MANAGEMENT OF FINANCIAL SERVICES AND

INSTITUITIONS

Q. 1 Answer the following questions (Maximum 50 Words)

a) Define Dematerialization.
Ans.) Dematerialization (DEMAT) is the move from physical
certificates to electronic bookkeeping. Actual stock certificates are then
removed and retired from circulation in exchange for electronic
recording. With the age of computers and the Depository Trust
Company, securities no longer need to be in certificate form. They can
be registered and transferred electronically.
Through dematerialization, so-called DEMAT accounts allow for
electronic transactions when shares of stock are bought and sold. Within
a DEMAT account, the certificates for stocks and other securities of the
user are held as a means for seamless trades to be made.

b) List the components of financial Instruments of India.

Ans.) Financial Instruments are classified into two types namely.

1. Cash Instruments - The value of the cash instruments are directly

influenced and determined by the markets. These are the kind of
securities which are easily transferred, such as: Equities, Mutual funds,
bonds, deposits and cash/cash equivalents.

2. Derivative Instruments - The value and characteristics of derivative

instruments are based on the underlying components such as assets,
interest rates or indices. These can be over-the-counter derivatives or
exchange-traded derivatives.

c) Step out the process of trade & Settlement in stock market.

Ans.) There are three phases in a secondary market transaction:

1) Trading
2) Clearing
3) Settlement

Trading
 
In the stock market, a large number of trades occur simultaneously. The
stock exchanges use an electronic order matching system to match ‘buy’
and ‘sell’ orders from different traders. This way, each trade is executed.

Clearing
 
Once two orders match and a trade is executed, the clearing process
takes place. Clearing is the identification of what security is owed to the
buyer and how much money is owed to the seller. The entire process is
managed by ‘clearing houses’. These are independent entities.

Settlement
 
The next step is to fulfill the financial obligations identified in the
clearing step. This involves the transaction settlement for the buyers and
sellers.
 
So once the buyer receives the security and the seller receives the
payment, the transaction is settled.

d) State the four objectives of financial institutions in India?

Ans.) Objectives of financial institutions in India are:

 Financial inclusion intends to increase awareness about the
benefits of financial services among the economically underprivileged
sections of the society.
 The process of financial inclusion works towards creating financial
products that are suitable for the less fortunate people of the society.
 Financial inclusion intends to improve financial literacy and
financial awareness in the nation.
 Financial inclusion aims to bring in digital financial solutions for
the economically underprivileged people of the nation.
 It also intends to bring in mobile banking or financial services in
order to reach the poorest people living in extremely remote areas of
the country.
 It aims to provide tailor-made and custom-made financial solutions
to poor people as per their individual financial conditions, household
needs, preferences, and income levels.

e) Define FPO.
Ans.) A follow-on public offering (FPO) is the issuance of shares to
investors by a company listed on a stock exchange. A follow-on offering
is an issuance of additional shares made by a company after an initial
public offering (IPO). However, follow-on offerings are different than
secondary offerings.
Public companies can also take advantage of an FPO through an offer
document. FPOs should not be confused with IPOs, the initial public
offering of equity to the public. FPOs are additional issues made after a
company is established on an exchange.

f) Name some of the Asset Backed Instruments.

Ans.) Asset-backed instruments, are bonds or notes backed by

financial assets. Typically these instruments or assets consist of
receivables other than mortgage loans,¹ such as credit card receivables,
auto loans, manufactured-housing contracts and home-equity loans.

g) Difference between commercial paper &Treasury bill.

Ans.) Commercial paper is a commonly used type of unsecured, short-

term debt instrument issued by corporations, typically used for the
financing of payroll, accounts payable and inventories, and meeting
other short-term liabilities. Maturities on commercial paper typically last
several days, and rarely range longer than 270 days. Commercial paper
is usually issued at a discount from face value and reflects prevailing
market interest rates.

