters/importers and the end users of the commodity.

In commodity futures, it is necessary to distinguish between investment commodities and consumption commodities. An investment commodity is generally held for investment purposes whereas consumption commodities are held mainly for consumption purposes. Gold and Silver can be classified as investment commodities whereas oil and steel can be classified as consumption commodities.

Is commodity trading only available in India?

No, Commodity trading is not only available in India but is a very popular trading practiced all over the world also. Most of the developed and developing countries have their own commodity markets. The first commodity exchange was started in 1849 in United States. Even a communist country like china has 3 commodity exchanges. Commodity trading is a very popular concept in rest of the world also.

What are the advantages of commodity future trading?

The commodity derivatives market is a direct way to invest in commodities rather than investing in the companies that trade in those commodities.

For example, an investor can invest directly in a steel derivative rather than investing in the shares of SAIL. It is easier to forecast the price of commodities based on their demand and supply forecasts as compared to forecasting the price of the shares of a company -- which depend on many other factors than just the demand -- and supply of the products they manufacture and sell or trade in.

The basic advantage of commodity future trading is for hedgers and for users of that commodity. A farmer may hedge his upcoming harvest at higher prices in the commodities markets to avoid any downfall in the market price in future while an automobile company may hedge its copper requirement at lower prices to secure its supply against any price rise in future. For an investor, it is an alternate investment class.

What is the difference between commodity trading in cash and futures?

Commodity trading in cash refers to spot dealing in commodities where payments and delivery are made immediately. Futures trading in commodities refer to a contract where by delivery and payment will be made at a pre fixed future date or time. In cash trading, the entire payment is made while in futures trading only a small percentage of the entire contract value (margin) needs to be paid immediately.

Which commodities are available in commodity trading?

Following commodities are available in commodity trading:

• Precious Metals: Gold, Silver Platinum
• Energy: Crude Oil, Natural Gas, Furnace Oil
• Base Metals: Aluminum, Copper, Nickel, Zinc, Lead, Steel ingots
• Agriculture:- Soybean, soya Oil, Chana, Palm Oil, Jeerra, Pepper, Turmeric, Chilli, Cardamon, Guar Gum, Guar Seed, Mentha Oil, RM seed, Sugar.

Commodity Trading

What are the pre requisites of commodity trading?

One needs to open the commodity trading account with AnandRathi, which will enable the user to trade across the exchanges, namely MCX, NCDEX, National Spot Exchange, NCDEX-Spot and NMCE. If one intends to participate in deliveries, the local sales tax requirements have to be fulfilled, or one can use the C&F agent services.

Do I need to take delivery of the commodity compulsorily every time I put a trade for it?

No, taking delivery of commodity is not compulsory, but most of the commodities are settled by compulsory delivery. The investor who does not wishes to get in to deliveries can hold his positions from the first day of the contract till the specified last trade day. One has to proactively square off his positions well before the expiry of the contract. But if there is any open position at the expiry then it will be settled by delivery. (Delivery logic may differ commodity to commodity, please check the exchange product note for the delivery logic of specific commodity)

Is there any no delivery period for commodities also as applicable in Equity trading?

Unlike equities, commodities are not a dividend yielding assets, and there is no concept of book closures, so there is no concept of "No Delivery" period applicable to commodities.

Regulation

How is commodity trading regulated in India and who regulates it?

Forward Markets Commission (FMC) is the regulatory authority under the Ministry of Consumer Affairs, Food and Public Distribution, of Govt. of India. The FMC regulates commodity trading under the Forward Contracts (Regulation) Act 1952 and Forward Contracts (Regulation) Rules 1954. After the FMC the exchanges have their own rules and bylaws by which the members of the exchange are guided. The FMC from time to time through exchanges and directly gives notifications and announcements regarding commodity trading. To check the latest announcements you can visit www.fmc.gov.in

Is commodity trading also available online as is for Equity & FNO trades? How safe is Online Commodity Trading?

Yes, AnandRathi Commodities Ltd provides online trading through internet for commodities also. It is absolutely safe to trade through our online trading platform.

Settlement

What is the normal settlement cycle for commodity trades?

Unlike equity markets which have common settlement day for all the scrips traded on a particular day, the commodity markets do not have a common cycle. As per the customs and traditions in the market from where the base price of the commodity is derived; the settlement dates defer for each commodity. For example, the Gold contract on MCX trades along with the COMEX Gold, so it has a contract that expires every alternate month, at the same time the Agro commodities have different settlement date. (Please refer to the exchange websites for settlement dates of a specific commodity)

How are margin requirement, risk management and settlements treated in commodity trading?

