Growth and Sustainability of Indian Capital markets

a myth or realty

By

Sridhar Kotyada
Ramesh Inkula
II Year MBA Students
Gayatri Vidya Parishad College for Degree and PG Courses
Rushikonda, Visakhapatnam-530 045
 

As every country today is aiming at reaching the status of developed country, the most
important input they require is the investment. Where do they get their investments?
Capital Market is the place where the economy can pool up funds required for their
investment needs. In the modern scenario of globalization Capital Market plays a vital role
in any economy. The strong presence of Capital Market resembles the strength of the
economy.

We can define Capital market as a place where longer maturity financial assets are
traded.

CAPITAL MARKETS IN DEVELOPING COUNTRIES: -

The term "emerging market" refers to the securities markets of a developing country and
the use that country makes of international capital markets.

CAPITAL MARKET IN INDIA: -

Coming to Indian context, the term capital market refers to only stock markets as per the
common man's ideology, but the capital markets have a much broader sense. Where as in
global scenario, it consists of various markets such as:

1. Government securities market

2. Municipal bond market
3. Corporate debt market
4. Stock market
5. Depository receipts market
6. Mortagate and asset-backed securities market
7. Financial derivates market
8. Foreign exchange market

STRUCTURE OF INDIAN CAPITAL MARKET: -

In India, many of the above markets are not developed to the required extent, and some
does not even exist.
A capital market can provide huge impetus to the development of any economy .so, it can
be said that the growth and sustainability of capital markets plays an important role towards
the development of the economy.

It is being observed that huge fluctuations are happening in Indian capital market in recent
past, but with the help of proper mechanism, which is being observed in India and after
examining various risk factors involved in capital markets, we attempt to say that the
growth which has been observed in Indian capital market in recent past is a realty, but not
a myth.

In India the capital market consists of

1. Stock market
2. Bonds, convertible debentures and debt market
3. New issue market and merchant banking

There are no special markets for the trading of municipal bonds, asset backed securities,
foreign exchange market and depository receipts market.

Right from the independence, thanks to steps initiated by the Indian government especially
after the post liberalization era. A huge growth has been observed in the aspects of quality
and quantity. Huge increase has been observed in the volumes of trade.

ROLE OF CAPITAL MARKETS: -

As we know that capital markets play a vital role in Indian economy, the growth of capital
markets will be helpful in raising the per-capita income of the individuals, decrease the
levels of un-employment, and thus reducing the number of people who lie below the poverty
line. With the increasing awareness in the people they start investing in capital markets with
long-term orientations, which would provide capital inflows to the sectors requiring financial
assistance.

Any individual investor considers the following factors of risk while investing in the capital
markets: -

1. VOLATILITY RISK AND RISK OF CONTAGIONS: High volatality is the characteristic of

any capital market, especially in emerging markets. They are immature and sometimes
vulnerable to scandal. They often lack legal and judicial infrastructure to enforce the law.
Accounting disclosure, trading and settlement practices may at times seem overly arbitrary
and naïve. Against this backdrop, many emerging markets have had to cope with
unprecedented inflows and outflows of capital. The sudden withdrawal of highly speculative,
short-term capital has the potential of taking with it much of a market's price support. Such
sudden flights of capital triggered by events in one emerging market can spread instantly to
other markets through contagion effects even when those markets have quite different
conditions.

2. LIQUIDITY RISK: Many emerging markets are small and illiquid. Volumes of trade are
quite low. This kind of thin trading often leads to higher costs because large transactions
have a significant impact on the market. Thus, buyers of large blocks of shares may have to
pay more to complete the transaction, and sellers may receive a lower price.
3. CLEARANCE AND SETTLEMENT RISK: Inadequate settlement procedures still exist in
many of the emerging markets. They lead to high FAIL rates. A Fail occurs when a trade
fails to settle on the settlement date.

4. POLITICAL RISK: In most of the developing countries the political systems are less
stable comparative to the developed countries. This scenario does not give the political
system to concentrate more on the capital market happenings and restrict any kind of
malfunctions or practices.

