A GUIDE TO INVESTMENT 

CONTENTS 
 
 
CHAPTER                     PARTICULARS                                     PAGENO 
   NO. 
 
1.                            Introduction 
2.                            Financial Planning 
3.                            Insurance Planning 
4.                            Investment Planning 
a) Equity 
b) Fixed Income 
c) Post Office Schemes 
d) Gold 
e) Commodities 
f) Currency 
g) Derivatives 
h) Mutual Funds 
i) ETFs 
j) Real Estate 
k) Alternate Investments 
l) Options for NRIs 
5.                            Tax Planning 
6.                            Retirement Planning 
7.                            Estate Planning 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 DISCLAIMER 
The  book  provides  general  information,  not  individually  targeted  personalised  advice.  Any 
advice  given  does  not  take  into  account  any  investor’s  particular  investment  objectives, 
financial situation and personal needs. Investors should assess for themselves whether the 
advice  is  appropriate  to  their  individual  investment  objectives,  financial  situation  and 
particular needs before making any investment decision on the basis of such general advice. 
Investors  can  make  their  own  assessment  of  the  advice  or  seek  the  assistance  of  a 
professional adviser. 

Investing  entails  some  degree  of  risk.  Investors  should  inform  themselves  of  the  risks 
involved before engaging in any investment. 

We endeavour to ensure accuracy and reliability of the information provided but does not 
accept  any  liability  whatsoever,  whether  in  tort  or  contract  or  otherwise,  for  any  loss  or 
damage arising from the use of this book. Past performance is not necessarily indicative of 
future results. Information and advice provided here is not an offer to buy or sell securities. 

Before  commencing  an  investment  program  we  recommend  you  seek  independent 
professional legal, tax and investment advice as to whether it is suitable for your particular 
needs  and  circumstances.  Failure  to  seek  detailed  professional  personally  tailored  advice 
prior to acting could lead to you acting contrary to your own best interests and could lead to 
losses of capital. 

We expressly deny any liability to you for loss in any manner or form now or at any time in 
the  future.  You  should  be  aware  that  some  investments  will  lose  money.  Conscious 
investment selections are on the basis of probabilities ‐ that they are proven profitable at 
some point in time in the future more often than not. Any action based on this information 
should  observe  standard  investment  and  trading  rules  such  as  diversification,  stop  losses 
and matching to personal risk tolerances. 

Investing strategies and actions  discussed  in our publications may not  be  suitable for you. 

You must make your own investment decisions in light of your own circumstances. 

 
 
 
 
 
 
 
 
 
 
 
 
 
About the Author

CA. Rajkumar S. Adukia

B.Com (Hons.), FCA, ACS, AICWA, LL.B,
M.B.A, Dip In IFRS(UK), Dip In LL & LW
Mobile: 098200 61049

Email: rajkumarfca@gmail.com/
Wesite: www.carajkumarradukia.com
Address: 1/3, Meridien Apartments, Veera Desai Road,
Andheri (West), Mumbai-400058.

Mr. Rajkumar S. Adukia is a highly acclaimed academician and an eminent and

experienced Chartered Accountant. An active member of various professional
bodies, he is a member of the Central Council of the Institute of Chartered
Accountants of India and numerous committees of the Institute of Chartered
Accountants of India and is actively involved in their working. He is constantly
engaged in knowledge development and has conducted more than 500 seminars &
workshops on topical issues relating to trade & industry. Based on his rich
experience, he has written numerous articles in newspapers and business magazines
and has authored books on varied topics. His books are known for their practicality
and for their proactive approaches to meeting practice needs. He has a wide range of
experiences over a career spanning more than two decades and has always shared
his experiences by working in close contact with the industry and trade bodies from
different forums.

Mr Rajkumar S. Adukia is also an advisor to many industries and organizations. His

firm of chartered accountants offer comprehensive advice and assistance in all areas
of business like company formation, forex matters, trade policy including free trade
agreements, anti dumping duties and cross border supply chains, taxation,
investment etc. Services offered are in the nature of Strategic Consulting and
Advisory, Compliance Support, Litigation support and Representations and Trade
Facilitation. Over the years the firm had gained strength and grown in size and has
extended their services in the international market as well.
 
 
 
 
 
 
 
 
 
 
 
 
 
PREFACE 
 
 
Most of the people know the virtues of investment. In the Indian culture, saving and for that 
matter  investing  –  particularly  in  gold  is  very  common.  However,  when  you  ask  someone 
what  are  the  investment  options  available  for  you,  the  most  common  answers  are  equity 
(shares), fixed deposits, gold and real estate (property). 
 
Though  the Indian  Financial  Market is  not  so  developed  as  that  of  the  developed nations, 
there are a plethora of options available in India which should be explored and used by the 
investor  depending  on  his  financial  circumstances.  The  Indian  Market  has  grown 
tremendously beyond the traditional options available.  
 
This  book  is  an  attempt  to  discuss  the  various  investment  options  available  in  the  Indian 
context. The focus of the book is not on ‘how to invest’ but ‘where to invest’. Each investor’s 
goals and needs differ. He has to draft a financial plan to suit his needs and at the same time 
the investment should be tax efficient. The investment option chosen must be based on his 
financial plan.  
 
The book covers general information on the various investment options in simple language 
and  relevant  tax  laws  have  been  incorporated.  We  have  tried  to  make  the  contents  as 
readable,  understandable  and  nonmathematical  as  possible.  The  information  has  been 
collected  from  various  public  sources.  Though  we  have  tried  our  best  to  keep  the 
information as accurate and updated as possible, it’s possible that some errors have crept 
in. The book has been updated till November 2011. Comments, suggestions and corrections 
are most welcome from the reader. 
 
Remember, 
 
With money, one can command devils, 
Without it, one cannot even summon a man. 
 
So, 
Work hard, Save regularly and invest wisely. 
Hopefully, the readers will be benefited.  
 
Happy reading 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTRODUCTION 
Do you have money put away for a rainy day? How will you manage if there’s a family
emergency? What about a down payment for a home, or a fund for higher education, or
retirement? Do you have loans to repay?
In this era of recession, deflation, and job cuts, it is especially important for you to consider
where your hard-earned money is going; financial security is the key in today’s unpredictable
world. And the first step towards gaining that security is to start investing.

Still not convinced? Then ask yourself why you need to save and invest. The answer’s really
very simple: so that your money can start earning money, and work towards reducing the
effort you put in everyday. By investing, you'll have a lot more money for things like
retirement, education, recreation -- or you could pass on your riches to the next generation so
that you become your family's Most Cherished Ancestor.

If you borrow money to pay for things you want, you are paying interest to others instead of
to yourself. Investing offers you a way to pay yourself instead of others. For example, if you
wish to send your children to college some day, you may be able to borrow money for tuition,
but either you or they will have to pay it back with interest. If you choose to invest money
today instead, you can earn interest and pay yourself, up until the time you need the money.

SAVING Vs. INVESTING

At this point, we need to address the differences between saving and investing.

Savings provide for emergencies and fund specific purchases in the near future (within two
years). The primary goal is to store funds and keep them safe. However, you invest to
increase net worth and work toward long-term goals. Also realise that investing involves risk,
where you could lose some of your original investment. Only consider an investment plan
when you have in place an emergency fund, insurance, control over credit use, and a
retirement plan.

WEALTH MANAGEMENT
Private wealth management encompasses a wide range of services aimed at managing the
financial affairs of an individual and family. Accordingly, this discipline covers:
1. Financial Planning –

1. Financial planning

2. Risk management and insurance planning

3. Retirement planning and employee benefits

4. Estate planning

5. Tax planning

6. Investment planning

2. Advisory services

3. Research services

4. Banking and finance

a. Day to day banking

 b. Liquidity management services

c. Lending

d. Foreign exchange services

5. Portfolio management services

a. Discretionary mandates

b. Non-discretionary mandates

Why to go to a wealth manager/financial advisor/financial planner?

With the growth of the Indian economy and the increase in the divide between the rich and
the poor, more excess capital is becoming available in the hands of the individuals and their
families. This money needs to be invested smartly to increase returns bearing in mind the risk
constraints. With the rapid increase in the number of investment products creating a problem
of choice, growing awareness towards one’s finances and an increase in financial frauds has
made it increasingly difficult for the individuals and families as a whole to manage their
finances on their own.
The most important point to bear in mind is that we are dealing with ourselves – humans
where the decision making process is greatly influenced by personal concerns and
preferences. The universe of private investors is heterogeneous with diverse investment
objectives, tastes (likes and dislikes), time horizons, perceptions of risk, taxation along with
the varying degree of stability and logic. Hence, all the problems of individuals are unique
and the solutions cannot be tailor made by blindly applying the assumptions of modern
financial theory. A Wealth Manager or financial advisor understands the needs of the investor
and provides him with an investment package which suits him.
However, it’s very important for the investor to choose a good wealth manager. Apart from
the manager’s professional qualifications and past performance, it’s important for the investor
to do a thorough check of its background and credibility in the market.
It’s quite possible that in spite of taking all such efforts, the manager turns out to be a
fraudster and we lose all our hard-earned money. The recent fraud at Citibank Wealth
Management proves it. Hence it’s important for the investor to remember that he is solely
responsible for his investments and should not take the words of the manager blindly.
Education and awareness are the two tools which will help you scrutinise the words and
actions of the manager and keep your money secure and growing. And that’s what this book
aims at providing you with.
 
 
 
 
 
FINANCIAL PLANNING 
Personal financial planning is broadly defined as "a process of determining an individual's
financial goals, purposes in life and life's priorities, and after considering his resources, risk
profile and current lifestyle, to detail a balanced and realistic plan to meet those goals." The
individual's goals are used as guideposts to map a course of action on 'what needs to be done'
to reach those goals.
Alongside the data gathering exercise, the purpose of each goal is determined to ensure that
the goal is meaningful in the context of the individual's situation. Through a process of
careful analysis, these goals are subjected to a reality check by considering the individual's
current and future resources available to achieve them. In the process, the constraints and
obstacles to these goals are noted. The information will be used later to determine if there are
sufficient resources available to get to these goals, and what other things need to be
considered in the process. If the resources are insufficient or absent to meet any of the goals,
the particular goal will be adjusted to a more realistic level or will be replaced with a new
goal.
Planning often requires consideration of self-constraints in postponing some enjoyment today
for the sake of the future. To be effective, the plan should consider the individual's current
lifestyle so that the 'pain' in postponing current pleasures is bearable over the term of the plan.
In times where current sacrifices are involved, the plan should help ensure that the pursuit of
the goal will continue. A plan should consider the importance of each goal and should
prioritize each goal. Many financial plans fail because these practical points were not
sufficiently considered.

The Benefits of Financial Planning 

Financial Planning provides direction and meaning to your financial decisions. It allows you 
to  understand  how  each  financial  decision  you  make  affects  other  areas  of  your  finances. 
For example, buying a particular investment product might help you pay off your mortgage 
faster or it  might delay your retirement significantly. By  viewing each financial decision as 
part of the whole, you can consider its short and long‐term effects on your life goals. You 
can also adapt more easily to life changes and feel more secure that your goals are on track.  

Who is a Financial Planner?

A Financial Planner is someone who uses the Financial Planning process to help you figure
out how to meet your life goals. The Planner can take a 'big picture' view of your financial
situation and make Financial Planning recommendations that are suitable for you. The
Planner can look at all your needs including budgeting and saving, taxes, investments,
insurance and retirement planning. Or, the Planner may work with you on a single financial
issue but within the context of your overall situation. This big picture approach to your
financial goals sets the Planner apart from other Financial Advisors, who may have been
trained to focus on a particular area of your financial life.

Can you do your own Financial Planning?

Some personal finance websites, magazines or self-help books can help you do your own
Financial Planning. However, you may decide to seek help from a professional Financial
Planner if:

1. You need expertise you don't possess in certain areas of your finances. For
example, a Planner can help you evaluate the level of risk in your investment
portfolio or adjust your retirement plan due to changing family circumstances.

2. You want to get a professional opinion about the Financial Plan you developed
 yourself.

3. You have an immediate need or unexpected life event such as a birth, inheritance
or major illness.

4. You feel that a professional Advisor could help you improve on how you are
currently managing your finances.

5. You know that you need to improve your current financial situation but don't
know where to start.

Be sure you're getting Financial Planning advice

The government does not regulate Financial Planners as Financial Planners; instead, it
regulates Planners by the services they provide. For example, a Planner who also provides
insurance transactions is regulated as an insurance agent. As a result, the term 'Financial
Planner' may be used inaccurately by some Financial Advisors. To add to confusion, many
Financial Advisors like accountants and investment Advisors can also offer Financial
Planning services. To be sure that you are getting Financial Planning advice, check if the
Advisor follows the six step process.

How to make Financial Planning work for you?

You are the focus of the Financial Planning process. As such, the results you get from
working with a Financial Planner are as much your responsibility as they are those of the
Planner. To achieve the best results from your Financial Planning engagement, you will need
to be prepared to avoid some of the common mistakes shown above by considering the
following advice:

Set measurable goals

Set specific targets of what you want to achieve and when you want to achieve results.
For example, instead of saying you want to be 'comfortable' when you retire or that you
want your children to attend 'good' schools, you need to quantify what 'comfortable' and
'good' mean so that you'll know when you've reached your goals.

Understand the effect of each financial decision

Each financial decision you make can affect several other areas of your life. For example,
an investment decision may have tax consequences that are harmful to your estate plans.
Or a decision about your child's education may affect when and how you meet your
retirement goals. Remember that all of your financial decisions are interrelated.

Re-evaluate your financial situation periodically

Financial Planning is a dynamic process. Your financial goals may change over the years
due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth,
 house purchase or change of job status. Revisit and revise your Financial Plan as time
goes by to reflect these changes so that you stay on track with your long-term goals.

Start planning as soon as you can

Don't delay your Financial Planning. People, who save or invest small amounts of money
early, and often, tend to do better than those who wait until later in life. Similarly, by
developing good Financial Planning habits such as saving, budgeting, investing and
regularly reviewing your finances early in life, you will be better prepared to meet life
changes and handle emergencies.

Be realistic in your expectations

Financial Planning is a common sense disciplined approach to managing your finances to

reach life goals. It cannot change your situation overnight; it is a life long process.
Remember that events beyond your control such as inflation or changes in the stock
market or interest rates will affect your Financial Planning results.

Realize that you are in charge

If you're working with a Financial Planner, be sure you understand the Financial
Planning process and what the Planner should be doing. Provide the Planner with all of
the relevant information about financial status. Ask questions about the recommendations
offered to you and play an active role in decision-making.

Common Mistakes in Financial Planning Approach

The following are some of the common mistakes made by consumers in their approach
towards Financial Planning

Don't set measurable goals.

Make a financial decision without understanding its affect on other financial issues.
Confuse Financial Planning with investing.
Neglect to re-evaluate their Financial Plan periodically.
Think that Financial Planning is only for the wealthy.
Think that Financial Planning is for when they get older.
Think that Financial Planning is the same as retirement planning.
Wait until a money crisis to begin Financial Planning.
Expect unrealistic returns on investments.
Think that using a Financial Planner means losing control.
Believe that Financial Planning is primarily tax planning.

The Financial Planning process consists of the following basic six steps: 
 1. Determine Current Financial Situation

In this first step of the financial planning process, you will determine your current financial
situation with regard to income, savings, living expenses, and debts. Preparing a list of
current asset and debt balances and amounts spent for various items gives you a foundation
for financial planning activities. It is something similar to preparing your current Balance
Sheet. How much assets you have and liabilities on you.
Your Balance Sheet could be as follows:
Assets
Residential House Rs. 50, 00,000
Car Rs. 10, 00,000
Securities Rs. 2, 00,000
Mutual Funds Rs. 5, 00,000
Bank Balance Rs. 3, 00,000
TOTAL ASSETS THUS OF WORTH 70 LAKHS.
LIABILITIES
Capital Rs. 27, 00,000
Home Loan Rs. 35, 00,000
Car Loan Rs. 5, 00,000
Personal Loan Rs. 3, 00,000
TOTAL LIABILITES WORTH 70 LAKHS.

2. Develop Financial Goals

We all have financial dreams. It could be buying the dream house, car, going on an extensive
holiday, retirement planning, and children education and so on. This is a very vital and
difficult task. Most people don’t know what they want in life. It’s time to pen down what you
want. Also, like every goal, it’s important that it should be measurable, realistic and having a
definite time frame. You should periodically analyze your financial values and goals.
3. Identifying alternate courses of action

Considering the current financial situation and understanding the financial goals to be
achieved, it’s time to chalk out alternate courses of action to achieve the goal. Now it’s
essential to find a balance between the present and the future. How much of present lifestyle
to be sacrificed for attaining future goals.
4. Evaluating the alternate courses of action

Risk profiling is very important at this stage. What is the ability and willingness of the person
to take risk? Also what are his personal likes and dislikes?

• You need to evaluate possible courses of action, taking into consideration your life
situation, personal values, and current economic conditions.
• Consequences of Choices. Every decision closes off alternatives. For example, a
decision to invest in stock may mean you cannot take a vacation. A decision to go to
school full time may mean you cannot work full time. Opportunity cost is what you
give up by making a choice. This cost, commonly referred to as the trade-off of a
decision, cannot always be measured in dollars.
• Decision making will be an ongoing part of your personal and financial situation.
Thus, you will need to consider the lost opportunities that will result from your
decisions.

5. Creating and implementing a financial plan

• In this step of the financial planning process, you develop an action plan. This
requires choosing ways to achieve your goals. As you achieve your immediate or
short-term goals, the goals next in priority will come into focus.
• To implement your financial action plan, you may need assistance from others. For
example, you may use the services of an insurance agent to purchase property
insurance or the services of an investment broker to purchase stocks, bonds, or mutual
funds.

6. Monitoring and revising the plan

• Financial planning is a dynamic process that does not end when you take a particular
action. You need to regularly assess your financial decisions. Changing personal,
social, and economic factors may require more frequent assessments.
• When life events affect your financial needs, this financial planning process will
provide a vehicle for adapting to those changes. Regularly reviewing this decision-
making process will help you make priority adjustments that will bring your financial
goals and activities in line with your current life situation.

ELEMENTS OF FINANCIAL PLANNING

 1. Investment planning:

Achieving goals requires projecting what they will cost, and when you need to withdraw
funds. A major risk to the household in achieving their accumulation goal is the rate of price
increases over time, or inflation. Using net present value calculators, the financial planner
will suggest a combination of asset earmarking and regular savings to be invested in a variety
of investments. In order to overcome the rate of inflation, the investment portfolio has to get a
higher rate of return, which typically will subject the portfolio to a number of risks.
Managing these portfolio risks is most often accomplished using asset allocation, which seeks
to diversify investment risk and opportunity. This asset allocation will prescribe a percentage
allocation to be invested in stocks, bonds, cash and alternative investments. The allocation
should also take into consideration the personal risk profile of every investor, since risk
attitudes vary from person to person.
2. Insurance Planning:

It is the analysis of how to protect a household from unforeseen risks. These risks can be
divided into liability, property, death, disability, health and long term care. Some of these
risks may be self-insurable, while most will require the purchase of an insurance contract.
Determining how much insurance to get, at the most cost effective terms requires knowledge
of the market for personal insurance. Business owners, professionals, athletes and entertainers
require specialized insurance professionals to adequately protect themselves. Since insurance
also enjoys some tax benefits, utilizing insurance investment products may be a critical piece
of the overall investment planning.
3. Tax planning:

Typically the income tax is the single largest expense in a household. Managing taxes is not a
question of if you will pay taxes, but when and how much. Government gives many
incentives in the form of tax deductions and credits, which can be used to reduce the lifetime
tax burden. Most modern governments use a progressive tax. Typically, as your income
grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the
myriad tax breaks when planning your personal finances can make a significant impact upon
your success.
4. Retirement Planning:

Retirement planning is the process of understanding how much it costs to live at retirement,
and coming up with a plan to distribute assets to meet any income shortfall.

5. Estate Planning:

It involves planning for the disposition of your asset when you die. This is an area which is
neglected by most people.
 
 
INSURANCE PLANNING 
"Security is something we all look for...

a) Security of Our Future,

b) Security of Finances,
c) Security of Our Loved Ones.
This makes Insurance Planning important. "
goes a popular saying that explains the importance of Insurance Planning.
It is extremely important that every person, especially the breadwinner, covers the risks to his
life, so that his family's quality of life does not undergo any drastic change in case of an
unfortunate eventuality.

So what are the risks that we run? To name a few –

• Risk on our lives - the worries of replacement of the incomes that we contribute to the
running of the household
• Risks of medical contingencies -since they have the capability of depleting our wealth
considerably
• Risks to assets -as the replacement of these can have tremendous financial
implications

If we can imagine a situation where our goals are disturbed by acts beyond our control, we
realize the relevance of insurance in our lives. Insurance, simply put, is the cover for all the
risks that we run into during our lives. Insurance enables us to live our lives to the fullest,
without worrying about the financial impact of events that could hamper it. In other words,
insurance protects us from the contingencies that could affect us.

Why Insurance Planning?

Insurance Planning is concerned with ensuring adequate coverage against insurable risks.
Calculating the right level of risk cover is a specialized activity, requiring considerable
expertise. Proper Insurance Planning can help you look at the possibility of getting a wider
coverage for the same amount of premium or the same level of coverage for the same amount
of premium or the same level of coverage for a reduced premium. Hence, the need for proper
insurance planning.

Insurance Planning takes into account the risks that surround you and then provides an
adequate coverage against those risks. There is no risk not worth insuring yourself against. Be
it life or non-life. And insurance should first and foremost be looked as a measure to guard
against all risks. Now depending upon person to person Insurance needs differ too. It depends
on your age, profile, requirements, level of risks, your income etc. So insurance planning
takes into account all the factors before chalking out a plan customized for you and gives you
the most suitable option.

LIFE INSURANCE PLANNING 
What is Life Insurance?

Life Insurance is a contract for payment of a sum of money to the person assured (or failing 
him/her, to the person entitled to receive the same) on the happening of the event insured 
against. Usually the contract provides for the payment of an amount on the date of maturity 
or at specified dates at periodic intervals or at unfortunate death, if it occurs earlier. Among 
other  things,  the  contract  also  provides  for  the  payment  of  premium  periodically  to  the 
Corporation by the assured. Life insurance is universally acknowledged to be an institution 
which eliminates 'risk', substituting certainty for uncertainty and comes to the timely aid of 
the family in the unfortunate event of death of the breadwinner. By and large, life insurance 
is civilization’s partial solution to the problems caused by death. Life insurance, in short, is 
concerned  with  two  hazards  that  stand  across the  life‐path  of  every  person:  that  of  dying 
prematurely  leaving  a  dependent  family  to  fend  for  itself  and  that  of  living  to  old  age 
without visible means of support.  

YOUR LIFE INSURANCE NEEDS 

Calculating life insurance needs is not a simple exercise but you must evaluate your current 
and required cover in 2010 and take corrective action. Remember that each of us has our 
own  lifestyle,  goals,  aspirations  and  dependents  which  may  be  completely  different  from 
the life situation for your friend or colleague. So what works for someone else may not work 
for you.  

There are essentially three ways to calculate your insurance needs 

a) Expense protection 

Calculates the corpus required to take care of the family's future expenses and goals. 
Inflation diminishes the value of money and hence expenses need to be adjusted to 
inflation for calculation of protection required.    

b) Human life value 

It  is  the  economic  value  of  an  individual;  the  present  value  of  all  his  or  her  future 
income.  Setting  aside  the  part  of  income  one  spends  on  oneself,  the  protection 
required through human life  value calculates  today's value of one's income for the 
years till his or her retirement. 

c) Needs analysis 

In this method you calculate your needs by considering each of your dependents and 
what financial milestones you want to achieve for them. The needs may range from 
child education, marriage to repayment of loans. Next you assess your current assets 
and investments and shortfall due to loss of life. This gap in income can be filled up 
by insurance. 

For what term do you need this cover? 

Ideally,  insurance  must  be  taken  to  cover  the  working  period  in  one's  life.  You  take 
insurance to protect your dependents from the loss of your income; using the same logic, 
you take insurance for the time that the dependents are being supported by your income. 
Hence,  it  is  advisable  to  take  insurance  till  one's  retirement.  However,  when  insurance  is 
taken for protecting and saving towards specific goals, then the tenure of the plan should 
match the years left for meeting the goal. 

What type of products suit you?  

Choosing a product will depend on the specific need and the life stage one is in. What is the 
final  product  you  will  choose?  When  there  are  multiple  choices  that match  the  need,  it is 
the affordability that makes the final choice. Most importantly, individuals must be aware of 
the purpose of the insurance they are buying. They must know that life insurance products 
for investment and savings are structured for the long term and meant for someone who is 
earning and whose earnings are supporting his/her dependant(s). 

Financial planning and its role in selecting insurance 

To be able to prescribe the best insurance products for an individual or family, a financial
plan is necessary. Any advisor needs an in-depth knowledge and understanding and proper
prioritization of all aspects of your life. The probable duration of life, amount of security
needed, present and future needs / shortfalls and post retirement requirements are also
essential pieces of information to be collected. Knowledge of the "markets" / mutual funds
and economic climate coupled with comprehension and application of HLV (human life
value), expense protection, and corpus requirements for retirement help in prescribing an
effective solution.

With the awareness of a need for proper financial planning on the rise, coupled with the
plethora of insurance products available, it is imperative that you take any decision after
doing your home work or engaging a competent financial planner.

In a nutshell

• It is very important that you are adequately covered as inadequate cover is equal to no
cover at all.
• Insurance planning is the first step towards financial planning and financial planning
should be the first step towards purchasing insurance. To advise an individual on his
or her insurance needs, it is important to get a holistic view of the present and the
future.
• Insurance requirement must be reviewed every two years or when there is a change in
the family scenario, for example: the addition of dependants.
• The insurance requirement changes with every change in your life -- income,
expenses, life style, members, liabilities and assets.

TYPES OF LIFE INSURANCE

Taking out a life insurance policy covers the risk of dying early, by providing for your family 
in the event of your death. It also manages the risk of retirement – providing an income for 
you in non‐earning years. Choosing the right policy type with the coverage that is right for 
you therefore becomes critical. 

There are a variety of policies available in the market, ranging from Term Endowment and 
Whole Life Insurance, to Money Back Policies, ULIPs, and Pension plans. Let’s see what each 
of these is about, so that you can consider the one that best suits you. 

1) Term insurance policy

A term insurance policy is a pure risk cover for a specified period of time. This means that
the sum assured is payable only if the policyholder dies within the policy term. For instance,
if a person buys Rs. 2 lakhs policy for 15-years, his family is entitled to the money if he dies
within that 15-year period.
If he survives the 15-year period he is not entitled to any payment; the insurance company
keeps the entire premium paid during the 15-year period.
So, there is no element of savings or investment in such a policy. It is a 100 per cent risk
cover. It simply means that a person pays a certain premium to protect his family against his
sudden death. He forfeits the amount if he outlives the period of the policy. This explains
why the Term Insurance Policy comes at the lowest cost.
This is suitable for you if…
You are looking for a low cost life cover without any savings benefits attached. Or
You are at that stage in life where insurance cover is vital but you cannot afford high
premium payment due to low income.
2) Whole Life Policy
As the name suggests, a Whole Life Policy is an insurance cover against death, irrespective
of when it happens.
Under this plan, the policyholder pays regular premiums until his death, following which the
money is handed over to his family.
This policy, however, fails to address the additional needs of the insured during his post-
retirement years. It doesn't take into account a person's increasing needs either. While the
insured buys the policy at a young age, his requirements increase over time. By the time he
dies, the value of the sum assured is too low to meet his family's needs.
As a result of these drawbacks, insurance firms now offer either a modified Whole Life
Policy or combine it with another type of policy.

3) Endowment Policy
Combining risk cover with financial savings, endowment policies is the most popular policies
in the world of life insurance. In an Endowment Policy, the sum assured is payable even if
the insured survives the policy term.
If the insured dies during the tenure of the policy, the insurance firm has to pay the sum
assured just as any other pure risk cover.
A pure endowment policy is also a form of financial saving, whereby if the person covered
remains alive beyond the tenure of the policy; he gets back the sum assured with some other
investment benefits.
In addition to the basic policy, insurers offer various benefits such as double endowment and
marriage/ education endowment plans. The cost of such a policy is slightly higher but worth
its value.
This is suitable for you if…
You want to accumulate capital for anticipated financial needs like buying an asset such as a
home, providing for your old age, your children's education, marriage, etc.
4) Money Back Policy
These policies are structured to provide sums required as anticipated expenses (marriage,
education, etc) over a stipulated period of time. With inflation becoming a big issue,
companies have realized that sometimes the
Money value of the policy is eroded. That is why with-profit policies are also being
introduced to offset some of the losses incurred on account of inflation.
A portion of the sum assured is payable at regular intervals. On survival the remainder of the
sum assured is payable.
In case of death, the full sum assured is payable to the insured.
The premium is payable for a particular period of time.
This is suitable for you if…
You plan to utilize the funds received from the policy for your future anticipated needs like a
car, an overseas holiday, children's educational needs, marriage expenses, etc
5) Annuities and Pension
In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically.
The purpose of an annuity is to protect against risk as well as provide money in the form of
pension at regular intervals.
6) Unit linked Insurance Plan (ULIP) 
It has the features of both the life cover and investments. The sum assured here is limited i.e.,
cover is provided to the extent of 50% after six months of the policy term. The insured is
given a choice to select the investment plan he wants his money to be invested in. Therefore
he has control over his investment & he can periodically supervise his investment. The
insurer invests approximately 80% in Investment plans and the balance 20% in risk cover and
other expenses. The insured is then allotted units for his investment on the basis of prevailing
NAV of the plan.

Riders: Comprehensive coverage 

In addition to the insurance plan of your choice, you might want to consider additional risk 
covers,  in  which  case  you  can  you  can  opt  for  riders:  additional  benefits  that  can  be 
purchased  with  an  insurance  policy.  Examples  of  riders  include  the  Term  rider,  the 
Accidental Death Benefit rider, and the Critical Illness rider. Choosing the right set of riders 
ensures a comprehensive insurance cover. 

When considering a life insurance policy with riders, make sure to understand the exclusions 
in  the  policy.  For  example,  under  Term  Insurance,  if  the  insured  person  commits  suicide, 
whether sane or insane, within one year from the date of commencement of a term policy, 
the  cover  will  become  void,  i.e.  the  nominee  cannot  claim  the  sum  assured.  Only  the 
premiums  paid  up  to  the  date  of  death  will  be  refunded;  after  deducting  the  expenses 
incurred by the insurer for issuing the cover. 

As important as it is to buy Life Insurance, it is even more important to pay your premiums 
on time. A life insurance company provides the insured with a grace period of 30 days i.e. a 
period of 30 days after the start date of the policy. The insured can pay premium on any day 
during this grace period. In case the insured dies during the grace period, the insurer is liable 
to pay the death benefit to the nominee less any amount outstanding (including the unpaid 
premium).  This  provision  helps  the  insurer  to  minimize  the  risk  of  policy  lapse 
unintentionally. 

In  these  uncertain  times,  you’re  better  off  planning  ahead,  and  securing  the  future  for 
yourself,  and  your  family.  Arm  yourself  with  the  facts  for  an  assurance  of  a  lifetime  of 
security. 
TAX BENEFITS THROUGH INSURANCE

Every financial planning culminates in March- the last month of financial year. People are
looking forward to get tax benefits through buying insurance. You can avail both (a)
deductions from taxable income and (b) exemption of proceeds from tax.
Tax Benefits can be availed through both life insurance and health insurance.
Whenever we talk about tax benefits, there are 3 sections of the Income Tax Act 1961 that we
come across time and again- Section 80C, Section 80D and Section 10(10D). Let’s discuss
them further:

Section 80C:

This section lets you avail tax benefits to maximum amount of Rs 1 lacs. The annual
premium that you pay is deducted from your taxable income. However there are two
conditions:

• The benefit for premium is restricted to 20% of actual Sum Assured

• The policy has to be continued for at least 2 years or it will result in reversal of
benefits taken.

Example: Mr. Bhandari takes life insurance plan with Sum Assured of Rs 2 lacs. The
maximum premium benefit he can avail is 20% of 2 lacs is Rs 40,000. If he pays premium of
Rs 50,000 only Rs 40,000 will be considered. So one should always take Sum Assured as 5
times the annual premium to fulfil the 20% condition. If Mr. Bhandari surrenders policy after
one year, then tax rebate taken will be reversed in the following year.

Section 80D:

A person can avail tax benefits by buying health insurance or commonly known as mediclaim
policy. The maximum deduction for individuals is Rs 15000 and for senior citizens, it’s Rs
20,000. However the maximum tax deduction combined could be Rs 35,000 if individual
buys health insurance for himself and his parents who are senior citizens.

Section 10(10D):

The Sum Assured provided to the nominee as death benefit after the insured person passes
away is completely tax free. One-third portion of pension value at vesting age is exempted
from tax. Before making your plans to avail tax benefits, one should always look at his or her
financial portfolio. A visible balance has to be maintained between liquid cash and long term
assets. An illustration will make things more clear:

Arvind has annual net income of Rs 6 lacs. After paying for the household expenses, children
school fees and other miscellaneous expenses, he saves around Rs 2 lacs. He keeps Rs 1 lacs
as his emergency money in savings account. He begins his tax planning and invests Rs
40,000 in child ULIP plan and Rs 15,000 for health insurance policy. The rest of amount is
invested in pension plan. By doing careful systematic tax planning, he saves Rs 8,000 yearly.
As a result of tax planning, he maintains good balance between liquidity and future assets.

MUTUAL FUNDS + TERM INSURANCE > ULIP 
The Mint, 17 July 2011

The new numbers say it clearly now: A mutual fund plus term insurance cover is a smarter 
strategy  than  buying  a  bundled  product  in  the  form  of  a  unit‐linked  insurance  plan  (Ulip). 
The insurers’ argument for the Ulip is old—it gives you double benefit of investment and life 
insurance in one product. Buy a mutual fund for investment and a pure term policy to cover 
your life, say financial planners. And arguments fly thick and fast from both camps.  

One of the arguments in favor of the Ulip was that if you kept the product alive for more 
than  10  years,  it  eventually  did  better  than  a  mutual  fund,  if  we  looked  at  similar  returns 
and  built  in  costs  of  entry,  fund  management  and  mortality.  But  with  both  the  capital 
market regulator and the insurance regulator hacking away at costs, the numbers need to 
be run again.  