There are 4 kinds of margins in commodity markets, the total margin is the sum of the following:

• Initial Margin - The margin required to initiate the position
• Exposure Margin - The margin required to carry the position
• Special Margin - Any special or additional margin imposed from time to time
• Delivery Margin - Additional margin collected for a short time before the delivery to reduce any settlement risks.

Typically the broker may charge the same amount of margin as specified by the exchange or more, and all clients have to maintain all the above said margins.

If there is any dispute in commodity trading, who would settle the same and how would it be settled?

All the disputes arising out of commodity trading will be settled as per the bylaws of the respective exchange where the trade was done.

Other facts about Commodity Trading

Are there any taxes levied on commodity trading also?

Similar to the equity exchanges, the commodity market trading also attracts taxes. The taxes applicable on commodity trading consist of the following:

• exchange fee charged on every transaction
• service tax applicable on the brokerage amount payable
• educational cess on the service tax
• Stamp Duty on every contract note

As of now the Commodities Transaction Tax (CTT) which was proposed in the budget speech of 2008, has not been implemented, hence CTT is not applicable so far.

Which are the registered commodity exchanges in India?

There are 22 commodity exchanges which are recognized by FMC in India. But majority of the volumes take place at the Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange of India (NCDEX) and National Multi Commodity Exchange of India (NMCE). For the total list of recognized exchanges please visit http://fmc.gov.in/htmldocs/exchanges/exchange_list.htm

Myths about Commodity Trading

Commodity trading is meant for market operators only

Besides market operators, commodity trading is also used by many investors as an alternate investment avenue. Commodity trading has become a very popular investment in short span of time as it is beneficial for market operators as well as for individual investors. There is an option of taking delivery of the commodities traded on the exchanges as well as to square off positions before expiry to earn monetary benefits which comes as an advantage for individual investors. Hence, it a myth that commodity trading is meant for market operators only

DOs and DONTs

Keep yourself updated and understand the circulars issued by the Commodity Exchanges

You should be aware of the latest announcements made by the commodity exchanges and the circulars issued with regards to commodity trading so that you are not left out unaware and use the same to your advantage in commodity trading.

Be aware of the rules and regulations of commodity trading

If you are a first time investor in commodity, you should make sure that you are aware of the rules and regulations governing commodity trading so that you do not end up in a position which may not be favorable to your investment.

Do not base your investment decision on some rumors

If you have come across any news or rumor about a commodity, be careful about what you hear and the fact about the same. Find out the truth, fact supporting such news or rumor, analyze the opportunity as an investment opportunity and then invest in the same if you find it genuine enough and suitable to your risk profile.

Do not trade in any commodity without knowing the specifications of any commodity contract

You should not invest in any commodity without proper understanding of the contract specifications of that commodity just because somebody has suggested you the same. Every commodity contract has a different set of specifications which need careful analysis in order to be able to take a position in commodity trades so that you are clear about the terms & conditions involved in such investment.

The contract specifications of every commodity are available on the commodity exchange websites.

Who is an NRI

As per the income tax act, an NRI is an Indian who is in India for at least 182 days in the financial year; or

365 days out of the preceding four financial years and 60 days in that year. An Indian Citizen who stays outside India either for the purpose of carrying out employment or business or vocation.

An Indian citizen deputed outside India for a temporary period for his / her employment.

Who is a PIO

A PIO is a Person of Indian Origin. A citizen of any country other than Bangladesh & Pakistan is a PIO if the person held an Indian Passport at any time OR The person OR either of the persons parents OR either of the grandparents were a citizen of India OR The person (citizen of any country other than Bangladesh & Pakistan) is a spouse of an Indian citizen OR of a person of Indian origin is also deemed to be a PIO. PIO card holders do not require a visa to visit India. They enjoy parity with NRIs with respect to all facilities in the economic and financial fields.

What is an OCB?

OCB stands for Overseas Corporate Body. OCB can be a company, partnership firm, society or any other corporate body which has its majority stakes directly or indirectly owned & irrevocable by the Non Resident Indians.

OCBs have been barred as a class of investor but they are permitted to hold securities acquired by them prior to declaration of such rules. Hence, OCBs can hold a demat account only to dematerialize their securities.

What happens to the residential status of an NRI / PIO who has returned back to settle done in India?

Once an NRI / PIO returns back to India to stay here permanently, their residential status changes to a resident Indian and will be treated like one for all the investment matters also but all this is subjected to fulfillment of the legal requirements for an NRI / PIO to become a resident Indian.

Concepts & Terms you should familiarize with

What is NRE

NRE stands for Non Resident External. NRE is a type of bank account opened for and by Non Resident Indians. Money lying in an NRE account can be taken outside the country, or we can say, the money lying in NRE account is fully repatriable.

This money can be converted into any foreign currency as desired by the account holder and can be remitted outside India.