5. CURRENCY RISK: The trade in capital markets will be highly impacted by the
fluctuations in the foreign exchange rates. The currencies of the emerging countries are not
stable enough to compete with those of the developed countries. This leads towards
unexpected losses for the investors in the markets.

6. LIMITED DISCLOSURE AND INSUFFICIENT LEGAL INFRASTRUCTURE: As it is

already mentioned earlier that disclosure levels will not be up to the required extent in
emerging markets, the investors will not have a bright picture of the company in which they
are investing, and this may lead towards losses. 

Coming to the Indian context, we can say that a proper mechanism has been devised to
face and sustain with all the above risks, after facing each of them in a practical way. Thus
the growth, which has been seen in India capital market, can be said as a "sustainable
growth"

HOW TO SUBSTANTIATE THAT THE GROWTH IS SUSTAINABLE: -

1. As Financial institutional investors plays a vital role in the capital market funds and it is a
fact that no FII'S is long term oriented and really have a concurrent opinion of investing in
the core sectors of the economy and their ultimate motto is to gain more profits in short
term, this makes the FII'S to with draw their funds all of sudden when there is a chance of
comparatively more profits in other capital markets. Quite a number of occasions it has
created a situation of panic in Indian capital markets, but with the timely involvement of
Government, RBI and SEBI (which are the directive bodies to capital markets in India), the
capital markets have come up from the disastrous situations.

Foreign Institutional Investors' (FIIs) net investment in the Indian stock markets in calendar
year 2005 crossed US$ 10 billion in the 2005 calendar, the highest ever by the foreign
funds in a single year after FIIs were allowed to make portfolio investments in the country's
stock markets in the early 90s.

India's popularity among investors can be gauged from the fact that the number of FIIs
registered with SEBI has increased from none in 1992-93 to 528 in 2000-01 to 803 in 2005-
06. In 2005 alone, 145 new FIIs registered themselves, taking the total registered FIIs to
803 (as on October 31, 2005) from 685 in 2004-05.

A number of these investors are Japanese and European funds aiming to cash in on the
rising equity markets in India. In addition, there was increased registration by non-
traditional countries like Denmark, Italy, Belgium, Canada and Sweden.

India has the third largest investor base in the world. India has one of the world's lowest
transaction costs based on screen based transactions, paperless trading and a T+2
settlements cycle.
India has the distinction of consistent returns from the equities. Indian equities are highest
across emerging Asia for the fiscal year (April 2005-March 2006). The returns from Indian
equity markets have been far ahead of other emerging markets such as Mexico (52%),
Brazil (43%) or gulf co-operation council (GCC) economies such as Kuwait (26%). Indian
equities have delivered the highest returns in the world.

2. The Price Earning Ratios of the companies were always in a positive direction and rapid
increase has been observed over a period of time.

3. The levels of inflation were staying at a comfortable level

4. The incorporation of SEBI (1992) various practices have been devised and the companies
are being asked to comply with strict, stringent measures of corporate governance and the
levels of disclosure are raised to a huge extent.

a. Previously there was no compulsion for QIB's to deposit any amount at the time of
subscribing for an IPO. But with a recent amendment of SEBI, now it is must to deposit
10% of the total subscription quoted in advance, which leads to reduce the level of defaults
of QIBs in IPOs.

b. With effect from 1st April 2003, the activity settlement cycle scheduled in the stock
markets has been shortened to T+2 days.

c. In addition to provide quarterly, half yearly, annual results the companies are now bound
to get revised their accounts half yearly by auditors or CAs. SEBI has made   required
changes to the listing agreement to bring this directive into affect.

d. Not only getting their accounts revised, the promoters of the companies should also
disclose details of their holding on a continuous basis to investors through a website for
which SEBI has considered creating an EDGAR DATABASE for the Indian market and is
going into disclosure of capital market related data on its website.

INVESTOR'S PROTECTION BILL: -

When there was a boom seen in the Indian capital market, number of companies have
collected funds from the investors through capital markets and vanished in no time. In order
to protect the small investor from this kind of vanishing companies SEBI has drafted a bill
clarifying the role of the "Department of Company Affairs" and acquiring the power to debar
the directors and trace and attach the assets of those companies.