We ran the numbers taking an annual investment of Rs. 1 lakh for a 35‐year‐old that would 
buy a life cover of Rs. 50 lakh. We used an illustration of a type II Ulip (one that gives you 
the fund value as well as the sum assured on death. Type I gives you the higher of the fund 
value or the sum assured) growing at an annual return of 10%, and we took a mutual fund 
with  an  expense  ratio  of  1.75%—most  diversified  equity  funds  in  Mint50  charge  around 
1.50‐1.75%  per  annum.  The  MF‐term  cover  combination  won.  The  same  numbers  for  a 
cover of Rs. 10 lakh, too, make the combination the winner for most part of the tenor. 
 
  

What changed? 

In September 2010, the regulator capped the costs to 2.25% for Ulips with tenors above 10 
years. So if the fund is growing at an assumed rate of 10%, the costs wouldn’t drag down the 
net return below 2.25%. In other words, the minimum mandated return becomes 7.75% in 
the  example  mentioned  above.  We  put  the  numbers  through  a  blender  of  Excel  sheets 
factoring in this cost and got the older result: Ulips are long‐term products and make sense 
if taken for a term above 10 years. But this is only in theory. 

To  calculate  the  real  returns,  you  will  need  to  look  at  the  projected  fund  value  in  the 
illustration,  which  includes  the  costs  that  do  not  come  under  regulatory  caps.  And  the 
minute  you  do  that,  your  returns  will  come  down.  In  the  example  we  took,  the  game 
changer was the cost of insurance or mortality cost that has been kept outside the caps.  

So while the published yield, which did not factor in the cost of insurance, conformed to the 
cost caps, a quick calculation of return on the basis of the fund value published in the same 
illustration told a different story.  

In  the  illustration  that  we  sampled  to  work  our  numbers  in  the  example  above,  the 
published  yield,  on  an  assumed  rate  of  return  of  10%,  was  8.51%.  However,  the  maturity 
corpus came to around Rs. 41.95 lakh, a return of 6.62%. It was the cost of insurance that 
dragged down the yield and the published return concealed the impact.  

Why high mortality costs 

So are the insurers padding up the cost of insurance because it doesn’t fall under the cost 
caps?  It  was  difficult  to  elicit  an  on‐the‐record  response  from  the  industry  but  an  actuary 
from  the  insurance  industry,  on  condition  of  anonymity,  confirmed.  He  said:  “Mortality 
charges don’t come under the cost caps which give an opportunity to the insurer to have a 
margin on the mortality cost.”  

The  cost  of  insurance  has  gone  up  also  because  of  the  recent  changes—now  Ulips  are  as 
much about insurance as about investment. The minimum sum assured has increased from 
five  times  multiple  to  10  times  multiple  and  is  capped  at  105%  of  the  premiums  paid.  In 
other words, for a premium of Rs. 1 lakh, the minimum sum assured can be Rs. 10 lakh. But 
if a person dies in the 18th year of a 20‐year term policy, his sum assured is not Rs. 10 lakh 
but Rs. 18.9 lakh which is 105% of all the premiums paid. Says Rituraj Bhattacharjee, head 
(product  development),  Bajaj  Allianz  Life  Insurance  Co.  Ltd:  “The  primary  reason  why  the 
total cost of insurance has gone up is that earlier the sum at risk would come down as the 
fund value went up. But as per the new guidelines, insurers need to maintain life cover of at 
least  105%  of  all  the  premiums  paid.  This  means  the  sum  at  risk  will  never  become  zero 
during the entire policy period.” 
Even  structurally,  Ulips  have  undergone  a  transformation.  Commissions  have  come  down 
and  in  order  to  incentivize  sale  of  Ulips,  insurers  are  easing  underwriting  norms.  Says 
Andrew Cartwright,  appointed actuary,  Kotak Life Insurance  Co. Ltd: “Mortality costs have 
risen  slightly  so  that  cover  can  be  offered  to  most  clients  without  going  for  medical 
examination.  Most  insurers  have  relaxed  underwriting  because  at  lower  commission  the 
intermediary  is  looking  for  greater  ease  of  sale.  The  insurance  companies  have  accepted 
higher risk in exchange for a slightly higher premium.” 

The impact on returns 

While, on the one hand,  the cost of insurance in a Ulip has increased, on the  other hand, 

term plans have slashed their premium rates since most plans are now offered online and 
are able to do away with distribution and administrative costs.  

As  a  result,  the  MF‐term  combination  has  become  a  clear  winner,  especially  if  you  are 
choosing higher cover. In the same example, for a premium of Rs. 1 lakh and a sum assured 
of  Rs.  50  lakh,  a  35‐year‐old  would  be  richer by  Rs.  5.06  lakh  at  the  end  of  20  years  if  he 
buys a term plan and invests the difference in an MF. Even with a basic cover of Rs. 10 lakh, 
the combination stays ahead for 19 out of 20 years; the Ulip outperformed only in the 20th 
year by Rs. 83,375.  

We  even  sampled  three  type  1  Ulips—the  MF‐term  combination  fared  better  for  a  higher 
cover in terms of returns. In one of the type I Ulips, for a premium of Rs. 1 lakh and a sum 
assured  of  Rs.  50  lakh,  a  35‐year‐old  would  get  Rs.  44.96  lakh  at  the  end  of  20  years, 
assuming  the  fund  grows  at  10%.  But  with  the  same  set  of  assumptions,  in  an  MF‐term 
combination, you would be richer by Rs. 2.06 lakh. Adds Cartwright: “In the earlier Ulips, the 
minimum sum assured was five times the premium. This meant that the risk was normally 
only  for  the  first  five  years  because  after  the  fifth  year  the  fund  would  exceed  the  sum 
assured. But now the minimum sum assured is 10 times the premium paid and the risk is for 
close to 10 years. As a result of this, the total mortality costs in a type 1 Ulip has gone up by 
around four times.”  

What to do 

Despite the regulatory whip, Ulips have become expensive products and as a general rule, 
you would do better by keeping your insurance and investment needs separate. Says Sanket 
Kawatkar,  practice  leader  (life  insurance),  Milliman,  an  actuarial  and  consulting  firm:  “If 
protection is your main motive, then Ulips defeat the purpose. Go for a term plan. That is 
the best product to have.”  

But if you must buy a Ulip do your due diligence first. A quick calculation indicates that when 
the  overall  cost  of  a  Ulip  conforms  to  the  cost  cap  of  2.25%  for  a  term  of  more  than  10 
years,  Ulips  outperform  mutual  funds  over  a  term  above  10  years.  But  don’t  look  at  the 
published  rate  of  return,  which  will  always  conform  to  the  cost  caps  since  it  excludes 
mortality costs, service tax and any cost of offering a guarantee. Go through the fine print to 
know  what  cost  heads  are  excluded  from  the  calculations.  Some  insurers  following  good 
practice will also publish the actual rate of return that includes all costs.  
See the illustrations carefully and ask your agent to give you the net return on your policy 
factoring in all costs. To find out the return yourself, simply go to the insurer’s website and 
look for return calculators or browse for financial calculators.  

INVESTMENT PLANNING 
Investment planning or management is the professional management of various securities 
(shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified 
investment  goals  for  the  benefit  of  the  investors.  Investors  may  be  institutions  (insurance 
companies,  pension  funds,  corporations,  charities,  educational  establishments  etc.)  or 
private investors (both directly via investment contracts and more commonly via collective 
investment schemes e.g. mutual funds or exchange‐traded funds). 

Process of investment management

Investment management also known as portfolio management is not a simple activity as it

involves many complex steps which is broken down into following steps for a better
understanding.

1. Specification of investment objectives & constrains

Investment needs to be guided by a set of objectives. The main objectives taken into
consideration by investors are capital appreciation, current income and safety of
principal. The relative importance of each of these objectives needs to be determined.
The main aspect that affects the objectives is risk. Some investors are risk takers
while others try to reduce risk to the minimum level possible. Identification of
constrains arising out of liquidity, time horizon, tax and special situations need to be
addressed.

2. Choice of the asset mix

In investment management the most important decision is with respect to the asset
mix decision. It is to do with the proportion of equity shares or shares of equity
oriented mutual funds i.e. stocks and proportion of bonds in the portfolio. The
combination on the number of stocks and bonds depends upon the risk tolerance of
the investor. This step also involves which classes of asset investments will be places
and also determines which securities should be purchased in a particular class.

3. Formulation of portfolio strategy

After the stock – bond combination is chosen, it is important to formulate a suitable

portfolio strategy. There are two types of portfolio strategies. The first is an active
portfolio strategy which aims to earn greater risk adjusted returns depending on the
market timing, sector rotation, security selection or a mix of these. The second
 strategy is the passive strategy which involves holding a well diversified portfolio and
also maintaining a pre-decided level risk.

4. Selection of securities

Investors usually select stocks after a careful fundamental and technical analysis of
the security they are interested in purchasing. In case of bonds credit ratings, liquidity,
tax shelter, term of maturity and yield to maturity are factors that are considered.

5. Portfolio Execution

This step involves implementing the formulated portfolio strategy by buying or

selling certain securities in specified amounts. This step is the one which actually
affects investment results.

6. Portfolio Revision

Fluctuation in the prices of stocks and bonds lead to changes in the value of the
portfolio and this calls for a rebalancing of the portfolio from time to time. This
principally involves shifting from bonds to stocks or vice-versa. Sector rotation and
security changes may also be needed.

7. Performance Evaluation

The assessment of the performance of the portfolio should be done from time to time.
It helps the investor to realize if the portfolio return is in proportion with its risk
exposure. Along with this it is also necessary to have a benchmark for comparison
with other portfolios that have a similar risk exposure.

What are the investment vehicles? 

There  are  many  different  ways  you  can  go  about  making  an  investment.  This  includes 
putting money into stocks, bonds, mutual funds, real estate, or starting your own business. 
Sometimes  people  refer  to  these  options  as  "investment  vehicles,"  which  is  just  another 
way  of  saying  "a  way  to  invest."  Each  of  these  vehicles  has  positives  and  negatives  .No 
matter the method you choose to invest; the goal is always to put your money to work so it 
earns you an additional profit. 

Just putting money aside is saving, 

Putting money to work is investing, 

It is the conversion from saving to investing that is important. 

What Investing Is Not… 

Investing  is  NOT  gambling.  Gambling  is  putting  money  at  risk  by  betting  on  an  uncertain 
outcome with the hope that you might win money. Part of the confusion between investing 
and gambling, however, may come from the way some people use investment vehicles. For 
example, it could be argued that buying a stock based on a "hot tip" you heard at the water 
cooler is essentially the same as placing a bet at a casino.  

True, investing doesn't happen without some action on your part. A "real" investor does not 
simply  throw  his  or  her  money  at  any  random  investment;  He  or  she  performs  thorough 
analysis  and  commits  capital  only  when  there  is  a  reasonable  expectation  of  profit.  Yes, 
there still is risk and there are no guarantees, but investing is more than simply hoping lady 
luck is on your side. 

Why Bother Investing? 

Obviously, everybody wants more money. It is pretty easy to understand that people invest 
because  they  want  to  increase  their  personal  freedom,  sense  of  security,  and  ability  to 
afford the things they want in life.  

However,  investing  is  becoming  less  of  an  extra  thing  to  do  and  more  of  a  necessity.  The 
days when everyone worked the same job for 30 years and then retired to a nice fat pension 
are gone.  For  the  average  person,  investing  is  not  so  much  a  helpful  tool  as  the  only  way 
they can retire and maintain their present lifestyle.  

What do you mean by Working Money: The Phenomenal Concept of Compounding? 

Albert  Einstein  said  that  compound  interest  is  "the  greatest  mathematical  discovery  of  all 
time." We think this is true partly because, unlike the trigonometry or calculus you studied 
back in high school, compounding can be applied to everyday life. 

The wonder of compounding (sometimes called "compound interest") transforms your

working money into a state-of-the-art, highly powerful income-generating tool.
Compounding is the process of generating earnings on an asset's reinvested earnings. To
work, it requires two things: (1) the re-investment of earnings, and (2) time. The more time
you give your investments, the more you are able to accelerate the income potential of your
original investment, which takes the pressure off you.

To demonstrate, let's look at an example:  

If you invest Rs.10, 000 today at 6%, you will have 10,600 in one year (10,000 x 1.06). Now 
let us say that rather than withdraw the Rs. 600 gained from interest, you keep it in there 
for another year. If you continue to earn the same rate of 6%, your investment will grow to 
Rs. 11,236.00 (Rs. 10,600 x 1.06) by the end of the second year. 

Because you re‐invested that Rs.600, it works together with the original investment, earning 
you Rs. 636, which is Rs. 36 more than the previous year. This little bit extra may seem like 
peanuts  now,  but  let's  not  forget  that  you  didn't  have  to  lift  a  finger  to  earn  that  Rs.36. 
More importantly, this Rs.36 also has the capacity to earn interest. After the next year, your 
investment will be worth Rs.11, 910.16 (Rs.11, 236 x 1.06) .In the second year you earned 
Rs.674.16, which is Rs.74.16 more interest than the first year. This increase in the amount 
made each year is compounding in action: interest earning interest on interest and so on…. 
It'll continue as long as you keep re‐investing and earning interest. It is thus advantageous to 
start investing early. 

Which are the three tests for investments? 

Motives  for  investment  may  vary,  but  there  are  some  common  desires.  We  want  our 
investments  to  give  us  some  return.  We  want  our  money  to  be  safe.  And,  in  case  of  an 
emergency,  we  want  our  money  back,  quickly.  Hence,  there  are  three  criteria  to  evaluate 
every investment avenue: 

1. Safety
2. Liquidity
3. Returns

Which is the most ideal Investment strategy? 

To select an optimal strategy, it is essential to first “Know Yourself” 

In the context of investing, the wise words of Oracle “Know Thyself” emphasize that success 
depends on ensuring that your investment strategy fits your personal characteristics. 

Even  though  all  investors  are  trying  to  make  money,  they  all  come  from  diverse 
backgrounds and have different needs. It follows that specific  

Investing  vehicles  and  methods  are  suitable  for  certain  types  of  investors.  Although  there 
are many factors that determine which  path  is optimal  for an investor, we'll look  at three 
main categories: 

a) Investment objectives,  
b) timeframe, and  
c) Investing personality. 

a) What are Investment Objectives 

Generally speaking; investors have a few primary objectives:  

¾ safety of capital 
¾ current income and 
¾ capital appreciation 

These  objectives  depend  on  a  person's  age,  stage/position  in  life,  and  personal 
circumstances.  A  75‐year‐old  widow  living  off  her  retirement  portfolio  is  far  more 
interested in preserving the value of investments than a 30‐year‐old business executive 
would  be.  Because  the  widow  needs  income  from  her  investments  to  survive,  she 
cannot risk losing her investment. The young executive, on the other hand, has time on 
his or her side. As investment income isn't currently paying the bills, the executive can 
afford to be more aggressive in his or her investing strategies. 
An investor's financial position will also affect his or her objectives. A multi‐millionaire is 
obviously going to have much different goals than a newly married couple just starting 
out. For example, the millionaire, in an effort to increase his profit for the year, might 
have no problem putting down Rs.100, 000 in a speculative real estate investment. To 
him, a hundred grand is a small percentage of his overall worth. Meanwhile, the couple 
is  concentrating  on  saving  up  for  a  down  payment  on  a  house,  never  mind  a  risky 
venture.  Regardless  of  the  potential  returns  there  may  be  on  a  risky  investment, 
speculation is just not appropriate for the young couple. 

b) How important is Timeframe? 

As a general rule, the shorter your time horizon, the more conservative you should 
be. For instance, if you are investing primarily for retirement and you are still in your 
20s, you still have plenty of time to make up for any losses you might incur along the 
way. At the same time, if you start when you are young, you don't have to put huge 
chunks  of  your  paycheck  away  every  month  because  you  have  the  power  of 
compounding on your side.  

On  the  other  hand,  if  you  are  about  to  retire,  it  is  very  important  that  you  either 
safeguard  or  increase  the  money  you  have  accumulated.  Because  you  will  soon  be 
accessing your investments, you don't want to expose all of your money to volatility you 
don't  want  to  risk  losing  your  investment  money  in  a  market  slump  right  before  you 
need to start accessing your assets.  

c) What is your personal characteristic? 

What is your style? Do you love fast cars, extreme sports, and the thrill of a risk? Or, do 
you prefer reading in your hammock while enjoying the calmness, stability, and safety of 
your backyard?  

Peter  Lynch,  one  of  the  greatest  investors  of  all  time,  has said  that  the  "key  organ  for 
investing is the stomach,  not the brain." In other words,  you need to  know how  much 
volatility  you  can  stand  to  see  in  your  investments.  There  is  some  truth  to  an  old 
investing maxim:  

You've taken on too much risk when you can't sleep at night because you are worrying 
about your investments. 

Another personality trait that will determine your investing path is your desire (or lack 
thereof)  to  research  investments.  Some  people  love  nothing  more  than  digging  into 
financial  statements  and  crunching  numbers.  To  others,  the  words  "balance  sheet," 
"income  statement,"  and  "stock  analysis"  sound  as  exciting  as  watching  paint  dry. 
Others  just  might  not  have  the  time  to  plow  through  prospectuses  and  financial 
statements. 
 Thus, in addition to risk taking ability, some personal characteristics like, a cool temper, 
balanced outlook and data based decisions determine the success of an investment.  

Which are the Forbidden/unsafe Investments?

The following categories of investment are totally forbidden for all categories of
investors:
‰ Chit funds, Nidhis, Mutual Benefit societies
‰ Phoney real estate schemes and plantation schemes.
‰ Deposits with partnership firms, private limited companies and other
companies who do not enjoy good credit rating.
‰ Speculative stocks and private placements of equity shares in companies
promoted by unknown –entrepreneurs.
‰ Volatile scrips which fluctuate rather dangerously.
‰ Peerless-type savings schemes which use insurance jargon simply to confuse
you.
‰ New issues of shares by first generation unknown-entrepreneurs.

Some guidelines towards a strong financial future:

The following are important steps towards ensuring a strong financial future:
o Define your goals
o Estimate your current financial position
o Choose the investments according to your life stage
o Diversify your investment to reduce risk
o Do a lot of market research
o Budget for your investment
o Reduce the number of records. Instead of having too many unwanted bank
accounts, demat accounts and unwanted investments, close the unnecessary
ones. Keep one bank account in a branch nearby and preferably in Joint names
o Have a cross power of attorney between spouses. This is valid during one’s
lifetime.
o Make nominations in (a) Company’s PF and your PPF accounts (b) LIC
policies and personal accident policies (c) Gratuity (d) Superannuation
schemes (e) Ownership flat (f) bank accounts etc.
o Acquaint your spouse and family members with your financial arrangements,
your advisors and consultants, and familiarise them with your files and
documents.

RISKS V/S REWARDS 
Risk is a fact of life for any investor. Stock markets go down, companies may go bankrupt, 
inflation rates may soar or the government may not have enough funds to pay back. Before 
investing  you  have  to  ask  the  question  "What  risk  is  involved?" 
It  is  important  to  measure  your  risk  tolerance, your  risk  capacity  and  the  risks  v/s returns 
associated  with a particular investment so that you can allocate assets  effectively without 
being overly cautious or too risky. 

Types of Risks Involved in Investing 

To find  out the risks involved  in your investment, you will  have to understand the various 

types of risks 

1. Macroeconomic risks                                                                                                                                              

Unfavorable political and economic developments can lead to a fall in the market. 

2. Market risks                  

If there is a general decline in the markets, your investments will obviously suffer 

3. Inflation risks                               

If there is inflation and returns don't increase proportionately, then the money invested will 
not buy the same amount in the future. 

4. Liquidity risks                                         

 If you want to sell off the investments, but nobody is buying it, the price will go down and 
you may not even recover the price you paid to purchase it. 

5. Sectoral risk  

If  a  particular  sector/industry  is  adversely  affected,  then  your  investments  in  that 
sector/industry will be negatively affected. 

6. Company risk             

If a company you invested in has performed badly, the prices of securities of that company 
could go down and therefore the value of your investments will also go   down. 

7. Interest rate risk                          

It  refers  to  the  risk  of  the  change  in  value  of  your  investment  as  a  result  of  movement  in 
interest rates. 

You should remember that every investment has risk attached to it. Only the degree of risk 
is different. You have to bear a certain amount of risk. Your aim of course should be to 
minimize risks and maximize returns. You should analyze your risks to evaluate the returns 
that you expect from your investment. 
Returns across various asset categories have shown that equity shares give the highest level 
of  returns  in  the  long‐term,  followed  by  corporate  bonds  and  deposits  and  lastly  bank 
deposits and government debt. Predictably the level of risk is also in the same order 

Now that you know about risks and returns, you must also know of ways to reduce risks and 
maximize your returns. The fact that higher the risk higher the returns doesn't imply that if 
you want a low risk investment portfolio, you invest in investments yielding low returns. But 
the key to investment success is the proper diversification of assets. Diversification means 
more than just having different types of investments. It means having a mix of investments 
across  sectors,  time  horizons,  markets,  instruments  and  so  on.  A  good  portfolio  will  have 
stocks, bonds, mutual funds, money market funds etc. of different companies from different 
sectors.  When  you  diversify,  you  spread  your  money  among  many  different  securities, 
thereby avoiding the risk that your portfolio will be badly affected because a single security 
or a particular market sector turns sour.  

PORTFOLIO AND DIVERSIFICATION 
The Portfolio  
A  portfolio  is  a  combination  of  different  investment  assets  mixed  and  matched  for  the 
purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio 
can  include  any  asset  you  own‐‐from  real  items  such  as  art  and  real  estate,  to  equities, 
fixed‐income instruments, and cash and equivalents. For the purpose of this section, we will 
focus  on  the  most  liquid  asset  types:  equities,  fixed‐income  securities,  and  cash  and 
equivalents. 

An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent 
a type of vehicle to which you have allocated a certain portion of your whole investment. 
The asset mix you choose according to your aims and strategy will determine the risk and 
expected return of your portfolio.  

Basic Types of Portfolios 

¾ Aggressive investment strategies 

In  general,  such  strategies  that  shoot  for  the  highest  possible  return  are  most 
appropriate for investors who, for the sake of this potential high return, have a high 
risk  tolerance  (can  stomach  wide  fluctuations  in  value)  and  a  longer  time  horizon. 
Aggressive portfolios generally have a higher investment in equities.  

¾ Conservative investment strategies 

The conservative investment strategies, which put safety at a high priority, are most 
appropriate  for  investors  who  have  a  lower  risk  tolerance  and  short  time  horizon. 
Conservative portfolios will generally consist mainly of cash and cash equivalents, or 
high‐quality fixed‐income instruments.  

To demonstrate the types of allocations that are suitable for these strategies, we'll look at 
samples of both a conservative and a moderately aggressive portfolio. 

(Note that the terms "cash" and the "money market" refer to any short‐term, fixed‐income 
investment. Money in a savings account and a certificate of deposit (CD), which pays a bit 
higher interest, are examples. ) 

 
 

The  main  goal  of  a  conservative  portfolio  strategy  is  to  maintain  the  real  value  of  the 
portfolio, that is, to protect the value of the portfolio against inflation. The portfolio you see 
here  would  yield  a  high  amount  of  current  income  from  the  bonds,  and  would  also  yield 
long‐term capital growth potential from the investment in high quality equities. 

 A moderately aggressive portfolio is meant for individuals with a longer time horizon and an 
average risk tolerance. Investors who find these types of portfolios attractive are seeking to 
balance the amount of risk and return contained within the fund.  

The  portfolio  would  consist  of  approximately  50‐55%  equities,  35‐40%  bonds,  5‐10%  cash 
and equivalents.   

You  can  further  break  down  the  above  asset  classes  into  subclasses,  which  also  have 
different  risks  and  potential  returns.  For  example,  an  investor  might  divide  the  equity 
portion  between  large  companies,  small  companies,  and  international  firms.  The  bond 
portion might be allocated between those that are short‐term and long‐term, government 
versus corporate debt, and so forth. More advanced investors might also have some of the 
alternative  assets  such  as  options  and  futures  in  the  mix.  As  you  can  see,  the  number  of 
possible asset allocations is practically unlimited. 

Why Portfolios? 

It all centers on diversification. Different securities perform differently at any point in time, 
so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of 
any one security. When your stocks go down, you may still have the stability of the bonds in 
your portfolio.  

There  have  been  all  sorts  of  academic  studies  and  formulas  that  demonstrate  why 
diversification  is  important,  but  it's  really  just  the  simple  practice  of  "not  putting  all  your 
eggs  in  one  basket."  If  you  spread  your  investments  across  various  types  of  assets  and 
markets, you'll reduce the risk of catastrophic financial losses. 

We have to use these criteria to assess our investment needs. For instance, if you want to 
put  away  money  for  retirement,  safety  will  be  the  most  important  criterion.  A  safe 
investment avenue that gives you a decent annual return will be good enough for you. What 
about the money your father sent you for the down payment on your car? You haven’t even 
decided on the model! You’ll probably keep the money in your savings bank account so that 
you can withdraw it quickly.  

Different motives, different needs, same good habit. 

Are you investing? Or speculating? 

"I can resist everything but temptation." ‐‐ Oscar Wilde 

If you are investing you have, one, a well‐defined time period for the returns you expect on 
your  investment  and,  two,  you  are  fairly  sure  of  the  returns  you  will  get.  In  other  words 
investing does follow a method, it could be a method you adopt from a financial expert or 
could be self‐defined.  

The  difference  with  speculation  is  then  about  the  degree.  Once  you  invest  the  difference 
will be more apparent. If you follow a method you almost wipe out any chances of making 
losses and making money is not that difficult. 

Speculators succumb to the temptation of putting their money for short periods expecting 
to get rich quick.  Some do succeed but it is all by fluke and hence, what has been seen is 
that most of the losers are ones who fail to cap this temptation. 

So when you go investing make sure that you are aiming and shooting and not shooting and 
then aiming. 

Preparation of a ‘Policy for Investment’ 
A Policy for Investment is a statement which provides a summation of the circumstances,
objectives, constraints and policies which govern the investments of the investor. A well
drafted Policy for Investment makes the investor recognize appropriate investment strategies
and no longer needs to trust the advisor blindly.
The Investment Policy Statement acts as a roadmap for taking every single investment
decisions and provides the much needed discipline in the portfolio management process.
It gives the following advantages:
1. Defining return objective

2. Understanding risk tolerance

3. Investment constraints

4. Guidelines to construct a portfolio

5. Basis for portfolio monitoring and review

 6. Better control over financial decisions

7. Allows perpetuity and solves disputes between client and advisor.

This statement can be made in the following manner:

POLICY OF INVESTMENT OF __________________ 
I. Financial history

What is the business or service of investor and his future plans? What are the
sources of wealth?
How strong is he financially?
What are motives of investment – security, growth?
Personal characteristics of the investor – stage of life, personality type?

II. Return Objectives

How much return I want and is it attainable?

Are these adjusted for inflation?

III. Risk tolerance

Ability to take risks? Consider factors like investor’s financial needs and goals,
importance of it for him, how much investment shortfall can he bear?
Willingness to take risks? How much risk I am willing to take to achieve my
goals.

IV. Constraints

1. Liquidity (can portfolio meet anticipated and unanticipated for cash)

2. Time horizon (what is the time horizon of the investments)

3. Taxes (what is the impact of tax on income and capital)

 4. Legal and Regulatory Environment

5. Any unique circumstances affecting the investor

The Policy for Investment needs to be reviewed from time-to-time for any change in
circumstances. The review process is done mostly once in a year or in six months if desirable.

Classification of Investments 

INVESTMENT UNIVERSE
EQUITY BONDS MUTU INSUR CORP DERIV ALTER SAVING
1. EQUITY (period more than a year)
ALFUN ANCE FINANC ATIVE NATIVE INS.
DS
a. Primary market E S INVEST

b. Secondary market

c. Overseas trading

2. BONDS

a. Corporate bond market

b. Government securities

c. Public deposits

3. MUTUAL FUNDS

a. Equity oriented

b. Debt oriented

c. Equity Linked Saving Savings (ELSS)

d. Unit linked Insurance Plans (ULIP)

4. INSURANCE

a. Endowment policy

b. Whole life policy

c. Term insurance policy

5. CORPORATE FINANCE

a. Bhichi (pooling of money to be given to a member for business, illegal since black
money involved)

b. Advances and deposits

6. DERIVATIVES

a. Forward contracts

b. Future contracts

i. Index futures

ii. Stock futures

iii. Currency futures

iv. Commodity futures

c. Options

d. Swaps

e. Exchange traded funds (ETF)

7. ALTERNATIVE INVESTMENS

a. Real estate

b. Private equity

c. Commodities

d. Currency

e. Distressed securities (not prevalent in India)

f. Hedge funds (not prevalent in india)

g. Managed futures (not prevalent in india)

8. SAVING INSTRUMENTS

a. Saving account

b. Post office saving accounts

 c. Fixed deposits

d. Recurring deposits

e. Public provident fund

f. Employers provident fund

g. Superannuation fund

h. Pension scheme

i. National saving certificate

j. Infrastructure bonds

EQUITY 
The only reason investors head for the stock market is to earn better returns compared to
other investment avenues. World over, and even in India, stocks have outperformed every
other asset class over the long run. Stocks are probably your best bet against inflation too.
However, it is to be remembered that investing in equities is riskier than and definitely
demands more time than other investments.
What is equity?
Equity comprises the equity ownership of a company and represents your right to buy or sell
your ownership interest at a later date. Equity securities are generally considered long-term
investments.
What are Shares and Stocks?
Shares and stock are an equity investment that signifies ownership in a business. These are a
fractional ownership interest in a business. Equity ownership of a firm can be obtained by
purchase of shares or stock of that firm. Return is in the form of a dividend and an increase in
the market price of the share. Shares are either common or equity shares or preferred shares.
As an equity shareholder you stand to benefit in a firm’s success and at the same time you
bear a part of the company’s risk too.

Preferred shareholders have additional rights like the right to participate in the profits after
the equity dividend has been paid and a right to receive a premium at the time of redemption.

What are the types of shares and stocks? 

The following are the various types of shares: 

• Blue Chips:

Blue chip shares are those of a company, which are financially strong, and of a high
quality. For those of you who want a safe, low-risk, long-term investment, investing
in these shares would be a safe bet. These provide dependable, modest returns at low
 risk. These companies have an excellent track record in dividend payments as well as
in growth in earnings.

• Growth stocks:

These are stocks in companies that have a fast growth rate like high-tech industries.
These stocks pay low or no dividends as the returns are ploughed back for future
expansions. These are a safe bet for those who do not need their money right away.
These stocks tend to fluctuate more.

• Income Stocks:

These shares are issued by companies having higher dividends. This is the right
choice for you, if what you are looking for is high current income. These are stocks of
stable industries and therefore less risky. Regular cash flow and stability characterize
these stocks.

• Cyclical stocks:

These are speculative stocks where the prices fluctuate with changes in the economy.
These stocks are for those who are willing to take risks and are financially in a strong
position.

• Defensive stocks:

These stocks are safe and consistent securities in companies not affected by changes
in an economy. As these are relatively low risk, the returns fetched are also low.
These stocks are an ideal choice for older people who would like to avoid taking risks.

• Speculative stocks:

These are high profit high-risk investments and are definitely not for the chicken
hearted. These are for the professional investors. These are issued by companies that
do not have an established track record.

What are the advantages of equity investment?

Ultimately, owning shares allows you to own a portion of a company (a share). The
management team and board of directors effectively work for you, and are there to maximise
your wealth. Therefore, they should be acting in a way that benefits you.

Greater Returns: Best Investment over time

Shares have been popular with investors historically because shares have had better returns
compared to other investments, such as bonds and cash in the bank. For an investment to be
growing, you need capital growth, which means share price increases beyond inflation (the
general increase in the cost of things you buy day to day).

Ease of Diversification
Diversification is simply not putting all your eggs in one basket. If you make smaller
investment in various different companies, the likelihood that one of your investments fails
means that it won’t have a great affect on your total investment. If you have all your eggs
spread between a number of baskets (investments), you are more insulated from any possible
downturns. Because you can buy small parcels of shares, you can get greater diversification
though investing in shares. Compare this to say property where a large sum of money is
placed in just one investment.

Liquidity

Another benefit of investing in shares is that it is a liquid asset.

With shares, you can log onto various websites and buy and sell easily. The market for shares
is large (for the large blue chip companies), meaning you can find buyers and sellers to fulfil
your request. E.g. If you want liquidate your portfolio (sell everything), it’s relatively easy to
find buyers. Compare this to selling property, where you may have only 1 or 2 interested
buyers.

Availability of Information

Information about a particular companies share, especially blue chip shares, are just about
everywhere, news on TV, newspaper and most financial websites. You get to know up to the
minute value of your share portfolio. Also, part of listing on the Stock Exchange, they must
report information to their shareholders through announcements, including financials (full
year and quarterly), news that may affect the share price, such as acquisitions and
divestments and respond to queries relating to large movements in their share price. This
disclosure ensures that all share holders are kept up to date on their investment.

Tax Benefits

Long term capital gains on sale of equity shares through a stock exchange are exempt from
Tax. Also, short term capital gains is taxable at 15 % which is loads better than being taxed at
ordinary income tax rate which can go to as high as 30%.

Other benefits:

¾ Capital Appreciation: Equity shares of good companies appreciate in value and

thus act as a partial hedge against inflation.
¾ Bonus shares: Successful companies issue bonus shares from time to time subject
to the guidelines issued by the SEBI. After bonus shares are issued, shareholders
are entitled to dividends not only on the original shares but also on the equity
shares.
¾ Annual dividends: All reasonably profitable companies try to maintain a steady
rate of dividends and some declare interim dividends as well.
¾ Rights shares: When a company desires to issue new equity shares the new shares
must first be offered to the existing shareholders on a pro-rata basis unless they
agree to give up this right. Such shares are called rights shares. If the
shareholder does not desire to subscribe to such shares they can sell them at a
profit, provided there is a demand for them. Also, when such a rights offer is
 made, the rights coupons given enjoy a premium. Shareholders can renounce their
right at a premium and get a profit.
¾ Can be pledged as security: Equity shares can be pledged as security to raise loans
¾ Voting rights: An equity shareholder enjoys voting rights in the general meetings
of the company. He can also appoint a proxy to attend meetings on his behalf.

