**Investment=

Investment is putting money into something with the hope of profit. More specifically,
investment is the commitment of money or capital to the purchase of financial instruments or other
assets so as to gain profitable returns in the form of interest, income {dividend}, or appreciation of
the value of the instrument.[1] It is related to saving or deferring consumption. Investment is
involved in many areas of the economy, such as business management and finance no matter for
households, firms, or governments. An investment involves the choice by an individual or an
organization, such as a pension fund, after some analysis or thought, to place or lend money in a
vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g.
futures or options), or the foreign asset denominated in foreign currency, that has certain level of
risk and provides the possibility of generating returns over a period of time.[2]

**Types of Investment Avenues

Knowing where and how to invest your hard earned money can be very difficult, and making a
wrong move could set your plans back many years. Whether your goal is to save up for a first home,
provide a quality education for your children or fund a comfortable retirement for yourself, it is
important to know your options.

Time Horizons Matter

1. Generally speaking, the longer your time horizon, the more risk you can afford to take. That
means that those with decades to go before retirement may want to keep a substantial portion
of their money in the stock market. Even though the stock market is subject to wild swings and
periods of steep declines, over the long haul, stocks still provide superior returns compared to
other financial vehicles. But as your time horizon shrinks, it is important to reassess your
exposure to the stock market and make adjustments as needed. Moving some of your
investments into safer instruments like certificates of deposit and U.S. Treasury-backed
instruments can protect you in the event a major bear market coincides with your planned
retirement date.

Individual Stocks

2. Individual stock investments are generally considered to be the riskiest of all mainstream
investments, but good stock pickers can also pocket some big rewards. For most people,
however, buying individual stocks can be a big risk, and it is generally not a good idea to put
more than 4 to 5 percent of your money into any one stock. Limiting exposure to any one stock
is a good way to reduce risk and cushion your portfolio in the event a given stock collapses.
With household names like AIG and Bank of America now nearly worthless, it is easy to see why
controlling individual stock risk is so important.

Mutual Funds

3. When mutual funds first came on the scene many individual investors were intrigued by the
concept of pooling the money from small investors and using it to buy a large basket of stocks.
The mutual fund concept allows even the smallest investors to achieve instant diversification,
reducing the risk of buying individual stocks. Even so, it is important to look at the riskiness of
the fund itself--some actively managed funds can be quite a bit more volatile than the stock
market as a whole. When choosing a mutual fund it is important to look at its beta co-efficient.
The beta rates how risky the fund is compared to the stock market as a whole. Investors who
want to learn more about beta coefficients and other investment terms can find lots of
information at Investopedia.com.
 Exchange-Traded Funds

4. Exchange-traded funds (ETFs) work much like mutual funds--with one important
difference. Unlike mutual funds, which are priced at the end of each trading day, ETFs can be
bought and sold in real time during the day. This allows investors to choose a price at which
they want to buy and sell--an important advantage over mutual funds. ETFs started out as a
way to track the major indexes; the popular Standard & Poor's 500 index can be tracked with
the ETF trading under the ticker symbol SPY. But today, there are ETFs that track virtually
every market sector, including single country funds and even commodities.

Bonds

5. Bonds are often considered safer than stocks, and high-quality bonds can provide stability.
Even so, it is important for investors to keep in mind that the value of bonds has an inverse
relationship to interest rates. This means that as rates rise, the value of the bond goes down,
and as interest rates fall, the value of the bond goes up For investors who simply want to collect
the interest and hold the bond to maturity, this should not be an issue, but investors who need
to sell bonds before they mature may find themselves getting less than they paid.

The Safety of Treasury Instruments

6. Investors who are looking for rock-solid stability and safety may want to look to the
government for their investments. The safety of Treasury bonds, notes and other instruments is
certainly not in doubt. Investors who want to learn more about Treasury investments can go to
the Treasury website at www.Treasury.gov.

**INVESTMENT AVENUES

There are a large number of investment instruments available today. To make our lives easier we
would classify or group them under 4 main types of investment avenues. We shall name and
briefly describe them.

1. Financial securities: These investment instruments are freely tradable and negotiable. These
would include equity shares, preference shares, convertible debentures, non-convertible
debentures, public sector bonds, savings certificates, gilt-edged securities and money market
securities.

2. Non-securitized financial securities: These investment instruments are not tradable,

transferable nor negotiable. And would include bank deposits, post office deposits, company fixed
deposits, provident fund schemes, national savings schemes and life insurance.

3. Mutual fund schemes: If an investor does not directly want to invest in the markets, he/she
could buy units/shares in a mutual fund scheme. These schemes are mainly growth (or equity)
oriented, income (or debt) oriented or balanced (i.e. both growth and debt) schemes.

4. Real assets: Real assets are physical investments, which would include real estate, gold &
silver, precious stones, rare coins & stamps and art objects.