NET BROKING: -With affect from March 2000 SEBI framed guidelines to start Internet
broking on Indian securities, which could increase the transparency in the operations, and
reduce flaws and loopholes in the transactions of Indian capital markets.

INVESTORS' PROTECTION FUND: -

The government of India has notified the establishment of investor protection fund in
October 2001 under sec 205c of the Companies Act, according to which a fund will be
created with amounts such as amounts in unpaid dividend accounts of companies etc, which
have remained, unclaimed and unpaid for 7 years from the date they became due for
payment. The creation of this fund shows that the Indian capital markets have reached to a
sustainable level ensuring the investors to get back their investments in case of any default
of the companies.

SCAMS PERTAINING TO INDIAN CAPITAL MARKET: -

Number of government norms and legislations had been imposed for keeping the market
free from trickery and deception. In spite of these norms and regulations Indian capital
markets could not be perfectly sterilized from scams, even then their performance is quite
noticeable and the market has really boosted up.

Various measures have been taken up and policies have been framed from time to time to
contain these scams and to reoccur in future. In spite of these scams, the markets stood at
a comfortable level and in fact have been positive in nature, which can be said as a symbol
of sustainability.

BENCHMARK:

As it is a known fact that in India SENSEX is considered as the yardstick of the capital
market, and the following observations speak about the growth and sustainability of the
capital markets in India.

JOURNEY OF SENSEX TOWARDS THE PINNACLE

Month, date Year Points

July 25 1990 1000
Jan 15 1992 2000
Feb 29 1992 3000
March 30 1992 4000
Oct 8 1999 5000
Feb 11  2000 6000
June 20 2005 7000
Sept 8 2005 8000
Nov 28 2005 9000
Feb 6 2006 10000         
 March 21 2006 11000          
April 20 2006 12000

From the above table we can observe that the time being taken to rise from thousand to
thousand is getting reduced at a great pace. Even though huge sea-saws are being seen,
the index is gaining in a remarkable manner, and on and over the time it resembles the
Sustained position.

FOREIGN DIRECT INVESTMENTS:

In this we can concentrate on two aspects, one is In-ward FDI and the other is Out-ward
FDI. India being one of the favorite destinations for the investors throughout the world is
attracting huge amounts of FDIs, which will be helpful in further strengthening the roots of
the Indian Capital Markets. In the other context we can say that some Indian firms rose to
the level of investing in foreign countries, which shows the strength of the companies. The
presence of these companies in Indian Capital markets would definitely enhance the
expectations of foreign investors investing in India.

We can quote the following recent inward FDIs:

  Mizuho Corporate Bank's decision to successfully expand base in the country has
managed to convince almost 60-65 major Japanese corporates to setup
manufacturing base in India.
 
 Sabre Capital and Singapore's Temasek Holding have teamed up to float a fund that
will invest up to US$ 5 billion in Indian equities as well as fixed income instruments
over the next five years.

OUT-WARD FDIS:

 Reliance Industries Ltd. has launched US$ 300 million in US debt market by issuing
10 and 12 years tenures.

We can add the following to stress the sustainability:

* The Prime Minister of India Dr. Man Mohan Singh, on the occasion of 125 years
celebrations of Bombay Stock Exchange has quoted "Capital Markets are the prerequisites
to the health of the economy. Indian Capital Markets has now begun to transform rapidly in
the past five years to offer world-class services to the investors".

* Deputy Chairman of Planning commission, Dr. Montek Singh Ahluwalia said, "Within the
next five years India will be achieving the growth rate of 9% which is not possible without
the role of Capital Markets".

* Union Minister for Commerce and Industry, Mr. Kamal Nath said "Of all the Foreign
Investors in India, 77 percent are making profits, and 8 percent break-even", which shows
that the players ending in losses are quite few compared to many other emerging markets.

The following reports of various surveys also show the sustainability:

* A landmark survey by the Japan Bank for International Co-operation (JBIC) shows that in
the next three years, India will be the third most favoured investment destination for
Japanese investors in a list, which includes US and Russia.