STOCK EXCHANGE 
Under the Securities Contract (Regulation) Act, 1956,
“stock exchange” means—
(a) any body of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956)
whether under a scheme of corporatisation and demutualisation or
otherwise, for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities.

There are 19 recognised stock exchanges in India. Mangalore Stock Exchange, Saurashtra
Kutch Stock Exchange, Magadh Stock Exchange and Hyderabad Stock Exchange have been
derecognised by SEBI. In terms of legal structure, the stock exchanges in India could be
segregated into two broad groups – 16 stock exchanges which were set up as companies,
either limited by guarantees or by shares, and 3 stock exchanges which were set up as
association of persons and later converted into companies, viz. BSE, ASE and Madhya
Pradesh Stock Exchange. Apart from NSE, all stock exchanges whether established as
corporate bodies or Association of Persons, were earlier non-profit making organizations. As
per the demutualisation scheme mandated by SEBI, all stock exchanges other than
Coimbatore stock exchange have completed their corporatisation and demutualisation
process. Accordingly, out of 19 stock exchanges 18 are corporatized and demutualised and
are functioning as for-profit companies, limited by shares.

BOMBAY STOCK EXCHANGE 

The Bombay Stock Exchange (BSE) (formerly, The Stock Exchange, Bombay) is a stock
exchange located on Dalal Street, Mumbai and is the oldest stock exchange in Asia. The
equity market capitalization of the companies listed on the BSE was US$1.63 trillion as of
December 2010, making it the 4th largest stock exchange in Asia and the 8th largest in the
world. The BSE has the largest number of listed companies in the world.
As of June 2011, there are over 5,085 listed Indian companies and over 8,196 scrips on the
stock exchange, the Bombay Stock Exchange has a significant trading volume. The BSE
SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though
many other exchanges exist, BSE and the National Stock Exchange of India account for the
majority of the equity trading in India. While both have similar total market capitalization
(about USD 1.6 trillion), share volume in NSE is typically two times that of BSE.

Hours of operation

Session Timing
Beginning of the Day Session 8:30 - 9:00
pre-open trading session 9:00 - 9:15
Trading Session 9:15 - 15:30
Position Transfer Session 15:30 - 15:50
Closing Session 15:50 - 16:05
Option Exercise Session 16:05 -

NATIONAL STOCK EXCHANGE 

The  National  Stock  Exchange  (NSE)  is  a  stock exchange  located  at  Mumbai,  Maharashtra, 
India. It is the 9th largest stock exchange in the world by market capitalization and largest in 
India by daily turnover and number of trades, for both equities and derivative trading. The 
NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange 
Fifty), an index of fifty major stocks weighted by market capitalisation. 
NSE is mutually‐owned by a set of leading financial institutions, banks, insurance companies 
and  other  financial  intermediaries  in  India  but  its  ownership  and  management  operate  as 
separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs 
who have taken a stake in the NSE. 

Trading  volumes  in  the  equity  segment  have  grown  rapidly  with  average  daily  turnover 
increasing from Rs.17 crores during 1994‐95 to Rs.15, 687 crores during FY 2009‐10. During 
the year 2009‐10, NSE reported a turnover of Rs.3, 812,032 crores in the equities segment. 

As on Dec 01, 2011

Traded Volume (shares in lakh) - 5,758.27
Traded Value (Rs crores) - 10,312.61

Innovations 
NSE pioneering efforts include: 

• Being the first national, anonymous, electronic limit order book (LOB) exchange to
trade securities in India. Since the success of the NSE, existent market and new
market structures have followed the "NSE" model.
• Setting up the first clearing corporation "National Securities Clearing Corporation
Ltd." in India. NSCCL was a landmark in providing innovation on all spot equity
market (and later, derivatives market) trades in India.
• Co-promoting and setting up of National Securities Depository Limited, first
depository in India
• Setting up of S&P CNX Nifty.
• NSE pioneered commencement of Internet Trading in February 2000, which led to the
wide popularization of the NSE in the broker community.
• Being the first exchange that, in 1996, proposed exchange traded derivatives,
particularly on an equity index, in India. After four years of policy and regulatory
debate and formulation, the NSE was permitted to start trading equity derivatives
• Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in
India.
• NSE has also launched the NSE-CNBC-TV18 media centre in association with
CNBC-TV18.
• NSE.IT Limited, setup in 1999, is a 100% subsidiary of the National Stock Exchange
of India. A Vertical Specialist Enterprise, NSE.IT offers end-to-end Information
Technology (IT) products, solutions and services.
• NSE (National Stock Exchange) was the first exchange in the world to use satellite
communication technology for trading, using a client server based system called
National Exchange for Automated Trading (NEAT). For all trades entered into NEAT
system, there is uniform response time of less than one second.

Trading

NSE's automated screen based trading, modern, fully computerised trading system designed
to offer investors across the length and breadth of the country a safe and easy way to invest.
The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully
automated screen based trading system, which adopts the principle of an order driven market
NSE  introduced  for  the  first  time  in  India,  fully  automated  screen  based  trading.  It  uses  a 
modern, fully computerised trading system designed to offer investors across the length and 
breadth of the country a safe and easy way to invest. 

The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully 
automated  screen  based  trading  system,  which  adopts  the  principle  of  an  order  driven 
market. 

Rolling Settlement

In  a  rolling  settlement,  each  trading  day  is  considered  as  a  trading  period  and  trades 
executed during the day are settled based on the net obligations for the day. 

At NSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. 
For arriving at the settlement day all intervening holidays, which include bank holidays, NSE 
holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are 
settled on Wednesday, Tuesday's trades settled on Thursday and so on. 

Market Timings 

Trading on the equities segment takes place on all days of the week (except Saturdays and 
Sundays and holidays declared by the Exchange in advance). The market timings of the 
equities segment are: 

Normal Market Open: 09:15 hrs 
Normal Market Close: 15:30 hrs 

The Closing Session is held between 15.40 hrs and 16.00 hrs 

Limited Physical Market Open: 09:15 hrs 
Limited Physical Market Close: 15:30 hrs 

Circuit Breakers 

The Exchange has implemented index-based market-wide circuit breakers in compulsory

rolling settlement with effect from July 02, 2001. In addition to the circuit breakers, price
bands are also applicable on individual securities.

Index-based Market-wide Circuit Breakers

The index-based market-wide circuit breaker system applies at 3 stages of the index
movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered
bring about a coordinated trading halt in all equity and equity derivative markets nationwide.
The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the
NSE S&P CNX Nifty, whichever is breached earlier.

• In case of a 10% movement of either of these indices, there would be a one-hour

market halt if the movement takes place before 1:00 p.m. In case the movement takes
place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour.
 In case movement takes place at or after 2:30 p.m. there will be no trading halt at the
10% level and market shall continue trading.
• In case of a 15% movement of either index, there shall be a two-hour halt if the
movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00p.m.
but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or
after 2:00 p.m. the trading shall halt for remainder of the day.
• In case of a 20% movement of the index, trading shall be halted for the remainder of
the day.

These percentages are translated into absolute points of index variations on a quarterly basis.
At the end of each quarter, these absolute points of index variations are revised for the
applicability for the next quarter. The absolute points are calculated based on closing level of
index on the last day of the trading in a quarter and rounded off to the nearest 10 points in
case of S&P CNX Nifty.

Price Bands 

Daily price bands are applicable on securities as below:

• Daily price bands of 2% (either way)

• Daily price bands of 5% (either way)
• Daily price bands of 10% (either way)
• No price bands are applicable on:
scrips on which derivative products are available or scrips included in indices on
which derivative products are available (unless otherwise specified)
• Price bands of 20% (either way) on all remaining scrips (including debentures,
preference shares etc).

SME EXCHANGE 

Small and medium enterprises (SMEs), particularly in developing countries like India, are the 
backbone of the nation's economy. They constitute the bulk of the industrial base and also 
contribute significantly to their exports as well as to their Gross Domestic Product (GDP) or 
Gross  National  Product  (GNP).  Micro,  Small  and  Medium  Enterprises  (MSMEs)  contributes 
8% of the country's GDP, 45% of the manufactured output and 40% of our exports. 

The greatest need for an SME is credit, for running their business and for scaling up. Today 
cost of  raising capital is very  high, in case of raising a capital  of around Rs. 100  crore; the 
cost  goes  up  to  12‐15%.  For  such  companies  and  others  who  find  it  very  difficult  to  raise 
money  SME  exchange  will  come  to  the  rescue.  It  would  also  help  them  to  unlock  the 
intrinsic value. It also provides an immense opportunity to investors to identify and invest in 
good companies at an early stage.  
The Prime Minister's Task Force in Jan. 2010 has recommended to set‐up a dedicated Stock 
Exchange/ Platform for SME. SEBI has also laid down the regulation for the governance of 
SME Exchange/Platform. 

In  Oct.  2011,  NSE  and  also  BSE  have  got  the  final  approval  from  SEBI  to  launch  their  SME 
platform.  For  listing,  if  the  paid‐up  capital  of  the  company  post‐issue  is  less  than  Rs.  10 
crore, then it can definitely come to the SME platform. If the paid‐up capital is between Rs. 
10  crore  and  Rs.  25  crore,  the  company  has  the  choice  to  come  to  the  main  exchange  or 
come  to  the  SME  platform.  Issues  on  this  platform  will  be  100  per  cent  underwritten  and 
merchant  bankers  will  underwrite  15  per  cent  on  their  own  account.  Also,  there  will  be 
three  years’  support  in  the  secondary  market  through  market  making  activity.  There  will 
also be safeguards against hostile takeovers in the SME exchange. 

The Small Industries Development Bank of India (SIDBI) is already working with the NSE to 
set up the SME exchange. Around 50‐60 SMEs are ready to raise equity capital by launching 
IPOs through the new exchange. 

INDICES 
A stock market index is a method of measuring a section of the stock market. Many indices 
are  cited  by  news  or  financial  services  firms  and  are  used  as  benchmarks,  to  measure  the 
performance of portfolios such as mutual funds. 

Alternatively, an index may also be considered as an instrument (after all it can be traded) 
which  derives  its  value  from  other  instruments  or  indices.  The  index  may  be  weighted  to 
reflect the market capitalization of its components, or may be a simple index which merely 
represents the net change in the prices of the underlying instruments. 

Most publicly quoted stock market indices (like the two quoted below) are weighted. 

BSE SENSEX 
The  Bombay  Stock  Exchange  (SENSEX)  also  referred  to  as  BSE  30  is  a  free-float market
capitalization-weighted  stock market index  of  30  well‐established  and  financially  sound 
companies  listed  on  Bombay Stock Exchange.  The  30  component  companies  which  are 
some of the largest and most actively traded stocks are representative of various industrial
sectors of the Indian economy. Published since January 1, 1986, the SENSEX is regarded as 
the pulse of the domestic stock markets in India. The base value of the SENSEX is taken as 
100 on April 1, 1979, and its base year as 1978‐79. On 25 July, 2001 BSE launched DOLLEX‐
30,  a  dollar‐linked  version  of  SENSEX.  As  of  21  April  2011,  the  market  capitalisation  of 
SENSEX was about 29,733 billion (US$603 billion) (42.34% of market capitalization of BSE), 
while its free‐float market capitalization was 15,690 billion (US$318 billion). 

S&P CNX Nifty 

The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty nicknamed Nifty 50 or simply 

Nifty (NSE: ^NSEI), is the leading index for large companies on the National Stock Exchange
of India.  The  Nifty  is  a  well  diversified  50  stock  index  accounting  for  23  sectors  of  the 
economy.  It  is  used  for  a  variety  of  purposes  such  as  benchmarking  fund  portfolios,  index 
based derivatives and index funds. Nifty is owned and managed by India Index Services and
Products Ltd.  (IISL),  which  is  a  joint  venture  between  NSE  and  CRISIL.  IISL  is  India's  first 
specialized  company  focused  upon  the  index  as  a  core  product.  IISL  has  a  marketing  and 
licensing agreement with Standard & Poor's. 

Nifty  has  shaped  up  as  the  largest  single  financial  product  in  India,  with  an  ecosystem 
comprising:  exchange  traded  funds  (onshore  and  offshore),  exchange‐traded  futures  and 
options (at NSE in India and at SGX and CME abroad), other index funds and OTC derivatives 
(mostly offshore). 

The S&P CNX Nifty covers 23 sectors of the Indian economy and offers investment managers 
exposure  to  the  Indian  market  in  one  portfolio.The  S&P  CNX  Nifty  stocks  represent  about 
60% of the total market capitalization of the National Stock Exchange (NSE). 

The  index  is  a  free  float  market  capitalisation  weighted  index.  From  inception,  the  index 
used full market capitalisation as weight assigned  to  different constituents. From June 26, 
2009, the index is computed based  on free float methodology. As  of November  2010,  top 
four scrips in the index (Reliance Industries, Infosys Technologies, ICICI Bank and Larsen & 
Toubro) account for about one third of the weight in the index whereas the top eight scrips 
account for about half the weightage in the index. 

The NSE publishes many other Sectoral indices and Thematic Indices. 

FAQ ON INDICES 

What do the ups and downs of an index mean? 

They reflect the changing expectations of the stock market about future dividends of India's 
corporate  sector.  When  the  index  goes  up,  it  is  because  the  stock  market  thinks  that  the 
prospective dividends in the future will be better than previously thought. When prospects 
of  dividends  in  the  future  become  pessimistic,  the  index  drops.  The  ideal  index  gives  us 
instant‐to‐instant  readings  about  how  the  stock  market  perceives  the  future  of  India's 
corporate sector.  

What is the basic idea in an index?  

Every stock price moves for two possible reasons: news about the company (e.g. a product 
launch, or the closure of a factory, etc.) or news about the country (e.g. nuclear bombs, or a 
budget announcement, etc.). The job of an index is to purely capture the second part, the 
movements of the stock market as a whole (i.e. news about the country). This is achieved by 
averaging.  Each  stock  contains  a  mixture  of  these  two  elements  ‐  stock  news  and  index 
news. When we take an average of returns on many stocks, the individual stock news tends 
to cancel out. On any one day, there would be good stock‐specific news for a few companies 
and bad stock‐specific news for others. In a good index, these will cancel out, and the only 
thing left will be news that is common to all stocks. The news that is common to all stocks is 
news about India. That is what the index will capture.  

What kind of averaging is done?  

For technical reasons, it turns out that the correct method of averaging is to take a weighted 
average, and give each stock a weight proportional to its market capitalisation. Suppose an 
index contains two stocks A and B. A has a market capitalisation of  1000 crore and B has a 
market capitalisation of  3000 crore. Then we attach a weight of 1/4 to movements in A and 
3/4 to movements in B.  

What is the portfolio interpretation of index movements?  

It is easy to create a portfolio, which will reliably get the same returns as the index i.e. if the 
index goes up by 4%, this portfolio will also go up by 4%. Suppose an index is made of two 
stocks, one with a market cap of  1000 crore and another with a market cap of  3000 crore. 
Then  the  index  portfolio  will  assign  a  weight  of  25%  to  the  first  and  75%  weight  to  the 
second. If we form a portfolio of the two stocks, with a weight of 25% on the first and 75% 
on the second, then the portfolio returns will equal the index returns. So if you want to buy 
1  lakh  of  this  two‐stock  index,  you  would  buy  25,000  of  the  first  and  75,000  of  the 
second;  this  portfolio  would  exactly  mimic  the  two‐stock  index.  A  stock  market  index  is 
hence just like other price indices in showing what is happening on the overall indices ‐‐ the 
wholesale  price  index  is  a  comparable  example.  In  addition,  the  stock  market  index  is 
attainable as a portfolio.  

Why are indices important?  

Traditionally,  indices  have  been  used  as  information  sources.  By  looking  at  an  index  we 
know how the market is faring. This information aspect also figures in myriad applications of 
stock  market  indices  in  economic  research.  This  is  particularly  valuable  when  an  index 
reflects highly up to date information (a central issue which is discussed in detail ahead) and 
the  portfolio  of  an  investor  contains  illiquid  securities  ‐  in  this  case,  the  index  is  a  lead 
indicator of how the overall portfolio will fare.  
In recent years, indices have come to the fore owing to direct applications in finance, in the 
form of index funds and index derivatives. Index funds are funds which passively 'invest in 
the  index'.  Index  derivatives  allow  people  to  cheaply  alter  their  risk  exposure  to  an  index 
(this  is  called  hedging)  and  to  implement  forecasts  about  index  movements  (this  is  called 
speculation). Hedging using index derivatives has become a central part of risk management 
in  the  modern  economy.  These  applications  are  now  a  multi‐trillion  dollar  industry 
worldwide, and they are critically linked up to market indices. 

Finally, indices serve as a benchmark for measuring the performance of fund managers. An 
all‐equity fund should obtain returns like the overall stock market index. A 50:50 debt:equity 
fund  should  obtain  returns  close  to  those  obtained  by  an  investment  of  50%  in  the  index 
and  50%  in  fixed  income.  A  well‐specified  relationship  between  an  investor  and  a  fund 
manager  should  explicitly  define  the  benchmark  against  which  the  fund  manager  will  be 
compared, and in what fashion.  

What kinds of indices exist?  

The most important type of market index is the broad‐market index, consisting of the large, 
liquid  stocks  of  the  country.  In  most  countries,  a  single  major  index  dominates 
benchmarking,  index  funds,  index  derivatives  and  research  applications.  In  addition,  more 
specialised  indices  often  find  interesting  applications.  In  India,  we  have  seen  situations 
where  a  dedicated  industry  fund  uses  an  industry  index  as  a  benchmark.  In  India,  where 
clear  categories  of  ownership  groups  exist,  it  becomes  interesting  to  examine  the 
performance of classes of companies sorted by ownership group.  

Isn't averaging like diversification; cancelling out vulnerability to one stock?  

Yes, the averaging that takes place in an index is equivalent to diversification. Diversification 
cancels  out  individual  stock  fluctuations.  From  an  investment  perspective,  diversification 
reduces  risk.  From  an  information  perspective,  diversification  cancels  out  stock  noise;  the 
only thing left after good diversification is the common factor ‐‐ news such as nuclear bombs 
‐‐ which hits all stocks and cannot possibly be removed by diversification.  

Then  a  larger  number  of  stocks  in  an  index  will  give  more  diversification  ‐‐  isn't  that  a 
good thing? Why don't we put all the stocks of the country into the index?  

It  is,  indeed,  the  case  that  putting  more  stocks  into  an  index  yields  more  diversification. 
However,  two  things  go  wrong  when  we  do  this  too  much:  First,  there  are  diminishing 
returns to diversification. Going from 10 stocks to 20 stocks gives a sharp reduction in risk. 
Going  from  50  stocks  to  100  stocks  gives  very  little  reduction  in  risk.  Going  beyond  100 
stocks  gives  almost  zero  reduction  in  risk.  Hence,  there  is  little  to  gain  by  diversifying, 
beyond a point. The more serious problem lies in the stocks that we take into an index when 
it is broadened. If the stock is illiquid, the observed prices yield contaminated information 
and actually worsen an index.  
What is wrong with the price information for illiquid stocks?  

There are three problems: 'stale prices', 'bid‐ask bounce' and vulnerability to manipulation. 
Through these problems, an index is actually worsened when illiquid stocks are put into it.  

A stock may be liquid on one exchange and illiquid on another ‐‐ what price do you take 
when calculating the index? 

Illiquid stocks yield bad price data; so the best quality data will come from the most liquid 
exchange. In India, that is NSE. The S&P CNX Nifty uses price data from NSE for calculations.  

What is 'stale prices'?  

Suppose we look at the closing price of an index. It is supposed to reflect the state of the 
stock market  at 3:30 PM on NSE.  Suppose an illiquid  stock  is in  the  index.  The last traded 
price (LTP) of the stock might be an hour, or a day, or a week old! The index is supposed to 
show how the stock market perceives the future of the corporate sector at 3:30 PM. When 
an illiquid stock injects these 'stale prices' into the calculation of an index, it makes the index 
more stale. It reduces the accuracy with which the index reflects information.  

What is 'bid‐ask bounce'?  

Suppose  a  stock  trades  at  bid  1440  ask  1490.  Suppose  no  news  appears  for  ten  minutes. 
But, over this period, suppose that a buy order first comes in (at  1490) followed by a sell 
order (at  1440). This sequence of events makes it seem that the stock price has dropped by 
50.  This  is  a  totally  spurious  price  movement!  Even  when  no  news  is  breaking,  when  a 
stock  price  is  not  changing,  the  'bid‐ask  bounce'  is  about  prices  bouncing  up  and  down 
between bid and ask. These changes are spurious. This problem is the greatest with illiquid 
stocks  where  the  bid‐ask  spread  is  wide.  When  an  index  component  shows  such  price 
changes it contaminates the index.  

What about market manipulation ‐ how would manipulation of an index take place, and 
how would an index be made less vulnerable to manipulation?  

The  index  is  a  large  entity  and  is  intrinsically  harder  to  manipulate  when  compared  to 
individual  stocks.  Obviously,  larger  indices  are  harder  to  manipulate  than  smaller  indices. 
The weak links in an index are the large, illiquid stocks. These are the achilles heel where a 
manipulator  obtains  maximum  impact  upon  the  index  at  minimum  cost.  Optimal  index 
manipulation consists of attacking these stocks. This is one more reason why illiquid stocks 
should be excluded from a market index; indeed this aspect requires that the liquidity of a 
stock in an index should be proportional to its market capitalisation.  

Why does the index keep changing from time to time?  

Think of a liquid stock as a good thermometer, one which gives accurate data about the true 
price of the stock, because it trades actively with a tight spread. The prices observed for an 
illiquid  stock  are  like  readings  from  a  low  quality  thermometer,  which  reports  noisy  data 
about the phenomenon of interest (the true price of the security). We try to find the fifty 
best thermometers in the country and average their values to make the S&P CNX Nifty. As 
time passes, better thermometers become available (in the form of large, liquid stocks that 
are  not  in  the  S&P  CNX  Nifty).  We  would  like  that  S&P  CNX  Nifty  always  uses  the  best 
thermometers possible. So we remove the weakest thermometer from inside the S&P CNX 
Nifty and accept the new stock into it. The world changes, so the index should change. Yet, 
the change should not be sudden ‐ for that would disrupt the character of the index. S&P 
CNX  Nifty  uses  clear,  researched  and  publicly  documented  rules  for  index  revision.  These 
rules are applied regularly, to obtain changes to the index set. Index reviews are carried out 
every six months to ensure that each security in the index fulfils all the laid down criteria. 
IDBI was once not listed; SBI was once illiquid; Infosys was once an obscure software start‐
up.  The  world  changes,  and  one  by  one,  these  stocks  have  come  into  the  S&P  CNX  Nifty. 
Each change in the S&P CNX Nifty is small, so the continuity of the index is maintained. Yet, 
at  all  times, S&P  CNX Nifty represents the 50  most important liquid stocks in the country, 
the best thermometers to build an index out of.  

When  a  stock  goes  out  and  a  new  stock  comes  in,  doesn't  that  make  index  levels  non‐
comparable?  

No. There are mathematical formulas, which ensure that yesterday's value and todays are 
comparable, even if a change in composition takes place in‐between. Think of an index as a 
portfolio.  The  composition  of  the  portfolio  changes,  but  it  is  still  meaningful  to  keep 
measuring the overnight returns on the portfolio from day to day. These returns, cumulated 
up, are the index level.  

Index revision sounds dangerous in terms of political pressures. Won't speculators try to 
push a stock they have purchased into S&P CNX Nifty? Or remove a stock from the index 
when they are shorting it?  

Of course they will. Hence there are no speculators on the internal committee of IISL, which 
manages  the  index  revisions.  Further,  there  are  objective,  publicly  defined  rules  which 
determine when stocks come in and go out of the index. There isn't much room for personal 
judgement here.  

You  say  that  buying  a  S&P  CNX  Nifty  portfolio  yields  the  same  returns  as  percentage 
changes on the S&P CNX Nifty index. But the weights will have to keep on changing from 
day to day when market caps change?  

No.  The  market‐cap  weighted  index  is  "self  weighting".  I.e.  when  weights  change  because 
prices change, yesterday's index portfolio continues to be today's index portfolio. Hence a 
buy  and  hold  strategy  is  all  that  is  required  to  replicate  index  returns  under  normal 
circumstances.  Note  that  someone  who  buys  and  holds  a  S&P  CNX  Nifty  portfolio  earns 
dividends; this should be compared with the S&P CNX Nifty TR index and not plain S&P CNX 
Nifty.  
So when do weights in an index change?  

When corporate actions take place, the market capitalisation changes and weights have to 
be adjusted. Rights issues, public issues and mergers all present such problems. Of course, 
when  index  set  changes  take  place,  the  portfolio  has  to  be  adjusted  and  weights  get 
modified. This requires elaborate and consistently‐applied policies. These policies have been 
the subject of great attention and care at IISL and are fully disclosed to the public.  

Why not form a small portfolio of the ten most liquid stocks, and work to ensure that the 
small portfolio is maximally correlated with the S&P CNX Nifty?  

This  can,  indeed,  be  done.  Is  it  worth  doing?  That  depends  upon  the  cost  and  benefit. 
Calculating the  weights,  in  the  ten stocks  with  the  lowest  market  impact  cost,  so that  the 
correlation with S&P CNX Nifty is maximised, is not easy to do. 

The gains from such an activity are not large. S&P CNX Nifty is explicitly designed to make it 
convenient to trade complete index portfolios. This is in contrast with other markets, where 
indices  have  arisen  before  index  futures  came  about,  and  ways  had  to  be  found  to  trade 
them. For example, the S&P 500 index was there before index futures came about. When 
index futures started trading, arbitrageurs had to find ways to trade the index ‐ trading 500 
stocks  on  the  floor‐based  New  York  Stock  Exchange  was  highly  cumbersome.  This  led  to 
great  creativity  in  finding  250‐stock  portfolios  which  correlate  well  with  the  S&P  500.  In 
India, there is no need to undergo these kinds of problems. S&P CNX Nifty is the base of the 
index futures, and S&P CNX Nifty is designed to be convenient to trade directly.  

PRIMARY MARKET  

1. Different kinds of issues 

Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus and
Private Placement. While right issues by a listed company and public issues involve a
detailed procedure, bonus issues and private placements are relatively simpler. The
classification of issues is as illustrated below:
(a) Public issue:

When an issue / offer of securities is made to new investors for becoming

part of shareholders’ family of the issuer it is called a public issue. Public issue can be
further classified into Initial public offer (IPO) and Further public offer (FPO). The
significant features of each type of public issue are illustrated below:

(i) Initial public offer (IPO): When an unlisted company makes either a fresh issue of
securities or offers its existing securities for sale or both for the first time to the
public, it is called an IPO. This paves way for listing and trading of the issuer’s
securities in the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer: When an already listed company
makes either a fresh issue of securities to the public or an offer for sale to the public,
it is called a FPO.

(b) Rights issue (RI):

When an issue of securities is made by an issuer to its shareholders existing as on a

particular date fixed by the issuer (i.e. record date), it is called an rights issue. The
rights are offered in a particular ratio to the number of securities held as on the record
date.

(c) Bonus issue:

When an issuer makes an issue of securities to its existing shareholders as on a record
date, without any consideration from them, it is called a bonus issue. The shares are
issued out of the Company’s free reserve or share premium account in a particular
ratio to the number of securities held on a record date.

(d) Private placement:

When an issuer makes an issue of securities to a select group of persons not exceeding
49, and which is neither a rights issue nor a public issue, it is called a private
placement. Private placement of shares or convertible securities by listed issuer can be
of two types:
 (i) Preferential allotment: When a listed issuer issues shares or convertible securities,
to a select group of persons in terms of provisions of Chapter XIII of SEBI (DIP)
guidelines, it is called a preferential allotment. The issuer is required to comply with
various provisions which inter alia include pricing, disclosures in the notice, lock in
etc, in addition to the requirements specified in the Companies Act.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares
or securities convertible in to equity shares to Qualified Institutions Buyers only in
terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.

2. Types of Offer Documents (ODs) 

(a) What is an offer document?

‘Offer document’ is a document which contains all the relevant information about the
company, promoters, projects, financial details, objects of raising the money, terms of the
issue etc and is used for inviting subscription to the issue being made by the issuer.
‘Offer Document’ is called “Prospectus” in case of a public issue or offer for sale and
“Letter of Offer” in case of a rights issue.

(b) I hear various terms like draft offer document, Red Herring prospectus etc, what
are they and how they are different from each other?

Terms used for offer documents vary depending upon the stage or type of the issue where
the document is used. The terms used for offer documents are defined below:

(i) Draft offer document: is an offer document filed with SEBI for specifying changes, if
any, in it, before it is filed with the Registrar of companies (ROCs). Draft offer document
is made available in public domain including SEBI website, for enabling public to give
comments, if any, on the draft offer document.

(ii) Red herring prospectus: is an offer document used in case of a book built public issue.
It contains all the relevant details except that of price or number of shares being offered.
It is filed with RoC before the issue opens.

(iii) Prospectus: is an offer document in case of a public issue, which has all relevant
details including price and number of shares being offered. This document is registered
with RoC before the issue opens in case of a fixed price issue and after the closure of the
issue in case of a book built issue.

(iv) Letter of offer: is an offer document in case of a Rights issue and is filed with Stock
Exchanges before the issue open.

(v) Abridged prospectus: is an abridged version of offer document in public issue and is
issued along with the application form of a public issue. It contains all the salient features
of a prospectus.

(vi) Abridged letter of offer: is an abridged version of the letter of offer. It is sent to all
the shareholders along with the application form.
 (vii) Shelf prospectus: is a prospectus which enables an issuer to make a series of issues
within a period of 1 year without the need of filing a fresh prospectus every time. This
facility is available to public sector banks /Public Financial Institutions.

(viii)Placement document: is an offer document for the purpose of Qualified Institutional

Placement and contains all the relevant and material disclosures.

3. Pricing of an Issue 

(a) Who fixes the price of securities in an issue?

Indian primary market ushered in an era of free pricing in 1992. SEBI does not play any role
in price fixation. The issuer in consultation with the merchant banker on the basis of market
demand decides the price. The offer document contains full disclosures of the parameters
which are taken in to account by merchant Banker and the issuer for deciding the price. The
Parameters include EPS, PE multiple, return on net worth and comparison of these
parameters with peer group companies.

(b) What is the difference between “Fixed price issue” and “Book Built issue”?

On the basis of Pricing, an issue can be further classified into Fixed Price issue or Book Built
Issue:
Fixed Price Issue: When the issuer at the outset decides the issue price and mentions it in
the Offer Document, it is commonly known as “Fixed price issue”.

Book built Issue: When the price of an issue is discovered on the basis of demand received
from the prospective investors at various price levels, it is called “Book Built issue”.

(c) What is IPO Grading?

IPO grading is the grade assigned by a Credit Rating Agency (CRAs) registered with SEBI,
to the initial public offering (IPO) of equity shares or any other security which may be
converted into or exchanged with equity shares at a later date. The grade represents a relative
assessment of the fundamentals of that issue in relation to the other listed equity securities in
India. Such grading is generally assigned on a five point point scale with a higher score
indicating stronger fundamentals and vice versa as below.

IPO grade 1 Poor fundamentals

IPO grade 2 Below Average fundamentals
IPO grade 3 Average fundamentals
IPO grade 4 Above average fundamentals
IPO grade 5 Strong fundamentals

IPO grading has been introduced as an endeavour to make additional information available
for the investors in order to facilitate their assessment of equity issues offered through an
IPO.

4. Understanding Book Building: 

(a) What is book Building?

Book building is a process of price discovery. The issuer discloses a price band or floor price
before opening of the issue of the securities offered. On the basis of the demands received at
various price levels within the price band specified by the issuer, Book Running Lead
Manager (BRLM) in close consultation with the issuer arrives at a price at which the security
offered by the issuer, can be issued.

(b) What is a price band?

The price band is a band of price within which investors can bid. The spread between the
floor and the cap of the price band shall not be more than 20%. The price band can be
revised. If revised, the bidding period shall be extended for a further period of three days,
subject to the total bidding period not exceeding thirteen days.

(c) How does Book Building work?

Book building is a process of price discovery. A floor price or price band within which the
bids can move is disclosed at least two working days before opening of the issue in case of an
IPO and at least one day before opening of the issue in case of an FPO. The applicants bid for
the shares quoting the price and the quantity that they would like to bid at. After the bidding
process is complete, the ‘cut off’ price is arrived at based on the demand of securities. The
basis of Allotment is then finalized and allotment/refund is undertaken. The final prospectus
with all the details including the final issue price and the issue size is filed with ROC, thus
completing the issue process. Only the retail investors have the option of bidding at
‘cut off’.

(d) How does “cut off” option works for investors?

“Cut off” option is available for only retail individual investor’s i.e. investors who are
applying for securities worth up to Rs 1,00,000/ only. Such investors are required to tick the
cut off option which indicates their willingness to subscribe to shares at any price
discovered within the price band. Unlike price bids (where a specific price is indicated)
which can be invalid, if price indicated by applicant is lower than the price discovered, the
cut off bids always remain valid for the purpose of allotment

(e) Can I change/revise my bid?

Yes, you can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form. However, the
entire process of changing or revising the bids shall be completed within the date of closure
of the issue.

(f) Can I cancel my Bid?

Yes, you can cancel your bid anytime before the finalization of the basis of allotment by
approaching/ writing/ making an application to the registrar to the issue.

(g) What proof can I request from a trading member or a syndicate member for
entering bids?
The syndicate member returns the counterfoil with the signature, date and stamp of the
syndicate member. You can retain this as a sufficient proof that the bids have been accepted
by the trading / syndicate member for uploading on the terminal.

6. Categories of Investors

(a) Whether the investors are categorized? If yes, how the allotment is made to
different categories?