Whereas, A Treasury Bill (T-Bill) is a short-term U.S. government debt

obligation backed by the Treasury Department with a maturity of one
year or less. Treasury bills are usually sold in denominations of $1,000.
However, some can reach a maximum denomination of $5 million in
non-competitive bids. These securities are widely regarded as low-risk
and secure investments.

The Treasury Department sells T-Bills during auctions using a

competitive and non-competitive bidding process. Noncompetitive bids
—also known as non-competitive tenders—have a price based on the
average of all the competitive bids received. T-Bills tend to have a
high tangible net worth.

h) What are the different sources of funds for development

bank?

Ans.) Sources of funds for development bank are:

 Internal Self-Finance.
 Equity, Debentures and Bonds.
 Public Deposits.
 Loans from Banks.
 The Managing Agency System.
 Indigenous Bankers.
 Development Finance Institutions.
 Foreign Capital.

i) Elaborate OCTEI and how it works?

Ans.)  The Counter Exchange of India (OTCEI) can be defined as a

stock exchange without a proper trading floor. All stock exchanges have
a specific place for trading their securities through counters. But the
OTCEI is connected through a computer network and the transactions
are taking place through computer operations. Thus, the development in
information technology has given scope for starting this type of stock
exchange.

OTCEI was set up to access high-technology enterprising promoters in

raising finance for new product development in a cost-effective manner
and to provide a transparent and efficient trading system to investors.

j) Any four duties of Stock Exchange.

Ans.) Duties of stock exchange are:

 Enable issuers and companies to raise new capital.

 Facilitate the process of investors subscribing in shares (securities)
 Provide capital to companies and investors.
 Organizes and oversees a fair and efficient market.

SECTION-B

Q.2.Describe the stock exchange market of India and its listing &
Trading mechanism in detail. 8

Ans.) Stock Exchange (also known as stock market or share market) is

one of the main integral part of capital market in India. It plays a vital
role in growing industries and commerce of a country which eventually
affect the economy. It is well organized market for purchase and sale of
corporate and other securities which facilitates companies to raise capital
by pooling funds from different investors as well as act as an investment
intermediary for investors. Moreover, it ensures that securities should be
traded according to some pre defined rules and regulations. London
Stock Exchange is the oldest stock exchange in the world whereas
Bombay Stock Exchange is the oldest one in India.

In India, there are 7 Stock Exchanges out of which NSE and BSE are the
two main indices. Most of the trading in Indian Stock Market takes place
on these two stock exchanges. Both the exchanges follow the same
trading hours, trading mechanism, settlement process etc. At the last
count, BSE comprises of 5800 listed firms whereas on the other hand its
rival NSE consists of 1659 listed firms. Interestingly, out of all the firms
listed on BSE, only around 500 firms constitutes more than 90 % of its
market capitalization.

Bombay Stock Exchange (BSE) is the leading and fastest stock

exchange in India as well as in South Asia established in 1875. Bombay
stock exchange is the world's 11th largest stock market by market
capitalization at $1.7 trillion as of 31 January 2015 (Monthly Reports,
World Federation of Exchanges). More than 5,000 companies are listed
on BSE. The main index of Bombay stock exchange is Sensex which
comprises of 30 stocks.

National Stock Exchange (NSE) was incorporated in 1992 as a tax

paying company and was recognized as a stock exchange in 1993 under
the Securities Contracts (Regulation) Act 1956. NSE is the 12th largest
stock exchange in the world with a market capitalization of more than
US$ 1.65 trillion as on 31 January 2015 (Monthly Reports, World
Federation of Exchanges). Moreover, it was the first exchange to
provide fully automated screen based electronic trading system. Nifty is
the indices to measure overall performance of the National Stock
Exchange which comprises of 50 stock index.

The Stock Exchange serves two critical functions:

a. It provides a critical link between companies that need funds

to set up new business or to expand their current operations
and interested investors.
 b. Stock Exchange also acts as a guide for the investors that
have excess funds to invest in such companies.