Before choosing the avenue for investment the investor would probably want to evaluate and
compare them. This would also help him in creating a well diversified portfolio, which is both
maintainable and manageable.
**speculation

In finance, speculation is a financial action that does not promise safety of the initial investment
along with the return on the principal sum.[1] Speculation typically involves the lending of money or
the purchase of assets, equity or debt but in a manner that has not been given thorough analysis or
is deemed to have low margin of safety or a significant risk of the loss of the principal investment.
The term, "speculation," which is formally defined as above in Graham and Dodd's 1934 text

**investment Vs. speculation=

1. -A speculator as someone that seeks to buy and sell in order to take advantage of market price
fluctuations. -An investor is someone who holds on to securities that provide a good income or
capital gain by virtue of them being based on something of real and increasing value.

2.- Alternatively, you could say that a speculator is someone that buys something only because they
think someone else will pay more for it in the near future,

-as opposed to an investor, who buys things because analysis confirms that the investment is of
high quality and/or good value, and worth holding.

3. -A speculator buys things because they believe a less informed person will buy it off them later at
a higher price,

-an investor buys things because they promise both a return on capital invested, as well as a return
of capital invested.

4. - The speculator's primary interest lies in anticipating and profiting from market fluctuations.

- The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
Market movements are important to him in a practical sense, because they alternately create low
price levels at which he would be wise to buy and high price levels at which he certainly should
refrain from buying and probably would be wise to sell.

*You are probably a good speculator if:

• You understand the risk and are taking positive measures to limit that risk. In fact risk
management is your bread and butter.
• You are taking steps to bring about a higher return than average by keeping a close eye on
your stocks and constantly riding the ups in price but selling out and waiting for the end to
the downs.
• Of the many issues you are watching this one seems to have the highest probability of doing
well over the time frame of your trading style.
• You anticipate a price increase but have a plan in place in case it doesn't.
• You track a large amount of information that may have an effect on prices, and get ready to
act if this information doesn't seem to be already reflected in the price.
• You are well tuned with the pulse of the market you are in, and ready to leave before the
herd does.
• You buy at the early signs of upturn after the price has fallen, but are ready to close your
position rapidly of you turn out to be wrong.
• You are mindful of the overall trend in prices.
• You buy the best value investment of its type during a boom.
• You buy something with the strongest upward price momentum.
• You sell because you notice a trend change.
• Market quotations are your bread and butter, you want the very latest information and lots
of it.
 • You don't trust anyone else with your money, the stupid cattle on the opposite side of the
trade from you don't know what they are missing and all those gurus are just crooks.
• Tax effective investments probably don't interest you as they are too long term and you can
make more money trading. You don't trust the promoters of these schemes anyway.

*You are probably a mug speculator if:

• You verbally acknowledge risk but ignore it, allocating a large proportion of your money to
this one venture.
• Risk management simply amounts to nodding your head saying you realise that there is of
course a risk, but doing absolutely nothing to take steps to limit, or even properly identify
risk.
• You are trying to bring about a very high return by buying something that looks exciting, but
you aren't too sure how the business works.
• You are buying something because someone you know told you it was good.
• You have absolutely no idea what else is out there because you haven't really checked, but
this one looks good.
• You think it is a sure thing to go up.
• You buy something that has fallen a lot because you don't think the price can go any lower.
• You find out the price crashed a week after it happens in a conversation with your friend that
"understands this sort of thing".
• Rene Rivkin says on TV that he "likes it a lot" so you buy it.
• You don't understand how people make money in the investment.
• You are trying to pick the very bottom to buy, or the exact top to sell.
• You will pay anything for an investment because prices are booming.
• You buy because it has gone up a lot.
• You sell because you want to take a profit.
• Rises in the price excite you, but as terrifying as it is to you, you don't take any action during
the dips because it is just a "paper loss" and you know it isn't really a loss unless you sell. If it
gets back in the black though you'll rapidly sell out and pocket the cash so you won't lose
face over it.
• You want someone to tell you what to buy next, and even though the last 20 newsletters you
subscribed to cost you lots of money, you haven't quite given up on newsletters just yet, you
also own the latest and greatest automatic software to free you from all that dull boring
analysis.
• You buy any investment that promises to save you tax.

**Stock Market Operations=

In this section we will study the main type of stock market operations costs, terms, doubles, options
and futures. We will also develop, at the end of the section, capital extensions of companies that
quote in the market convertible debentures in stocks buying public offers (BPO) and selling public
offers (SPO).

• Cash Operation • Buying Options

• Term Operations • Sales Option
• On Credit Card Purchase • Options over shares as an incentive
• On Credit Cash Sale system for directors
• Operations of Doubles • Operation of Futures
• Stock Options
1. Cash Operation
This is the most usual way of negotiating in the market. In cash operations, liquidation is done the
same day or a few days later, according to the kind of chosen securities. Therefore, in cash operations,
the delivery of securities from the buyer and the payment of the same by the buyer s done immediately
after the negotiation.

2. Term Operations
These operations occur when securities that are not paid off cash, but in an agreed term. Basically,
there are two types of term operations: those that follow the Latin or French system, and those who are
based on the North American margin system. The two systems are very different from each other.
3. On Credit Card Purchase
Although these operations are known as operations on credit the reality is that they are cash
operations in which a credit is given to the buyer (lending him money). The most common case of a
buyer using a credit is when the quotation of the securities are going to rise.
4. On Credit Cash Sale

In this case, it is also a cash operation in which the vendor receives as a loan time securities. The on
credit vendor sells the securities that he doesn’t have because he thinks that in the future he will be
able to purchase them cheaper.