Investors are broadly classified under following categories :

(i) Retail individual Investor (RIIs)
(ii) Non Institutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)

“Retail individual investor” means an investor who applies or bids for securities for a value
of not more than Rs. 1, 00,000. (Increased to Rs.200000)

“Qualified Institutional Buyer” shall mean:

a) a public financial institution as defined in section 4A of the Companies Act, 1956;
b) a scheduled commercial bank;
c) a mutual fund registered with the Board;
d) a foreign institutional investor and sub account registered with SEBI, other than a sub
account which is a foreign corporate or foreign individual;
e) a multilateral and bilateral development financial institution;
f) a venture capital fund registered with SEBI;
g) a foreign venture capital investor registered with SEBI;
h) a state industrial development corporation;
i) an insurance company registered with the Insurance Regulatory
and Development Authority (IRDA);
j) a provident fund with minimum corpus of Rs. 25 crores;
k) a pension fund with minimum corpus of Rs. 25 crores);
l) National Investment Fund set up by resolution no. F. No. 2/3/2005 DDII dated
November 23, 2005 of Government of India published in the Gazette of India.”
Investors who do not fall within the definition of the above two categories are categorized
as “Non Institutional Investors”

Allotment to various investor categories is provided in the guidelines and is detailed below:

In case of Book Built issue

1. In case an issuer company makes an issue of 100% of the net offer to public through 100%
book building process—

(a) Not less than 35% of the net offer to the public shall be available for allocation to retail
individual investors;
(b) Not less than 15% of the net offer to the public shall be available for allocation to
non institutional investors i.e. investors other than retail individual investors and Qualified
Institutional Buyers;
(c) Not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers:
2. In case of compulsory Book Built Issues at least 50% of net offer to public being allotted
to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall
be refunded.

3. In case the book built issues are made pursuant to the requirement of mandatory allocation
of 60% to QIBs in terms of Rule 19(2)(b) of Securities Contract (Regulation) Rules, 1957,
the respective figures are 30% for RIIs and 10% for NIIs.

In case of fixed price issue

The proportionate allotment of securities to the different investor categories in an fixed price
issue is as described below:

1. A minimum 50% of the net offer of securities to the public shall initially be made available
for allotment to retail individual investors, as the case may be.
2. The balance net offer of securities to the public shall be made available for allotment to:
a. Individual applicants other than retail individual investors, and
b. Other investors including corporate bodies/ institutions irrespective of the number of
securities applied for.

(b) What are “firm allotment investor categories”?

SEBI (DIP) guidelines provide that an issuer making an issue to public can allot shares on
firm basis to some categories as specified below:

(i) Indian and Multilateral Development Financial Institutions,

(ii) Indian Mutual Funds,
(iii) Foreign Institutional Investors including Non Resident Indians and Overseas
Corporate Bodies and
(iv) Permanent/regular employees of the issuer company.
(v) Scheduled Banks
It may be noted that OCBs are prohibited by RBI to make investment.

(c) Which are the investor categories to whom reservations can be made in a public
issue on competitive basis?

Reservation on Competitive Basis is when allotment of shares is made in proportion to the

shares applied for by the concerned reserved categories. Reservation on competitive basis can
be made in a public issue to the following categories:

(i) Employees of the company

(ii) Shareholders of the promoting companies in the case of a new company and shareholders
of group companies in the case of an existing company
(iii) Indian Mutual Funds
(iv) Foreign Institutional Investors (including non resident Indians and overseas corporate
bodies)
(v) Indian and Multilateral development Institutions
(vi) Scheduled Banks
In a public issue by a listed company, the reservation on competitive basis can be made for
retail individual shareholders and in such cases the allotment to such shareholders shall be on
proportionate basis

(d) Is there any discretion while doing the allotment amongst various investor
categories as per the permissible allocations?

No, there is no discretion in the allotment process. All allottees are allotted shares on a
proportionate basis within their respective investor categories.

7. Investment in public Issues/ rights issues: 

(a) Where can I get application forms for applying/ bidding for the shares?

Application forms for applying/bidding for shares are available with all syndicate members,
collection centres, the brokers to the issue and the bankers to the issue. In case you intend to
apply through new process introduced by SEBI i.e. APPLICATIONS SUPPORTED BY
BLOCKED AMOOUNT (ASBA), you may get the ASBA application forms form the Self
Certified Syndicate Banks.

(b) Whom should I approach if the information disclosed in the offer document
appears to be factually incorrect?

The document is prepared by Merchant Banker(s), registered with SEBI. They are required to
do the due diligence while preparing an offer document. The draft offer document submitted
to SEBI is put on website for public comments. In case, you find any instance of
misinformation/ lack of information, you may send your complaint to Lead Manager to the
issue and/ or to SEBI, at this address: Securities & Exchange Board of India, C4 A, G Block,
Bandra Kurla Complex, Bandra (E), Mumbai 400051.

(c) Is it compulsory for me to have a Demat Account?

As per the requirement, all the public issues of size in excess of Rs.10 crore are to made
compulsorily in demat mode. Thus, if you intend to apply for an issue that is being made in a
compulsory demat mode, you are required to have a demat account and also have the
responsibility to put the correct DP ID and Client ID details in the bid/application forms.

(c) Is it compulsory to have PAN?

Yes, it is compulsory to have PAN. Any investor who wants to invest in an issue should have
a PAN which is required to be mentioned in the application form. It is to be distinctly
understood that the photocopy of the PAN is not required to be attached along with the
application form at the time of making an application.

(e) For how many days an issue is required to be kept open?

The period for which an issue is required to be kept open is:

For Fixed price public issues: 3 10 working days

For Book built public issues: 3 7 working days extendable by 3 days in case of a revision in
the price band
For Rights issues: 15 30 days.

(f) When do I get the allotment/ refund of shares?

For Fixed price public issues: 30 days of the closure of the issue
For Book built public issues: 15 days of the closure of the issue
For Rights issues: 15 days of the closure of the issue

(g) How can I know about the demand for an issue at any point of time?

The status of bidding in a book built issue is available on the website of BSE/NSE on a
consolidated basis. The data regarding bids is also available investor category wise. After the
price has been determined on the basis of bidding, the public advertisement containing, inter
alia, the price as well as a table showing the number of securities and the amount payable by
an investor, based on the price determined, is issued.
However, in case of a fixed price issue, information is available only after the closure of the
issue through a public advertisement, issued within 10 days of dispatch of the certificates of
allotment/ refund orders.

(h) How will I get my refund in an issue?

You can get refunds in an issue through various modes viz. registered/ordinary post, Direct
Credit, RTGS (Real Time Gross Settlement), ECS (Electronic Clearing Service) and NEFT
(National Electronic Funds Transfer).
As stated above, if you are residing in one of the 68 centres as specified by Reserve Bank of
India, then you will get refunds through ECS only except where you are otherwise disclosed
eligible under Direct Credit and RTGS. If you are residing at any other centre, then you will
continue to get refunds through registered/ordinary post. You are therefore advised to read
the instructions given in the prospectus/ abridged prospectus/ application form about centres.

(i) When will the shares allotted to me get listed?

In book built public issue the listing of shares will be done within 3 weeks after the closure of
the issue. In case of fixed price public issue, it will be done within 37 days after closure of the
issue.

(j) How will I know which issues are coming to the market?

The information about the forthcoming issues may be obtained from the websites of Stock
Exchanges. Further the issuer coming with an issue is required to give issue advertisements in
an English national Daily with wide circulation, one Hindi national newspaper and a regional
language newspaper with wide circulation at the place where the registered office of the
issuer is situated.

(k) Where do I get the copies of the offer document?

The soft copies of the offer documents are put up on the website of Merchant banker and on
the website of SEBI under Reports/Documents section
[http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=5]. Copies of the offer
documents in hard form may be obtained from the merchant banker or office of SEBI, SEBI
Bhawan, Plot No. C4 A “G” Block, BKC, Bandra (E), Mumbai 400051 on a payment of
Rs 100 through Demand Draft made in favour of Securities & Exchange Board of India.

(l) How do I find the status of offer documents filed by issuers with SEBI?

SEBI updates the processing status of offer documents on its website every week under the
section http://www.sebi.gov.in/Index.jsp?contentDisp=PrimaryMarket in SEBI website. The
draft offer documents are put up on the website under Reports/Documents section. The final
offer documents that are filed with SEBI/ROC are also put up for information under the same
section.

(m) Whom do I approach if I have grievances in respect of non receipt of shares, delay
in refund etc.?

You can approach the compliance officer of the issue, whose name and contact number is
mentioned on the cover page of the Offer Document. You can also address your complaints
to SEBI at the following address: Office of Investor Assistance & Education, Securities &
Exchange Board of India, C4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai
400051.
INDIAN DEPOSITORY RECEIPTS 
1. Whether a foreign company can access Indian securities market for raising funds?

Yes, a foreign company can access Indian securities market for raising funds through issue of
Indian Depository Receipts (IDRs)

2. What is an Indian Depository Receipts (IDRs)?

An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt

created by a Domestic Depository (custodian of securities registered with the Securities and
Exchange Board of India) against the underlying equity of issuing company to enable foreign
companies to raise funds from the Indian securities Markets.

3. Which are all the legislations governing IDRs?

Central Government notified the Companies (Issue of Indian Depository Receipts) Rules,
2004 (IDR Rules) pursuant to the section 605 A of the companies Act. SEBI issued
guidelines for disclosure with respect to IDRs and notified the model listing agreement to be
entered between exchange and the foreign issuer specifying continuous listing requirements.

4. Who is eligible to issue IDRs?

The eligibility criteria given under IDR Rules and Guidelines are as under :

The foreign issuing company shall have :

• pre issue paid up capital and free reserves of at least US$ 50 million and have a minimum
average market capitalization (during the last 3 years) in its parent country of at least US$
100 million;
• a continuous trading record or history on a stock exchange in its parent country for at least
three immediately preceding years;
• a track record of distributable profits for at least three out of immediately preceding five
years;
• listed in its home country and not been prohibited to issue securities by any Regulatory
Body and has a good track record with respect to compliance with securities market
regulations.
The size of an IDR issue shall not be less than Rs. 50 crores.
5. Which intermediaries are involved in issuance of IDRs?

• Overseas Custodian Bank is a banking company which is established in a country outside

India and has a place of business in India and acts as custodian for the equity shares of
issuing company against which IDRs are proposed to be issued in the underlying equity
shares of the issuer is deposited.
• Domestic Depository who is a custodian of securities registered with the as SEBI and
authorised by the issuing company to issue Indian Depository Receipts;
• Merchant Banker registered with SEBI who is responsible for due diligence and through
whom the draft prospectus for issuance of the IDR is filed with SEBI by the issuer company.

6. Whether the draft prospectus for IDRs has to be filed with SEBI as in case of
domestic issues?

Yes. Foreign issuer is required to file the draft prospectus with SEBI. Any changes specified
by SEBI shall be incorporated in the final prospectus to be filed with Registrar of Companies.

7. Whether IDRs can be converted into underlying equity shares?

IDRs can be converted into the underlying equity shares only after the expiry of one year
from the date of the issue of the IDR, subject to the compliance of the related provisions of
Foreign Exchange Management Act and Regulations issued there under by RBI in this
regard.

8. Who is responsible to distribute the corporate benefits to the IDR holders?

On the receipt of dividend or other corporate action on the IDRs, the Domestic Depository
shall distribute them to the IDR holders in proportion to their holdings of IDRs.

9. Whether there are any other requirements for investing in IDRs?

Yes.
• IDRs can be purchased by any person who is resident in India as defined under FEMA.
• Minimum application amount in an IDR issue shall be Rs. 20,000.
• Investments by Indian companies in IDRs shall not exceed the investment limits, if any,
prescribed for them under applicable laws
• In every issue of IDR—
(i) At least 50% of the IDRs issued shall be subscribed to by QIBs;
(ii) The balance 50% shall be available for subscription by non institutional.

10. Why do you need an IDR? 

An IDR is meant to diversify your holdings across regions to free you from a “region bias” or 
the risk of a portfolio getting too concentrated in the home market. You need to study the 
firm’s  financials  before  you  buy  its  IDR.  However,  since  these  IDRs  are  listed,  bought  and 
sold  on  the  Indian  markets,  the  impact  of  global  markets  and  exchange‐rate  risks  are 
reduced, though not totally eliminated.  

11. How are IDRs taxed? 
IDRs are taxed differently from equity shares. If you sell an IDR within a year of purchase, 
your gains will be taxed at your income‐tax rates. For exits made after a year, the tax rate 
will  be  10%  without  indexation  and  20%  with  indexation.  Since  the  IDR  does  not  deduct 
dividend  distribution  tax,  dividends  are  taxed  in  your  hand  as  per  your  income  tax  rates. 
IDRs also don’t impose securities transaction tax.  

12. Is there a currency risk? 

In theory, the price of the underlying share of the international firm at the foreign exchange 
and the exchange rate would play a role in determining the price of the IDR on the domestic 
exchange.  But,  in  practice,  this  may  not  play  out  fully  because  the  IDR  would  need  to  be 
bought  and  sold  in  Indian  rupees  and  its  price  discovery  would  happen  based  on  demand 
and  supply,  just  like  any  other  equity  share.  Dividends  declared  by  the  firm  will  be 
distributed  in  foreign  currency  and  this  would  be  then  converted  to  Indian  rupees  at 
prevailing exchange rates.  

Standard Chartered is the first company to come out with an IDR in May 2010. StanChart
derived 12% of its income from India in 2009, and India contributed $1.06 billion of its $7.23
billion operating profit last year, and that may have something to do with this first.

Ten IDRs equals a share of Standard Chartered Plc. It fixed issue price at Rs 104. Retail
investors got IDR allotment at a 5% discount. The IDR issue had a price band of Rs 100-115.
The issue got subscribed 2.20 times. A total of 449.71 million bids were obtained out of
which 15.03 million bids were obtained at cut-off price. Qualified Institutional Buyers led
the race subscribing 4.15 times. This was followed by Non-institutional buyers and retail
investors who subscribed 1.91 times and 0.26 times.

It got listed on the June 11, 2010 at Rs.105.

SECONDARY MARKET 
Secondary Market refers to a market where securities are traded after being initially offered
to the public in the primary market and/or listed on the Stock Exchange. Majority of the
trading is done in the secondary market. Secondary market comprises of equity markets and
the debt markets.

For the general investor, the secondary market provides an efficient platform for trading of
his securities. For the management of the company, Secondary equity markets serve as a
monitoring and control conduit—by facilitating value-enhancing control activities, enabling
implementation of incentive-based management contracts, and aggregating information (via
price discovery) that guides management decisions.

What is the difference between the primary market and the secondary market?

In the primary market, securities are offered to public for subscription for the purpose of
raising capital or fund. Secondary market is an equity trading avenue in which already
existing/pre- issued securities are traded amongst investors. Secondary market could be either
auction or dealer market. Stock exchange is the part of an auction market.

Whom should I contact for my Stock Market related transactions?

You can contact a broker or a sub broker registered with SEBI for carrying out your
transactions pertaining to the capital market.

Who is a broker?

A broker is a member of a recognized stock exchange, who is permitted to do trades on the

screen-based trading system of different stock exchanges. He is enrolled as a member with
the concerned exchange and is registered with SEBI.

Who is a sub broker?

A sub broker is a person who is registered with SEBI as such and is affiliated to a member of
a recognized stock exchange.

Am I required to sign any agreement with the broker or sub-broker?

Yes. For the purpose of engaging a broker to execute trades on your behalf from time to time
and furnish details relating to yourself for enabling the broker to maintain client registration
form you have to sign the “Member – Client agreement” if you are dealing directly with a
broker. In case you are dealing through a sub-broker then you have to sign a ”Broker - Sub
broker - Client Tripartite Agreement”. Model Tripartite Agreement between Broker-Sub
broker and Clients is applicable only for the cash segment. The Model Agreement has to be
executed on the non-judicial stamp paper. The Agreement contains clauses defining the rights
and responsibility of Client vis-à-vis broker/ sub broker. The documents prescribed are model
formats. The stock exchanges/stock broker may incorporate any additional clauses in these
documents provided these are not in conflict with any of the clauses in the model document,
as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines.

What is Member –Client Agreement Form?

This form is an agreement entered between client and broker in the presence of witness where
the client agrees (is desirous) to trade/invest in the securities listed on the concerned
Exchange through the broker after being satisfied of brokers capabilities to deal in securities.
The member, on the other hand agrees to be satisfied by the genuineness and financial
soundness of the client and making client aware of his (broker’s) liability for the business to
be conducted.

What are the various accounts an investor should have for trading in securities market?

Beneficial owner Account (B.O. account) / Demat Account: It is an account opened with a
depository participant in the name of client for the purpose of holding and transferring
securities.

Trading Account: An account which is opened by the broker in the name of the respective
investor for the maintenance of transactions executed while buying and selling of securities.

Client Account / Bank Account: A bank account which is in the name of the respective client
and is used for debiting or crediting money for trading in the securities market.

How do I place my orders with the broker or sub broker?

You can either go to the broker’s / sub broker’s office or place an order over the phone /
internet or as defined in the Model Agreement given above.

How do I know whether my order is placed?

The Stock Exchanges assign a Unique Order Code Number to each transaction, which is
intimated by broker to his client and once the order is executed, this order code number is
printed on the contract note. The broker member has also to maintain the record of time when
the client has placed order and reflect the same in the contract note along with the time of
execution of the order.

What documents should be obtained from broker on execution of trade?

You have to ensure receipt of the following documents for any trade executed on the
Exchange:
a. Contract note in Form A to be given within stipulated time.
b. In the case of electronic issuance of contract notes by the brokers, the clients shall
ensure that the same is digitally signed and in case of inability to view the same, shall
communicate the same to the broker, upon which the broker shall ensure that the
physical contract note reaches the client within the stipulated time.
It is the contract note that gives rise to contractual rights and obligations of parties of the
trade. Hence, you should insist on contract note from stock broker.

How trading takes place and what is the process of trading?

The normal course of online trading in the Indian market context is placed below:

Step 1. Investor / trader decides to trade

Step 2. Places order with a broker to buy / sell the required quantity of respective securities
Step 3. Best priced order matches based on price-time priority
Step 4. Order execution is electronically communicated to the broker’s terminal
Step 5. Trade confirmation slip issued to the investor / trader by the broker
Step 6. Within 24 hours of trade execution, contract note is issued to the investor / trader by
the broker
Step 7 Pay-in of funds and securities before T+2 day
Step 8. Pay-out of funds and securities on T+2 day

In case of short or bad delivery of funds / securities, the exchange orders for an auction to
settle the delivery. If the shares could not be bought in the auction, the transaction is closed
out as per SEBI guidelines.

What is the maximum brokerage that a broker can charge?

The maximum brokerage that can be charged by a broker has been specified in the Stock
Exchange Regulations and hence, it may differ from across various exchanges. As per the
BSE & NSE Bye Laws, a broker cannot charge more than 2.5% brokerage from his clients.

What are the charges that can be levied on the investor by a stock broker?

The trading member can charge:

1. Brokerage charged by member broker.
2. Penalties arising on specific default on behalf of client (investor)
3. Service tax as stipulated.
4. Securities Transaction Tax (STT) as applicable.

The brokerage, service tax and STT are indicated separately in the contract note.

What is STT?

Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock
exchanges at rates prescribed by the Central Government from time to time. Pursuant to the
enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities
Transaction Tax Rules, 2004 and STT came into effect from October 1, 2004.

What is a Rolling Settlement?

In a Rolling Settlement, trades executed during the day are settled based on the net
obligations for the day. Presently the trades pertaining to the rolling settlement are settled on
a T+2 day basis where T stands for the trade day. Hence, trades executed on a Monday are
typically settled on the following Wednesday (considering 2 working days from the trade
day). The funds and securities pay-in and pay-out are carried out on T+2 day.

What is the pay-in day and pay- out day?

Pay in day is the day when the brokers shall make payment or delivery of securities to the
exchange. Pay out day is the day when the exchange makes payment or delivery of securities
to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003. The
exchanges have to ensure that the pay out of funds and securities to the clients is done by the
broker within 24 hours of the payout. The Exchanges will have to issue press release
immediately after pay out.

In case of purchase of shares, when do I make payment to the broker?

The payment for the shares purchased is required to be done prior to the pay in date for the
relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange.

In case of sale of shares, when should the shares be given to the broker?

The delivery of shares has to be done prior to the pay in date for the relevant settlement or as
otherwise provided in the Rules and Regulations of the Exchange and agreed with the
broker/sub broker in writing.

How long it takes to receive my money for a sale transaction and my shares for a buy
transaction?

Brokers were required to make payment or give delivery within two working days of the pay
- out day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2
w.e.f. April 01, 2003, the pay out of funds and securities to the clients by the broker will be
within 24 hours of the payout.

Is there any provision where I can get faster delivery of shares in my account?

The investors/clients can get direct delivery of shares in their beneficial owner accounts. To
avail this facility, you have to give details of your beneficial owner account and the DP-ID of
your DP to your broker along with the Standing Instructions for ‘Delivery-In’ to your
Depository Participant for accepting shares in your beneficial owner account. Given these
details, the Clearing Corporation/Clearing House shall send pay out instructions to the
depositories so that you receive pay out of securities directly into your beneficial owner
account.

What is an Auction?

The Exchange purchases the requisite quantity in the Auction Market and gives them to the
buying trading member. The shortages are met through auction process and the difference in
price indicated in contract note and price received through auction is paid by member to the
Exchange, which is then liable to be recovered from the client.

What happens if the shares are not bought in the auction?

If the shares could not be bought in the auction i.e. if shares are not offered for sale in the
auction, the transactions are closed out as per SEBI guidelines. The guidelines stipulate that
“the close out Price will be the highest price recorded in that scrip on the exchange in the
settlement in which the concerned contract was entered into and up to the date of
auction/close out OR 20% above the official closing price on the exchange on the day on
which auction offers are called for (and in the event of there being no such closing price on
that day, then the official closing price on the immediately preceding trading day on which
there was an official closing price), whichever is higher.
Since, in the rolling settlement the auction and the close out takes place during trading hours,
the reference price in the rolling settlement for close out procedures would be taken as the
previous day’s closing price.

What is Margin Trading Facility?

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging

mechanism which enables investors to take exposure in the market over and above what is
possible with their own resources. SEBI has been prescribing eligibility conditions and
procedural details for allowing the Margin Trading Facility from time to time.

Corporate brokers with net worth of at least Rs.3 crore are eligible for providing Margin
trading facility to their clients subject to their entering into an agreement to that effect. Before
providing margin trading facility to a client, the member and the client have been mandated
to sign an agreement for this purpose in the format specified by SEBI. It has also been
specified that the client shall not avail the facility from more than one broker at any time.

The facility of margin trading is available for Group 1 securities and those securities which
are offered in the initial public offers and meet the conditions for inclusion in the derivatives
segment of the stock exchanges.

For providing the margin trading facility, a broker may use his own funds or borrow from
scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to
borrow funds from any other source.

The "total exposure" of the broker towards the margin trading facility should not exceed the
borrowed funds and 50 per cent of his "net worth". While providing the margin trading
facility, the broker has to ensure that the exposure to a single client does not exceed 10 per
cent of the "total exposure" of the broker.

Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as
40%.
In addition, a broker has to disclose to the stock exchange details on gross exposure including
name of the client, unique identification number under the SEBI (Central Database of Market
Participants) Regulations, 2003, and name of the scrip.

The arbitration mechanism of the exchange would not be available for settlement of disputes,
if any, between the client and broker, arising out of the margin trading facility. However, all
transactions done on the exchange, whether normal or through margin trading facility, shall
be covered under the arbitration mechanism of the exchange.

What happens if I do not get my money or share on the due date?

In case a broker fails to deliver the securities or make payment on time, or if you have
complaint against conduct of the stock broker, you can file a complaint with the respective
stock exchange. The exchange is required to resolve all the complaints. To resolve the
dispute, the complainant can also resort to arbitration as provided on the reverse of contract
note /purchase or sale note. However, if the complaint is not addressed by the Stock
Exchanges or is unduly delayed, then the complaints along with supporting documents may
be forwarded to SEBI. Your complaint would be followed up with the exchanges for
expeditious redressal.

In case of complaint against a sub broker, the complaint may be forwarded to the concerned
broker with whom the sub broker is affiliated for redressal.

What recourses are available to me for redressing my grievances?

You have following recourses available:

· Office of Investor Assistance and Education (OIAE) : You can lodge a complaint with
OIAE Department of SEBI against companies for delay, non-receipt of shares, refund orders,
etc., and with Stock Exchanges against brokers on certain trade disputes or non receipt of
payment/securities.

· Arbitration: If no amicable settlement could be reached, then you can make application for
reference to Arbitration under the Bye Laws of concerned Stock Exchange.

- Court of Law

What is BSE IndoNext?

Regional stock exchanges (RSEs) have registered negligible business during the last few
years and thus small and medium-sized companies (SMEs) listed there find it difficult to raise
fresh resources in the absence of price discovery of their securities in the secondary market.
As a result, investors also do not find exit opportunity in case of such companies.

BSE IndoNext has been formed to benefit such small and medium size companies (SMEs),
the investors in these companies and capital markets at large. It has been set up as a separate
trading platform under the present BSE Online Trading (BOLT) system of the BSE. It is a
joint initiative of BSE and the Federation of Indian Stock Exchanges (FISE).
EQUITY DERIVATIVES 
An equity derivative is a class of derivatives whose value is at least partly derived from one
or more underlying equity securities. Options and futures are by far the most common equity
derivatives; however there are many other types of equity derivatives that are actively traded.

In India, around 98% of equity derivatives are traded on the National Stock Exchange.

What are Index Futures and Index Option Contracts?

Futures contract based on an index i.e. the underlying asset is the index, are known as Index
Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These
contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known as Index options
contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the
right but not the obligation to buy / sell the underlying index on expiry. Index Option
Contracts are generally European Style options i.e. they can be exercised / assigned only on
the expiry date.

In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex.
Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling
the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index
constituents are individually eligible for derivatives trading. However, no single ineligible
stock in the index shall have a weightage of more than 5% in the index. The index is required
to fulfil the eligibility criteria even after derivatives trading on the index have begun. If the
index does not fulfil the criteria for 3 consecutive months, then derivative contracts on such
index would be discontinued.

By its very nature, index cannot be delivered on maturity of the Index futures or Index option
contracts therefore, these contracts are essentially cash settled on Expiry.

Why mini derivative contract?

The minimum contract size for the mini derivative contract on Index (Sensex and Nifty) is
Rs. 1 lakh at the time of its introduction in the market. The lower minimum contract size
means that smaller investors are able to hedge their portfolio using these contracts with a
lower capital outlay. This means a better hedge for portfolio, and also results in more
liquidity in the market.

Why longer dated index options?

Longer dated derivatives products are useful for those investors who want to have a long term
hedge or long term exposure in derivative market. The premiums for longer term derivatives
products are higher than for standard options in the same stock because the increased
expiration date gives the underlying asset more time to make a substantial move and for the
investor to make a healthy profit. Presently, longer dated options on Sensex and Nifty with
tenure of up to 3 years are available for the investors.

What are the various membership categories in the equity derivatives market?

The various types of membership in the derivatives market are as follows:

i. Trading Member (TM) – A TM is a member of the derivatives exchange and can trade on
his own behalf and on behalf of his clients.

ii. Clearing Member (CM) –These members are permitted to settle their own trades as well as
the trades of the other non-clearing members known as Trading Members who have agreed to
settle the trades through them.

iii. Self-clearing Member (SCM) – A SCM are those clearing members who can clear and
settle their own trades only.

What is the lot size of contract in the equity derivatives market?

Lot size refers to number of underlying securities in one contract. The lot size is determined
keeping in mind the minimum contract size requirement at the time of introduction of
derivative contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size
is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares
i.e. one contract in XYZ Ltd. covers 200 shares.

What is the margining system in the equity derivatives market?

Two type of margins have been specified -

i. Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which
depends on the time in which Mark to Market margin is collected.

ii. Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted
against the available Liquid Net-worth for option positions. In the case of Futures Contracts
MTM may be considered as Mark to Market Settlement.

EQUITY DERIVATIVES ON BSE 

Currently, BSE Sensex Futures and Sensex Options are actively traded on the BSE. BSE also
allows futures trading in some 84 selective scrips. BSE is planning to add 135 additional
stocks in this segment soon.

EQUITY DERIVATIES ON NSE 

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with 
the  launch  of  index  futures  on  June  12,  2000.  The  futures  contracts  are  based  on  the 
popular benchmark S&P CNX Nifty Index. 

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE 
also became the first exchange to launch trading in options on individual securities from July 
2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and 
Options on individual securities are available on 223 securities stipulated by SEBI. 

The Exchange has also introduced trading in Futures and Options contracts based on CNX‐IT, 
BANK NIFTY, and NIFTY MIDCAP 50 indices. 

Products

Since the launch of the Index Derivatives on the popular benchmark S&P CNX Nifty Index
in 2000, the National Stock Exchange of India Limited (NSE) today have moved ahead with
a varied product offering in equity derivatives. The Exchange currently provides trading in
Futures and Options contracts on 9 major indices and 226 securities. The Exchange also
introduced trading in Mini Derivatives contracts to provide easier access for small investors
to invest in Nifty futures and options.

A. S&P CNX Nifty F&O 

S&P CNX Nifty Futures

Security descriptor

The security descriptor for the S&P CNX Nifty futures contracts is:

• Market type : N
• Instrument Type : FUTIDX
• Underlying : NIFTY
• Expiry date : Date of contract expiry

• Instrument type represents the instrument i.e. Futures on Index.

• Underlying symbol denotes the underlying index which is S&P CNX Nifty
• Expiry date identifies the date of expiry of the contract

Underlying Instrument

The underlying index is S&P CNX NIFTY.

Trading cycle

S&P CNX Nifty options contracts have 3 consecutive monthly contracts, additionally 3
quarterly months of the cycle March / June / September / December and 8 following semi-
annual months of the cycle June / December would be available, so that at any point in time
there would be options contracts with at least 5 year tenure available. On expiry of the near
month contract, new contracts (monthly/quarterly/ half yearly contracts as applicable) are
introduced at new strike prices for both call and put options, on the trading day following the
expiry of the near month contract.

Expiry day

S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts expire on the previous trading day.

Contract size

The value of the futures contracts on Nifty may not be less than Rs. 2 lakhs at the time of
introduction. The permitted lot size for futures contracts & options contracts shall be the
same for a given underlying or such lot size as may be stipulated by the Exchange from time
to time.

Price steps

The price step in respect of S&P CNX Nifty futures contracts is Re.0.05.
Base Prices

Base price of S&P CNX Nifty futures contracts on the first day of trading would be
theoretical futures price.. The base price of the contracts on subsequent trading days would be
the daily settlement price of the futures contracts.

Price bands

There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures
contracts. However, in order to prevent erroneous order entry by trading members, operating
ranges are kept at +/- 10 %. In respect of orders which have come under price freeze,
members would be required to confirm to the Exchange that there is no inadvertent error in
the order entry and that the order is genuine. On such confirmation the Exchange may
approve such order.

Quantity freeze

Orders which may come to the exchange as quantity freeze shall be such that have a quantity
of more than 15000. In respect of orders which have come under quantity freeze, members
would be required to confirm to the Exchange that there is no inadvertent error in the order
entry and that the order is genuine. On such confirmation, the Exchange may approve such
order. However, in exceptional cases, the Exchange may, at its discretion, not allow the
orders that have come under quantity freeze for execution for any reason whatsoever
including non-availability of turnover / exposure limit. In all other cases, quantity freeze
orders shall be cancelled by the Exchange.

S & P CNX NIFTY OPTIONS 

Security descriptor

The security descriptor for the S&P CNX Nifty options contracts is:

• Market type : N
• Instrument Type : OPTIDX
• Underlying : NIFTY
• Expiry date : Date of contract expiry
• Option Type : CE/ PE
• Strike Price: Strike price for the contract
• Instrument type represents the instrument i.e. Options on Index.
• Underlying symbol denotes the underlying index, which is S&P CNX Nifty
• Expiry date identifies the date of expiry of the contract
• Option type identifies whether it is a call or a put option., CE - Call European, PE -
Put European.

Underlying Instrument

The underlying index is S&P CNX NIFTY.

Trading cycle
S&P CNX Nifty options contracts have 3 consecutive monthly contracts, additionally 3
quarterly months of the cycle March / June / September / December and 5 following semi-
annual months of the cycle June / December would be available, so that at any point in time
there would be options contracts with at least 3 year tenure available. On expiry of the near
month contract, new contracts (monthly/quarterly/ half yearly contracts as applicable) are
introduced at new strike prices for both call and put options, on the trading day following the
expiry of the near month contract.

Expiry day

S&P CNX Nifty options contracts expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts expire on the previous trading day.

Strike Price Intervals

1. The Strike scheme for all near expiry (near, mid and far months) Index Options is:

Number of strikes
Index Level Strike Interval
In the money- At the money- out of the money
≤ 2000 50 8-1-8
>2001 ≤ 3000 100 6-1-6
>3000 ≤ 4000 100 8-1-8
>4000 ≤ 6000 100 12-1-12
>6000 100 16-1-16

2. The Strike scheme for Nifty long term quarterly and Half Yearly expiry option contracts is:

Number of strikers
Index Level Strike Interval
In the money- At the money- out of the money
≤ 2000 100 6-1-6
>2001 ≤ 3000 100 9-1-9
>3000 ≤ 4000 100 12-1-12
>4000 ≤ 6000 100 18-1-18
>6000 100 24-1-24

Contract size

The value of the option contracts on Nifty may not be less than Rs. 2 lakhs at the time of
introduction. The permitted lot size for futures contracts & options contracts shall be the
same for a given underlying or such lot size as may be stipulated by the Exchange from time
to time.

Price steps

The price step in respect of S&P CNX Nifty options contracts is Re.0.05.

Base Prices
Base price of the options contracts, on introduction of new contracts, would be the theoretical
value of the options contract arrived at based on Black-Scholes model of calculation of
options premiums.

The options price for a Call, computed as per the following Black Scholes formula:
C = S * N (d1) - X * e- rt * N (d2)

and the price for a Put is : P = X * e- rt * N (-d2) - S * N (-d1)

where :
d1 = [ln (S / X) + (r + σ2 / 2) * t] / σ * sqrt(t)
d2 = [ln (S / X) + (r - σ2 / 2) * t] / σ * sqrt(t)
= d1 - σ * sqrt(t)

C = price of a call option

P = price of a put option
S = price of the underlying asset
X = Strike price of the option
r = rate of interest
t = time to expiration
σ = volatility of the underlying

N represents a standard normal distribution with mean = 0 and standard deviation = 1

ln represents the natural logarithm of a number. Natural logarithms are based on the constant
e (2.71828182845904).

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.

The base price of the contracts on subsequent trading days will be the daily close price of the
options contracts. The closing price shall be calculated as follows:

• If the contract is traded in the last half an hour, the closing price shall be the last half
an hour weighted average price.
• If the contract is not traded in the last half an hour, but traded during any time of the
day, then the closing price will be the last traded price (LTP) of the contract.