The main aim of this study is to determine the impact of various

economic variables on the performance of stock market of selected listed
IT companies on NSE.

There are number of sectors or industries which are listed on National

Stock Exchange and Bombay Stock Exchange. In addition to this, an
individual sector comprises of number of companies. There are around
73 sectors listed on NSE and BSE seperately. Some of the important
sectors present on both the exchanges are as follows:-

 BANKING SECTOR
 AUTOMOBILE SECTOR
 INFORMATION TECHNOLOGY SECTOR
 METAL SECTOR
 REAL ESTATE SECTOR
 FMCG SECTOR
 MEDIA & ENTERTAINMENT SECTOR
 PHARMACEUTICALS SECTOR
 POWER SECTOR
 PSU BANK SECTOR

TRADING MECHANISM

1.)Finding a Broker

A broker acts as an intermediary or a mediator between the investor and

the stock exchange. The work of a broker is transfer of order
electronically from the investor to the exchange. Any transaction that
occurs in stock market is taken care by the stock exchange. Normally in
India the stock exchange for trading is active from 9:15 AM to 3:30 PM.
However from 1st October, 2018 SEBI has decided to extend the trading
hours till 11:55 pm in a move to attract the investors dealing in Indian
products on overseas exchanges. The brokers should be selected on the
following basis:

• Watching out for fees taken for opening an online trading account
• Having a proper look at ratings and customer service.
• Brokerage charge for intraday trading
• Brokerage charge on selling a long held share
• Margin provided by the broker on intraday trading
• The broker must provide information regarding investment
opportunities on a regular basis.

Open an online trading account with ATS and avail lowest brokerage
charges on your trading transactions, 24/7 customer support, call and
trade facility, and easy and instant payout options.

2.) Opening Account With the Broker

Having selected a broker it is time to open an online trading account

with the broker. A broker always opens a trading account in the name of
the investor/ client only if he/she is satisfied about the credit worthiness
of the client. If the broker feels satisfied with the client he/she will open
the account by writing the client’s name in the broker’s book. The
minimum requirement for opening a trading account is PAN card, and
bank account failing to which the account cannot be opened.

3.) Placing the Order

After the account is opened successfully a notification will be provided

via email or message. Then the investor can begin the trading as per
his/her wish. The trading or investment is done by purchasing a
specified number of shares of a particular company. The order when
placed is incomplete until the order status shows complete. Different
online trading platforms follow different symbols to mark the order
placing. Order can also be placed via a telephonic call with the broker.
There are different types of orders:

Buy Orders

Buy orders are placed when the price of the share is expected to rise.
This can be understood by simple Demand-Supply curve. As the demand
increases people buy more and the price gradually rises. The same logic
applies in the share market. As the price of the share rises, the investors
feel the price will further rise and they buy the shares. However the
amount of quantity is fully dependent on the availability of funds and
risk associated with the particular share.

Sell orders

Sell orders are executed when the investor feels that the price of the
share will decline from now on. However it is totally based on analysis
and predictions.

Limit order

It is an order for buying or selling of securities at a particular price as set

by the investor. However there is no guarantee that the limit order will
be executed.

Stop Loss order

It is an order to sell the shares as soon as the price of the share falls up to
a particular level or from the buy side to buy the share when the price
rises up to a specified level. This is set by the client to avert the loss
which can occur in share market. This is done to not suffer loss more
than the specified limit.
Fixed Price order

When the investor specifies the price at which he/she wants to buy/sell
the shares is called fixed price order.

Market order

A market order is executed at CMP (Current Market Price). It occurs

mainly during intraday trading. When the buyer has bought the shares
and has not sold the shares before 3:15pm then from the broker side the
shares are sold at CMP.

Discretionary order

It is normally done by the broker from their side when the investor has
complete faith and trusts the broker. It is an order to the broker to
buy/sell the shares at whatever price the broker thinks will be good for
the investor.