Money can be freely transferred from the NRE account to NRO account.

What is NRO

NRO stands for Non Resident Ordinary. NRE is a type of bank account opened for and by Non Resident Indians. It is just like any other ordinary saving bank account. Money lying in an NRO account cannot be taken outside the country or we can say, the money lying in NRO account is non repatriable. Money cannot be transferred from NRO account to NRE account.

What is FCNR?

FCNR stands for Foreign Currency Non Residential. It is a fixed deposit account maintained in permissible foreign currencies. These accounts can be freely remitted outside India.

What is PIS?

PIS stands for Portfolio Investment Scheme. It is a scheme promoted by RBI to allow investments by NRIs & PIOs. Under this scheme, NRIs and PIOs can buy and sell shares & convertible debentures of Indian Companies by buying or selling through accounts held for the purpose with designated bank branch.

An NRI or PIO who wants to invest in equity secondary market can do so only through a PIS account and on recognized stock exchanges. It is mandatory for an NRI or PIO to have a PIS account in order to invest in Indian equity and only one PIS account can be held at a time with only one designated bank branch.

PIS account is meant for investing in Indian markets only. PIS account is not allowed for investment in mutual fund.

RBI has authorised a few main branches of major commercial banks as Authorised Dealers (ADs) to offer PIS.

What is a non PIS account?

A non PIS account is like a normal savings bank account which can be opened with any bank in India and the transactions taking place in the account are not required to be reported to RBI.

Those shares which are not allowed to be sold under PIS account, can be sold under this account. Shares acquired in IPO, gifted by someone or bought as a resident Indian can be sold under this account.

Mutual Fund transactions and shares acquired as NRI / PIO from an IPO can also be effected in this account.

NRI Investment Why do an NRI / PIO require a PIS account?

Due to regulatory obligations, an NRI / PIO cannot hold more than 5% stake in any Indian Company and also the total foreign holdings in any company / sector cannot exceed a certain pre defined limit.

The same is monitored under FEMA regulations for any breach of such pre defined limits and thus monitoring NRI / PIO investments through PIS accounts becomes easier as the transactions taking place through PIS account are reported to RBI as and when they take place hence, an NRI / PIO is required to open a PIS account to invest in equity secondary market.

How many PIS accounts can be held at a time?

At a time, only one PIS account can be held by an NRI / PIO with a bank branch designated by RBI for the purpose.

What are the investment avenues where an NRI can invest?

The investment avenues available for the Non-Resident Indians in India are

• Government securities or units of Unit Trust of India
• Non-convertible debentures of Indian companies
• Bank accounts in India
• Investment in securities /shares & convertible debentures of Indian Cos
• Investment in immovable property in India
• Investment in mutual funds in India
• Company deposits.

NRIs are not permitted to invest in

• Public Provident Fund (PPF)
• National Savings Certificates (NSC) issued by post offices in India as well as other postal schemes.

What are the pre requisites of opening an NRI account?

In order to invest in Indian equity markets, an NRI / PIO would require to open the following accounts:

• NRE / NRO / FCNR Bank Account
• Demat Account
• PIS Account

The following documentary proofs are also required:

How can I get my physical share certificates dematerialized?

You can get your physical share certificates dematerialized like a resident Indian where you need to contact a depository participant who can help you with the same and fill up the DRF form. Once the depository participant gets confirmation of your holdings from the concerned company, your certificates will get dematerialized and the same would be credited to your demat account.

Holding securities in demat only constitutes a change in the form and does not need any special permission. Only those physical securities which already have the status as "R" - "Repatriable" or "NR"- "Non-Repatriable" can be dematerialized in the corresponding depository accounts.

Can I withdraw funds out of my bank account in India? (NRE / NRO)

The repatriation of the sale proceeds, net of taxes, are allowed if the original purchase was made on repatriation basis and such investments were made out of funds from NRE/FCNR account or by means of remittance from abroad.

How are Corporate actions given effect to for NRIs?

On any corporate action taking place, it is given effect in NRI investment accounts based on the criteria whether they are due to a dividend, interest, rights or bonus resulting out of investment on non-repatriation basis will not be allowed for repatriation while any corporate benefit resulting out of investment on repatriation basis will be allowed for repatriation.

On issue of bonus shares as a result of corporate action taking place, in order to sell those shares, they have to be transferred to a Non-PIS demat account from PIS account and sold from there. The sale proceeds are credited to the Non- PIS account.

Upon sale of such shares bought in the Non PIS accounts, the sale proceeds are credited to Non - PIS account.

In case a resident Indian becomes a non-resident, will he/she be required to change the status of his/her holding from Resident to Non-Resident?