5.Operations of Doubles

The operations of doubles, also called “repos”, are done above all by the investors that try to have a
better management of their resources when investing exceeding money during a relatively short
period. The operations of doubles take place when at the same time a cash operation and an opposite
term operation coincide.

6. Stock Options
A contract of options is an agreement between two parts, in which one of them has the right to buy or
sell an underlying asset (financial or not) in change of a premium. The other part is obliged, in
exchange for perceiving the premium, to sell or buy, in case the buyer of the option so decides.
7. Buying Options

The buying option, also denominated call, gives the purchaser the right to acquire a security during a
determined period of time and at a prefixed price. if after the agreed period the purchase has not taken
place, you loose the option. In the buying option, the issuer of the option is compromised to deliver the
securities, if the purchaser so decides. When the price of the market is higher than the exercise price
the optioner can make some profit; on the contrary, if the exercise price is higher than that of the
market , the option has a lack of value for the purchaser.

8. Sales Option
However, the sales option or put option gives the right to sell at a predetermined net price during a
determined period of time. The issuer of the sales option is obliged to buy the securities in case it is
demanded by the vendor. The sales option lacks of value when the market price is higher than the
exercise price. The option can benefit the vendor, in case the exercise price is higher to that of the
market price.
9. Options over shares as an incentive system for directors

Option contracts that are written on the epigraphs above are very different from some incentive
systems that along these last years many companies have started. These systems consist in giving their
employees options over shares (stock options). One of the most famous cases is that of the telephone
stock options.

10. Operation of Futures

The operation of futures consists in the compromise to buy or sell assets in a future date, at
predetermined price when signing the agreement. In this way, the operator can reduce the risk of
fluctuation due that he already knows the future price of the asset. To be able to do these type of
operations you have to deposit a guarantee in the contracting center, which fluctuates in between 5 and
10% of the total value of the contract.

**Types of Risk
When most people think of "risk" they translate it as loss of principal. However, there are many kinds
of risk. Let's take a look at some of them:

• Capital Risk: Losing your invested monies.

• Inflationary Risk: Investment's rate of return doesn't keep pace with inflation rate.
• Interest Rate Risk: A drop in an investment's interest rate.
• Market Risk: Selling an investment at an unfavorable price.
• Liquidity Risk: Limitations on the availability of funds for a specific period of time.
• Legislative Risk: Changes in tax laws may make certain investments less advantageous.
• Default Risk: The failure of the institution where an investment is made.

**concept of derivatives=

• Derivatives in general refer to contracts that derive from another - whose value depends on
another contract or asset. Derivatives are essentially devised as a hedging device to insulate a
business from risks over which a business has no or little control, but in practice, they are also
used as yield-kickers.
• Where there are risks, there are derivatives to strip the risk and transfer it. As derivatives are
essentially devices of transferring risks, their types and applications differ based on the type of
risk facing a business.

The derivative is often called the "instantaneous" rate of change. A rate of change is simply a
comparison of the change in one quantity to the simultaneous change in a second quantity. For
instance, the amount of money your employer owes you compared to the length of time you
worked for him determines your rate of pay. The comparison is made in the form of a ratio,
dividing the change in the first quantity by the change in the second quantity. When both
changes occur during an infinitely short period of time (in the same instant), the rate is said to
be "instantaneous," and then the ratio is called the derivative.

• To better understand what is meant by an instantaneous rate of change, consider the graph of a
straight line (see Figure 1).
• The line's slope is defined to be the ratio of the rise (vertical change between any two points) to
the run (simultaneous horizontal change between the same two points). This means that the
slope of a straight line is a rate, specifically, the line's rate of rise with respect to the horizontal
axis. It is the simplest type of rate because it is constant, the same between any two points, even
two points that are arbitrarily close together. Roughly speaking, arbitrarily close together means
 you can make them closer than any positive amount of separation. The derivative of a straight
line, then, is the same for every point on the line and is equal to the slope of the line.

TABLE 1

x2- (x2-x1)/(t2-
x1 x2 t1 t 2 t 2-t1
x1 t1)

0 8 0 0.707106781 8 0.707106781 11.3137085

1 7 0.25 0.661437828 6 0.411437828 14.58300524

3 5 0.433012702 0.559016994 2 0.126004292 15.87247514

• Figure 2. Illustration by Hans & Cassidy. Courtesy of Gale Group.

• Determining the derivative of a curve is somewhat more difficult, because its instantaneous rate
of rise changes from point to point (see Figure 2).
• We can estimate a curve's rate of rise at any particular point, though, by noticing that any
section of a curve can be approximated by replacing it with a straight line. Since we know how
to determine the slope of a straight line, we can approximate a curve's rate of rise at any point,
by determining the slope of an approximating line segment. The shorter the approximating line
segment becomes, the more accurate the estimate becomes. As the length of the approximating
line segment becomes arbitrarily short, so does its rise and its run. Just as in the case of the
straight line, an arbitrarily short rise and run can be shorter than any given positive pair of
distances. Thus, their ratio is the instantaneous rate of rise of the curve at the point or the
derivative. In this case the derivative is different at every point, and equal to the slope of the
tangent at each point. (A tangent is a straight line that intersects a curve at a single point.)