* A survey conducted by Ernst and Young on "investors on risk", which surveyed 137
institutional investors, shows that, 23 % of investors prefer CEO taking ownership of risk
and 54 % investors are risk tolerant, 18 % embrace risk. In another context, 31 % say
"good risk management is worth premium price" and 53 % wants boards to play active role
in risk. This could be a positive factor for India, which boosts the morale of Foreign
Investors to participate in Indian Capital Markets.

* Standard and Poor, India's leading ratings, financial news, risk and policy advisory
company, in partnership with its subsidiary CRISIL, provides exceptional insight into key
financial trends and developments in the Indian market reveal that "India, today is one of
the world's fastest growing and most dynamic economies, and a key contributor to Asia's
Balance of Payments' surplus".

POLICY SUGGESTIONS:

* A separate task force has to be setup to monitor and govern the happenings in the capital
markets, which should to be given an autonomous power, and should be constituted by the
Constitution of India such as Election Commission and Central Vigilance Commission etc. Its
role should be constituted regarding the matters such as, Governance of Companies,
Disclosure Norms, investing patterns etc.

* A proper mechanism has to be derived to regulate the operations of FIIs and contain
them with required regulations, but at the same time the regulations must not be in such a
manner that the FIIs does not get discouraged and withdraw their investments all in
sudden. The mechanism should regulate the unexpected capital flight, which could cause
rapid vibrations in the capital markets.

* Government and the governing bodies such as RBI and SEBI should together take
required steps to avoid the occurrence of scams, which will lead towards decreasing-morale
of the investors.

* Another way of sticking to sustainability can be said as encouraging and creating open
environment, which would bring in huge amounts of FDIs rather than FIIs.

* Municipal Bonds Market, Depository Receipts Market, Derivatives Market have to be

developed to a greater extent so that the trading volumes in these markets will be
increased substantially.

* Awareness among small investors has to be generated, and government has to take
certain measures to create awareness and at the same time they must be protected from
any kind of defaults.

* As the chances of risk can never be brought to zero level in any capital market, it should
be seen that the risk is reduced to the minimum extent possible.

In view with the above-mentioned facts and circumstances it can be justified to say that the
growth and sustainability of Indian Capital Markets is a Reality.

Conclusion:

A steady and growing market size, reliable business community, high levels of intellectual
manpower, technological expertise and a dedicated reform process that has brought about
impressive economic liberalization, has made India a very attractive destination for
investments in capital markets.

Acknowledgements:

We are very much grateful for the cooperation and interest of the professors who supported
in this phase of our presentation work. It would not have been possible with out their help.
Dr.B.Madhukar Patniak and Mr.TVV Phani Kumar supported this presentation. Our sincere
thanks to Mr. Murthy, the librarian of our college.

I would like to express my thanks to management of Gayatri Vidya Parishad College, School
of Management Studies for their permission which helped us to develop the ideas put
forward here in this paper.

Bibliography:
Author  K.T.Liaw  Title: Capital markets
Author  N.Gopalswamy  Title: Capital markets
Author  Fabozzi and Modgiliani  Title: Capital markets

Websites:

www.crisil.com
www.domain-b.com
www.zeenews.com
www.ey.com
www.ibef.org
www.rbi.org
www.imf.org
www.2.standardandpoors.com
 

Sridhar Kotyada
Ramesh Inkula
II Year MBA Students
Gayatri Vidya Parishad College for Degree and PG Courses
Rushikonda, Visakhapatnam-530 045
 

Book Building
About Book Building

Book Building is basically a capital issuance process used in Initial Public Offer (IPO)
which aids price and demand discovery. It is a process used for marketing a public offer
of equity shares of a company. It is a mechanism where, during the period for which
the book for the IPO is open, bids are collected from investors at various prices, which
are above or equal to the floor price. The process aims at tapping both wholesale and
retail investors. The offer/issue price is then determined after the bid closing date based
on certain evaluation criteria. 

The Process:

 The Issuer who is planning an IPO nominates a lead merchant banker as a 'book
runner'.

 The Issuer specifies the number of securities to be issued and the price band for orders.
  The Issuer also appoints syndicate members with whom orders can be placed by the
investors.