If the contract is not traded for the day, the base price of the contract for the next trading day
shall be the theoretical price of the options contract arrived at based on Black-Scholes model
of calculation of options premiums.

Quantity freeze

Orders which may come to the exchange as quantity freeze shall be such that have a quantity
of more than 15000. In respect of orders which have come under quantity freeze, members
would be required to confirm to the Exchange that there is no inadvertent error in the order
entry and that the order is genuine. On such confirmation, the Exchange may approve such
order. However, in exceptional cases, the Exchange may, at its discretion, not allow the
orders that have come under quantity freeze for execution for any reason whatsoever
including non-availability of turnover / exposure limit. In all other cases, quantity freeze
orders shall be cancelled by the Exchange.
 B. Individual Securities F & O

INDIVIDUAL SECURITIES FUTURES 

Security descriptor

The security descriptor for the futures contracts is:

• Market type : N
• Instrument Type : FUTSTK
• Underlying : Symbol of underlying security
• Expiry date : Date of contract expiry
• Instrument type represents the instrument i.e. Futures on Index.
• Underlying symbol denotes the underlying security in the Capital Market (equities)
segment of the Exchange
• Expiry date identifies the date of expiry of the contract

Underlying Instrument

Futures contracts are available on 226 securities stipulated by the Securities & Exchange
Board of India (SEBI). These securities are traded in the Capital Market segment of the
Exchange.

Trading cycle

Futures contracts have a maximum of 3-month trading cycle - the near month (one), the next
month (two) and the far month (three). New contracts are introduced on the trading day
following the expiry of the near month contracts. The new contracts are introduced for three
month duration. This way, at any point in time, there will be 3 contracts available for trading
in the market (for each security) i.e., one near month, one mid month and one far month
duration respectively.

Expiry day

Futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a
trading holiday, the contracts expire on the previous trading day.

Contract size

The value of the futures contracts on individual securities may not be less than Rs. 2 lakhs at
the time of introduction for the first time at any exchange. The permitted lot size for futures
contracts & options contracts shall be the same for a given underlying or such lot size as may
be stipulated by the Exchange from time to time.

Price steps

The price step in respect of futures contracts is Re.0.05.

Base Prices
Base price of futures contracts on the first day of trading (i.e. on introduction) would be the
theoretical futures price. The base price of the contracts on subsequent trading days would be
the daily settlement price of the futures contracts.

Price bands

There are no day minimum/maximum price ranges applicable for futures contracts. However,
in order to prevent erroneous order entry by trading members, operating ranges are kept at +/-
20 %. In respect of orders which have come under price freeze, members would be required
to confirm to the Exchange that there is no inadvertent error in the order entry and that the
order is genuine. On such confirmation the Exchange may approve such order.

Quantity freeze

Orders which may come to the exchange as a quantity freeze shall be based on the notional
value of the contract of around Rs.5 crores. Quantity freeze is calculated for each underlying
on the last trading day of each calendar month and is applicable through the next calendar
month. In respect of orders which have come under quantity freeze, members would be
required to confirm to the Exchange that there is no inadvertent error in the order entry and
that the order is genuine. On such confirmation, the Exchange may approve such order.
However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that
have come under quantity freeze for execution for any reason whatsoever including non-
availability of turnover / exposure limits.

INDIVIDUAL SECURITIES OPTIONS 

Security descriptor

The security descriptor for the options contracts is:

• Market type : N
• Instrument Type : OPTSTK
• Underlying : Symbol of underlying security
• Expiry date : Date of contract expiry
• Option Type : CE/ PE
• Strike Price: Strike price for the contract
• Instrument type represents the instrument i.e. Options on individual securities.
• Underlying symbol denotes the underlying security in the Capital Market (equities)
segment of the Exchange
• Expiry date identifies the date of expiry of the contract
• Option type identifies whether it is a call or a put option., CE - Call European, PE -
Put European.

Underlying Instrument

Option contracts are available on 226 securities stipulated by the Securities & Exchange
Board of India (SEBI). These securities are traded in the Capital Market segment of the
Exchange.

Trading cycle
Options contracts have a maximum of 3-month trading cycle - the near month (one), the next
month (two) and the far month (three). On expiry of the near month contract, new contracts
are introduced at new strike prices for both call and put options, on the trading day following
the expiry of the near month contract. The new contracts are introduced for three month
duration.

Expiry day

Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a
trading holiday, the contracts expire on the previous trading day.

Strike Price Parameters

Following strike parameter is currently applicable for options contracts on all individual
securities:

The strike price interval would be:

No. of Strikes ProvidedNo. of additional strikes

Strike
In the money- At thewhich may be enabled
Underlying Closing Price Price
money- Out of theintraday in either
Interval
money direction
Less than or equal to Rs.50 2.5 5-1-5 5
> Rs.50 to ≤ Rs.100 5 5-1-5 5
> Rs.100 to ≤ Rs.250 10 5-1-5 5
> Rs.250 to ≤ Rs.500 20 5-1-5 5
> Rs.500 to ≤ Rs.1000 20 10-1-10 10
> Rs.1000 50 10-1-10 10

The Exchange, at its discretion, may enable additional strikes as mentioned in the above table
in the direction of the price movement, intraday, if required. The additional strikes may be
enabled during the day at regular intervals and message for the same shall be broadcast to all
trading terminals.

New contracts with new strike prices for existing expiration date are introduced for trading on
the next working day based on the previous day’s underlying close values, as and when
required. In order to decide upon the at-the-money strike price, the underlying closing value
is rounded off to the nearest strike price interval.

The in-the-money strike price and the out-of-the-money strike price are based on the at-the-
money strike price interval.

Contract size

The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at
the time of introduction for the first time at any exchange. The permitted lot size for futures
contracts & options contracts shall be the same for a given underlying or such lot size as may
be stipulated by the Exchange from time to time.
Price steps

The price step in respect of the options contracts is Re.0.05.

Base Prices

Base price of the options contracts, on introduction of new contracts, would be the theoretical
value of the options contract arrived at based on Black-Scholes model of calculation of
options premiums.

The base price of the contracts on subsequent trading days will be the daily close price of the
options contracts. The closing price shall be calculated as follows:

• If the contract is traded in the last half an hour, the closing price shall be the last half
an hour weighted average price.
• If the contract is not traded in the last half an hour, but traded during any time of the
day, then the closing price will be the last traded price (LTP) of the contract.

If the contract is not traded for the day, the base price of the contract for the next trading day
shall be the theoretical price of the options contract arrived at based on Black-Scholes model
of calculation of options premiums.

Quantity freeze

Orders which may come to the exchange as a quantity freeze shall be based on the notional
value of the contract of around Rs.5 crores. Quantity freeze is calculated for each underlying
on the last trading day of each calendar month and is applicable through the next calendar
month. In respect of orders which have come under quantity freeze, members would be
required to confirm to the Exchange that there is no inadvertent error in the order entry and
that the order is genuine. On such confirmation, the Exchange may approve such order.
However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that
have come under quantity freeze for execution for any reason whatsoever including non-
availability of turnover / exposure limits.

C. DERIVATIVES ON GLOBAL INDICES

All resident Indians are allowed to trade in derivatives on global indices. The existing
members of the equity derivatives segment can trade without any additional formalities.

How to trade in derivatives on Global Indices as a client?

All the existing resident clients of trading members in the equity derivatives segment are
eligible to trade on global indices. There is no additional documentation formalities stipulated
by the exchange in this regard.
New clients are eligible to trade in derivatives on global indices by opening an account with a
trading member of NSE.

Advantages of derivatives on Global Indices

The derivatives contract on global indices provides various advantages as outlined below:
 Derivatives contracts on the index will enable Indian investors to participate in
Opportunities international financial markets and bringing diversification in their investment
portfolios
The contracts shall be traded during Indian time and under the domestic
Simplicity
regulatory set up
The contracts are rupee denominated. Hence there shall be no currency risk
No currency risk
associated with trading them
The instruments would be introduced in the existing equity derivatives segment.
Ease of Access The existing trading, clearing and risk management infrastructure could be used
without any additional cost
Settlement Guarantee currently available in equity derivatives segment shall be
Security
automatically extended to these products as well.

Further existing hardware, software and network can be used to trade in derivatives on Global
Indices. Investors may use their existing relationship with their trading members to trade these
products.

Following are the products available:

Standard & Poor's 500 (S&P 500)

Standard & Poor's 500 S&P 500)® index represents 500 leading companies of the U.S.
economy and covers approximately 75% of U.S. equities. S&P 500 is maintained by S& P
Indices and was introduced in 1957.
S&P® Futures Contract Specifications

Ticker Symbol S&P500

Contract Size 250 units
Contract size multiplied by the index level (For example: if the current
Notional value index value is 1000 then the notional value would be 1000 x 250 = Rs.
2,50,000)
Tick Size 0.25
Trading Hours As in equity derivative segment
3rd Friday of the respective contract month. In case third Friday is a
Expiry Date holiday in USA or in India the contract shall expire on the preceding
business day
3 serial monthly contracts and 3 Quarterly expiry contracts in the Mar-
Contract months
Jun-Sep-Dec cycle
Daily Settlement Price Last half hour's weighted average price
All open positions at close of last day of trading shall be settled to the
Special Opening Quotation (SOQ) of the S&P 500 Index on the date
Final Settlement Price
of expiry. (http://www.cmegroup.com/trading /equity-
index/files/SOQ.pdf)
Final settlement will be Cash settled in INR based on final settlement
Final Settlement Procedure
price
Final Settlement day All open positions on expiry date shall be settled on the next working
 day of the expiry date (T+1)
The Trading Member/Mutual Funds position limits as well as the
Position Limits disclosure requirement for clients is same as applicable in case of
domestic stock index derivatives

S&P® Options Contract Specifications

Ticker Symbol S&P500

Contract Size 250 units
Tick Size 0.05
Trading Hours As in equity derivative segment
No. of strikes/strike 12-1-12 strikes with 5 point interval and further 4-4 strikes of 10 point
intervals interval.
3rd Friday of the respective contract month. In case third Friday is a
Expiry Date holiday in USA or in India the contract shall expire on the preceding
business day.
3 serial monthly contracts and 3 Quarterly expiry contracts in the Mar-
Contract months
Jun-Sep-Dec cycle
The options contracts shall be European styled which can be exercised
Option Type
only on the expiration date
Daily Settlement Price Daily premium settlement
All open positions at close of last day of trading shall be settled to the
Special Opening Quotation (SOQ) of the S&P 500 ndex on the date of
Final Settlement Price
expiry (http://www.cmegroup.com /trading/equity-
index/files/SOQ.pdf)
Final settlement will be Cash settled in INR based on final settlement
Final Settlement Procedure price. long positions of in-the money contracts shall be assigned to
open short positions in option contracts.
All open positions on expiry date shall be settled on the next working
Final Settlement day
day of the expiry date (T+1)
The Trading Member/Mutual Funds position limits as well as the
Position Limits disclosure requirement for clients is same as applicable in case of
domestic stock index derivatives.

DOW JONES INDUSTRIAL AVERAGES

Dow Jones Industrial Average index includes 30 large and liquid blue-chip stocks traded on
U.S. exchanges. The index was first published in 1896 and represents leading companies
selected from a diversified range of U.S. industries.

NSE Contract Specifications

Ticker Symbol DJIA
Contract Size 25 units
 Contract size multiplied by the index level (For example: if the current
Notional value index value is 10000 then the notional value would be 10000 x 25 =
Rs. 2,50,000)
Tick Size 2.50
Trading Hours As in equity derivative segment
3rd Friday of the respective contract month. In case third Friday is a
Expiry Date holiday in USA or in India the contract shall expire on the preceding
business day
3 serial monthly contracts and 3 Quarterly expiry contracts in the Mar-
Contract months
Jun-Sep-Dec cycle
Daily Settlement Price Last half hour's weighted average price
All open positions at close of last day of trading shall be settled to the
Special Opening Quotation (SOQ) of the DJIA Index on the date of
Final Settlement Price
expiry. ( http://www.cmegroup.com/trading /equity-
index/files/SOQ.pdf)
Final settlement will be Cash settled in INR based on final settlement
Final Settlement Procedure
price
All open positions on expiry date shall be settled on the next working
Final Settlement day
day of the expiry date (T+1)
The Trading Member/Mutual Funds position limits as well as the
Position Limits disclosure requirement for clients is same as applicable in case of
domestic stock index derivatives

SUMMARY OF EQUITY DERIVATIVES ON THE NSE

ONLINE TRADING 
What is online trading in securities?
Online trading in securities refers to the facility of investor being able to place his own orders
using the internet trading platform offered by the trading member viz., the broker. The orders
so placed by the investor using internet would be routed through the trading member.

How can one start trading online?

To start with, investor needs to identify a trading member who offers internet trading facility
and register with the trading member for availing the internet trading facility.

How to choose an online stock broker?

Many of the big and medium sized trading members offer internet trading facility. Investor
can get the details of trading members of the Exchange on the website www.nseindia.com.
Identify brokers offering internet trading facility; check their references from persons having
knowledge about financial markets and select a broker who has good reputation and
capability to deliver all the services that are expected by the investor. Particular attention
should be paid by the investor to the availability of support in case of technical problems
while choosing the broker.

Who could use online trading?

Usually, a person familiar in using computer, conversant with the use of internet and who is
able to tackle routine problems associated with use of personal computers may opt for online
trading.

Are there additional documents to be executed for registering as internet customer?

As per SEBI and Exchange stipulations, in addition to execution of regular KYC documents,
the investor would have to execute a specific Member- client agreement for internet trading
which broadly spells out the rights and obligations of trading member and Investor besides
alerting on system related risk, confidentiality of user id and password. Further, Member and
investor may also agree amongst themselves in execution of other documents like Power of
Attorney for DP operations, Opening of DP and bank account etc.

What documents are received usually after registration as an online trading client?

On registering as online trading client with the trading member, normally investor receives a
welcome kit containing the user-id and password allotted to the client.

What precautions an online investor must take on starting online trading?

Investor has to take care that:

1. The Default password provided by the broker is changed before placing of order. Ensure
that password is not shared with others. Change password at periodic interval.
2. He has understood the manner in which the online trading software has to be operated.
3. He has received adequate training on usage of software
4. The system has facility for order and trade confirmation after placing the orders
What should investor know about failure of system that is being used for placing
orders?

Every online trading client should understand that there could be a possibility of failure of
system which could include failure at various points including net work failure, connectivity
failure etc.

Generally, the trading members have alternate ways of servicing the investors in the
eventuality of such failures. In order to mitigate risks arising from such failures, investor
before starting trading should understand from the trading member about ways and means of
dealing with such failures, steps that investor needs to take for knowing his position, closing
the position etc.

What are the other safety measures online client must observe?

1. Avoid placing order from the shared PC’s / through cyber cafés.
2. Log out after having finished trading to avoid misuse.
3. Ensure that one does not click on “remember me” option while signing on from non-
regular location.
4. Do not leave the terminal unattended while one is “signed-on” to the trading system.
5. Protect your personal computer against viruses by placing firewall and an anti-virus
solution.
6. You should not open email attachments from people you do not know.

How can one investor make sure that his access to trading is continuously available?

In the course of his dealing, investor should always make sure that sufficient funds and
securities are available in his account with the trading member and that he is regular in
payment of margins so as to avoid blocking of account by the trading member. Where due to
shortage of margin or funds not paid, the account is blocked and positions are squared off or
securities are sold by the trading member, investor may get the details of such square-up,
sales from the trading member.

Where online trades are being done is there any documents that I need to receive from
the trading member for the trades executed?

For every trade that takes place on the Exchange, the trading member needs to issue contract
note within 24 hours from the date of execution of the trade. Generally, internet based
investors opt for Digital contract notes. Hence, at the time of client registration investor
should provide an email id which is regularly used. In case investor wishes to receive
physical contract notes, he may specify so in the client registration document and cut off the
email id column.

Investor needs to regularly check the contract notes and if any variation in the trades is found
needs to take up the issue with the trading member immediately. Besides the Contract Notes,
trading member needs to issue quarterly statement of funds and securities to the investor and
such statement can be digitally issued if investor has opted for digital document.
SECURITIES LENDING AND BORROWING SCHEME 
Under the securities lending and borrowing scheme, an owner of securities can lend the same
to a borrower through an approved intermediary that acts as a central counterparty. An
approved intermediary has to be registered with the Indian stock market regulator—the
Securities and Exchange Board of India, or SEBI. There is no direct contact between the
borrower and lender, and both the borrower and lender of securities independently enter into
a contract with the approved intermediary.

The SLB scheme is facilitated by the National Securities Clearing Corporation of India
(NSCCL), the clearing corporation of the National Stock Exchange of India (NSE), through a
screen based exchange-traded system called SLB-NEAT. It has a centralised anonymous
order book and all the borrowing and lending are cleared, settled and guaranteed. The
expected lending fee is quoted as price and the tenures are available up to 12 months.

Which securities are available for transactions in SLB?

Presently securities on which derivatives are available in the F&O segment are available for
transactions in SLB.

How can I register as a participant in SLB?

Any existing member/custodian of CM segment can register as a participant in SLB. The

following are a requirement for registering as a participant
i) Application in writing to NSCCL on letter head of the clearing member
ii) Enter into an agreement with NSCCL in the prescribed format which is referred to as “Part
A” of the Master Agreement.
iii) Minimum deposit of Rs. 10 lacs to be given as demand draft favouring National Securities
Clearing Corporation Ltd.
iv) Board Resolution for becoming a participant in SLB.
v) Open an account with CDSL for SLB settlement.

How can one participate in SLB?

In case of lending and borrowing on behalf of clients the participant should enter an
agreement with the client as prescribed. The participant is also required to obtain a UCI code
for the client after which the client can lend and borrow in SLB

Who all can participate in SLB?

SEBI has permitted all categories of Investors viz. Retail and Institutional to participate in
SLB.

Is there any Counterparty risk involved in SLB transactions at NSCCL?

NSCCL acts as a central counterparty providing financial settlement guarantee for SLB
transactions. NSCCL has a robust risk management system and collects adequate margins
from participants to cover counterparty risks.

Will the lending/borrowing of securities under the Securities Lending Scheme will
amount to “transfer” under clause (47) of section 2 of the Income-tax Act (Act) in the
hands of the lender?

As per the clarification from Income Tax vide their circular no. 2/2008, dated 22-2-2008
transactions done in the SLB shall not be regarded as transfer. For further details, please refer
circular no. 2/2008, dated 22-2-2008 of the income tax department.

What are the transactions charges & STT applicable for SLB?

Currently, there are no transaction charges and STT is not levied in case of SLB transactions
as specified in circular no. 2/2008, dated 22-2-2008 of the income tax department.
What is the tenure for SLB transactions?

The tenure for SLB transactions is up to 12 months. 12 fixed monthly tenures with fixed
reverse leg settlement dates are available for transactions in SLB. The fixed settlement dates
are the first Thursday of the respective month and the date is displayed on the NEAT SLB
trading screen at the time of order entry. Each month is assigned a series to it with January
having series as 01 up to December having series as 12.

How shall one quote the lending fee?

Lending fee is quoted on per share basis. Lending fee may be quoted based on the annualized
yield expected by the lender or the cost which the borrower expects to pay. For e.g. If the
lender is lending shares for a period of 180 days he could quote lending fee per share which is
based on the rate of return expected by the lender.

What is the settlement cycle for a SLB Transaction?

T Day: The Transaction is executed on T Day between the lender and borrower. T+1 day:
The Lenders are required to deliver the securities for pay-in on T+1 day. Securities are
thereafter transferred to the borrowing participants during pay-out on T+1 day. The borrower
shall bring the lending fee on T+1 which shall be passed on to the lender in the funds pay-out.

Reverse leg settlement date: The borrower needs to deliver the securities at the time of pay-in
which shall be returned back to the lender during the pay-out.

What are the various margins applicable to the borrower & lender on T Day?

In case of borrower only the lending fee is levied upfront as margin.

In case of lender, 25% of the lending price (T-1 cash market closing price) and Mark to
market (MTM) at end of day are charged to the lender. These margins are not applicable to
lender in case if lender does Early Pay-in of securities.

What margins are applicable to the borrower & lender from T+1 to Reverse leg
settlement day (Reverse Leg)?

No margins are levied on the lender.

100% of lending price, Value at Risk margins, Extreme Loss Margins (same as applicable in
Cash market for buying or selling a security) and EOD MTM are levied on the borrower.

What form of collaterals can be provided towards margin requirement?

The margins are collected from the collaterals of participant/custodian. Participant/Custodian

can provide collaterals in form of cash, fixed deposit or bank guarantee.

What is early recall of securities by the lender?

A participant having an existing lend position can recall a position by entering a recall order
on the trading terminal. The lender shall quote the lending fee it wishes to forego for the
balance period. In case the order is matched successfully then the settlement of the early
recall transaction happens on a T+1 basis. After successful completion of pay-in, the position
of the lender would cease to exist.

Recall orders can be entered up to 3 days prior to the respective reverse leg settlement day.

What is early repayment of securities by the borrower?

A participant having an existing borrow position can repay the securities to NSCCL. On
receipt of securities the margins levied on borrower are immediately released. The borrower
can further lend the securities for the balance period of the tenure. For this the borrower
needs to enter a repay order on the trading terminal by selecting order type as “Repay”. The
borrower shall quote the fee he expects to receive for the balance period. In case the order is
matched successfully then the settlement of the early repay transaction shall happen on a T+1
basis. After successful completion of pay-in the position of the borrower shall cease to exist.
Repay orders can be entered up to 3 days prior to the respective reverse leg settlement day.
The orders can also be entered for partial quantity.

What action is taken if the lender fails to deliver securities on T+1 day?

The transaction shall be financially closed out at the below rate

25% of closing price of the security on T+1 day (closing price for the security in the capital
market segment of NSE), or

(Maximum trade price of the security in the capital market segment of NSE from T to T+1
day) - (T+1 day closing price of the security in capital market segment of NSE)

What action is taken if the borrower fails to bring the funds/collaterals on T+1?

The transaction shall be cancelled, however, the lending fee shall be collected and passed on
to the lender.

What action is taken if the borrower fails to bring securities at the time of reverse leg
settlement?

If the borrower fails to deliver the securities NSCCL conducts a buy-in auction to acquire the
securities on the reverse leg settlement date. If securities are not available in auction then the
transaction is financially closed out at the below mentioned close out rate.

Maximum trade price in the capital market segment of NSEIL from (reverse leg settlement
day – 1 day) to reverse leg settlement day, or

25% above the closing price of the security in the capital market segment on the reverse leg
settlement day.

Are there any position limits applicable in SLBM?

Yes position limits are applicable in case of SLBM. Following are the current limits
applicable Market Wide Position Limits: 10% of the free-float capital of the company in
terms of number of shares i.e. 10% of the number of shares held by non-promoters in the
relevant security.

Participant/ FII/MF Position limits: Lower of 10% of the market-wide position limits (No of
shares) or Rs. 50 crs.

Client Level Position Limits: should not be more than 1% of the market-wide position limits.

What action is taken in case of Corporate Actions?

In case of Corporate Actions other than dividend and stock split, transactions are foreclosed 2
days prior to ex-date or as prescribed by NSCCL from time to time.

For dividends the dividend would be collected from the borrower and passed on the lender at
the time of book closure/record date. In respect of stock split the borrower's obligation would
be revised as per the proportionate spilt and would be passed on to the lender during the
reversal leg.

FACTORS TO BE SEEN WHILE SELECTING A BROKER 
1. REPUTATION 

First and foremost, as an investor, you must ensure that the broker has the right credentials. 
Browse  through  the  SEBI/  stock  exchange  websites,  scan  for  pending  investor  complaints 
against a broker and also seek a second opinion from those who know/ have dealt with the 
broker.  

Ensure complete clarity on the segments and facilities signed up for, contract notes/ trade 
confirmations, unused funds in the account, particularly the Power of Attorney and above 
all, instant facility to access all the above mentioned information. It is always good to deal 
with a transparent and experienced broker with strong financial standing, shareholding and 
reputation. 

2. QUALITY OF ADVICE 

Quality of advice impacts investment success. Make sure that your broker advises you in line 
with your goals and risk appetite and possesses adequate manpower, customer support and 
infrastructure  in  order  to  effectively  disseminate  vital,  market  related  information.  Your 
Relationship  Manager  should  be  appropriately  qualified  and  certified  (preferably  NCFM, 
NISM,  AMFI,  etc.)  to  provide  undistorted  information  during  volatile  market  conditions. 
Furthermore, ethics determine the ultimate beneficiary. Confirm that your broker’s advice 
on particular investments will benefit you and  not them (in terms of commission received 
on certain transaction). 
 3. RANGE OF PRODUCTS 

If you are a disciplined investor or aspire to be one, look for a broker who can provide you 
access  to  investment  products  across  asset  classes  in  a  seamless  manner.  Today,  many 
brokers  offer  access  to  multiple  investment  options  spanning  across  equities,  futures, 
options, ETFs, Mutual Funds, and Insurance etc. in a single login.  

In  addition,  opt  for  a  broker  offering  multiple  trading  channels  like,  Internet,  Branch,  Call 
Centre,  Mobile,  etc.  Also,  check  whether  the  broker  has  "Post  Market  Hour  Order  Placing 
Facilities". A big plus would be an account with a broker having user‐friendly customer care 
facilities. 

4. TECHNOLOGY AND EASY ACCESSIBILITY 

Technological  advancement  has  pervaded  even  the  trading  arena.  Hence,  maintain  an 
account with the broker who believes in bringing the best of technology at your fingertips. 
Explore their website and check out ease of usage.  

If  you  are  planning  to  have  an  online  trading  facility,  check  the  availability  of  trading  site 
during  busy  hours,  streaming  quotes,  reliable  order  execution  mechanism,  graph  studies, 
online  funds  transfer  facility,  offline  support  etc.  Easy  accessibility  is  equally  imperative‐ 
choose a broker with strong credentials very near to your locality. 

5. COST EFFICIENCY 

Last  but  not  the  least,  investments  products  and  advisory  services  should  be  available  at 
competitive rates. However, remember, never compromise on quality for cost. Always scout 
for  a  full  service  broker  and  choose  the  one  who  provides  clear  and  easy  to  understand 
brokerage structure. Be vigilant and monitor your accounts regularly.  

In case you happen to notice some charges debited to your account with out‐of‐context or 
prior  uninformed  narration,  immediately  get  it  clarified  with  the  broker.  Investors  have 
every right to know about their accounts and charges levied at any given point in time. 

 
 

SHORT TERM STRATEGIES 
Investment  is  a  long  term  game  and  short  term  trading  is  not  considered  a  good  strategy 
altogether for goal based financial planning. However, when considered from the viewpoint 
of  traders  and  speculators,  it  would  be  wrong  to  suggest  that  short  term  trading  is  bad. 
Investors should understand that short term trading mostly relies on deep study (to a large 
extent, technical analysis), controlling one’s emotions and surely luck.  

In the current volatile market scenario, you could be tempted to try your luck in some short 
term  investment  strategies  to  make  the  best  out  of  a  bad  situation.  Here  is  an 
understanding of some short term trading strategies usually followed by short term traders. 
Knowing  these strategies  will  make  you  aware  of  your  own  actions.  However,  do  proceed 
with caution. 

Day‐trade in stocks 

In this trading style, traders buy and sell the stocks on the same day or in a very short period 
of time. The traders take advantage of daily market volatility to profit. They buy when the 
stock prices go down hoping the prices to appreciate in the day. They square‐off by the end 
of the day. This can result in profit or loss depending on whether the price they sold at was 
higher or lower than their buy price.  

This  is  a  very  popular  way  to  trade.  The  popularity  stems  from  the  fact  that  this  looks 
exciting. Even if traders lose money, the loss doesn’t seem big as daily variation is not very 
volatile.  Day‐trading,  however,  is  the  most  popular  way  to  lose  money.  Investors  look  at 
daily loss and assume that this is not a big loss but accumulated losses over the year gives a 
very gloomy picture. 
Risk mitigation 

Investors should not put all their money in day‐trading. If you are too excited by daily price 
volatility  and  want  to  try  your  hands  in  day‐trading,  put  at  most  10%  of  your  total 
investment for this and play with this. Do not gamble more. 

Trading on margin 

In  margin  trading,  the  investor  spends  some  part  from  his  or  her  pocket  and  borrows  the 
rest  from  the  broker  at  an  interest.  In  this  context,  investors  have  to  understand  the 
concept of initial and maintenance margin. Initial margin is the % of total investment that 
investors have to put. When the prices go down, your contribution in terms of percentage 
will go down. After it goes below a certain percentage, the broker will ask you to put more 
money  to  take  it  to  the  initial  margin.  This  “certain  percentage”  is  called  maintenance 
margin. 

 
Take an example.  

Let’s say an investor, Rakesh buys 100 stock of Airtel at Rs 400 a share. The initial margin is 
25%  and  maintenance  margin  is  10%.  This  means  Rakesh  has  to  put  10,000  (25%  of  total 
investment  of  40,000).  The  rest  30,000  is  borrowed  by  broker.  Suppose  the  prices  start 
going down and goes to Rs 330 a share. In this case, the total value is 330*100 = Rs 33,000. 
Let’s calculate what the contribution by investor at this point is. The investor contribution is 
(33000‐30000)/33000.  This  is  less  than  10%.  Hence  investor  will  get  a  call  to  put  more 
money so that his or her contribution is 25% of Rs 33000 which is Rs 8250. Since his amount 
is 3000, he will have to deposit another 5250. 

This is high risk high return strategy. The advantage is that if the prices go up, you earn all 
the profit minus the interest you pay to the broker on his contribution. However, the loss is 
equally yours because the broker will anyway charge the interest. This is a double whammy. 

Risk Mitigation 

The only risk mitigation strategy is that the investors should never put more money when 
margin call is given by the broker. The investor, instead, should ask the broker to square off 
the  position  with  whatever  loss  has  happened.  Avoid  the  temptation  to  put  more  money 
after the margin call. 

Selling short  

In this short term strategy, investors borrow and sell the shares and later they have to buy 
this from open market and give it back to the lender. The idea is to benefit from decreasing 
prices. Investors short‐sell stocks because they assume that prices will go down and when it 
goes down they buy it cheaper and give it back. The difference is the profit to investors. 
For example. An investor Rakesh expects the price of Airtel with current market price @400 
to go down. Since he has no stocks, he borrows 100 Airtel stocks from the market and sells it 
immediately earning 40,000. After sometime, as he expected, the Airtel price went down to 
350.  He  buys  100  stocks  back  at  35,000  and  gives  it  back.  He  earns  Rs  5000  from  this 
transaction. We are ignoring transaction costs and other charges for the sake of simplicity. 

Risk mitigation 

Short‐selling is speculative in nature and investors may lose if the prices go up. There is no 
guarantee that stocks will go down as expected. If you are keen on doing it, use a very small 
amount (less than 10% of your investment) for short‐selling. 

There are short term investors who have done tremendously well but they are few and far 
between. Hence investors should put their major portion of investment corpus for long term 
wealth building assets and segregate a minor portion for short term speculation. 

STOCK OR MUTUAL FUNDS 
  The two methods of investing in equities are either directly or indirectly. Direct investment 
entails purchasing stocks directly, while indirect investment entails investing in mutual funds 
that in turn invest in stocks. 

Differences in investing in stocks vs mutual funds:

There are many differences between investing in stocks and mutual funds. Here are the major
differences between them.

Stocks Mutual funds

Need a demat account for buying and No need for demat account, except for buying and
selling selling ETFs
Must be traded through a broker except Can be traded through a financial broker or directly
in case of IPO by approaching the fund house
You are the part owner of the company, You don’t own shares directly, so you are not
making you eligible for bonus shares, eligible for any rights due to the owner
voting rights etc.
You get dividend if the company makes Dividend is optional and if chosen will affect the
the profit value of your investment by the amount of
dividend declared
You have to keep a check on the Expert fund managers take care of all the activities
performance of your holdings
The charges incurred here are the demat There is an entry load, exit load, fund management
charges, and buying/selling charges (only charges and buy sell spread. These charges can
when the transaction takes place) significantly affect the returns generated by the

Price of a share can be very volatile
Need a lot of money to diversify
fund
Normally the NAVs do not show a significant rise
or crash
Diversification can be achieved with amounts as
low as Rs. 5000 (or even lesser in case of ELSS)

Pros and cons of both the types of investment:

Stocks:

Pros Cons
You are the owner of Higher risk since if the
the company company closes down, you
tend to lose money
Can earn dividends, The fortunes of even the most
which may be your profitable companies can
source of income change suddenly, so you stand
to lose the dividend
You can buy/sell in the Your stop loss may not be
stocks at the price of reached, making it difficult for
your choice by using you to trade in the stock
the option of stop loss
Suitable only for experienced
investors
Is time consuming as you need
to study the fundamentals of
the stock
Diversification needs a lot of
money which is not possible
for small investors
May not be liquid, particularly
if the company is small or
mid-cap

Mutual funds:

Pros Cons
Managed professionally You end up paying the
charges for availing of this
expertise
Diversification can be You don’t have a say in
achieved with nominal deciding where your money
amount of Rs 5000 is invested. The fund
manager decides for you
and he may be wrong, thus
causing a loss
Very liquid You have to pay exit load if
you redeem your
investment before a certain
time frame
Can be purchased directly High fund management
thus saving you from expenses can erode the
having to pay entry load returns
Unlike companies, mutual Tend to be mis-sold by the
funds will not close down. mutual fund advisors as
Rather they would be well as fund houses
merged into another
successful fund.

While both mutual funds and stocks have their own distinct features, it is up to each
individual investor to decide where to invest. For those who have time, expertise and money,
direct investing can be done. For others, mutual funds are the way to go. In fact, some funds
have managed to outperform their benchmark index. However one important point to be
noted is that both are long-term investment options.
BEHAVIOURAL FINANCE    
There have been many studies that have documented long-term historical phenomena in
securities markets that contradict the efficient market hypothesis and cannot be captured
plausibly in models based on perfect investor rationality. Behavioural finance attempts to fill
the void.
It is a field of finance that proposes psychology-based theories to explain stock market
anomalies. Within behavioural finance, it is assumed that the information structure and the
characteristics of market participants systematically influence individuals' investment
decisions as well as market outcomes.
STOCK MARKET PSYCOLOGY
Here are some of the most common mistakes we make while investing:
1. Social Proof

It is human nature to look to others to determine the best course of action for ourselves. If we
see others buying stocks, then it must be a good time to buy. The same goes for when
everyone else is selling. It’s also known as Herd Mentality. It usually comes into play during
a Bull Run or a Bear Run where everyone is buying or selling not because of some
fundamental factors but because others are doing so.
2. Scarcity

We all have a natural tendency to want things that are in short supply. The more rare an item,
the greater its value because few will be able to possess it. Not only do we want a scarce item
more, but we will make up reasons for why we want it so.