**Derivative - A Concrete Example

A fairly simple, and not altogether impractical example is that of the falling apple. Observation tells us
that the apple's initial speed (the instant before letting go from the tree) is zero, and that it accelerates
rapidly. Scientists have found, from repeated measurements with Figure 3. Illustration by Hans &
Cassidy. Courtesy of Gale Group. various falling objects (neglectin…

**Options:

• The significant difference between a future and an option is that the option provides the
contracting parties only an option, not an obligation, to buy or sell a financial instrument or
security at a pre-fixed price, called the strike price. Obviously, the option buyer will exercise the
option only when he is in the money, that is, he gains by exercising the option.
• For example, suppose X holding a security of USD 1000 buys an option to put the security at its
current price with Y. Now if the price of the security goes down to USD 900. X may exercise the
option of selling the security to Y at the agreed price of USD 1000 and protect against the loss
on account of decline in the market value. If, on the other hand, the price of the security goes
upto USD 1100, X is out of the money and does not gain by exercising the option to sell the
security at a price of USD 1000 as agreed. Hence, X will not exercise the option. In other words,
the option buyer can only get paid and does not stand to a position of loss.
• Had this been a futures contract or forward contract, Y could have compelled X to sell the
security for the agreed price of USD 1000 in either case. That is to say, while a future contract
can result into both a loss and a profit, an option can only result into a profit, and not a loss.
 • Two basic types of options are: call options and put options. A call option is an option to
call, that is, acquire a particular quantity and/or at particular strike price. A put option is just
the reverse- the option to put or sell a particular quantity and/or at a particular strike price.

**Futures:

• Futures are more standardised forms of forward contracts and mostly operate in organised
markets. While it is possible to have a forward contract for any commercial transaction, futures
are normally exchange-traded. Futures contracts are highly uniform contracts that specify the
quantity and quality of the good that can be delivered, the delivery date(s), the method for
closing the contract, and the permissible minimum and maximum price fluctuations permitted
in a trading day.

**Concept of Mutual Funds=

MUTUAL FUND
Mutual fund is a trust that pools money from a group of investors (sharing common financial goals)
and invest the money thus collected into asset classes that match the stated investment objectives of
the scheme. Since the stated investment objectives of a mutual fund scheme generally forms the basis
for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its
stated objectives at any point of time.

Every Mutual Fund is managed by a fund manager, who using his investment management skills and
necessary research works ensures much better return than what an investor can manage on his own.
The capital appreciation and other incomes earned from these investments are passed on to the
investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the
fund in the same proportion as his contribution amount put up with the corpus (the total amount of
the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.
Any change in the value of the investments made into capital market instruments (such as shares,
debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market
value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by
dividing the market value of scheme's assets by the total number of units issued to the investors.
For example:
A. If the market value of the assets of a fund is Rs. 100,000
B. The total number of units issued to the investors is equal to 10,000.
C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
D. Now if an investor 'X' owns 5 units of this scheme

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

ADVANTAGES OF MUTUAL FUND

S.
Advantage Particulars
No.

Mutual Funds invest in a well-diversified portfolio of

Portfolio securities which enables investor to hold a diversified
1.
Diversification investment portfolio (whether the amount of investment is
big or small).

Fund manager undergoes through various research works

Professional and has better investment management skills which ensure
2.
Management higher returns to the investor than what he can manage on
his own.

Investors acquire a diversified portfolio of securities even

with a small investment in a Mutual Fund. The risk in a
3. Less Risk
diversified portfolio is lesser than investing in merely 2 or 3
securities.

Due to the economies of scale (benefits of larger volumes),

Low Transaction
4. mutual funds pay lesser transaction costs. These benefits
Costs
are passed on to the investors.

An investor may not be able to sell some of the shares held

5. Liquidity by him very easily and quickly, whereas units of a mutual
fund are far more liquid.

Mutual funds provide investors with various schemes with

different investment objectives. Investors have the option of
Choice of
6. investing in a scheme having a correlation between its
Schemes
investment objectives and their own financial goals. These
schemes further have different plans/options

Funds provide investors with updated information

7. Transparency pertaining to the markets and the schemes. All material
facts are disclosed to investors as required by the regulator.

Investors also benefit from the convenience and flexibility

offered by Mutual Funds. Investors can switch their
holdings from a debt scheme to an equity scheme and vice-
8. Flexibility
versa. Option of systematic (at regular intervals) investment
and withdrawal is also offered to the investors in most
open-end schemes.
 Mutual Fund industry is part of a well-regulated investment
environment where the interests of the investors are
9. Safety
protected by the regulator. All funds are registered with
SEBI and complete transparency is forced.

DISADVANTAGES OF MUTUAL FUND

S.
Disadvantage Particulars
No.

Costs Control Investor has to pay investment management fees and fund
Not in the distribution costs as a percentage of the value of his
1.
Hands of an investments (as long as he holds the units), irrespective of the
Investor performance of the fund.

The portfolio of securities in which a fund invests is a decision

taken by the fund manager. Investors have no right to interfere
No Customized
2. in the decision making process of a fund manager, which some
Portfolios
investors find as a constraint in achieving their financial
objectives.