Cancel order

If the price is not matched then the order is cancelled and new fresh
orders have to be placed again. Also, however if the margins are
insufficient then order is cancelled. In that case the trader has to place
order with a reduced number of order quantity.

Day order

The validity of these orders is for the day in which they are put in the
trading platform. However if they are not executed (buy/sell) then the
orders are cancelled automatically from the broker side.
Good Till Day order

An order can be placed by the investor specifying the number of days for
which the orders will remain open. However even after the price level is
not met then the order has to be cancelled and it is automatically
cancelled.

4.)Execution of the Order

The orders are executed by the broker on behalf of the clients. The buy
orders must tally the sell orders if not then the broker will sell/buy to
match the order. For this the broker charges an amount. Normally in an
electronic platform the execution occurs automatically.

5.) Preparation of Contract Notes

A contract note is a written agreement between the broker and the

investor for smooth execution of the transaction. A contract note is sent
through an automated message and via mail through the registered
phone and mail respectively by the end of the day. However it varies
from broker to broker and the timing varies.
A contract contains the transaction name, brokerage charges, trading on
BSE/ NSE, SEBI registration number of the broker, settlement number
and a digital signature by the broker.

6.) Contract Settlement

The settlement is done by the clearing agency which functions in each

stock exchange. The clearing agency delivers the share certificates by
the end of the day.
Q.3. Discuss the Powers and Duties of SEBI 8

Ans.) Securities and Exchange Board of India (SEBI) is a statutory

regulatory body entrusted with the responsibility to regulate the Indian
capital markets. It monitors and regulates the securities market and
protects the interests of the investors by enforcing certain rules and
regulations.

SEBI was founded on April 12, 1992, under the SEBI Act, 1992.
Headquartered in Mumbai, India, SEBI has regional offices in New
Delhi, Chennai, Kolkata and Ahmedabad along with other local regional
offices across prominent cities in India.

The objective of SEBI is to ensure that the Indian capital market works
in a systematic manner and provide investors with a transparent
environment for their investment. To put it simply, the primary reason
for setting up SEBI was to prevent malpractices in the capital market of
India and promote the development of the capital markets.

The functions and powers of SEBI have been listed in the SEBI
Act,1992. SEBI caters to the needs of three parties operating in the
Indian Capital Market. These three participants are mentioned below:

• Issuers of the Securities: 

Companies that issue securities are listed on the stock exchange. They
issue shares to raise funds. SEBI ensures that the issuance of Initial
Public Offerings (IPOs) and Follow-up Public Offers (FPOs) can take
place in a healthy and transparent way.

• Protects the Interests of Traders & Investors: 

It is a fact that the capital markets are functioning just because the
traders exist. SEBI is responsible for safeguarding their interests and
ensuring that the investors do not become victims of any stock market
fraud or manipulation.
 • Financial Intermediaries: 
SEBI acts as a mediator in the stock market to ensure that all the market
transactions take place in a secure and smooth manner. It monitors every
activity of the financial intermediaries, such as broker, sub-broker,
NBFCs, etc

Securities and Exchange Board of India has the following three powers:

• Quasi-Judicial: With this authority, SEBI can conduct hearings

and pass ruling judgements in cases of unethical and fraudulent
trade practices. This ensures transparency, fairness, accountability
and reliability in the capital market. SEBI PACL case is an
example of this power.

• Quasi-Legislative: Powers under this segment allow SEBI to draft

rules and regulations for the protection of the interests of the
investor. One such regulation is SEBI LODR (Listing Obligation
and Disclosure Requirements). It aims at consolidating and
streamlining the provisions of existing listing agreements for
several segments of the financial market like equity shares. This
type of regulation formulated by SEBI aims to keep any
malpractice and fraudulent trading activates at bay.