Similarly, we will rush in and buy stocks at Rs.100 because we are afraid that in a short time 
they will only be available for Rs.120, Rs.150, or much more. We must buy it now, because 
this price may not be available for much longer. That is why when the stock market is rising, 
we feel a great need to jump in and buy, buy, buy. 

As  the  market  rises,  stocks  at  lower  prices  become  more  and  more  scarce,  which  creates 
more buying, which makes them scarcer, and on and on it goes until the music stops. 

3. Loss aversion 

We like making money, but we hate losing money a lot more. That is why when there is a 
large drop  in the stock market  and we have  lost a  lot of money, we are  shy about buying 
more. Once we have lost, we want to hold on to what we have for fear of losing more. 
This  makes us  most  likely  to  buy  when  prices  are  high,  because  we  have  lost  nothing  and 
have gained much (at least on paper). Similarly we are likely to sell or at the very least, not 
buy, when prices are low. 

Loss aversion also results in the ‘Get Even Bias’. Once a stock owned has gone into red, we 
would hold on to it hoping that at least we get even‐recover the money invested in it. 

4. Self‐serving bias 

This is when investors are quick to take credit for portfolio gains, but just as quick to blame
losses on outside factors like market forces or the Bank of China. Self-serving bias helps
investors avoid accountability. Although you might feel better by following this bias, you
will be cheating yourself out of a valuable opportunity to improve your investing intelligence.
If you’ve never made a mistake in the market, you’ll have no reason to develop better
investing skills and your returns will reflect it.
5. Past serves the future

When investors start believing that the past equals the future, they are acting as if there is no
uncertainty in the market. Believing that the past predicts the future is a sign of
overconfidence. When enough investors are overconfident, it pumps the market up to the
point where a huge correction is inevitable. The investors who get hit the hardest, the ones
who are still all in just before the correction, are the overconfident ones who are sure that the
Bull Run will last forever.
6. Anchoring

It refers to focusing on one detail at the expense of all the others. Maybe we have read a good
report on a particular stock in a magazine. Now, if the business news is reporting some flaws
in corporate governance in the company which can have serious implications on the
company’s functionality, rather than selling it we would ignore the news and hold on to the
stock because our mind is anchored to the magazine article.
Similarly, markets become volatile when investors pour in money based purely on a few
figures from the financials and the analysts’ predictions without knowing about the
companies those numbers represent.
There are many more behavioural traits in the market which makes it quite irrational.
Understanding the market psychology is beneficial for the short term trader and also for the
long term investor so that we gain on others mistakes and avoid making them ourselves.

HOW TO EVEN THE ODDS

When we feel ourselves getting caught up in the emotion of the stock market, we must stop 
ourselves  from  buying  or  selling  anything.  Decisions  that  are  made  in  haste  are  usually 
decisions that we will regret later on. 

This is why many experts encourage investors to have a strategy. When you are swept up by 
the  powerful  forces  of  scarcity,  you  can  fall  back  on  your  strategy.  Before  making  a  stock 
trade, simply ask yourself this – Does this trade fit into my long‐term stock trading strategy? 
If not, then you must walk away. 

INVESTMENT STYLES TO BE AVOIDED

Your investment style is an extension of your own personality. A calmer demeanour would 
most probably have a conservative approach to investing and would choose safer deposits 
over riskier returns. Their approach would be in stark contrast to the route adopted by the 
hyper lot who take risks hoping it results in higher returns. And there are also those that are 
comfortable with striking a balance between risk and return: the moderates. 

No matter which style of investing you choose for yourself, there are a few personality traits
that are best kept away when managing your money. So, while it is very interesting to note
the kind of investor that you are (or could be), it is probably more enlightening to realize the
kind of investor that you should never turn into. Here are three types of investors that you
should be wary of:

The Hoarder 

He  is  so  carried  away  with  accumulating  all  possible  investment  avenues  that  he  simply 
doesn’t have the time to focus on reviewing his portfolio and is most often stuck with funds 
that he could do without. His portfolio would probably resemble a sort of supermarket of 
funds,  complete  with  a  section  on  new  launches  (NFOs)  and  cash‐backs  (Dividend  paying 
funds). On the face of it, the Hoarder might seem like the eternal optimist, clinging on to a 
fund even when it has repeatedly disappointed over the years. And the only real reason that 
the Hoarder stays with a poor performing fund is because he is too busy adding some more 
to his portfolio. 

If you are a Hoarder, it’s time to review your portfolio and clean your portfolio.

The Bundle of Nerves 

The  Bundle of  Nerves  is  always  looking  for  the  slightest  movement  in  the  market  to  drive 
him into action, either to add a new fund or to let go of an old one. Keeping his portfolio 
constant is not his style. And, yes, he keeps his financial advisor on his speed dial. 

He believes that “Change” (or rather Churn) is the key to having a successful portfolio. An 
avid follower of investment shows, stock market predictions and financial channels’ minute‐
by‐minute  update,  the  Bundle  of  Nerves  needs  to  see  constant  movement  in  his 
investments to feel at ease – either by increasing or reducing the number of his funds. The 
Bundle of Nerves lacks the most important skill in investing: Patience! 

If you are this type of investor, remember that investment needs time to deliver results.
Constant churning of portfolio will only increase your transaction cost and make your broker
happy.

The Sitting Duck 

The Sitting Duck is excited about investing, and he trusts blindly. Most first time investors 
believe  that  their  financial  advisor  or  investment  guru  will  have  an  answer  for  absolutely 
everything related to investments. It takes them a while to understand that their advisor too 
is human, and that it is only human to err. It helps to note that the part in the discussion 
where the investor is asked for his views on the proposed “get‐rich‐quick” plan also offers 
scope for refusal. The Sitting Duck fails to see that a proposal proposes, and that he has the 
absolute right to dispose of it. 

If  it  feels  like  you're  being  cheated  don't  let  it  continue.  The  next  time  you  sit  with  your 
advisor to discuss a new plan, keep your cell phone handy, and have a friend call you. It's up 
to you to decide whether it's an 'emergency' or 'a wrong number.' 

While  every  individual  has  different  objectives,  beliefs  and  level  of  knowledge,  whatever 
type of investor you are, don’t be a hoarder, a bundle of nerves or a sitting duck.  

20 Mantras to Wise Investing 
Mantra 1
Invest only in fundamentally strong companies

• Do not go for momentum or penny stocks.

• Invest only in companies with strong fundamentals; these are the ones that will withstand
market pressures, and perform well in the long term.
• Equity investments cannot be sold back to the company/promoters.
• Strong stocks are also liquid stocks.

Mantra 2
Read Carefully

• Do not gamble away your hard earned money.

• Due diligence is a must.
• Read about the offer. This is an advice difficult to practice with offer documents now
running into more than 1000 pages; abridged prospectus too is difficult to read. Yet, read you
must, at least sections on risk factors, litigations, promoters, company history, project, objects
of the issue and key financial data.

Mantra 3
Follow life-cycle investing

• You can afford to take greater risks when you are young.
• As you cross 50, start getting out of risky instruments.
• By 55/60, you should be totally out of equity. (You can’t afford to lose your capital when
you have stopped earning new money). There are better things in life at that age than watch
the price ticker on TV!

Mantra 4
Invest in IPO

• IPOs are a good entry point.

• Remember, IPOs have to be bought; these are not forced upon the investors.
• Due diligence is a must. Must never blindly invest in an IPO.
• Decide whether you are investing in an IPO or in a company. If as an IPO, then exit
on listing date. If as a company, then remain invested as you would in a listed stock.
• And use the ASBA process to invest.

Mantra 5
Learn to Sell

• Most investors buy and then just hold on (Most advice by experts on the media is also to
buy or hold, rarely to sell).
• Profit is profit only when it is in your bank (and not in your register or Excel sheet).
• Remember, you cannot maximize the market’s profits so don’t be greedy.
• Set a profit target, and sell.

Mantra 6
Deal only with registered intermediaries

• Many unauthorized operators in the market who will lure you with promises of high returns,
and then vanish with your money.
• Dealing with registered intermediaries is safer and allows recourse to regulatory action.

Mantra 7
Let not greed make you an easy prey!

• Many scamsters are roaming around, to exploit your greed.

• Most scams rob small investors.
• Be careful about the entity seeking your money.
Mantra 8
Beware of the media, especially the stock specific advice on electronic media

• Too many “saints” in the capital market offering free advice!

• In reality, many of these advisors have vested interests.
• Also beware of the get-rich schemes being sold through SMS and emails.

Mantra 9
Don’t get taken in by advertisements

• The job of an advertisement is to make you feel-good.

• Don’t get carried away by attractive headlines, appealing visuals, catchy messages.

Mantra 10
Beware of fixed/guaranteed returns schemes

• Anyone who is offering a return much greater than the bank lending rate is suspicious.
• Remember plantation companies-promised huge returns (in some cases 50% on Day 1)!

Mantra 11
Beware of the grey market premium

• These are artificial and normally created by the promoter himself.

Mantra 12
Don’t get overwhelmed by sectoral frenzies

• Remember, all companies in a sector are not good. Each sector will have some very good
companies, some reasonably good companies and many bad companies.
• Be also wary about companies that change their names to reflect the current sectoral fancy.

Mantra 13
Don’t over-depend upon ‘comfort’ factors like

• IPO Grading
• Independent Directors

Mantra 14
Don’t blindly take decisions based on accounts just because these are audited

• High incidence of fraudulent accounts and of mis-advertising of financial results. Satyam

case is a wakeup call.
• Read qualifications and notes to the accounts.
• Look out especially for unusual entries related party transactions, sundry debtors,
subsidiaries’ accounts.

Mantra 15
Cheap shares are not necessarily worth buying
• Do not chase price, chase value.
• Price can be low because the company in fact is not doing well (but hype over the
company/sector may induce you).
• Worse, the price can be low because the face value has been split (over 500 companies have
split their shares).
Rationale given: make shares affordable to small investors
- Not valid as in demat, one can buy even one share
- Real purpose: to make shares appear “cheap”
- Companies with a share price of Rs.50 have split 1:10!

Mantra 16
Be wary of companies where promoters issue shares/warrants to themselves

• Preferential allotments to promoters are almost always made for the benefit of the
promoters only. (The fair route should be rights issue).

Mantra 17
Don’t be fooled by Corporate Governance Awards/CSR

• There is a high incidence of fraudulent companies upping their CG and CSR activities.

Mantra 18
Be honest

• Be honest to yourself as only then you can demand honesty.

• We are very weak investors/no strong investor associations/take everything lying down.
• Need to form/join strong investor associations and fight for our rights.
• Need to demand disgorgement.

Mantra 19
Invest-don’t speculate

• Don’t invest just because a friend has told you that scrip would be a jackpot.
• Speculating in the market is similar to gambling. It’s just that such gambling is legal.
• To be a successful investor requires planning, study and discipline.

Mantra 20
Don’t leverage on the market

Leverage trading is for traders in the market. For investors, invest your own funds. Don’t
borrow and invest in the market. And investment must be a small share of your wealth and
not your entire hard earned money.

 
 

CURRENT SCENARIO AND WHAT ONE SHOULD DO 
With the mayhem unleashed due to the downgrade of US to AA+, markets across the world
have experienced correction. Following are some of the many issues facing today:

• a complete fiscal mess in the peripheral EU countries,

• the political chaos in the Middle East and corresponding uncertainty about the price of
oil,
• an incredibly topsy-turvy monetary policy and excess indebtedness in the US,
• a structural change in the outlook for commodity prices, climate change and the
possibility of correspondingly higher inflation and interest rates and
• a highly uncertain outlook for the euro and the greenback,
• domestic slowdown of the economy, slow progress over economic reforms, persistent
high inflation and interest rates

In times like these, logical thinking is the first casualty. There are market observers who
suggest that there is more pain and the market can trend down. There are other more
optimistic ones who suggest that markets have been anticipating this and are already factored
into the fall. By implication, what they mean is that the downside is limited and the upside
potential is higher.
Following tips can be followed in such volatile investment climate:

1. Invest for the long-term by sticking to high quality stocks with good growth outlook,
ignoring the more immediate risk of short-term losses.
2. Hold cash and moderate your return expectations.
 3. First, investors should not change their allocations now to accommodate the
champion investment avenue today– Gold. Most people have long-term goals and
meeting them would require a consistent strategy. One should not look at changing
the strategy overnight, whenever there is some change in the environment. The
strategy would have to be revisited only if the events have considerably changed the
risk-return possibilities over the period, which calls for such a change. This is not one
such event.

4. Indian stock markets have been considerably driven by FII money and when
money moves back to western shores seeking “safe havens”, the markets fall. But, if
one looks at the indebtedness of the various countries and the prognosis for their
economies from here on, FII money will sooner than later come back to emerging
economies with potential. India is one such economy, which has the potential to grow
at 7%+ levels. Hence, it is a fact that though there are short-term problems, the
medium to long-term outlook is good.

5. Apart from changing some tactical allocation & tweaking the portfolio a bit,
one should let the strategy remain intact. This means continuing SIPs/RDs which are
going on, continuing with the investments done in the past to achieve long-term goals
and not attempting a major change of the allocation just because Gold seems to be the
star on the horizon.

6. There are those who want to shift their money away from equities and into
FDs and other such debt instruments. That again is not a good strategy. Investing in
equity at this point would give the best bang for the buck.

7. You should invest so that you can participate in and benefit from the
company's growth. Keeping this in mind, the ideal period to stay invested should
preferably be greater than 5 years.

You would learn that in the long run, the relevance of the right price diminishes. If
you choose the right company and have the right time perspective, in the longer term,
it doesn't really matter too much whether you bought it at the lowest (right) price or
not. This is because as long as the company is growing and you hold on to your
investment, the Power of Compounding will multiply the value of your investment at
a rate that will make the initial investment price insignificant. This makes a real
mantra for wealth creation!

FIXED INCOME 
The Fixed Income securities market was the earliest of all the securities markets in the world 
and has been the forerunner in the emergence of the financial markets as the engine of 
economic growth across the globe. The Fixed Income Securities Market, also known as the 
Debt Market or the Bond market, is easily the largest of all the financial markets in the 
world today. The Debt Market has, as such, a very prominent role to play in the efficient 
functioning of the world financial system and in catalyzing the economic growth of nations 
across the globe. 
 

The Indian debt market is today one of the largest in Asia and includes securities issued by 
the  Government  (Central  &  State  Governments),  public  sector  undertakings,  other 
government bodies, financial institutions, banks and corporate. 

The economy is heading for a slowdown and bond yields are not far from peaks seen during 
the year.  This by itself is a good case for buying into bond yields and the risk return profile 
of investing in bonds is very much in your favour. Bond funds that invest in government and 
corporate bonds are an alternative if you do not want to invest directly in bonds.  

What are fixed income securities?

Fixed-income securities are investments where the cash flows are according to a pre-
determined amount of interest, paid on a fixed schedule. They are usually obligations of
issuer of such instrument as regards certain future cash flow representing interest & principal,
which the issuer would pay to the legal owner of the Instrument.

What are the types of fixed income securities?

The different types of fixed income securities include government securities, corporate
bonds, commercial paper, treasury bills, strips etc. The instruments traded can be classified
into the following segments based on the characteristics of the identity of the issuer of these
securities:
Why should one invest in fixed income securities?

1. Fixed Income securities offer a predictable stream of payments by way of interest and
repayment of principal at the maturity of the instrument.
2. The debt securities are issued by the eligible entities against the moneys borrowed by
them from the investors in these instruments. Therefore, most debt securities carry a
fixed charge on the assets of the entity and generally enjoy a reasonable degree of
safety by way of the security of the fixed and/or movable assets of the company.
3. The investors benefit by investing in fixed income securities as they preserve and
increase their invested capital or also ensure the receipt of dependable interest
income.
4. The investors can even neutralize the default risk on their investments by investing in
Govt. securities, which are normally referred to as risk-free investments due to the
sovereign guarantee on these instruments.

Debt Markets in India and all around the world are dominated by Government securities,
which account for between 50 – 75% of the trading volumes and the market capitalization
 in all markets. Government securities (G-Secs) account for 70 – 75% of the outstanding
value of issued securities and 90-95% of the trading volumes in the Indian Debt Markets.

FAQ ON FIXED INCOME 
What is the difference between a fixed income security and equity?

Holders of fixed-income securities are creditors of the issuer, not owners. Equity represents a
share in the ownership of the issuer.

What are fixed interest rate securities and floating interest rate securities?
Fixed interest rate securities are those in which the interest payable is fixed beforehand.
Floating interest rate securities are those in which the interest payable is reset from at pre-
determined intervals according to a pre-determined benchmark.

What are the key components of fixed income securities?

Credit quality, yield, and maturity are key components of fixed-income securities.

What is credit quality?

Credit quality is an indicator of the ability of the issuer of the fixed income security to pay
back his obligation. The credit quality of fixed-income securities is usually assessed by
independent rating agencies such as Standard & Poor's, Moody's in the U.S. and CRISIL in
India. Most large financial institutions also have their own internal rating systems.

What is the yield on a security?

Yield on a security is the implied interest offered by a security over its life, given its current
market price.

What is maturity?

Maturity indicates the life of the security i.e. the time over which interest flows will occur.

What are coupon payments?

Coupon payments are the cash flows that are offered by a particular security at fixed
intervals. The coupon expressed as a percentage of the face value of the security gives the
coupon rate.

Why is there a difference between coupon rate and yield?

The difference between coupon rate and yield arises because the market price of a security
might be different from the face value of the security. Since coupon payments are calculated
on the face value, the coupon rate is different from the implied yield.

Why do long term securities offer more return than short- term securities?

Long-term securities typically offer more return than short-term securities because investors
usually prefer to lend money for shorter terms. Hence money lent out for longer terms will
have a higher yield.

What are callable securities?

Callable securities are those which can be called by the issuer at predetermined time/times,
by repaying the holder of the security a certain amount which is fixed under the terms of the
security.

What is the relationship between price and Yield?

Prices and interest rates are inversely related.

What is the Coupon rate of the Security?

The Coupon rate is simply the interest rate that every debenture/Bond carries on its face value
and is fixed at the time of issuance. For example, a 12% p.a. coupon rate on a bond/debenture
of Rs 100 implies that the investor will receive Rs 12 p.a. The coupon can be payable
monthly, quarterly, half-yearly, or annually or cumulative on redemption

What is meant by a Maturity date for Security?

Securities are issued for a fixed period of time at the end of which the principal amount
borrowed is repaid to the investors. The date on which the term ends and proceeds are paid
out is known as the Maturity date. It is specified on the face of the instrument. In respect of
Demat Debt instrument due date is known from ISIN Number of the security.

What is Redemption of Bond/Debenture?

On reaching the date of maturity, the issuer repays the money borrowed from the investors.
This is known as Redemption or Repayment of the bond/debenture.
If the redemption proceeds are more than the face value of the bond/debentures, the
debentures are said to be redeemed at a premium. If one gets less than the face value, then
they are redeemed at a discount and if one gets the same as their face value, then they are
redeemed at par.

What is meant by Current yield?

This is the yield or return derived by the investor on purchase of the instrument (yield related
to purchase price).
It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If
an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the
instrument would be computed as:

Current Yield = (10%*100)/90 X 100, that is 11.11% p.a.

What is Yield to maturity (YTM)?

The yield or the return on the instrument is held till its maturity is known as the Yield-to-
maturity (YTM). It basically measures the total income earned by the investor over the entire
life of the Security.

This total income consists of the following:

• Coupon income: The fixed rate of return that accrues from the instrument
• Interest-on-interest at the coupon rate: Compound interest earned on the coupon
income
• Capital gains/losses: The profit or loss arising on account of the difference between
the price paid for the security and the proceeds received on redemption/maturity

What do you mean by "Cum-Interest" and "Ex-Interest"?

Cum-interest means the price of security is inclusive of the interest accrued for the interim
period between last interest payment date and purchase date.
Security with ex-interest means the accrued interest has to be paid separately

What do you mean by the terms Face Value, Premium and Discount in a Securities
Market?

Securities are generally issued in denominations of 10, 100 or 1000. This is known as the
Face Value or Par Value of the security. When a security is sold above its face value, it is
said to be issued at a Premium and if it is sold at less than its face value, then it is said to be
issued at a Discount.

What is Day count convention?

The market uses quite a few conventions for calculation of the number of days that has
elapsed between two dates. It is interesting to note that these conventions were designed prior
to the emergence of sophisticated calculating devices and the main objective was to reduce
the math in complicated formulae. The conventions are still in place even though calculating
functions are readily available even in hand-held devices. The ultimate aim of any convention
is to calculate (days in a month)/ (days in a year). The conventions used are as below. We
take the example of a bond with Face Value 100, coupon 12.50%, last coupon paid on 15th
June, 2000 and traded for value 5th October, 2000.

A/360(Actual by 360)

In this method, the actual number of days elapsed between the two dates is divided by 360,
i.e. the year is assumed to have 360 days. Using this method, accrued interest is 3.8888.

A/365 (Actual by 365)

In this method, the actual number of days elapsed between the two dates is divided by 365,
i.e. the year is assumed to have 365 days. Using this method, accrued interest is 3.8356

A/A (Actual by Actual)

In this method, the actual number of days elapsed between the two dates is divided by the
actual days in the year. If the year is a leap year AND the 29th of February is included
between the two dates, then 366 is used in the denominator, else 365 is used. Using this
method, accrued interest is 3.8356

What is interest rate risk, re-investment risk and default risk?

(i) Interest Rate risk:

Interest rate risk, market risk or price risk are essentially one and the same. These are typical
of any fixed coupon security with a fixed period-to-maturity. This is on account of an inverse
relation between price and interest. As interest rates rise, the price of a security will fall.
However, this risk can be completely eliminated in case an investor's investment horizon
identically matches the term of the security.
(ii) Re-investment risk:

This risk is again akin to all those securities, which generate intermittent cash flows in the
form of periodic coupons. The most prevalent tool deployed to measure returns over a period
of time is the yield-to-maturity (YTM) method. The YTM calculation assumes that the cash
flows generated during the life of a security is re-invested at the rate of the YTM. The risk
here is that the rate at which the interim cash flows are re-invested may fall thereby affecting
the returns.

(iii) Default risk:

This kind of risk in the context of a Government security is always zero. However, these
securities suffer from a small variant of default risk i.e., maturity risk. Maturity risk is the risk
associated with the likelihood of the government issuing a new security in place of redeeming
the existing security. In case of Corporate Securities it is referred to as Credit Risk.

What is Yield Curve?

The relationship between time and yield on a homogenous risk class of securities is called the
Yield Curve. The relationship represents the time value of money - showing that people
would demand a positive rate of return on the money they are willing to part today for a
payback into the future. It also shows that a Rupee payable in the future is worth less today
because of the relationship between time and money. A yield curve can be positive, neutral or
flat. A positive yield curve, which is most natural, is when the slope of the curve is positive,
i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This
result, as people demand higher compensation for parting their money for a longer time into
the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his
occurs when people are willing to accept more or less the same returns across maturities. The
negative yield curve (also called an inverted yield curve) is one of which the slope is
negative, i.e. the long term yield is lower than the short term yield.

What is Zero Coupon Yield Curve?

The Zero Coupon Yield Curve (also called the Spot Curve) is a relationship between maturity
and interest rates. It differs from a normal yield curve by the fact that it is not the YTM of
coupon bearing securities, which gets plotted. Represented against time are the yields on zero
coupon instruments across maturities. The benefit of having zero coupon yields (or spot
yields) is that the deficiencies of the YTM approach (See Yield to Maturity) are removed.
However, zero coupon bonds are generally not available across the entire spectrum of time
and hence statistical estimation processes are used. The zero coupon yield curve is useful in
valuation of even coupon bearing securities and can be extended to other risk classes as well
after adjusting for the spreads. It is also an important input for robust measures of Value at
Risk (VaR)

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates - rates that banks
offer to their depositors, rates that they lend to their borrowers, the rate at which the
Government borrows in the bond/G-Sec, market, rates offered to small investors in small
savings schemes like NSC rates at which companies issue fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly
referred to as macroeconomic. Some of these factors are:

1. Demand for money

2. Government borrowings
3. Supply of money
4. Inflation rate
5. The Reserve Bank of India and the Government policies which determine some of the
variables mentioned above.

DEBT MARKET 
The Debt Market is the market where fixed income securities of various types and features
are issued and traded. There is no single location or exchange where debt market participants
interact for common business. Participants talk to each other, over telephone, conclude deals,
and send confirmations by Fax, Mail etc. with back office doing the settlement of trades. In
the sense, the wholesale debt market is a virtual market. The daily transaction volume of all
the debt instruments traded would be about Rs.4000 - 5000 crores per day. In India, NSE has
its separate segment, which allows online trades in the listed debt securities through its
member brokers.

What is the importance of the Debt Market to the economy?

The key role of the debt markets in the Indian Economy stems from the following reasons:
• Efficient mobilization and allocation of resources in the economy
• Financing the development activities of the Government
• Transmitting signals for implementation of the monetary policy
• Facilitating liquidity management in tune with overall short term and long term
objectives.
Since the Government Securities are issued to meet the short term and long term financial
needs of the government, they are not only used as instruments for raising debt, but have
emerged as key instruments for internal debt management, monetary management and short
term liquidity management.

What are the benefits of an efficient Debt Market to the financial system and the
economy?

• Reduction in the borrowing cost of the Government and enable mobilization of

resources at a reasonable cost.
• Provide greater funding avenues to public-sector and private sector projects and reduce
the pressure on institutional financing.
• Enhanced mobilization of resources by unlocking illiquid retail investments like gold
• Development of heterogeneity of market participants
• Assist in the development of a reliable yield curve.

Who are institutional investors in the Indian Debt Market?

Institutional investors operating in the Indian Debt Market are:

• Banks
• Insurance companies
• Provident funds
• Mutual funds
• Trusts
• Corporate treasuries
• Foreign investors (FIIs)

What are the segments in the secondary debt market?

The segments in the secondary debt market based on the characteristics of the investors and
the structure of the market are:
• Wholesale Debt Market – where the investors are mostly Banks, Financial Institutions,
the RBI, Primary Dealers, Insurance companies, Provident Funds, MFs, Corporate
and FIIs.
• Retail Debt Market - involving participation by individual investors, Small trusts and
other legal entities in addition to the wholesale investor classes.

Securities lending and borrowing rates are determined by the forces of demand and supply of
securities. This, in turn, is largely determined by the outstanding positions to be carried
forward to the next settlement. The higher outstanding purchase position generally means
higher demand for borrowing of securities and consequently higher securities borrowing
charges or vice-versa. Sometimes, the lending and borrowing charges for securities may be
zero. In such cases, neither the borrower nor the lender of securities gets any charge and the
transactions may be carried forward to the next settlement without payment of charges.

Who Regulates Indian G-Secs and Debt Market?

Reserve Bank of India (RBI)

The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of
India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has
to simultaneously fulfil several other important objectives viz. managing the borrowing
program of the Government of India, controlling inflation, ensuring adequate credit at
reasonable costs to various sectors of the economy, managing the foreign exchange reserves
of the country and ensuring a stable currency environment.

RBI controls the issuance of new banking licenses to banks. It controls the manner in which
various scheduled banks raise money from depositors. Further, it controls the deployment of
money through its policies on CRR, SLR, priority sector lending, export refinancing,
guidelines on investment assets etc.

Another major area under the control of the RBI is the interest rate policy. Earlier, it used to
strictly control interest rates through a directed system of interest rates. Each type of lending
activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has
moved slowly towards a regime of market determined controls.

Securities and Exchange Board of India (SEBI)

Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of
India (SEBI). SEBI controls bond market and corporate debt market in cases where entities
raise money from public through public issues.

It regulates the manner in which such moneys are raised and tries to ensure a fair play for the
retail investor. It forces the issuer to make the retail investor aware, of the risks inherent in
the investment, by way and its disclosure norms. SEBI is also a regulator for the Mutual
Fund; SEBI regulates the entry of new mutual funds in the industry. It also regulates the
instruments in which these mutual funds can invest. SEBI also regulates the investments of
debt FIIs.

Apart from the two main regulators, the RBI and SEBI, there are several other regulators
specific for different classes of investors, e.g. the Central Provision Fund Commissioner and
the Ministry of Labour regulate the Provident Funds.

Religious and Charitable trusts are regulated by some of the State governments of the states,
in which these trusts are located.

Who are Primary Dealers & Satellite Dealers?

Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising

the first tier of the government securities market. Satellite Dealers work in tandem with the
Primary Dealers forming the second tier of the market to cater to the retail requirements of
the market.

These were formed during the year 1994-96 to strengthen the market infrastructure and put in
place an improvised and an efficient secondary government securities market trading system
and encourage retailing of Government Securities on large scale.
What role do Primary Dealers play?

The role of Primary Dealers is to;

(i) Commit participation as Principals in Government of India issues through bidding in

auctions
(ii) Provide underwriting services
(iii) Offer firm buy - sell / bid ask quotes for T-Bills & dated securities
(iv) Development of Secondary Debt Market

WHOLESALE DEBT MARKET (WDM) 

What is the structure of the Wholesale Debt Market?

The Debt Market is today in the nature of a negotiated deal market where most of the deals
take place through telephones and are reported to the Exchange for confirmation. It is
therefore in the nature of a wholesale market.
Who are the most prominent investors in the Wholesale Debt Market in India?

The Commercial Banks and the Financial Institutions are the most prominent participants in
the Wholesale Debt Market in India. During the past few years, the investor base has been
widened to include Cooperative Banks, Investment Institutions, cash rich corporate, Non-
Banking Finance companies, Mutual Funds and high net-worth individuals. FIIs have also
been permitted to invest 100% of their funds in the debt market, which is a significant
increase from the earlier limit of 30%. The government also allowed in 1998-99 the FIIs to
invest in T-bills with a view towards broad-basing the investor base of the same.
What are the types of trades in the Wholesale Debt Market?

There are normally two types of transactions, which are executed in the Wholesale Debt
Market:

• An outright sale or purchase and

• A Repo trade

What is the concept of the broken period interest as regards the Debt Market?
The concept of the broken period interest or the accrued interest arises as interest on bonds
are received after certain fixed intervals of time to the holder who enjoys the ownership of the
security at that point of time. Therefore an investor who has sold a bond which makes half-
yearly interest payments three months after the previous interest payment date would not
receive the interest due to him for these three months from the issuer. The interest on these
previous three months would be received by the buyer who has held it for only the next three
months but receive interest for the entire six month periods as he happens to be holding the
security at the interest payment date. Therefore, in case of a transaction in bonds occurring
between two interest payment dates, the buyer would pay interest to the seller for the period
from the last interest payment date up to the date of the transaction. The interest thus
calculated would include the previous date of interest payment but would not include the
trade date.

What is the role of the Exchanges in the WDM?

BSE and other Exchanges offer order-driven screen based trading facilities for Govt.
securities. The trading activity on the systems is however restricted with most trades today
being put through in the broker offices and reported to the Exchange through their electronic
systems which provide for reporting of “Negotiated Deals” and “Cross Deals”.

How is the settlement carried out in the Wholesale Debt Market?

The settlement for the various trades is finally carried out through the SGL of the RBI except
for transfers between the holders of Constituent SGL A/c in a particular Bank or Institution
like intra-a/c transfers of securities held at the Banks and CCIL. As far as the Broker
Intermediated transactions are concerned, the settlement responsibility for the trades in the
Wholesale market is primarily on the clients i.e. the market participants and the broker has no
role to play in the same. The member only has to report the settlement details to the Exchange
for monitoring purposes. The Exchange reports the trades to RBI regularly and monitors the
settlement of these trades.

What are the trading and reporting facilities offered by the BSE and NSE Wholesale
Debt Segment?

The BSE Wholesale Debt Segment offers trading and reporting facilities through the GILT
System, an automatic on-line trading system, which will over a period of time provide an
efficient and reliable trading system for all the debt instruments of different types and
maturities including Central and State Govt. securities, T-Bills, Institutional bonds, PSU
bonds, Commercial Paper, Certificates of Deposit, Corporate debt instruments and the new
innovative instruments like municipal securities, securitized debt, mortgage loans and
STRIPs. Similarly, the NSE Wholesale Debt Segment provides its trading facilities through
the NEAT (National Exchange for Automated Trading) system.
RETAIL DEBT MARKET (RDM) 
The Retail Debt Market, in the new millennium, presents a vast kaleidoscope of opportunities
for the Indian investor whose knowledge and participation hitherto has been restricted to the
equity market.

It would surprise many to know that a retail debt market was at one point of time very much
present in India. Right through the forties and the fifties and until the early sixties, a good
proportion of the holdings of Government securities were concentrated with individual
investors; available statistics indicate that more than half of the holdings in Government
securities were concentrated with retail investors in the early 50s.

Today, there exists an inherent need for households to diversify their investment portfolio so
as to include various debt instruments, including Government securities. The growing
investments in the Bond Funds and the Money Market Mutual Funds are a sign of the
increasing recognition of this fact by the retail investors.

Retail investors would have a natural preference for fixed income returns and especially so in
the current situation of increasing volatility in the financial markets. The Central Government
Securities (G-Secs) are the one of the best investment options for an individual investor today
in the financial markets.

Who are the participants in the Retail Debt Market?  

The following are the main investor segments who could participate in the Retail Debt
Market:

• Mutual Funds
• Provident Funds
• Pension Funds
• Private Trusts.
• Religious Trusts and charitable organizations having large investible corpus
• State Level and District Level Co-operative Banks
• Housing Finance Companies
• NBFCs and RNBCs
 • Corporate Treasuries
• Hindu-Undivided Families (HUFs)
• Individual Investors

Retail Trading in G-Secs

The Government of India and RBI, recognizing the need for retail participation had in early
2000 announced a scheme for enabling retail participation through a non-competitive bidding
facility in the G-Sec auctions with a reservation of 5% of the issue amount for non-
competitive bids by retail investors.

The Retail Trading in G-Secs. commenced on January 16, 2003 in accordance with the SEBI
Circular bearing ref. no. SMD/Policy/GSEC/776/2003 dated 10th January 2003.