Difficulty in Many investors find it difficult to select one option from the
Selecting a plethora of funds/schemes/plans available. For this, they may
3.
Suitable Fund have to take advice from financial planners in order to invest in
Scheme the right fund to achieve their objectives.

**TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds
Open-end Funds | Closed-end Funds

Open-end Funds
Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The
fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to
investors) and repurchases (from the investors) by the fund. An open-end fund is not required to
keep selling new units to the investors at all times but is required to always repurchase, when an
investor wants to sell his units. The NAV of an open-end fund is calculated every day.

Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known
as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the
closure of the offer, buying and redemption of units by the investors directly from the Funds is not
allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues
to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to
each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a
closed-end fund is computed on a weekly basis (updated every Thursday).
 2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the
corpus of the Fund and its outstanding units do get changed.

Load Funds | No-load Funds

Load Funds
Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning,
fund manager's salary etc. Many funds recover these expenses from the investors in the form of load.
These funds are known as Load Funds. A load fund may impose following types of loads on the
investors:

• Entry Load - Also known as Front-end load, it refers to the load charged to an investor at the
time of his entry into a scheme. Entry load is deducted from the investor's contribution
amount to the fund.
• Exit Load - Also known as Back-end load, these charges are imposed on an investor when he
redeems his units (exits from the scheme). Exit load is deducted from the redemption
proceeds to an outgoing investor.
• Deferred Load - Deferred load is charged to the scheme over a period of time.
• Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit
load reduces as the investor stays longer with the fund. This type of load is known as
Contingent Deferred Sales Charge.

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

Tax-exempt Funds | Non-Tax-exempt Funds

Tax-exempt Funds
Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity
oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term
capital gains and dividend income in the hands of investors are tax-free.

Non-Tax-exempt Funds
Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds,
except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out
of sale of units by an investor within 12 months of purchase are categorized as short-term capital
gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction
Tax (STT). STT is deducted from the redemption proceeds to an investor.

BROAD MUTUAL FUND TYPES

1. Equity Funds
Equity funds are considered to be the more risky funds as compared to other fund types, but they also
provide higher returns than other funds. It is advisable that an investor looking to invest in an equity
fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each
falling into different risk bracket. In the order of decreasing risk level, there are following types of
equity funds:
a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for
maximum capital appreciation and invest in less researched shares of speculative nature.
Because of these speculative investments Aggressive Growth Funds become more volatile and
thus, are prone to higher risk than other equity funds.
b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5
years) but they are different from Aggressive Growth Funds in the sense that they invest in
companies that are expected to outperform the market in the future. Without entirely adopting
speculative strategies, Growth Funds invest in those companies that are expected to post above
average earnings in the future.
c. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio
comprises of only those companies that meet their criteria. Criteria for some speciality funds
could be to invest/not to invest in particular regions/companies. Speciality funds are
concentrated and thus, are comparatively riskier than diversified funds.. There are following
types of speciality funds:
i. Sector Funds: Equity funds that invest in a particular sector/industry of the market are
known as Sector Funds. The exposure of these funds is limited to a particular sector (say
Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer
Goods) which is why they are more risky than equity funds that invest in multiple sectors.
ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest
in one or more foreign companies. Foreign securities funds achieve international
diversification and hence they are less risky than sector funds. However, foreign securities
funds are exposed to foreign exchange rate risk and country risk.
 iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market
capitalization than large capitalization companies are called Mid-Cap or Small-Cap
Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip
companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap
companies have market capitalization of less than Rs. 500 crores. Market Capitalization
of a company can be calculated by multiplying the market price of the company's share by
the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-
Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility
in share prices of these companies and consequently, investment gets risky.
iv. Option Income Funds*: While not yet available in India, Option Income Funds write
options on a large fraction of their portfolio. Proper use of options can help to reduce
volatility, which is otherwise considered as a risky instrument. These funds invest in big,
high dividend yielding companies, and then sell options against their stock positions,
which generate stable income for investors.
d. Diversified Equity Funds - Except for a small portion of investment in liquid money market,
diversified equity funds invest mainly in equities without any concentration on a particular
sector(s). These funds are well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to equity market risk. One
prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As
per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times.
ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time
of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption
by the investor before the expiry of the lock-in period makes him liable to pay income tax on
such income(s) for which he may have received any tax exemption(s) in the past.
e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a
specific stock market index. The portfolio of these funds comprises of the same companies that
form the index and is constituted in the same proportion as the index. Equity index funds that
follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that
follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are
less diversified and therefore, are more risky.
f. Value Funds - Value Funds invest in those companies that have sound fundamentals and
whose share prices are currently under-valued. The portfolio of these funds comprises of shares
that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share)
and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies
from diversified sectors and are exposed to lower risk level as compared to growth funds or
speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar
etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value
funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.