 Investors place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open auction.

 A Book should remain open for a minimum of 5 days.

 Bids cannot be entered less than the floor price.
 Bids can be revised by the bidder before the issue closes.
 On the close of the book building period the 'book runner evaluates the bids on the
basis of the evaluation criteria which may include -
o Price Aggression
o Investor quality
o Earliness of bids, etc.

 The book runner and the company conclude the final price at which it is willing to issue
the stock and allocation of securities.

 Generally, the number of shares are fixed, the issue size gets frozen based on the price
per share discovered through the book building process.

 Allocation of securities is made to the successful bidders.

 Book Building is a good concept and represents a capital market which is in the process
of maturing.

Initial Public Offerings

Corporates may raise capital in the primary market by way of an initial public offer,
rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities
to the public in the primary market. This Initial Public Offering can be made through the
fixed price method, book building method or a combination of both.
In case the issuer chooses to issue securities through the book building route then as
per SEBI guidelines, an issuer company can issue securities in the following manner:

a. 100% of the net offer to the public through the book building route.
b. 75% of the net offer to the public through the book building process and 25% through
the fixed price portion.
c. Under the 90% scheme, this percentage would be 90 and 10 respectively.
Difference between shares offered through book building and offer of shares through normal
public issue:

Features Fixed Price process Book Building process

Pricing Price at which the securities are Price at which securities will be
offered/allotted is known in offered/allotted is not known in advance to
advance to the investor. the investor. Only an indicative price range is
known.
Demand Demand for the securities offered Demand for the securities offered can be
is known only after the closure of known everyday as the book is built.
the issue
Payment Payment if made at the time of Payment only after allocation.
subscription wherein refund is
given after allocation.
Book building

From Wikipedia, the free encyclopedia

Jump to: navigation, search

Book building is basically the process of generating a book of investor demand for the shares during an
IPO for efficient price discovery. Usually, the issuer appoints a major investment bank to act as a book
runner.

Book building is a common practice in developed countries and has recently been making inroads into
emerging markets as well, including India. The whole book building process is done on-line.

[edit] Process

During the fixed period of time for which the subscription is open, the book runner collects bids from
investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder
before the book closes. The process aims at tapping both wholesale and retail investors. The final issue
price is not determined until the end of the process when the book has closed. After the close of the
book building period, the book runner evaluates the collected bids on the basis of certain evaluation
criteria and sets the final issue price.

If demand is high enough, the book can be oversubscribed. In these case the greenshoe option is
triggered.

Mutual Funds - The Logic behind Investing in Them

Mutual funds are investment companies that pool money from investors at large and offer to sell and
buy back its shares on a continuous basis and use the capital thus raised to invest in securities of
different companies. This article helps you to know in depth on:

* Is it possible to diversify investment if invested in mutual funds?

* Find more on the working of mutual fund

* Know more about the legal aspects in relation to the mutual funds

At the beginning of this millennium, mutual funds out numbered all the listed securities in New York
Stock Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in
comparison to bonds and stocks. The popularity of mutual funds may be relatively new but not their
origin which dates back to 18th century. Holland saw the origination of mutual funds in 1774 as
investment trusts before spreading to Anglo-Saxon countries in its current form by 1868.

We will discuss now as to what are mutual funds before going on to seeing the advantages of mutual
funds. Mutual funds are investment companies that pool money from investors at large and offer to sell
and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of
different companies. The stocks these mutual funds have are very fluid and are used for buying or
redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies
and receive dividends in lieu of them and the earnings are distributed among the share holders.

A Brief of How Mutual Funds Work

Mutual funds can be either or both of open ended and closed ended investment companies depending
on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to
investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund.
Closed end funds have limited number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of
various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way,
which is the dividend they get on the securities they hold. Second is by the redemption of their shares
by investors will be at a discount to the current NAVs (net asset values).

Are Mutual Funds Risk Free and What are the Advantages?

One must not forget the fundamentals of investment that no investment is insulated from risk. Then it
becomes interesting to answer why mutual funds are so popular. To begin with, we can say mutual
funds are relatively risk free in the way they invest and manage the funds. The investment from the pool
is well diversified across securities and shares from various sectors. The fundamental understanding
behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of
a corporation or a whole sector doing badly then the possible losses from that would be balanced by the
returns from other shares.