• Quasi-Executive: SEBI is authorized to file a case against anyone

who violates its rules and regulation. It is empowered to inspect
account books and other documents as well if it finds traces of any
suspicious activity.
Q.4. Write short notes on:
a) Book Building Process b) Micro finance
2X4=8

Ans.)
a.) Book Building Process:

Book building is the process by which an underwriter attempts to

determine the price at which an initial public offering (IPO) will be
offered. An underwriter, normally an investment bank, builds a book by
inviting institutional investors (fund managers et al.) to submit bids for
the number of shares and the price(s) they would be willing to pay for
them.

Book building has surpassed the 'fixed pricing' method, where the price
is set prior to investor participation, to become the de facto mechanism
by which company’s price their IPOs.

The process of price discovery involves generating and recording

investor demand for shares before arriving at an issue price that will
satisfy both the company offering the IPO and the market. It is highly
recommended by all the major stock exchanges as the most efficient way
to price securities.

The book building process comprises of these steps:

1. The issuing company hires an investment bank to act

as underwriter who is tasked with determining the price range the
security can be sold for and drafting a prospectus to send out to the
institutional investing community.

2. Invite investors, normally large scale buyers and fund managers, to

submit bids on the number of shares that they are interested in
buying and the prices that they would be willing to pay.
 3. The book is 'built' by listing and evaluating the aggregated demand
for the issue from the submitted bids. The underwriter analyzes the
information then uses a weighted average to arrive at the final
price for the security, which is termed the 'cut off' price.

4. The underwriter has to, for the sake of transparency, publicize the
details of all the bids that were submitted.

5. Allocate the shares to the accepted bidders.

Even if the information collected during the book building suggests a

particular price point is best, that does not guarantee a large number of
actual purchases once the IPO is open to buyers. Further, it is not a
requirement that the IPO be offered at that price suggested during the
analysis.

b.) Micro Finance:

Microfinance is a way in which loans, credit, insurance, access to
savings accounts, and money transfers are provided to small business
owners and entrepreneurs in the underdeveloped parts of India.

The beneficiaries of microfinance are those who do not have access to

these traditional financial resources. Interest rates on microloans are
generally higher than that on traditional personal loan.

Microfinance includes the following products:

1. Micro-loans - Microfinance loans are significant as these are

provided to borrowers with no collateral. The end result of
microloans should be to have its recipients outgrow smaller
loans and be ready for traditional bank loans.

2. Micro-savings – Such accounts allow entrepreneurs operate

savings accounts with no minimum balance. These accounts help
 users inculcate financial discipline and develop an interest in
saving for the future.

3. Micro-insurance - It is a type of coverage provided to borrowers

of microloans. These insurance plans have lower premiums than
traditional insurance policies.

In some situations, recipients of microloans are expected to take some

training courses, such as cash flow management or book-keeping.

Importance of Microfinance

• Almost half of the population of our country does not have a basic
savings account. However, this segment requires financial services
so that their aspirations such as building of assets and protection
against risk can be fulfilled.

• Microfinance provides access to capital for individuals who are

financially underserved. If microfinance institutions were not
offering loans to this segment of the society, these groups would
have resorted to borrowing money from friends or family
members. The probability of them opting for fast cash loans or
payday advances (that bear huge interest rates) are also high.

• Microfinance helps these groups invest wisely in their businesses,

and hence, is in alignment with the government’s vision of
financial inclusion in the country.

Q.5. Explain the process of hire purchase

8

Q.6. Explain the mechanism of stock Holding Corporation of India

by its working. 8
Q.7. what do you understand by mutual fund? Explain the
different types of mutual funds in detail.16

Ans.) A mutual fund is a type of financial vehicle made up of a pool of

money collected from many investors to invest in securities like stocks,
bonds, money market instruments, and other assets. Mutual funds are
operated by professional money managers, who allocate the fund's assets
and attempt to produce capital gains or income for the fund's investors.
A mutual fund's portfolio is structured and maintained to match the
investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally
managed portfolios of equities, bonds, and other securities. Each
shareholder, therefore, participates proportionally in the gains or losses
of the fund. Mutual funds invest in a vast number of securities, and
performance is usually tracked as the change in the total market cap of
the fund—derived by the aggregating performance of the underlying
investments.