g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend
Yield Equity Funds is to generate high recurring income and steady capital appreciation for
investors by investing in those companies which issue high dividends (such as Power or Utility
companies whose share prices fluctuate comparatively lesser than other companies' share
prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk
level as compared to other equity funds.
2. Debt / Income Funds
Funds that invest in medium to long-term debt instruments issued by private companies, banks,
financial institutions, governments and other entities belonging to various sectors (like infrastructure
companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to
generate fixed current income (and not capital appreciation) to investors. In order to ensure regular
income to investors, debt (or income) funds distribute large fraction of their surplus to investors.
Although debt securities are generally less risky than equities, they are subject to credit risk (risk of
default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt
funds usually invest in securities from issuers who are rated by credit rating agencies and are
considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on
different investment objectives, there can be following types of debt funds:
a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging
to all sectors of the market are known as diversified debt funds. The best feature of diversified
debt funds is that investments are properly diversified into all sectors which results in risk
reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors
which further reduces risk for an individual investor.
b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus
funds that are confined to investments in selective debt securities, issued by companies of a
specific sector or industry or origin. Some examples of focused debt funds are sector, specialized
and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds.
Because of their narrow orientation, focused debt funds are more risky as compared to
diversified debt funds. Although not yet available in India, these funds are conceivable and may
be offered to investors very soon.
c. High Yield Debt funds - As we now understand that risk of default is present in all debt
funds, and therefore, debt funds generally try to minimize the risk of default by investing in
securities issued by only those borrowers who are considered to be of "investment grade". But,
High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers
who are considered to be of "below investment grade". The motive behind adopting this sort of
risky strategy is to earn higher interest returns from these issuers. These funds are more volatile
and bear higher default risk, although they may earn at times higher returns for investors.
d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or
provide assured returns to investors, but there can be funds that come with a lock-in period and
offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns
is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are
generally debt funds and provide investors with a low-risk investment opportunity. However,
the security of investments depends upon the net worth of the guarantor (whose name is
specified in advance on the offer document). To safeguard the interests of investors, SEBI
permits only those funds to offer assured return schemes whose sponsors have adequate net-
worth to guarantee returns in the future. In the past, UTI had offered assured return schemes
(i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI
was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government
had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India
offers assured return schemes to investors, though possible.

e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having
short term maturity period (of less than one year) that offer a series of plans and issue units to
investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the
exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term
investors. The objective of fixed term plan schemes is to gratify investors by generating some
expected returns in a short period.
3. Gilt Funds
Also known as Government Securities in India, Gilt Funds invest in government papers (named dated
securities) having medium to long term maturity period. Issued by the Government of India, these
investments have little credit risk (risk of default) and provide safety of principal to the investors.
However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of
debt securities are inversely related and any change in the interest rates results in a change in the NAV
of debt/gilt funds in an opposite direction.

4. Money Market / Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt
instruments. These securities are highly liquid and provide safety of investment, thus making money
market / liquid funds the safest investment option when compared with other mutual fund types.
However, even money market / liquid funds are exposed to the interest rate risk. The typical
investment options for liquid funds include Treasury Bills (issued by governments), Commercial
papers (issued by companies) and Certificates of Deposit (issued by banks).

5. Hybrid Funds
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts
and money market securities. Hybrid funds have an equal proportion of debt and equity in their
portfolio. There are following types of hybrid funds in India:
a. Balanced Funds - The portfolio of balanced funds include assets like debt securities,
convertible securities, and equity and preference shares held in a relatively equal proportion.
The objectives of balanced funds are to reward investors with a regular income, moderate capital
appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are
appropriate for conservative investors having a long term investment horizon.
b. Growth-and-Income Funds - Funds that combine features of growth funds and income
funds are known as Growth-and-Income Funds. These funds invest in companies having
potential for capital appreciation and those known for issuing high dividends. The level of risks
involved in these funds is lower than growth funds and higher than income funds.

c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money
market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation
funds adopt a variable asset allocation strategy that allows fund managers to switch over from
one asset class to another at any time depending upon their outlook for specific markets. In
other words, fund managers may switch over to equity if they expect equity market to provide
good returns and switch over to debt if they expect debt market to provide better returns. It
should be noted that switching over from one asset class to another is a decision taken by the
fund manager on the basis of his own judgment and understanding of specific markets, and
therefore, the success of these funds depends upon the skill of a fund manager in anticipating
market trends.
6. Commodity Funds
Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or
commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity
fund that invests in a single commodity or a group of commodities is a specialized commodity fund
and a commodity fund that invests in all available commodities is a diversified commodity fund and
bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest
in gold, gold futures or shares of gold mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized
assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of
these funds may be to generate regular income for investors or capital appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end
mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges
like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer
diversification, flexibility of holding a single share (tradable at index linked prices) at the same time.
Recently introduced in India, these funds are quite popular abroad.

9. Fund of Funds
Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund
schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio
comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a
portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds
provide investors with an added advantage of diversifying into different mutual fund schemes with
even a small amount of investment, which further helps in diversification of risks. However, the
expenses of Fund of Funds are quite high on account of compounding expenses of investments into
different mutual fund schemes.

Mutual Fund Operation Flow Chart

** Indian scenario of Mutual Funds=

The year 1993 was a remarkable turning point in the Indian Mutual Fund industry. The stock investment
scenario till then was restricted to UTI (Unit Trust of India) and public sector. This year marked the entry of
private sector mutual funds, giving the Indian investors a wider choice of selecting mutual funds. From then on,
the graph of mutual fund players has been on the rise with many foreign mutual funds also setting up funds in
India. The industry has also witnessed several mergers and acquisitions proving it advantageous to the Indian
investors.