This logic has seen the mutual funds to be perceived as risk free investments in the market. Yes, this is
not entirely untrue if one takes a look at performances of various mutual funds. This relative freedom
from risk is in addition to a couple of advantages mutual funds carry with them. So, if you are a retail
investor and planning an investment in securities, you will certainly want to consider the advantages of
investing in mutual funds.

* Lowest per unit investment in almost all the cases

* Your investment will be diversified

* Your investment will be managed by professional money managers

Continue to: What are the Laws Governing Mutual Funds

Best guide for selecting the right mutual funds

Selecting best mutual funds mean a lot more than deciding by indices and their past performances.
However, you need to remember one thing that there is no quick gratification in investments of any
kind. This article tells you regarding:

* How can you select a mutual fund for investment?

* Is it important to pick up companies that are performing above average?

* Is it advisable to compare mutual funds across category?

When your investment purpose is for saving for retirement, then risk minimization should be your
mantra. And one of the best avenues for you to invest now is mutual funds as they have an average of
50 stocks in each portfolio for diversification and cushioning the risks. Selecting best mutual funds mean
a lot more than deciding by indices and their past performances. However, you need to remember one
thing that there is no quick gratification in investments of any kind.
Let us discuss the dos and don'ts of selecting the best mutual funds. These points should serve as
guidelines for making decision on whether your pick is among the best in the industry or not.

Dos In Selecting the Best Mutual Fund

1. Draw down your investment objective. There are various schemes suitable for different needs. For
example retirement plan, capital growth etc. Also get clear about your time frame for investment and
returns. Equity funds are not advisable for short term because of their long term nature. You can
consider money market and floating rate funds for short term gains. This equals asking - What kind of
mutual fund is right for me?

2. Once you have decided on a plan or a couple of them, collect as much information as possible on
them from different sources offering them. Funds' prospectus and advisors may help you in this.

3. Pick out companies consistently performing above average. Mutual funds industry indices are
helpful in comparing different funds as well as different plans offered by them. Some of the industry
standard fund indices are Nasdaq 100, Russel 2000, S&P fund index and DSI index with the latter rating
the Socially Responsible Funds only. Also best mutual funds draw good results despite market volatility.

4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all your short listed
funds and how they affect your returns. Best mutual funds have lower cost out go.

5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe Ratio explains
whether a fund is risk free based on its expected returns compared against a risk free money market
fund.

6. Some funds have the advantage of low minimum initial investments. You can start investing even
with $250 a month. This is advisable for building asset bases over a long period with small regular
investments.

Continue to: Don'ts in Selecting Best Mutual Funds

Like there are pit falls in every investment sphere you must be careful about even while investing
in mutual funds. Here is a list of don'ts you must consider for selecting best performing mutual
funds

 Don't go by the past performance alone. For, an average of performance over a period
will not tell you whether the performance is growing or at least maintained in the recent
years.
  Don't go by hearsay about the reputations of a fund. There are various rating agencies
which index the mutual funds regularly based on multiple factors. It forms your first step
in finding the best performing mutual funds.
 Don't invest huge sums of money in a single fund or all the money in one go. Spread out
your investments rationally. For example: Index funds for high returns, bond funds for
lower risks, 401 (k) retirement plans and so on.
 Don't ignore absolute returns. NAVs and percentage growths don't factor-in the taxes and
charges. Higher loads can diminish you in absolute returns. Some of the funds load you at
both buying as well as selling. Even no load funds have fees such as Rule 12-b fees.
 Don't chase a mutual fund because it is performing great in a bull run in the stock market.
Once the market stagnates or the trend reverses these funds will follow suit.
 Don't compare a mutual fund across the category. This means a diversified fund should
not be compared with index fund. While choosing a best one compare funds from the
same category regardless of the promoting companies.

It is definitely not easy to pick a few best mutual funds from those in the market. It is like
searching for the proverbial needle in the stack of hay. However, a best mutual fund is one that
charges low fees, that sticks to principles and investment styles, that puts your interest on top of
every thing else. The most important character of best mutual funds is they don't just know how
to ride a bull run but also a bear market.