Investors typically earn a return from a mutual fund in three ways:

Income is earned from dividends on stocks and interest on bonds held in
the fund's portfolio. A fund pays out nearly all of the income it receives
over the year to fund owners in the form of a distribution. Funds often
give investors a choice either to receive a check for distributions or to
reinvest the earnings and get more shares.
If the fund sells securities that have increased in price, the fund has
a capital gain. Most funds also pass on these gains to investors in a
distribution.

If fund holdings increase in price but are not sold by the fund manager,
the fund's shares increase in price. You can then sell your mutual fund
shares for a profit in the market.
Types of Mutual Funds
Mutual funds are divided into several kinds of categories, representing
the kinds of securities they have targeted for their portfolios and the type
of returns they seek. There is a fund for nearly every type of investor or
investment approach. Other common types of mutual funds include
money market funds, sector funds, alternative funds, smart-beta funds,
target-date funds, and even funds-of-funds, or mutual funds that buy
shares of other mutual funds.

Equity Funds

The largest category is that of equity or stock funds. As the name

implies, this sort of fund invests principally in stocks. Within this group
are various subcategories. Some equity funds are named for the size of
the companies they invest in: small-, mid-, or large-cap. Others are
named by their investment approach: aggressive growth, income-
oriented, value, and others. Equity funds are also categorized by whether
they invest in domestic (U.S.) stocks or foreign equities. There are so
many different types of equity funds because there are many different
types of equities. A great way to understand the universe of equity funds
is to use a style box, an example of which is below.

The idea here is to classify funds based on both the size of the
companies invested in (their market caps) and the growth prospects of
the invested stocks. The term value fund refers to a style of investing
that looks for high-quality, low-growth companies that are out of favor
with the market. These companies are characterized by low price-to-
earnings (P/E) ratios, low price-to-book (P/B) ratios, and high dividend
yields. Conversely, spectrums are growth funds, which look to
companies that have had (and are expected to have) strong growth in
earnings, sales, and cash flows. These companies typically have high
P/E ratios and do not pay dividends. A compromise between strict value
and growth investment is a "blend," which simply refers to companies
that are neither value nor growth stocks and are classified as being
somewhere in the middle.

Fixed-Income Funds

Another big group is the fixed income category. A fixed-income mutual

fund focuses on investments that pay a set rate of return, such as
government bonds, corporate bonds, or other debt instruments. The idea
is that the fund portfolio generates interest income, which it then passes
on to the shareholders.

Sometimes referred to as bond funds, these funds are often actively

managed and seek to buy relatively undervalued bonds in order to sell
them at a profit. These mutual funds are likely to pay higher returns than
certificates of deposit and money market investments, but bond funds
aren't without risk. Because there are many different types of bonds,
bond funds can vary dramatically depending on where they invest. For
example, a fund specializing in high-yield junk bonds is much riskier
than a fund that invests in government securities. Furthermore, nearly all
bond funds are subject to interest rate risk, which means that if rates go
up, the value of the fund goes down.

Index Funds

Another group, which has become extremely popular in the last few
years, falls under the moniker "index funds." Their investment strategy
is based on the belief that it is very hard, and often expensive, to try to
beat the market consistently. So, the index fund manager buys stocks
that correspond with a major market index such as the S&P 500 or the
Dow Jones Industrial Average (DJIA). This strategy requires less
research from analysts and advisors, so there are fewer expenses to eat
up returns before they are passed on to shareholders. These funds are
often designed with cost-sensitive investors in mind.

Balanced Funds

Balanced funds invest in a hybrid of asset classes, whether stocks,

bonds, money market instruments, or alternative investments. The
objective is to reduce the risk of exposure across asset classes.This kind
of fund is also known as an asset allocation fund. There are two
variations of such funds designed to cater to the investors objectives.
Some funds are defined with a specific allocation strategy that is fixed,
so the investor can have a predictable exposure to various asset classes.
Other funds follow a strategy for dynamic allocation percentages to meet
various investor objectives. This may include responding to market
conditions, business cycle changes, or the changing phases of the
investor's own life.