Are mutual funds emerging as preferred investment option? Are they safe and will your money be secured with
them? Before proceeding to answer these questions, a look at the February 2006, Indian bull market scenario is
worth a mention.

For the first time ever, stock market indices in India are at a record high. The Bombay Stock Exchange closed
above the 10,000-mark for the first time ever, an ecstatic event in the history of the Stock exchange. Market
savvy Indian investors have been busy transacting across sectors such as banking automobile, sugar, consumer
durable, fast moving consumer goods (FMCG) and pharmaceutical scripts. And, the Union Finance Minister,
Mr.P.Chidambaram, has responded positively and advised investors to take informed decisions or invest through
mutual funds.

Mutual funds are not considered any more as obscure investment opportunities. The mutual funds assets have
registered an annual growth rate of 9% over the past 5 years. Considering the current trend and the relative
positive response of the Indian economy, a much bigger jump is on the anvil.

History of Indian Mutual funds

The history of the Indian mutual fund industry can be traced to the formation of UTI in 1963. This was a joint
initiative of the Government of India and RBI. It held monopoly for nearly 30 years. Since 1987, non-UTI
mutual funds entered the scenario. These consisted of LIC, GIC and public-sector bank backed Indian mutual
funds. SBI Mutual fund was the first of this kind. 1993 saw the entry of private sector players on the Indian
Mutual Funds scene. Mutual fund regulations were revised in 1996 to accommodate changing market needs.

With the Sensex on a scorching bull rally, many investors prefer to trade on stocks themselves. Mutual funds are
more balanced since they diversify over a large number of stocks and sectors. In the rally of 2000, it was noticed
that mutual funds did better than the stocks mainly due to prudent fund management based on the virtues of
diversification.

**Some of the major players on the Indian mutual fund scene:

• ABN AMRO Mutual Fund

• Benchmark Mutual Fund

• Taurus Mutual Fund
• Birla Mutual Fund
• Unit Trust of India
• BOB Mutual Fund
• UTI Mutual Fund
• Canbank Mutual Fund

• Chola Mutual Fund

• Deutsche Mutual Fund

• DSP Merrill Lynch Mutual

Fund

• Escorts Mutual Fund

• Fidelity Mutual Fund

• Franklin Templeton

• Investments

• HDFC Mutual Fund

• HSBC Mutual Fund

• ING Vysya Mutual Fund

• JM Financial Mutual Fund

• Kotak Mahindra Mutual

Fund

• LIC Mutual Fund

• Morgan Stanley Mutual

Fund

• PRINCIPAL Mutual Fund

• Prudential ICICI Mutual

Fund

• Reliance Mutual Fund

• Sahara Mutual Fund

• SBI Mutual Fund

• Standard Chartered Mutual

Fund

• Sundaram Mutual Fund

• Tata Mutual Fund

Different Indian mutual funds allow investors various solutions ranging from retirement planning and buying a
house to planning for child's education or marriage. Tax-wise stocks and mutual funds work similarly since long-
term capital gains from both stocks and equity-oriented mutual funds are tax-free.

Well, what are the charges, fees and expenses associated with investing in Indian mutual funds? At the time of
entry into a mutual fund, you have to pay an additional charge or entry load along with the value of units
purchased.

When you exit from the scheme, you will get back the value of the units less the exit load charges. If you want
to switch from one type of mutual fund investment to another, you will be required to pay the exchange fees.
Advisory fees, broker fees, audit fees and registrar fees are some of the other recurring expenditures that would
be charged to you. These expenses involve administrative and other running costs.

In India, SEBI (The Securities and Exchange Board of India) is the regulating authority that SEBI formulates
policies and regulates the mutual funds to protect the interest of the Indian investors. There have been revisions
and amendments from time to time.

Even mutual funds promoted by foreign entities come under the purview of SEBI when operating in India. SEBI
has revised its regulations to allow Indian mutual funds to invest in both gold and gold related instruments.

**Fundamental analysis

Fundamental analysis of a business involves analyzing its financial statements and health, its management and
competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the
overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock,
futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up
analysis and top down analysis.[1] The term is used to distinguish such analysis from other types of investment
analysis, such as quantitative analysis and technical analysis.

Fundamental analysis is performed on historical and present data, but with the goal of making financial
forecasts. There are several possible objectives:

• to conduct a company stock valuation and predict its probable price evolution,
• to make a projection on its business performance,
• to evaluate its management and make internal business decisions,
• to calculate its credit risk.

**Economic Analysis

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Economic forces affect decisions made in personal business activities, as well as within business organizations,
government entities, and nonprofit organizations. Changes in economic conditions affect and are affected by
supply and demand, strength of buying power and the willingness to spend, and the intensity of competitive
efforts. These changes propel fluctuations in the overall state of the economy and influence courses of action and
the timeliness of actions. Nonprofit organizations, for example, may find that fund-raising efforts fueled by
personal contributions are more successful during periods of economic prosperity. A first-time home buyer may
be more inclined to purchase a house when interest rates are low and prices are likely to increase in future
months. Since decision makers cannot control economic forces, a concerted effort should be made to monitor
such forces. All business executives know that it is important to gain some idea of what general business
conditions will be in the months or years ahead. Fortunately, certain economic indicators or indicesenable
decision makers to forecast oncoming changes in economic forces. Since both individuals and organizations
operate in a dynamic economic environment, losing sight of what is going on can be disastrous for either.