Will Mutual Funds Definitely Work in Your Favor?

Mutual funds have gained in popularity with the investing public especially in the last two decades
following what is now known as the longest bull run of twenty years. Mutual funds have created wealth
for retirees and general safe financial players with the rise in stock prices. This article throws light on:

 What are the factors that prompt investors to invest in mutual funds?
 What are the risks involved in investing in mutual funds?
 Who regulates mutual funds?

Any one who is aware of stock market is not new to mutual funds. Mutual funds have gained in
popularity with the investing public especially in the last two decades following what is now known as
the longest bull run of twenty years. At the out set mutual funds have created wealth for retirees and
general safe financial players with the rise in stock prices. But why invest in mutual funds and why is
investing in mutual funds a popular option? How beneficial are they and what are the risk factors
involved in mutual funds investing? After all they are also a kind of instruments of investments.

Why Invest In Mutual Funds?

If you are considering investing in stock market and are afraid of its some what unpredictable
fluctuations, you can definitely consider investing in mutual funds. Some of the reasons that go strongly
in favor of mutual funds are their lowest risk factors owing to diversification of assets in to various
sectors and scrips or instruments within. As with the risk, the costs of unit share too are spread across
making them affordable by almost any one. If you are looking at open end funds you can always
purchase them from the company at the NAV minus some loads or expenses. The closed end funds give
you the flexibility of independent stocks while combining the best of the features of mutual funds.

How Mutual Funds Manage To Reduce Their Risk?

Fund managers allocate available funds in a specified proportion among various instruments of
investments. Consider a fund being well diversified across the spectrum of exchange listed stocks and
bonds which yield a guaranteed return in addition to being invested in money markets and real estates.
While bonds and money market investments provide a low but steady return, other instruments are of
high yielding character in a short period. The higher risk of high yielding portfolio is compensated for by
the investments in bonds in events of adverse market behavior.

The portfolio will be constantly reviewed and adjusted to variations in order to maximize returns and
minimize risks. This means, fund managers buy or sell stocks or bonds as per the dictates of the fund and
market pulls. For example an investment in a perceived risky instrument will be sold immediately and
reinvested in a prospective media of the time.

http://www.sharemarketbasics.com/Mutual-Funds/

Types of Dividend
A dividend is a payment made by a company to its shareholders.

A company can retain its profit for the purpose of re-investment in the business operations (known as
retained earnings), or it can distribute the profit among its shareholders in the form of dividends.

A dividend is not regarded as an expenditure; rather, it is considered a distribution of assets among

shareholders. The majority of companies keep a component of their profits as retained earnings and
distribute the rest as dividend.

The different types of dividends include:

 * Special dividend: Normally, public companies declare their dividends on a specific schedule;
however, they also have the option to declare a dividend at any time. This type of dividend is referred to
as a special dividend.

* Cash dividend: Paid in checks, this is the most basic form of dividend. Cash dividends considered a
type of investment earnings, and are taxable.

* Stock dividend: Given in the form of bonus shares or stocks of the issuing company or a subsidiary
company. Normally, they are offered on the basis of a prorata allotment.

* Property (in kind) dividend: Distributed in the form of assets by the issuing company or a subsidiary
company.

* Other types of dividend: Warrants and financial assets having market value are also distributed in
the form of dividends.

The distribution of dividends requires the approval of the board of directors, who declare the time or
date when the dividend will be distributed. The dates are categorized into four types:

* Ex-dividend date: The ex-dividend date is defined as the date subsequent to which every share that
is traded does not have any right to claim the dividend, which has been declared in the immediate past.

* Declaration date: The declaration date is defined as the date on which the board of directors
declares its aim for payment of dividend. On this date, the payment date and the record date are also
announced.

* Record date: The record date is defined as the date on or before which the shareholders who have
officially recorded their ownership and are entitled to get the dividend.

* Payment date: The payment date is defined as the date on which the checks of dividend will be sent
to shareholders or deposited to brokerage accounts.