As per the FEMA act, an NRI can continue to hold the securities, which he/she had acquired as a resident Indian, even after he/she has become a non-resident Indian, but would need to transfer the shares to his NRO account.

Taxation and Charges

How is taxation treated for NRI investment?

Taxation on Mutual Fund earnings

The tax on capital gain is deducted after considering the indexation benefits wherever applicable, by the AMC.

There are various TDS rates for mutual funds.

For short-term capital gains

• Equity schemes 15%+
• Non-equity schemes 30%+

For long-term capital gains

• Equity schemes 0%
• Non-equity schemes 20%+

Taxability

Tax Deducted at Source

• As per regulatory guidelines, tax, as applicable, has to be deducted at source for profits made in the equity market transactions.
• Before crediting sales proceeds, the banker must determine the appropriate tax and deduct it at source.
• The TDS rate varies as per the tenure of the investment. TDS can be classified into long-term capital gain and short-term capital gain.
• In long-term capital gain, if the period of holding is more than one year, then the TDS rate applicable is zero percent.
• In short-term capital gain, if the period of holding is less than one year, then the TDS rate applicable is fifteen percent plus.

It is to be noted that no TDS is charged on losses.

For any TDS to be deducted and money to be credited to the bank account, 3 things need to be verified

• Amount of gain
• Duration of holding, that is, long term or short term
• Source of fund for purchase, that is, NRE or NRO.

In case of non-PIS transaction, such as IPO shares, the NRI has to give the contract note, and demat statement or letter of allotment.

Dividend Taxation

Dividend received from a domestic company or mutual funds is tax free in the hands of an NRI investor.

However, there is a Dividend Distribution Tax (DDT) at source

• 16.99 percent on dividends of a domestic company
• Equity-based schemes of mutual funds are exempt from DDT
• 14.16 percent in case of debt-based schemes of mutual
• funds
• 28.32 percent in case of liquid schemes.

What is currency trading?

In simple words, currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies.

The currency market

The currency trading (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover. Markets are places to trade goods. The same goes with FOREX. The Forex goods (or merchandise) are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars.

Understanding the Forex Market

Word "Forex" comes from shorting up "foreign exchange" and it is used to describe currency spot market mostly but also currency futures and options market. This is the biggest and most fluent global market. Forex is over the counter market. It means that there are no agreed centres or exchanges where you need to be connected in order to trade. It is a big worldwide network, letting you trade 24 hours per day usually from Monday till Friday.

Who can trade in Currency Futures markets in India?

Any resident Indian or company including banks and financial institutions can participate in the futures market. However, at present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.

Which currency pairs are listed?

Any currency can be traded on the international level. However, on the Multi Commodity Exchange (MCX- SX), only 4 major currencies are traded against the Indian Rupee.

• USDINR
• EURINR
• GBPINR
• JPYINR

Which are the Exchanges used?

The commonly used exchanges on the national level are - Multi Commodity Exchange (MCX- SX) National Stock Exchange (NSE) The most commonly used exchange on the international level - COMEX

Who are the Regulators of the Market

The currency market is regulated jointly by the Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI).

How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.

Is there a central location for the Forex Market?

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

When is the FX market open for trading?

Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events

How does one profit in Forex?

Very simply put, buy cheap and sell for more! The profit is generated from the fluctuations (changes) in the currency exchange market.

What is Margin?

Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability,the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.

What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.

What is a Spot Market?

A Spot Market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Mercantile Exchange (CME), National Stock Exchange (NSE), MCX SX, BSE offer currency futures contracts whose delivery dates may span several months into the future. Settlement of Forex spot transactions usually occurs within two business days.

What are the major fundamental factors that affect currency movements?

1. Trade Balance – This refers to imports and exports, and is probably the most important determinant of a currencys value. When imports are greater than exports, you have a trade deficit. When exports are greater than imports, you have a surplus. A shift in the trade balance between two countries tends to weaken the currency of the country with greater deficit

2. Wealth – Wealth is a countrys reserves, in the form of gold, cash, natural resources, and so on. Any factor that affects a countrys ability to repay loans, finance imports, and affect investments affects the markets perception of its currency and the currencys value.

3. Internal Budget Deficit or Surplus – A country running a current account deficit has, on balance, a weaker currency than one that runs a budget surplus. This is tricky, however, in that the direction of the surplus or deficit affects perceptions and currency valuations too.

4. Interest Rates – Funds travel globally in electronic format responding to changes in short-term interest rates. If three-month interest rates in Germany are running 1% less than three-month rates in the United States, then all other things being equal, "hot money" flows out of Euro into the Dollar.

5. Inflation – Inflation in each country and inflationary expectations, affect currency values.

6. Political factors – Taxes, stability and other factors that affect the international trade of a country or the perception of "soundness" of the currency affect its valuation.