How is the pricing done in Retail Debt Market?

When investors buy a government security, they receive interest for the full six months on the
next interest payment date even if the security is not held for six months. For this reason, on
the date of purchase, the buyer has to pay the seller the interest accrued on the security from
the date of last interest payment until the date of
purchase. This accrued interest is added to the price of the security while entering the quote
on the system. Price including the accrued interest is called Dirty Price. Price of the security
without accrued interest is called Clean Price.

Example : 7.46% GOI 2017 is quoted at a clean price of Rs 112.50

Face Value = Rs. 10,000 (100 Units of Rs. 100 each)
Interest Payment Date = 28th August, 2001
Settlement date : 11th January 2002
Accrued interest = (Rate of interest) x No. of days since last Int. payment date/360

In the given case Accrued Interest will be (7.46 x 133)/ 360 = 2.76 (per Rs 100 of FV)

Dirty Price = Clean Price + Accrued Interest = 112.50 + 2.76 = 115.26

Consideration Amount = Dirty Price x Face Value/100 = Rs. 11,526

What is the face value of the government security? What is the minimum order size?

All government securities made available for trading in Retail Debt Market will have a face
value of Rs. 100/-. An investor is required to place order for a minimum of 10 units.

What are the returns on a government security?

Government Securities carry a face value, but are traded at a price. When an investor buys
securities, he pays its current price which may be higher or lower than the face value. The
investor will receive interest at the coupon rate of the security on the face value that the
investor holds. Similarly, investor will receive the face value on the maturity date and not the
amount invested. The returns on the security are determined by the yield-to-maturity (YTM)
of the investment and not by the interest rate.
Why should I invest in Government Securities?

Presently, retail investors in fixed income securities have following alternatives for
investments:

An investor may invest in government securities for the following considerations

. Good avenue for investment
. Highest safety
. Regular stream of income every six months
. Assured yield to maturity if held till redemption
. No tax deduction at source
. Additional income tax benefit of Rs.3000/- under Section 80L of
Income Tax Act
. Diversification of risk
. Liquidity through trading

Let us consider an example of 12% GOI 2008. As on June 1, 2002, its purchase price is Rs.
122.52 (prices are quoted per Rs. 100). If an investor holding the above security were to sell
it on January 14, 2003, he would have received a sale price of Rs. 130.28, amounting to an
annualized return of 18.06%, in addition to the half yearly interest payment @ 12 % on the
face value received by the investor. Now, if the investor had put in the bulk money in other
alternative means for investment as indicated above, he would have earned lesser returns of
between 7-9%.

Secondly, investment in government securities has the added advantage of easy entry and exit
routes resulting in more liquidity to the investor as compared to other fixed income
investments which have varying periods of lock-in for the holder and would be more
beneficial if held to maturity.

What is the importance of making government securities available to retail investors

. Cost-effective means of raising long term funds for government

. Provide effective and accessible means for long term investments for retail investors
. Develop a stable debt market for different classes of investors
• Create broad base holding pattern and depth
. Provide efficient price discovery mechanism in primary and secondary
market thereby strengthening the existing system
. Diversification of risk
. Low cost of intermediation for investors

RDM of the NSE 

NSE has introduced a trading facility through which retail investors can buy and sell
government securities from different locations in the country through registered NSE brokers
and their sub brokers in the same manner as they have been buying and selling equities. This
market is known as "Retail Debt Market" of NSE.

Whom should I approach for buying / selling securities in Retail Debt Market?

To buy / sell securities investors need to approach the same NSE broker through whom they
have been dealing for equities or derivative products.

Do I need to register as a client again with NSE broker and what are the formalities?

All investors who have already registered with an NSE broker need not go through any
registration process. The existing registration with the broker shall stand valid and may be
used for executing trades in Retail Debt Market.

How do I give buy / sell instruction to my NSE broker?

All order instructions are to be passed to the broker in the similar manner as in the case of
trading in equity shares.

How do I know interest payment dates?

Government securities have interest payment at fixed interval of six months. The interest
payment dates are made available on the web-site as also on the trading screen. The Reserve
Bank of India announces a shut period three days prior to the interest payment date. NSE
shall announce suspension of trading of a security in which the interest payment is due.
Similarly, NSE shall announce the re-admission of the security for trading at the end of shut
period.

How do I settle my trades? What is the settlement cycle?

Trades in Retail Debt Market are settled in the same manner as in the case of equities on a
T+2 (working days) rolling basis. Hence in case of a buy trade, the client is required to make
payment to the NSE broker in such a manner that the amount paid is realized well before the
pay-in day, and the securities are then credited by the NSE broker to the client's beneficiary
account after the pay-out. Similarly, in case of sell trade the client has to give delivery out
instructions to the pool account of the NSE broker well before the prescribed settlement day
immediately upon getting the contract note for sale, and the NSE broker shall make payment
to the client after the pay-out.
What happens if I do not receive/deliver my securities purchased / sold through NSE
broker?

As in case of the equities market, the investor is not affected in case the delivering broker
fails to meet its obligation, since NSCCL provides financial guarantee for the net settlement
obligation through the Settlement Guarantee Fund separately set up for this purpose. In case
of short deliveries, unsettled positions are not auctioned but are directly closed out at Zero
Coupon Yield Curve (ZCYC) valuation prices plus a 5% penalty on the value.

The buyer shall be eligible for the higher of the following as compensation:

i) Highest traded price from the trade date to the date of close out OR
ii) Closing price of the security on the close out date plus interest calculated at the rate of
overnight FIMMDA-NSE MIBOR for the close out date

Can I use my existing depository account to trade in G-Secs?

Investors can use the existing beneficiary account with depositories for receiving and
delivering government securities.

How will I receive interest in case of holding the securities till the next interest payment
date?

All investors holding government securities in the dematerialised form in their beneficiary
account with depositories shall receive the interest payment from the respective depository.

In case of dispute between me and the broker of NSE, whom should I approach?

The broker client agreement specifies that any dispute between the broker and client should
be lodged immediately with Investor Grievance Cell at Mumbai office or the Regional
Offices of NSE based on the dealing office where the deals were executed. The investors are
required to furnish relevant documents such as contract note or purchase / sale notes in the
specified Investor Complaint Form-I available on NSE website www.nseindia.com.The
Exchange also facilitate the process of arbitration between the brokers and their clients. The
disputes between clients and brokers are resolved through arbitration in accordance with the
Bye-Laws of the Exchange.

The Retail Debt Market is set to grow tremendously in India with the broadening of the
market participation and the availability of a wide range of debt securities for retail trading
through the Exchanges.

The following are the trends, which will impact the Retail Debt Market in India in the near
future:
 • Expansion of the Retail Trading platform to enable trading in a wide range of
government and non-government debt securities.
• Introduction of new instruments like STRIPS, G-Secs. with call and put options,
securitised paper etc.
• Development of the secondary market in Corporate Debt
• Introduction of Interest Rate Derivatives based on a wide range of underlying in the
Indian Debt and Money Markets.
• Development of the Secondary Repo Markets.

CORPORATE DEBT MARKET 
The corporate bond market has been in existence in India for a long time. However, despite a
long history, the size of the public issue segment of the corporate bond market in India has
remained quite insignificant. The lack of market infrastructure and comprehensive regulatory
framework coupled with low issuance leading to low liquidity in the secondary market,
narrow investor base, inadequate credit assessment skills, high cost of issuance, lack of
transparency in trades and underdevelopment of securitization of products are some of the
major factors that hindered the growth of the private corporate debt market.

What is the structure of the Corporate Debt Market in India?  

The Indian Primary market in Corporate Debt is basically a private placement market with
most of the corporate bond issues being privately placed among the wholesale investors i.e.
the Banks, Financial Institutions, Mutual Funds, Large Corporate & other large investors. The
proportion of public issues in the total quantum of debt capital issued annually has decreased
in the last few years. Around 92% of the total funds mobilized through corporate debt
securities in the Financial Year 2002 were through the private placement route.

The Secondary Market for Corporate Debt can be accessed through the electronic order-
matching platform offered by the Exchanges. BSE offers trading in Corporate Debt Securities
through the automatic BOLT system of the Exchange. The Debt Instruments issued by
Development Financial Institutions, Public Sector Units and the debentures and other debt
securities issued by public limited companies are listed in the 'F Group' at BSE.

What are the various kinds of debt instruments available in the Corporate Debt Market?  

The following are some of the different types of corporate debt securities issued:

• Non-Convertible Debentures
• Partly-Convertible Debentures/Fully-Convertible Debentures (convertible in to Equity
Shares)
• Secured Premium Notes
• Debentures with Warrants
• Deep Discount Bonds
• PSU Bonds/Tax-Free Bonds

How is the trading, clearing and settlement in Corporate Debt carried out at BSE?  

The trading in corporate debt securities in the F Group are traded on the BOLT order-
matching system based on price-time priority. The trades in the 'F Group' at BSE are to be
settled on a rolling settlement basis with a T+2 Cycle. Trading continues from Monday to
Friday during the week. The Trade Guarantee Fund (TGF) of the Exchange covers all the
trades in the 'F' Group undertaken on the electronic BOLT system of the Exchange.

MONEY MARKET INSTRUMENTS 

By convention, the term "Money Market" refers to the market for short-term requirement and
deployment of funds. Money market instruments are those instruments, which have a
maturity period of less than one year. The most active part of the money market is the market
for overnight call and term money between banks and institutions and repo transactions. Call
Money / Repo are very short-term Money Market products. The below mentioned
instruments are normally termed as money market instruments:
 1. Certificate of Deposit (CD)
2. Commercial Paper (C.P)
3. Inter Bank Participation Certificates
4. Inter Bank term Money
5. Treasury Bills
6. Bill Rediscounting
7. Call/ Notice/ Term Money

1. CALL MONEY MARKET (call/notice/term money) 

The call money market is an integral part of the Indian Money Market, where the day-to-day
surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from
1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and
if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money
refers to Money lent for 15 days or more in the Inter-Bank Market.

Banks borrow in this money market for the following purpose:

• To fill the gaps or temporary mismatches in funds

• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank
• To meet sudden demand for funds arising out of large outflows.

Thus call money usually serves the role of equilibrating the short-term liquidity position of
banks.

Call Money Market Participants:

1. Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

2. Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI
and mutual funds etc.

Non Bank institutions are not permitted in the call/notice money market with effect from
August 6, 2005.

Reserve Bank of India has framed a time schedule to phase out the second category out of
Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.

2. COMMERCIAL PAPER (CP) 

Commercial Papers are short term borrowings by Corporate, FIs, Primary Dealers (PDs),
from Money Market. These are sold directly by the issuers to the investors or else placed by
borrowers through agents / brokers etc.
Features

• Commercial Papers when issued in Physical Form are negotiable by endorsement and
delivery and hence highly flexible instruments
• Issued subject to minimum of Rs 5 lacs and in the multiples of Rs. 5 Lac thereafter,
• Maturity is 15 days to 1 year
• Unsecured and backed by credit of the issuing company
• Can be issued with or without Backstop facility of Bank / FI

Eligibility Criteria

Any private/public sector co. wishing to raise money through the CP market has to meet the
following requirements:

• Tangible net-worth not less than Rs 4 crore - as per last audited statement
• Should have Working Capital limit sanctioned by a bank / FI
• Credit Rating not lower than P2 or its equivalent - by Credit Rating Agency approved
by Reserve Bank of India.
• Board resolution authorizing company to issue CPs
• PD and AIFIs can also issue Commercial Papers

Commercial Papers can be issued in both physical and demat form. When issued in the
physical form Commercial Papers are issued in the form of Usance Promissory Note.
Commercial Papers are issued in the form of discount to the face value.

CP may be issued to and held by individuals, banking companies, other corporate bodies
registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs)
and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the
limits set for their investments by Securities and Exchange Board of India (SEBI). Amount
invested by single investor should not be less than Rs.5 lakh (face value).

Most of the demand for commercial papers is coming from mutual funds that are expanding
their liquid funds' portfolios, which invests in short-term debt papers.
Following is a table showing commercial papers reported by Companies. The data has been
provided by the Fixed Income Money Market & Derivatives Association of India. The data is
as on 14 Nov 2011.

ISIN Security Days Avg Avg Last Trds

TrdsValue
Mty Price Yield Yield
(Crores)
INE414G14809 MUTHOOT FIN 38 98.83 11.34 11.34 1
20
INE511C14DL8 MAGMA SHRACHI FIN. 42 98.92 9.52 9.52 1
5
INE597H14460 TGS INVEST & TRADE 31 99.22 9.25 9.25 1
25
INE242A14AY3 IOC LTD. 85 97.84 9.46 9.46 1
100
INE242A14AB1 IOC LTD. 1 99.98 8.80 8.80 1
25
INE958G14BX1 RELIGARE FINV 3 99.92 9.50 9.50 1
25
INE094A14497 HPCL 4 99.90 8.80 8.80 1
50
INE094A14562 HPCL 17 99.58 9.05 9.05 1
50
INE205A14051 SESA GOA LTD. 10 99.76 8.95 8.95 3
200
INE001A14FC8 HDFC LTD 25 99.38 9.15 9.15 8
500
INE018E14AL6 SBI CARDS & PAYMENTS 2 99.95 8.80 8.80 3
55
INE094A14505 HPCL 7 99.83 8.90 8.90 2
100
INE242A14AX5 IOC LTD. 81 97.96 9.45 9.45 3
200
INE029A14386 BPCL. 87 97.80 9.44 9.44 2
500
INE580B14691 GRUH FIN. 39 99.03 9.18 9.18 1
5
INE522D14822 MANAPPURAM GEN 17 99.49 10.95 10.95 1
1
INE148I14080 INDIABULLS HSG. FIN 21 99.46 9.48 9.48 1
5
INE763I14151 TRANS.& RECT (I) LTD 46 98.79 9.74 9.74 1
2
INE242A14AC9 IOC LTD. 3 99.93 8.91 8.91 1
10
INE958G14EV9 RELIGARE FINV 38 98.88 10.88 10.88 1
6
INE945G14877 RELIGARE SEC. 37 98.89 11.12 11.12 1
6
INE511C14CM8 MAGMA SHRACHI FIN. 23 99.42 9.50 9.50 3
50
INE592A14060 ORIENT PAPER & IND 10 99.74 9.35 9.35 1
25
INE531F14612 EDELWEISS SEC 3 99.95 8.97 8.97 1
230
INE522D14830 MANAPPURAM GEN 21 99.34 11.49 11.49 1
1

3. CERTIFICATE OF DEPOSITS (CD) 

This scheme was introduced in July 1989, to enable the banking system to mobilise bulk
deposits from the market, which they can have at competitive rates of interest.

CDs differ from term deposit because they involve the creation of paper, and hence have the
facility for transfer and multiple ownerships before maturity. CD rates are usually higher than
the term deposit rates, due to the low transactions costs. Banks use the CDs for borrowing
during a credit pick-up, to the extent of shortage in incremental deposits. Most CDs are held
until maturity, and there is limited secondary market activity.
For the benefit of people with a low risk profile, fund houses are now creating fixed maturity
plans (FMP) which invest in certificates of deposit (CDs).

The major features are:  

Who can issue:  

1. Scheduled  commercial  banks  (except  RRBs)  and  All  India  Financial  Institutions 
within their `Umbrella limit’.  
2. CRR/SLR Applicable on the issue price in case of banks  
3. Investors Individuals (other than minors), corporations, companies, trusts, funds, 
associations etc  

Maturity: Min: 7 days and Max: 12 Months (in case of FIs minimum 1 year and maximum 
3 years).  

Amount:  Min: Rs.1 lac, beyond which in multiple of Rs.1 lac  

Interest rate:  Market related. Fixed or floating  

Loan Against collateral of CD: Not permitted  

Pre‐mature cancellation: Not allowed  

Transfer Endorsement & delivery: Any time  

Nature: Usance Promissory note. Can be issued in Dematerialisation form only wef June 
30, 2002  
Other conditions  
• If payment day is holiday, to be paid on next preceding business day  
• Issued at a discount to face value  
• Duplicate can be issued after giving a public notice & obtaining indemnity  

Even though CDs do not provide huge returns, they are considered a stable and reliable 
investment option and are preferred by many.  

Like all investment avenues, CDs have their own advantages and disadvantages: 

• CDs range in term from one month to 5 years and you cannot get back your money until 
the term is up. 

• Account holders can get better interest rates if they allow a longer maturation period and 
are promised principal as well as interest when the CD reaches maturity. 

• The interest on savings in CD accounts is fixed throughout the term of the deposit. 
• A special CD arrangement allows you to withdraw the money from the interest earned. In 
this way, you can reap the benefits of the interest without debiting from the principal. 

• There are short‐term CDs which can earn 6‐7% and one‐year CDs which can give 9‐10% per 
annum. 

• Some safe investments like bank CDs and Savings Bonds come with fixed interest rates (for 
a period of time) along with a government guarantee for the safety of the principal. 

To sum up, an accurately researched CD is a great way to put your money to work without 
having to accept high levels of risk. 

4. TREASURY BILLS 

Treasury bills are actually a class of Central Government Securities. Treasury bills,
commonly referred to as T-Bills are issued by Government of India against their short term
borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of below
mentioned periods are currently issued by Government/Reserve Bank of India in Primary
Market: 91-day and 364-day T-Bills. All these are issued at a discount-to-face value. For
example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the
end of its tenure at Rs. 100.00. 91 days T-Bills are auctioned under uniform price auction
method where as 364 days T-Bills are auctioned on the basis of multiple price auction
method.

Investors: Treasury bills can be purchased by any one (including individuals) except State
govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying
discount rate depending upon the bids.

Denomination: Minimum amount of face value Rs.1 lac and in multiples thereof. There is no
specific amount/limit on the extent to which these can be issued or purchased.
Maturity: 91 days and 364 days.

Rate of interest: Market determined, based on demand for and supply of funds in the money
market.

Other features:

•These are highly liquid and safe investment giving attractive yield.
• Approved assets for SLR purposes and DFHI is the market maker in these instruments and
provide (daily) two way quotes to assure liquidity.
• RBI sells treasury bills on auction basis (to bidders quoting above the cut-off price fixed by
RBI) every fortnight by calling bids from banks, State Govt. and other specified bodies.

TREASURY BILL FUTURES 

On the 4th July, 2011, leading stock exchange NSE launched the interest rate futures of T‐91 
bills. The 91 Day T Bill futures are probably of a lot more interest to institutional investors 
than retail investors because not many retail investors are taking a position on interest rate 
movements.  Most  of  the  current  trading  is  being  done  by  PSUs,  private  banks,  and 
corporate clients. However, there is a huge segment of retail investors who are interested in 
speculation, and a futures contract with relatively low margin requirements is as good a tool 
as any for speculative purposes.  

This is an interesting product, and has already done much better in volumes than the other 
IRFs introduced in India. 

Who all are permitted to participate in 91 DTB futures?

The existing members of the currency derivatives segment and futures & options segment are
allowed to participate in 91 DTB futures. All categories of investors including FIIs are
permitted to participate in 91 DTB futures.
The broad categories of investors in 91 DTB futures shall be Banks, Primary Dealers, Mutual
Funds, Insurance companies, Broker members, FIIs and Corporate.
What are the advantages of trading in T-Bill futures?

1. Cash settled futures contract, no physical delivery on expiry of the contract

2. Lower margins as compared to other assets
3. High on Safety as no Counterparty Risk
4. No Securities Transaction Tax (STT)
5. Existing trading infrastructures can be used
6. Existing bank account of currency derivatives segment for settlement
7. Easier and cheaper access to rates trading in India

What are trading hours and size of the contract?

Trading hours would be 09:00 am to 05:00 pm. One contract shall denote face value of Rs 2
Lakhs.

What is the contract tenures permitted for 91 DTB futures by SEBI?

Three serial monthly contracts followed by three quarterly contracts of the cycle
March/June/September/December are permitted by SEBI.

How to quote the contract?

Quotation shall be Rs 100 minus futures discount yield.

E.g. for a futures discount yield of 5% p.a. the quote would be 100 – 5 = Rs 95
The order matching would happen at quoted price.
The quote price shall be in multiple of Rs 0.0025.

How to relate the underlying market quotation to quote futures contract based on
futures discount yield?

In NEAT plus and NOW, yield calculator is provided to ease the conversion between
discount yield and yield to maturity. Further a facility is provided in trading systems to quote
the futures contract either in terms of YTM, valuation price or quote price. If the order is
placed in terms of valuation price or YTM, system will compute the quote price rounded to
nearest Rs 0.0025 and order will be placed accordingly.

How the contract value will be computed using quote price?

SEBI has specified formula for computing contract settlement value.

Contract Value = Rs 2000 * (100 - 0.25 * y), where y is the futures discount yield
E.g. for a quote price of Rs 95 the futures discount yield shall be 5% p.a. Therefore the
contract value shall be: 2000*(100 – 0.25* 5) = Rs 197500

How marked to market (MTM) value is calculated for the positions in T-Bill futures?

All the open positions are marked to market on T+1 day based on the daily settlement price
Daily settlement price (DSP) is computed as DSP = 100 – 0.25 * Yw

(Yw is weighted average futures yield of

last ½ hour subject to at-least five trade else,
last one hour subject to at-least five trades else,
last two hours subject to at-least five trades)

In the absence of above, theoretical futures yield shall be derived using T-Bill benchmark
rates as published by FIMMDA.

MTM settlement of 91 DTB futures shall be netted with other settlements of currency
derivatives segment.

What is the last trading day or expiry day of the contract month?

The contract shall expire on last Wednesday of the expiry month at 01.00 pm. If any expiry-
day is a trading holiday, then the expiry/last trading day would be previous working day.

What is final settlement methodology on expiry of futures contract?

The contract would be settled in cash in Indian rupees on expiry plus one working day. Final
settlement of the contract would be on weighted average price as published by RBI in 91
DTB auction result on expiry day.

What is the counterparty risk involved in 91 DTB futures transactions?

NSCCL acts as a central counterparty providing financial settlement guarantee for trades of
91 DTB futures. NSCCL has a robust risk management system and collects adequate margins
from participants to cover counterparty risks.

What are the various margins specified for 91 DTB futures positions by SEBI?
Initial Margin - NSCCL shall adopt SPAN® (Standard Portfolio Analysis of Risk) system for
the purpose of real time initial margin computation. The Initial Margin requirement shall be
based on a worst case loss of a portfolio of an individual client across various scenarios of
price changes. The various scenarios of price changes would be so computed so as to cover a
99% VaR over a one day horizon.
Initial margin would be subject to a minimum of 0.1 % of the notional value of the contract
on the first day of trading in 91-day T-bill futures and 0.05 % of the notional value of the
contract thereafter. The notional value of the contract shall be 200,000.
Extreme loss margin - Extreme loss margin shall be calculated at 0.03 % of the notional value
of the contract for all gross open positions.

What is the calendar spread margin specified for 91 DTB futures by SEBI?

Calendar spread margins shall be applicable only on spread positions:

Rs 100/- for spread of one month
Rs 150 for spread of two month
Rs 200/- for spread of three month
Rs 250/- for spread of four month and beyond

For a calendar spread position, the extreme loss margin shall be 0.01% of the notional value
of the far month contract. The benefit for a calendar spread would continue till expiry of the
near month contract.

What are the position limits specified by SEBI for 91 DTB futures?

Client level: The gross open positions of the client across all contracts should not exceed 6%
of the total open interest or Rs 300 crores whichever is higher
Trading Member level: The gross open positions of the trading member across all contracts
should not exceed 15% of the total open interest or Rs.1000 crores whichever is higher
Clearing Member level: No separate position limit is prescribed at the level of clearing
member. However, the clearing member shall ensure that his own trading position and the
positions of each trading member clearing through him is within the limits specified above
FIIs: The total gross long (bought) position in cash and Interest Rate Futures markets taken
together should not exceed their individual permissible limit for investment in government
securities and the total gross short (sold) position, for the purpose of hedging only, should not
exceed their long position in the government securities and in Interest Rate Futures, at any
point in time

What are the various forms of collaterals clearing members can provide towards their
margin requirement?
The collaterals can be provided in form of cash, fixed deposit receipts, bank guarantee,
Government of India securities (G-Sec), Cash market securities and Mutual fund units.
Approved list of G-Sec, cash market securities and mutual funds units with applicable haircut
is available on www.nseindia.com
No separate collaterals is required, existing collaterals of currency derivatives segment can be
used to trade this product.

What is STT applicable for 91 DTB futures?

Currently, there are no STT applicable for 91 DTB futures

5. REPOS 

Under a repo transaction, a holder of securities sells them to an investor with an agreement to
repurchase at a predetermined date and rate.

In a typical repo transaction, the counter-parties agree to exchange securities and cash, with a
simultaneous agreement to reverse the transactions after a given period. To the lender of cash,
the securities lent by the borrower serves as the collateral; to the lender of securities, the cash
borrowed by the lender serves as the collateral. Repo thus represents a collateralized short
term lending where cost of the transaction is the repo rate. The lender of securities (who is
also the borrower of cash) is said to be doing the repo; the same transaction is a reverse repo
in the books of lender of cash (who is also the borrower of securities).

A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired
with a simultaneous commitment to resell. Hence whether a transaction is a repo or a reverse
repo is determined only in terms of who initiated the first leg of the transaction. When the
reverse repurchase transaction matures, the counter-party returns the security to the entity
concerned and receives its cash along with a profit spread. One factor which encourages an
organization to enter into reverse repo is that it earns some extra income on its otherwise idle
cash.

A repo is also sometimes called a ready forward transaction as it is a means of funding by

selling a security held on a spot (ready) basis and repurchasing the same on a forward basis.
Though there is no restriction on the maximum period for which repos can be undertaken,
generally, repos are done for a period not exceeding 14 days. Different instruments can be
considered as collateral security for undertaking the ready forward deals and they include
Government dated securities, treasury bills.
Banks, PDs, institutions and corporate are permitted to undertake both repos and reverse
repos.

Repos being short term money market instruments are necessarily being used for
smoothening volatility in money market rates by central banks through injection of short term
liquidity into the market as well as absorbing excess liquidity from the system.

6. INTER­BANK PARTICIPATION CERTIFICATES (IBPC) 

The Inter Bank Participation Certificates are short term instruments to even out the short term
liquidity within the Banking system particularly when there are imbalances affecting the
maturity mix of assets in Banking Book. The primary objective is to provide some degree of
flexibility in the credit portfolio of banks. It can be issued by schedule commercial bank and
can be subscribed by any commercial bank.

The IBPC is issued against an underlying advance, classified standard and the aggregate
amount of participation in any account time issue. During the currency of the participation,
the aggregate amount of participation should be covered by the outstanding balance in
account.

There are two types of participation certificates, with risk to the lender and without risk to the
lender. Under ‘with risk participation’, the issuing bank will reduce the amount of
participation from the advances outstanding and participating bank will show the
participation as part of its advances. Banks are permitted to issue IBPC under ‘with risk’
nomenclature classified under Health Code-I status and the aggregate amount of such
participation in any account should not exceed 40% of outstanding amount at the time of
issue. The interest rate on IBPC is freely determined in the market. The certificates are
neither transferable nor prematurely redeemable by the issuing bank.

Under without risk participation, the issuing bank will show the participation as borrowing
from banks and participating bank will show it as advances to bank.

The scheme is beneficial both to the issuing and participating banks. The issuing bank can
secure funds against advances without actually diluting its asset-mix. A bank having the
highest loans to total asset ratio and liquidity bind can square the situation by issuing IBPCs.
To the lender, it provides an opportunity to deploy the short-term surplus funds in a secured
and profitable manner. The IBPC with risk can also be used for capital adequacy
management.
This is simple system as compared to consortium tie up.

7. BILL REDISCOUNTING 

Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit
to their customers by discounting commercial bills. This credit is repayable on maturity of the
bill. In case of need for funds, and can rediscount the bills in the money market and get ready
money.

Bills rediscounting is an important segment of the Money Market and this instrument
provides short-term liquidity to banks in need of funds. The effective cost of funds raised by
scheduled commercial banks through the bills rediscounting scheme is lower than the
effective cost of inter-bank term deposit/loans of over 60 days as the latter are subject to
reserve requirements; as such banks seeking funds through the money market find bill
rediscounting very lucrative. The presence of a healthy bills market can enable the banks and
also the other financial institutions to invest their surplus funds profitably by selecting
appropriate maturities and it would impart flexibility to the money market by evening out
liquidity in the banking system and there would be more effective monetary control.
Progressive use of bills imposes financial discipline on borrowers as also on lenders.
 SECURITIES BY GOVT/PSU/PFI 

1. GOVERNMENT OF INDIA DATED SECURITIES 

G-Secs or Government of India dated Securities are Rupees One hundred face-value units /
debt paper issued by Government of India in lieu of their borrowing from the market. These
form a part of the borrowing program approved by the parliament in the ‘union budget’.
These can be referred to as certificates issued by Government of India through the Reserve
Bank acknowledging receipt of money in the form of debt, bearing a fixed interest rate (or
otherwise) with interests payable semi-annually or otherwise and principal as per schedule,
normally on due date on redemption

G- Secs are normally issued in dematerialized form (SGL). When issued in the physical form
they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities,
have a period of 1 year to 20 years. Government Securities when issued in physical form are
normally issued in the form of Stock Certificates. Such Government Securities when are
required to be traded in the physical form are delivered by the transferor to transferee along
with a special transfer form designed under Public Debt Act 1944.

The transfer does not require stamp duty. The G-Secs cannot be subjected to lien. Hence, is
not an acceptable security for lending against it. Some Securities issued by Reserve Bank of
India like 8.5% Relief Bonds are securities specially notified & can be accepted as Security
for a loan.

What type of new G-Secs is issued by Government of India?

Earlier, the RBI used to issue straight coupon bonds i.e. bonds with a stated coupon payable
periodically. In the last few years, new types of instruments have been issued. These are:-

Inflation linked bonds:

These are bonds for which the coupon payment in a particular period is linked to the
inflation rate at that time - the base coupon rate is fixed with the inflation rate (consumer
price index-CPI) being added to it to arrive at the total coupon rate.

The idea behind these bonds is to make them attractive to investors by removing the
uncertainty of future inflation rates, thereby maintaining the real value of their invested
capital.
FRBs or Floating Rate Bonds comes with a coupon floater, which is usually a margin over
and above a benchmark rate. E.g., the Floating Bond may be nomenclature/denominated as
+1.25% FRB YYYY (the maturity year). +1.25% coupon will be over and above a
benchmark rate, where the benchmark rate may be a six month average of the implicit cut-off
yields of 364-day Treasury bill auctions. If this average works out 9.50% p.a. then the coupon
will be established at 9.50% + 1.25% i.e., 10.75%p.a. Normally FRBs (floaters) also bear a
floor and cap on interest rates. Interest so determined is intimated in advance before such
coupon payment which is normally, semi-annual.

Zero coupon bonds:

These are bonds for which there is no coupon payment. They are issued at a discount to face
value with the discount providing the implicit interest payment. In effect, zero coupon bonds
are like long duration T - Bills.

Who are the main investors of Govt. Securities in India?

Traditionally, the Banks have been the largest category of investors in G-secs accounting for
more than 60% of the transactions in the Wholesale Debt Market. The Banks are a prime and
captive investor base for G-secs as they are normally required to maintain 25% of their net
time and demand liabilities as SLR but it has been observed that the banks normally invest
10% to 15% more than the normal requirement in Government Securities because of the
following requirements:
• Risk free nature of the Government Securities
• Greater returns in G-Secs as compared to other investments of comparable nature

What is the issuance process of G-secs?

G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or
price-based (participants bid a price for a bond with a fixed coupon) auction basis. The
Auction can be either a Multiple price (participants get allotments at their quoted
prices/yields) Auction or a Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs
through which non-competitive bids will be allowed up to 5 percent of the notified amount in
the specified auctions of dated securities.

How can investors in India hold G-Secs?

G-Secs can be held in either of the following forms:

• Physical Security (which is mostly outdated & not used much)
• SGL (Subsidiary General Ledger) A/c with the Public Debt Office of the RBI. The SGL
A/c are however restricted only to few entities like the Banks & Institutions.
• Constituent SGL A/c with Banks or PDs who hold the G-secs on behalf of the investors
in their SGL-II A/c of RBI, meant only for client holdings.
 • Same Demat A/c as is used for equities at the Depositories. NSDL & CDSL will hold
them in their SGL-II A/c of RBI, meant only for client holdings.

What are ‘Gilt edged’ securities?

The term government securities encompass all Bonds & T-bills issued by the Central
Government, state government. These securities are normally referred to, as "gilt-edged" as
repayments of principal as well as interest are totally secured by sovereign guarantee.

’Gilt Securities’ are issued by the RBI, the central bank, on behalf of the Government of
India. Being sovereign paper, gilt securities carry absolutely no risk of default.

What are ‘Gilt Funds’?

Gilt funds, as they are conveniently called, are mutual fund schemes floated by asset
management companies with exclusive investments in government securities. The schemes
are also referred to as mutual funds dedicated exclusively to investments in government
securities. Government securities mean and include central government dated securities, state
government securities and treasury bills. The gilt funds provide to the investors the safety of
investments made in government securities and better returns than direct investments in these
securities through investing in a variety of government securities yielding varying rate of
returns gilt funds, however, do run the risk.. The first gilt fund in India was set up in
December 1998.

What is auction of Securities?

Auction is a process of calling of bids with an objective of arriving at the market price. It is
basically a price discovery mechanism. There are several variants of auction. Auction can be
price based or yield based. In securities market we come across below mentioned auction
methods.

French Auction System: After receiving bids at various levels of yield expectations, a
particular yield level is decided as the coupon rate. Auction participants who bid at yield
levels lower than the yield determined as cut-off get full allotment at a premium. The
premium amount is equivalent to price equated differential of the bid yield and the cut-off
yield. Applications of bidders who bid at levels higher than the cut-off levels are outright
rejected. This is primarily a Yield based auction.

Dutch Auction Price: This is identical to the French auction system as defined above. The
only difference being that the concept of premium does not exist. This means that all
successful bidders get a cut-off price of Rs. 100.00 and do not need to pay any premium
irrespective of the yield level bid for.

Private Placement: After having discovered the coupon through the auction mechanism, if on
account of some circumstances the Government / Reserve Bank of India decides to further
issue the same security to expand the outstanding quantum, the government usually privately
places the security with Reserve Bank of India. The Reserve Bank of India in turn may sell
these securities at a later date through their open market windiow albeit at a different yield.
On-tap issue: Under this scheme of arrangements after the initial primary placement of a
security, the issue remains open to yet further subscriptions. The period for which the issue
remains open may be sometimes time specific or volume specific

What is record date/shut period?