While the objectives are similar to those of a balanced fund, dynamic

allocation funds do not have to hold a specified percentage of any asset
class. The portfolio manager is therefore given freedom to switch the
ratio of asset classes as needed to maintain the integrity of the fund's
stated strategy.

Money Market Funds

The money market consists of safe (risk-free), short-term debt

instruments, mostly government Treasury bills. This is a safe place to
park your money. You won't get substantial returns, but you won't have
to worry about losing your principal. A typical return is a little more
than the amount you would earn in a regular checking or savings
account and a little less than the average certificate of deposit (CD).
While money market funds invest in ultra-safe assets, during the 2008
financial crisis, some money market funds did experience losses after the
share price of these funds, typically pegged at $1, fell below that level
and broke the buck.

Income Funds

Income funds are named for their purpose: to provide current income on

a steady basis. These funds invest primarily in government and high-
quality corporate debt, holding these bonds until maturity in order to
provide interest streams. While fund holdings may appreciate in value,
the primary objective of these funds is to provide steady cash flow to
investors. As such, the audience for these funds consists of conservative
investors and retirees. Because they produce regular income, tax-
conscious investors may want to avoid these funds.

International/Global Funds

An international fund (or foreign fund) invests only in assets located

outside your home country. Global funds, meanwhile, can invest
anywhere around the world, including within your home country. It's
tough to classify these funds as either riskier or safer than domestic
investments, but they have tended to be more volatile and have unique
country and political risks. On the flip side, they can, as part of a well-
balanced portfolio, actually reduce risk by increasing diversification,
since the returns in foreign countries may be uncorrelated with returns at
home. Although the world's economies are becoming more interrelated,
it is still likely that another economy somewhere is outperforming the
economy of your home country.

Specialty Funds

This classification of mutual funds is more of an all-encompassing

category that consists of funds that have proved to be popular but don't
necessarily belong to the more rigid categories we've described so far.
These types of mutual funds forgo broad diversification to concentrate
on a certain segment of the economy or a targeted strategy. Sector
funds are targeted strategy funds aimed at specific sectors of the
economy, such as financial, technology, health, and so on. Sector funds
can, therefore, be extremely volatile since the stocks in a given sector
tend to be highly correlated with each other. There is a greater
possibility for large gains, but a sector may also collapse (for example,
the financial sector in 2008 and 2009).

Regional funds make it easier to focus on a specific geographic area of

the world. This can mean focusing on a broader region (say Latin
America) or an individual country (for example, only Brazil). An
advantage of these funds is that they make it easier to buy stock in
foreign countries, which can otherwise be difficult and expensive. Just
like for sector funds, you have to accept the high risk of loss, which
occurs if the region goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies

that meet the criteria of certain guidelines or beliefs. For example, some
socially-responsible funds do not invest in "sin" industries such as
tobacco, alcoholic beverages, weapons, or nuclear power. The idea is to
get competitive performance while still maintaining a healthy
conscience. Other such funds invest primarily in green technology, such
as solar and wind power or recycling.

Exchange Traded Funds (ETFs)

A twist on the mutual fund is the exchange traded fund (ETF). These

ever more popular investment vehicles pool investments and employ
strategies consistent with mutual funds, but they are structured as
investment trusts that are traded on stock exchanges and have the added
benefits of the features of stocks. For example, ETFs can be bought and
sold at any point throughout the trading day.
ETFs can also be sold short or purchased on margin. ETFs also typically
carry lower fees than the equivalent mutual fund. Many ETFs also
benefit from active options markets, where investors
can hedge or leverage their positions. ETFs also enjoy tax advantages
from mutual funds. The popularity of ETFs speaks to their versatility
and convenience.

(END OF ASSIGNMENT)