**THE PROCESS OF CONDUCTING AN ECONOMIC ANALYSIS=

Step 1—Identify Appropriate Economic Indicators
Step 2—Collect Economic Data
Step 3—Prepare or Select an Economic Forecast
Step 4—Interpret the Economic Data
Step 5—Monitor Intervening Forces
Step 6—Use the Economic Analysis for Decision Making

*Economic Analysis: Business Cycles, Monetary & Fiscal Policy, Economic Indicators, World
Events & Foreign Trade, Inflation, Public Sentiment, GDP Growth, Unemployment, Productivity,
Capacity Utilization, etc.

*Industry Analysis: Industry Structure, Competition, Supply-Demand Relationships, Product

Quality, Cost Elements, Government Regulation, Business Cycle Exposure, etc.

**Equity Shares
An equity share, commonly referred to as ordinary share also represents the form of fractional
ownership in which a shareholder, undertakes the maximum entrepreneurial risk associated with a
business venture. The holder of such shares will be a member of the company and will have voting
rights.
An equity share, commonly referred to as ordinary share also represents the form of fractional
ownership in which a shareholder, undertakes the maximum entrepreneurial risk associated with a
business venture. The holder of such shares will be a member of the company and will have voting
rights.
Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to
those already held.
Bonus Shares: Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profits earned in the earlier years.
Preferred Stock/ Preference shares: Owners of this kind of shares are entitled to a fixed
dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus.

Fundamental Analysis
As with the analysis of fixed income securities, equities may be analyzed on an expected future
cash flow, or benefit, to the shareholder basis. When reading the financial papers one often encounters
the term "intrinsic value". This concept is what is considered to be the corner stone of fundamental
analysis.
How does an investor determine if a stock is undervalued, overvalued, or trading at fair market
value? With fundamental analysis, this may be done by applying the concept of intrinsic value. If all
the information regarding a corporations future anticipated growth, sales figures, cost of operations,
and industry structure, among other things, are available and examined, then the resulting analysis is
said to provide the intrinsic value of the stock.
To a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the
intrinsic value of a stock is above the current market price, the investor would purchase the stock.
However, if the investor found through analysis that the intrinsic value if a stock was below the market
price for the stock, the investor would sell the stock from their portfolio or take a short position in the
stock.
 There are several steps associated with fundamental analysis. The investor must make an
examination of the current and future overall health of the economy as a whole. Attempt to determine
the short-, medium- and long-term direction and level of interest rates. This may done through
interest rate forecasting. An understanding of the industry sector involved, including the maturity of
the sector and any cyclical effects that the overall economy have on it, is also necessary.
Once these steps have been undertaken, then the individual firm must be analyzed. This
analysis must include the factors which give the firm a competitive advantage in its sector (low cost
producer, technological superiority, distribution channels, etc.). As well, an in-depth look at the firm
must be undertaken. Such factors as management experience and competence, history of performance,
accuracy of forecasting revenues and costs, growth potential, etc., must be examined.
All the steps above give a qualitative overview of the firms position within its sector and the
economy as a whole. This is necessary in order to understand whether a quantitative analysis should
be undertaken. If numbers must come into play, there are two relatively simple models which can be
helpful for the investor willing to better understand the firm being investigated for investment. The
two most commonly used methods for determining the intrinsic value of a firm are the dividend
discount model, and the price/earnings model. Both methods if employed properly should produce
similar intrinsic values.

Technical Analysis
Technical analysis is based on an examination of the price and volume movements of individual
stocks, sectors, or the market as a whole. By charting historic information the technical analyst is
searching for clues as to what direction the market, sector or stock will move next. Distinctive patterns
emerge in charting which are used to make market direction or momentum decisions. Technical
analysis may be applied to anything that is traded, whether it be stocks, bonds, commodities, or
currencies. There is no desire in pure technical analysis to examine the qualitative and quantitative
factors affecting an industry as with fundamental analysis.
Technical analysis is based on two fundamental assumptions. First, all historic price and
volume patterns exhibited by a stock represent the total market perception of what is known or
knowable about the individual stock. Thus, past price and volume behaviour is indicative of future
movements. Second, the market does not move in a random manner. Long-term patterns develop in
the market which have sub-trends within them. An adept technical analyst is able to identify and
exploit trend defining patterns. Given the assumptions which underlie technical analysis, a technician
aims to identify trends, changes in trends, and target price levels for each newly developed trend
pattern.
There are many types of technical analysis. Market technicians depend on more than just price
and volume data for identifying turning points in the market. Dow Theory, Elliot Wave Theory, pattern
identification, moving averages, advance/decline, charting styles, odd lots, short selling, put/call ratio,
relative strength indicators, Fibonacci levels are all tools of the technical analyst. Very few technicians
rely solely on one form of technical analysis. Several are used in conjunction with one another in order
to confirm market movements or trend changes.