G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest
to the holders registered in its register on a certain date. Such date is known as record date.
Securities are not transferred in the books of issuer during the period in which such records
are updated for payment of interest etc. Such period is called as shut period. For G-Secs held
in Demat form (SGL) shut period is 3 working days.

What are the types of risks involved in investments in G-Sec?

G-Secs are usually referred to as risk free securities. However, these securities are subject to
only one type of risk i.e., interest-rate risk. Subject to changes in the overall interest rate
scenario, the price of these securities may appreciate or depreciate.

What is OMO, who conducts it and why is it conducted?

OMO or Open Market Operations is a market regulating mechanism often resorted to by

Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market regulator
keeps buying or/and selling securities through its open market window. It's decision to sell
or/and buy securities is influenced by factors such as overall liquidity in the system,
disciplining a sentiment driven market, signalling of likely movements in interest rate
structure, etc.

What is a Constituent SGL Account?

A Constituent Subsidiary General Ledger Account (CSGL) is a service provided by Reserve

Bank of India through Primary Dealers and Banks to those entities who are not allowed to
hold direct SGL Accounts with it. This account provides for holding of Central/State
Government Securities and Treasury bills in book entry/dematerialized form. Individuals are
also allowed to hold a Constituent SGL Account.

2. TREASURY BILLS 

Please refer section on Money Market Instruments.

3. STATE  GOVERNMENT  SECURITIES/STATE  DEVT  LOANS/STATE 

BONDS 
These are issued by the respective state governments but the RBI coordinates the actual
process of selling these securities. Each state is allowed to issue securities up to a certain
limit each year. The planning commission in consultation with the respective state
governments determines this limit. Generally, the coupon rates on state loans are marginally
higher than those of GOI-Secs issued at the same time.

The procedure for selling of state loans, the auction process and allotment procedure is
similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and
other modalities are similar to GOI-Secs. They are also issued in dematerialized form.

SGL Form State Government Securities are also issued in the physical form (in the form of
Stock Certificate) and are transferable. No stamp duty is payable on transfer for State Loans
as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.

4. GOVERNMENT OF INDIA 8 % SAVING BONDS 

The Government of India 8 per cent Savings Bonds, 2003 (taxable) scheme is another
instrument suitable for investors seeking returns that are fixed and assured. GOI Savings
Bonds may not be terrific investment option if you are looking for capital appreciation or a
substantial margin over inflation.

Further, investments in RBI’s 8% Savings Bonds do not qualify for Income Tax Deductions
and interest earned is fully taxable. However, unlike other saving instruments, they are risk-
free.

Who can invest:

A. An individual;
a. Who is not a Non-resident Indian
b. In his or her individual capacity or
c. On joint basis, or
d. Anyone or survivor basis, or
e. On behalf of a minor as father/mother/legal guardian.
B. A Hindu Undivided Family
C. An Institution
1. ‘Charitable Insititution’ under section 25 of the Indian Companies Act 1956.
2. Institution obtained Certificate Of Registration as charitable institution .
3. Any Institution which obtained certificate from Income Tax Authority
U/S 80G of Income Tax Act ,1961.
“UNIVERSITY” established or incorporated by Central, State or Provincial Act, U/S
3 of University Grants Commission Act, 1956 (3 of 1956) .

Mode of Holding

Bonds are issued in the form of Bond Ledger Account in denominations of Rs. 1000/- These
bonds are not transferable. A nomination facility is available..

Liquidity
These bonds cannot be traded in secondary market. The good thing is that investors can get a
loan against these bonds, from select banks.

Salient Features

• Minimum Contribution : Rs.1,000 (Investment in multiples of 1000); no maximum

limit on investment

• Maturity Period: The tenure of the bond is 6 years from the date of issue. No interest
would accrue after the maturity of the bond.
• Options Available : 1) Half Yearly Interest Payable, 2) Cumulative
• Rate of Interest: Bonds will bear interest @ 8.00% p.a. and are payable half-yearly.
The interest payment dates are February 1 and August 1 for non-cumulative
investments. For investors who have chosen the cumulative option, the value of the
investments at the end of 6 years would be Rs. 1601/- (being Principal and Interest)
for every Rs. 1000/- invested. Interest on the Bonds is taxable under Income Tax Act
1961.
• Compounding Frequency : Half Yearly Compounding for Cumulative
• Premature Withdrawal : Not allowed
• Nomination Facility : Nomination facility is available for Individual investment for
sole holder or surviving holder basis. This facility is not be available for joint
holdings and minor investment.
• Tax Exemptions : No income tax exemption available, however, the bonds will be
exempt from Wealth-Tax under the Wealth-Tax Act, 1957.
• Tax on Interest : Fully Taxable

CORPORATE FIXED INCOME SECURITIES 

1. DEBENTURE 

A Debenture is a debt security issued by a company (called the Issuer), which offers to pay
interest in lieu of the money borrowed for a certain period. In essence it represents a loan
taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument
and repays the principal normally, unless otherwise agreed, on maturity.
These are long-term debt instruments issued by private sector companies. These are issued in
denominations as low as Rs 1000 and have maturities ranging between one and ten years.
Long maturity debentures are rarely issued, as investors are not comfortable with such
maturities
Debentures enable investors to reap the dual benefits of adequate security and good returns.
Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits they can be
transferred from one party to another by using transfer from. Debentures are normally issued
in physical form. However, corporate/PSUs have started issuing debentures in Demat form.
Generally, debentures are less liquid as compared to PSU bonds and their liquidity is
inversely proportional to the residual maturity. Debentures can be secured or unsecured.

What are the different types of debentures?

Debentures are divided into different categories on the basis of:

(1) Convertibility of the instrument

(2) Security

Debentures can be classified on the basis of convertibility into:

• Non Convertible Debentures (NCD): These instruments retain the debt character and
cannot be converted in to equity shares
• Partly Convertible Debentures (PCD): A part of these instruments are converted into
Equity shares in the future at notice of the issuer. The issuer decides the ratio for
conversion. This is normally decided at the time of subscription.
• Fully convertible Debentures (FCD): These are fully convertible into Equity shares at
the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion
the investors enjoy the same status as ordinary shareholders of the company.
• Optionally Convertible Debentures (OCD): The investor has the option to either
convert these debentures into shares at price decided by the issuer/agreed upon at the
time of issue.

On basis of Security, debentures are classified into:

• Secured Debentures: These instruments are secured by a charge on the fixed assets of
the issuer company. So if the issuer fails on payment of either the principal or interest
amount, his assets can be sold to repay the liability to the investors
• Unsecured Debentures: These instrument are unsecured in the sense that if the issuer
defaults on payment of the interest or principal amount, the investor has to be along
with other unsecured creditors of the company.

What is exactly meant by the term secured redeemable debenture?

 Secured refers to the security given by the issuer for the loan transaction represented by the
debenture. This is usually in the form of a first mortgage or charge on the fixed assets of the
company on a pari-passu basis with other first charge holders like financial institutions etc.
Sometimes, the charge can also be a second charge instead of a first charge. Most of the times
the charge is created on behalf of the entire pool of debenture holders by a trustee specifically
appointed for the purpose.

Redeemable refers to the process whereby the debenture is extinguished on payment of all the
obligations due to the holder after the repayment of the last instalment of the principal
amount of the debenture.

What is a difference between a bond and a debenture?

Long-term debt securities issued by the Government of India or any of the State
Government’s or undertakings owned by them or by development financial institutions are
called as bonds. Instruments issued by other entities are called debentures. The difference
between the two is actually a function of where they are registered and pay stamp duty and
how they trade.

Debenture stamp duty is a state subject and the duty varies from state to state. There are two
kinds of stamp duties levied on debentures viz. issuance and transfer. Issuance stamp duty is
paid in the state where the principal mortgage deed is registered. Over the years, issuance
stamp duties have been coming down. Stamp duty on transfer is paid to the state in which the
registered office of the company is located. Transfer stamp duty remains high in many states
and is probably the biggest deterrent for trading in debentures in physical segment, resulting
in lack of liquidity.

On issuance, stamp duty is linked to mortgage creation, wherever applicable while on

transfer, it is levied in accordance with the laws of the state in which the registered office of
the company in question is located. A debenture transfer has to be effected through a transfer
form prescribed for under Companies Act.

Issuance of stamp duty on bonds is under Indian Stamp Act 1899 (Central Act). A bond is
transferable by endorsement and delivery without payment of any transfer stamp duty.

What is a Secured Premium Note (SPN)?

SPN is a secured debenture redeemable at premium issued along with a detachable warrant,
redeemable after a notice period, say four to seven years. The warrants attached to SPN gives
the holder the right to apply and get allotted equity shares; provided the SPN is fully paid.
There is a lock-in period for SPN during which no interest will be paid for an invested
amount. The SPN holder has an option to sell back the SPN to the company at par value after
the lock in period. If the holder exercises this option, no interest/ premium will be paid on
redemption. In case the SPN holder holds it further, the holder will be repaid the principal
amount along with the additional amount of interest/ premium on redemption in instalments
as decided by the company. The conversion of detachable warrants into equity shares will
have to be done within the time limit notified by the company.

2. DEEP DISCOUNT BONDS 
A bond that sells at a significant discount from par value and has no coupon rate or lower
coupon rate than the prevailing rates of fixed-income securities with a similar risk profile.
They are designed to meet the long term funds requirements of the issuer and investors who
are not looking for immediate return and can be sold with a long maturity of 25-30 years at a
deep discount on the face value of debentures.

3. PSU BONDS 

These are Medium or long term debt instruments issued by Public Sector Undertakings
(PSUs). The term usually denotes bonds issued by the central PSUs (ie PSUs funded by and
under the administrative control of the Government of India). Most of the PSU Bonds are
sold on Private Placement Basis to the targeted investors at Market Determined Interest
Rates. Often investment bankers are roped in as arrangers to this issue. Most of the PSU
Bonds are transferable and endorsement at delivery and are issued in the form of Usance
Promissory Note.

In case of tax free bonds, normally such bonds accompany post dated interest cheque /
warrants.

4. BONDS OF PFIs/AIFIs 

Apart from public sector undertakings, Financial Institutions are also allowed to issue bonds.
They issue bonds in 2 ways:-

1) Through public issues targeted at retail investors and trusts

2) Through private placements to large institutional investors.

PFIs offer bonds with different features to meet the different needs of investors eg. Monthly
return bonds, Quarterly coupon bearing Bonds, cumulative interest Bonds, step up bonds etc.
Some PFIs are allowed to issue bonds (as per their respective Acts) in the form of Book entry
hence, PFIs like IDBI, EXIM Bank, NHB, do issue Bonds in physical form (in the form of
holding certificate or debenture certificate as the case may be,in book entry form) PFIs who
have provision to issue bond in the form of book entry are permitted under the Respective
Acts to design a special transfer form to allow transfer of such securities. Nominal stamp duty
/ transfer fee is payable on transfer transactions.

5. INFRASTRUCTURE BONDS 

What are tax‐saving infrastructure bonds? 

These  are  special  bonds  issued  by  institutions  such  as  Industrial  Finance  Corporation  of 
India,  Infrastructure  Development  Finance  Corporation  and  any  non‐banking  financial 
company,  also  called  infrastructure  finance  company  by  the  Reserve  Bank  of  India.  In 
financial year 2010‐11, the likes of Larsen & Toubro, India Infrastructure Finance Company 
Limited, Power Finance Corporation and IDFC issued these in tranches. Next year, these will 
be issued again. 
Why have these been introduced? 

These  are  long‐term  bonds,  which  will  invest  in  government's  infrastructure  projects.  The 
issuing companies act as intermediaries, borrowing from investors and lending, or investing 
in such long gestation projects. The maturity period for these bonds is mostly 10‐15 years. 
Usually, these have a lock‐in period of five‐seven years. Post this, the issuer can exercise the 
buyback option. These bonds also get listed on the stock exchanges, providing you a second 
exit route. But these are not traded actively in the secondary market. 

Returns from these bonds will not exceed the yield on 10‐year government securities. You 
can choose from an annual or cumulative payout. In the former, you will receive the interest 
amount  each  year.  While  in  the  latter,  the  interest  gets  added  to  the  investment  amount 
each year and enjoys the benefit of compounding over the investment period. 

Why should you invest? 

Investment in infrastructure bonds is advisable from a tax‐planning perspective, as you get 
an additional exemption on Rs 20,000. There is a special section ‐‐ 80CCF ‐‐ that the Ministry 
Of Finance has added to the Income Tax Act for the same. However, taxpayers can consider 
investing in these bonds, only once they have exhausted the Section 80C limit of Rs 100,000. 
Individuals  belonging  to  the  highest  income  tax  paying  group  (falling  in  the  30.9  per  cent 
bracket), across all age groups can also look at this product. 

Senior citizens, in the highest tax bracket, can opt for an annual payout for a regular return.  

The Rs 20,000 invested in these bonds will be exempted from taxation under Section 80CCF, 
but the interest earned will be added to your income and taxed according to the slab. 

6. CORPORATE BONDS 

Corporate  Bonds  are  issued  by  public  sector  undertakings  and  private  corporations  for  a 
wide range of tenors but normally upto15 years. However, some Banks and Companies like 
Reliance have also issued Perpetual Bonds. 

Compared  to  government  bonds,  corporate  bonds  generally  have  a  higher  risk  of  default. 
This risk depends, of course, upon the particular corporation issuing the bond, its rating, the 
current  market  conditions  and  the  sector  in  which  the  Company  is  operating.  Corporate 
bond  holders  are  compensated  for  this  risk  by  receiving  a  higher  yield  than  government 
bonds.  Some  corporate  bonds  have  an  embedded  call  option  that  allows  the  issuer  to 
redeem the debt before its maturity date. Some even carry a put‐option for the benefit of 
the  investors.  Other  bonds,  known  as  convertible  bonds,  allow  investors  to  convert  the 
bond into equity. 
 7. COMPANY DEPOSITS 

When it comes to investments, all of us would like to earn higher and secured returns. If you 
also  belong  to  the  same  category,  corporate  Fixed  Deposits  (FDs)  pose  a  good  option  in 
these times of high inflation and inflation FD rates. However, one needs to look at following 
aspects  of  corporate  FDs  to  understand  the  characteristics  and  nature  of  returns  to 
understand this investment instrument.  

Characteristics 

1. Corporate FDs usually earn higher interest rates as compared to bank FDs (can range from 
9% to 16%). 

2. Like bank FDs, they are good source of monthly, quarterly, half‐yearly or yearly interest 
income.  

3. The tenure is flexible, ranging from six months to seven years.  

4. Also, there is no tax deduction at source for FDs earning interest of up to Rs 5,000 a year.  

5. Unlike  bank  FDs,  corporate  FDs  give  you  an  option  to  choose  a  nominee  for  your 
investment.  

6. In addition, the operational process is hassle‐free, resulting in easy opening of corporate 
accounts. In some cases, even PAN card is not allowed.  

7. On the other hand, corporate FDs are not as secured as bank FDs as all the returns shown 
are projected and not guaranteed.  

Comparison  of  Well‐Known 

Corporate  FDs 

 
Rating Decoder 

Fixed deposits are credit rated by independent credit rating agencies such as CRISIL, ICRA, 
etc. Credit rating agencies give ratings to debt instruments on basis of detailed study of the 
financial and non‐financial performance of the company that issues fixed deposit schemes. 
The  rating  reveals  whether  the  company  will  be  able  to  repay  the  promised  amount  at 
maturity or not. 

Issues with Corporate FDs 

1. Default  risk:  These  companies’  FDs  carry  ‘Default  Risk’,  which  means,  at  maturity  they 
might not be able to return at projected interest rate and default in payment. 

2. Unsecured  investments:  Bank  fixed  deposits  are  backed  by  RBI’s  insurance  for  securing 
amount up to Rs 1 lakh. It means that in case you have invested in bank FD, you will get Rs 1 
lakh, even if the bank defaults in paying you back. However, there is no security like this in 
corporate FDs, resulting in investor losing all his money. 

3. Operational risk: Another problem with corporate FDs is that the companies are slow and 
irresponsible in maintenance and updating of FD holders’ records. Because of this, there can 
be  instances  of  delayed  documentation  like  receipt  of  FD,  other  papers,  etc.  Also,  it  can 
cause problems in case of change of address, etc. as it may take longer. 

4. High sales commission attached: The corporate houses, generally, pay hefty commissions 
to their sales agents to push their FDs well in market. As a result, sales agents do indulge in 
mis‐selling, keeping investors’ unaware of the critical aspects of the instrument. 

In case you have checked these facts and you find that the fixed deposit you are interested 
in scores good in all those parameters that mattered, your risk will be minimized. 

It  is  important  to  decide  on  the  basis  of  the  following  factors  to  ensure  safety  of  your 
money: 

1. If rating is same for more than one company, choose the one with better reputation. It 
necessarily  gives  an  edge  to  choose  a  company  with  better  market  reputation  and 
performance record, as it will increase the chances of getting good returns. Also, it further 
decreases the chances of default. 

2. Check promoter’s credibility. Credibility, here, includes director and other key persons of 
the company. Persons known for bad credit discipline and companies with bad repayment 
track records should be kept away from portfolio.  

3. Do not park huge amounts in one company. In case you have huge amount to invest in 
and find corporate FDs suitable enough, try to diversify your investments by investing in 2‐3 
different companies, with different investment horizons. This would minimize  the chances 
of  loss,  even  if  one  of  those  corporate  FD  is  not  giving  good  returns.  Also,  it  would  be 
advisable to find out whether the funds accumulated were used for stated purpose or not. 

4. Invest only if no premature withdrawal is foreseen as premature withdrawal in corporate 
FDs is difficult to deal with. There are real time instances,  where it has been more than 5 
years of FD maturity, but the investors are still waiting for proceeds. 

Here,  if  the  goal  is  of  utter  importance,  for  which  money  cannot  be  compromised,  it  is 
advisable to invest in bank FDs, instead of corporate ones. 

Regulating Public Deposits  

Company Deposits are issued to the general public and hence also known as Public deposits. 

The  public  deposits  are  regulated  by  the  provisions  of  the  Companies  Act  and  the 
Companies (Acceptance of Deposit) Rules, 1975. According to them, the following amounts 
are not included in the expression 'deposits':‐ 

ƒ Any amount received from the Central Government or a State Government, local
authority, foreign Government, any foreign citizen or authority or any other source
whose repayment is guaranteed by the Central Government or a State Government
ƒ Any amount received as a loan from any banking company, State Bank of India or its
subsidiaries, a nationalised bank or co-operative bank
 ƒ Any amount received as a loan from any of the notified financial institutions
ƒ Any amount received by a company from any other company
ƒ Any amount received from an employee of the company by way of security deposit
ƒ Any amount received by way of security or as an advance from any purchasing,
selling or other agents in the course of or for the purposes of the business of the
company
ƒ Any amount received by way of subscriptions to any shares, stock, bonds or
debenture pending the allotment of such shares, etc., and calls in advance on shares
ƒ Any amount received in trust or any amount in transit
ƒ Any amount received from directors of the company or from its shareholders by a
private company
ƒ Any amount of unsecured loans brought in by the promoters in pursuance of
stipulations of financial institutions or loans provided by the promoters themselves
and/or by their relatives but not by their friends and business associates.

Under the Companies Act and the rules framed there‐under, the invitation and acceptance 
of deposits by companies is subjected to the following conditions:‐ 

ƒ Companies are not permitted to raise unlimited amounts of fund through public
deposits. The aggregate of all outstanding deposits cannot exceed certain prescribed
percentage of the paid up capital and free reserves of the company.
ƒ Invitations of deposits by a company can be made only by means of an advertisement
specifying the financial position, management structure and other particulars relating
to a company. A company which has defaulted in repayment of deposit or interest
thereon is prohibited from inviting deposits.
ƒ The depositors shall fill the application form supplied by the company. The company
in return issues a deposit receipt which is an acknowledgement of debt by the
company. The terms and conditions of the deposit are printed on the back of the
receipt. The company shall maintain a register of deposits containing the prescribed
particulars and file returns of deposits duly certified by their auditor with a Registrar
on or before 30th June of every year.
ƒ The interest to be allowed on such deposits by the company must be in accordance
with the rate fixed by the Government. The rate of interest on deposits also varies
depending upon the period of deposit and the reputation of the company.

The  Companies  (Amendment)  Act,  2000  has  inserted  certain  new  sections,  in  order  to 
protect  the  interests  of  small  depositors.  The  expression  'small  depositor'  means  ''a 
depositor  who  has  deposited  (in  a  financial  year)  a  sum  not  exceeding  twenty  thousand 
rupees  in  a  company  and  includes  his  successors,  nominees  and  legal  representatives".  In 
case of any default by the company in paying back to them, it shall inform the Company Law 
Board within sixty days from the date of default. The Company Law Board will then direct 
the  company  to  repay  to  small  depositors  within  a  period  of  thirty  days  from  the  date  of 
receipt  of  intimation  of  default.  On  failure  to  comply  with  the  orders  of  the  Board,  the 
company and its directors shall be punishable with imprisonment and payment of daily fine 
during  the  period  in  which  such  non‐compliance  continues.  However,  if  such  a  defaulting 
company wants to invite deposits from small depositors, it shall state the complete nature 
of default in all its future advertisements and application form.  
Besides, the Reserve Bank of India issues directives from time to time for regulating public 
deposits.  These  are  aimed  at  safeguarding  the  interest  of  the  public  and  to  give  them  a 
feeling of security in investing in the public deposits. 

BANK DEPOSITS 
Bank deposits serve different purposes for different people. Some people cannot save
regularly; they deposit money in the bank only when they have extra income. The purpose of
deposit then is to keep money safe for future needs. Some may want to deposit money in a
bank for as long as possible to earn interest or to accumulate savings with interest so as to
buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen, deposit all
their income from sales in a bank account and pay all business expenses out of the deposits.
Keeping in view these differences, banks offer the facility of opening different types of
deposit accounts by people to suit their purpose and convenience.

On the basis of purpose they serve, bank deposit accounts may be classified as follows:

a. Savings Bank Account

b. Current Deposit Account
c. Fixed Deposit Account
d. Recurring Deposit Account.

1. SAVING BANK DEPOSIT ACCOUNT 
If a person has limited income and wants to save money for future needs, the Saving Bank
Account is most suited for his purpose. This type of account can be opened with a minimum
initial deposit that varies from bank to bank. Money can be deposited any time in this
account. Withdrawals can be made either by signing a withdrawal form or by issuing a
cheque or by using ATM card. Normally banks put some restriction on the number of
withdrawal from this account. Interest is allowed on the balance of deposit in the account.
The rate of interest on savings bank account varies from bank to bank and also changes from
time to time. A minimum balance has to be maintained in the account as prescribed by the
bank.

SAVING INTEREST RATE DEREGULATION 

As part of its deregulation drive, Reserve bank of India has deregulated interest rates on all 
deposits  (except  the  saving  deposit)  long  back.  This  step  increased  competition  among 
banks and now depositors have the choice to figure out the highest fixed deposit rate and 
use the bank that offers it. With effect from 25th October, 2011, RBI has deregulated interest
rates on saving accounts and banks are now free to decide the same within certain conditions
imposed by RBI.

These are:

• First, each bank will have to offer a uniform interest rate on savings bank deposits up to
Rs.1 lakh, irrespective of the amount in the account within this limit.
• Second, for savings bank deposits over Rs.1 lakh, a bank may provide differential rates of
interest, if it so chooses, subject to the condition that banks will not discriminate in the
matter of interest paid on such deposits, between one deposit and another of similar
amount, accepted on the same date, at any of its offices.

One of the biggest advantages of saving account interest rate deregulation will be that the 
policy rate hike will also reflect in saving accounts interest rate. A matured economy cannot 
afford  to  have  such  differences  in  the  market  rate  and  saving  accounts  rate.  Moreover, 
inflation  is  stubbornly  high  for  last  couple  of  quarters.  The  real  interest  rate  from  savings 
account is negative by a huge margin.  

On the very first day itself Yes Bank announced the increase of Saving Fund Interest from
4% to 6%. Other banks are likely to announce the changes in Saving fund interests in the
near future. The following are some of the banks which are offering Best / Highest / Top /
Maximum Interest Rates on Saving Accounts

Best
Rate of
Interest
Maximum Rate of Interest on on
Name of the Bank /
Saving Accounts (for balance Saving Wef
Institution
upto Rs.1 lac) Accounts
(balance
ABOVE
Rs.1 lac)
Yes Bank 6.00% 6.00% 26/10/2011
Kotak Mahindera Bank 5.50% 6.00% 01/11/2011
IndusInd Bank 5.50% 6.00% 01/11/2011
The Ratnakar Bank 5.50% 5.50% 01/11/2011
Saraswat Bank 6.00% 6.00% 30/11/2011

2. CURRENT DEPOST ACCOUNT

Big businessmen, companies and institutions such as schools, colleges, and hospitals have to
make payment through their bank accounts. Since there is restriction on number of
withdrawals from savings bank account, that type of account is not suitable for them. They
need to have an account from which withdrawal can be made any number of times. Banks
open current account for them. Like savings bank account, this account also requires certain
minimum amount of deposit while opening the account. On this deposit bank does not pay
any interest on the balances. Rather the accountholder pays certain amount each year as
operational charge. For the convenience of the accountholders banks also allow withdrawal
of amounts in excess of the balance of deposit. This facility is known as overdraft facility. It
is allowed to some specific customers and upto a certain limit subject to previous agreement
with the bank concerned.

3. RECURRING DEPOSIT ACCOUNT 

These kind of deposits are most suitable for people who do not have lump sum amount of 
savings, but are ready to save a small amount every month.    Normally, such deposits earn 
interest on the amount already deposited (through monthly instalments) at the same rates 
as are applicable for Fixed Deposits / Term Deposits.   These are best if you wish to create a 
fund for your child's education or marriage of your daughter or buy a car without loans. 
Under  these  type  of  deposits,  the person  has to  usually  deposit  a  fixed  amount  of  money 
every  month  (usually  a  minimum  of  Rs,  100/‐  p.m.).    Any  default  in  payment  within  the 
month attracts a small penalty.    However, some Banks besides offering a fixed instalment 
RD,  have  also  introduced  a  flexible  /  variable RD.  Under  these  flexible  RDs  the  person  is 
allowed  to  deposit  even  higher  amount  of  instalments,  with  an  upper  limit  fixed  for  the 
same e.g. 10 times of the minimum amount agreed upon. 

Such accounts are normally allowed for maturities ranging from 6 months to 120 months. A  
Pass book is usually issued wherein the person can get the entries for all the deposits made 
by  him  /  her  and  the  interest  earned.     Premature  withdrawal  of  accumulated  amount 
permitted  is  usually  allowed  (however,  penalty  may  be  imposed  for  early  withdrawals).    
These accounts can be opened in single or joint names. Nomination facility is also available. 

4. FIXED DEPOSIT ACCOUNT 

All Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days 
to  10  years.    The  term  "fixed"  in  Fixed  Deposits  (FD)  denotes  the  period  of  maturity  or 
tenor.  Therefore,  the  depositors are  supposed  to  continue  such  Fixed  Deposits  for 
the length  of  time  for  which  the  depositor  decides  to  keep  the  money  with  the  bank.  
However, in case of need, the depositor can ask for closing (or breaking) the fixed deposit 
prematurely  by  paying  a  penalty  (usually  of  1%,  but  some  banks  either  charge  less  or  no 
penalty).   (Some banks   introduced variable interest fixed deposits.  The rate of interest on 
such  deposits keeps  on  varying  with  the  prevalent  market  rates  i.e.  it  will  go  up  if  market 
interest rates go up and it will come down if the market rates fall.  However, such type of 
fixed deposits has not been popular till date). 

The rate of interest for Fixed Deposits differs from bank to bank (unlike previously when the 
same were regulated by RBI and all banks used to have the same interest rate structure.   
The  earlier  trend  that  private  sector  and  foreign  banks  offer  higher  rate  of  interest  is  no 
more valid these days.  However, small banks are forced to offer higher rate of interest to 
attract  more  deposits.     Usually  a  bank  FD  is  paid  in  lump  sum  on  the  date  of  maturity.  
However, some banks have facility to pay interest at the end of every quarter.  If one desires 
to  get  interest  paid  every  month,  then the  interest  paid  will be  at  a  marginal  discounted 
rate.  In the changed computerized environment, now the Interest payable on Fixed Deposit 
can  also  be  easily  transferred  on  due  dates  to  Savings  Bank  or  Current  Account  of  the 
customer 

At  present,  the  interest  rate  on  a  one‐year  fixed  deposit  is  hovering  around  9.25%  per 
annum. For longer‐term deposits of 3‐5 years, the rates are in range of 8.25% to 9.25%. 

Risk factors in fixed deposits by banks 

The only risk that most depositors are aware of is the failure on the part of the bank to allow 
depositors to redeem their investment on maturity. But again, deposits of up to Rs 1 lakh 
are insured. Therefore, investments of Rs 1 lakh or less are default‐proof.  
 
However, there is another risk that depositors are either not aware of or ignore ‐ the 
reinvestment risk. This refers to the possibility that, if the interest rate cycle were to turn, 
you may have to settle for a lower rate of interest when your deposit comes up for renewal. 
That is assuming that you would not need the money then and, hence, would prefer to 
extend the tenure of the investment.  
 
The reinvestment risk will always be there. You may be able to earn good returns on your 
fixed deposit for a period of say one year, but, after that, the interest rate offered could be 
lower.  

Short-term versus long-term

Usually, rates on short-term fixed deposits of 1-2 years are higher than on deposits with
tenures of 3-5 years and beyond. Understandably, the tendency among individuals is to lap up
shorter-maturity deposits, since the yield is higher and also the lock-in period is shorter,
cutting down the wait involved.

Monitoring FDs

When you make a deposit, a bank asks you whether you want to opt for auto renewal on
completion of the term or want to take the maturity amount. It's tempting to go for the auto
renewal option so that even if you oversleep, you don't lose out on the interest after the
deposit matures. Almost 90% of the investors are opting for auto renewal.

This facility suits people who have no time to track their fixed deposits. However, auto
renewal may not be the best option for investors, especially in the current scenario, when the
interest rates on deposits of certain tenures can be far higher. If the investor has opted for auto
renewal, he may be missing out on an opportunity to earn a better rate. This can be as high as
1 percentage point. If you don't provide an instruction, the deposit will be renewed at the
prevailing rate for the same tenure.

You need to keep an eye on the calendar for the maturity dates of your deposits. Make an
entry in the diary or set a reminder on the due date. In this manner, you will be able to switch
to another term or maybe another bank depending on the rates available when your deposit
matures
You also need to be watchful of the interest rates because the frequency of changes in deposit
rates has increased. Earlier, interest rates used to change once a year when the RBI made any
policy changes. Now, with frequent tweaking of the repo rate and other policy rates, fixed
deposit rates are changing almost every quarter.

Some more tips:

• You should try to keep your surplus funds in Fixed Deposit for a longer duration if
you feel you will not need the funds during the tenure of the deposit, as longer
maturity deposits usually give higher returns. However, in recent times, banks have
frequently been giving higher interest for shorter durations as such banks do not want
to lock their liabilities at a higher rate of interest as they are of the view that soon
interest rates will come down.

If you feel that interest rates of longer duration deposits are going to fall in future, you should
opt for longer duration of fixed deposits so that you can continue to earn higher interest. If
you feel that interest rates are likely to go up in near future, you should opt for the fixed
deposits for short maturities, so that as and when the interest rates go up, you should be able
to re-invest the funds at a higher rate.

If you plan to invest large sum say, Rs.1,00,000/- or above, you may opt for more than one
fixed deposits in different banks or branches or of different durations in the same bank , as in
case of emergency, pre-mature cancellation can be got done only for one FD. (However,
nowadays some banks allow pre-mature option for part withdrawals also).

• If you keep large sums of money in savings account or current accounts, but wants
full liquidity, you may opt for schemes like 2-in1 deposits or smart deposits or auto
sweep, where bank keeps a minimum sum in your saving account all the time and all
the amounts above that will be automatically shifted to a fixed deposit. Such banks
even allow automatic pre-mature cancellation as and when some cheques are
presented for payment.

MAX FIXED DEPOST RATES IN INDIA (updated upto 19 oct 2011)

Interest
S.No. Bank Tenure
Rate
1 year to
1 Lakshmi Vilas Bank less than 10.50%
2 years
1 year to
Tamil Nadu Mercantile
2 less than 10.25%
Bank
2 years
1 year to
3 City Union Bank less than 10.25%
2 years
4 Dhanalaxmi Bank 300 days 10.00%
5 State Bank of Travancore 500 days 10.00%
6 South Indian Bank 300 days 10.00%
 1 year to
7 Karur Vysya Bank 10.00%
2 years
8 State Bank of Patiala 999 days 9.75%
250 to
9 Syndicate Bank 9.55%
364 days
10 Punjab and Sind Bank 500 days 9.75%
1 year to
11 Karnataka Bank 9.75%
2 years
12
12 Corporation Bank 9.65%
months
13 Yes Bank 480 days 9.60%
14 Kotak Bank 700 days 9.50%
15 IDBI Bank 500 days 9.50%
2 years to
16 J&K Bank less than 9.50%
3 years
17 Federal Bank 1 year 9.50%
18 Central Bank of India 555 days 9.40%
1 year to
less than
19 Axis Bank 9.40%
14
months
20 Andhra Bank 1 year 9.40%
2 years to
21 Vijaya Bank less than 9.35%
3 years
22 Bank of Baroda 444 days 9.35%
23 Dena Bank 1 year 9.25%
24 Canara Bank 1 year 9.25%
25 Indian Overseas Bank 1 year 9.25%
26 ICICI Bank 990 days 9.25%
27 Bank of India 555 days 9.25%
1 year to
28 Indian Bank less than 9.50%
3 years

POST OFFICE SCHEMES 
Small savings schemes are designed to provide safe & attractive investment options to the
public and at the same time to mobilise resources for development.
OPERATING AGENCIES :

Ø These schemes are operated through about 1.54 Lakh post offices throughout the country.
Ø Public Provident Fund Scheme is also operated through about 8000 branches of public
sector banks in addition to the post offices.
Ø Deposit Schemes for Retiring Employees are operated through selected branches of public
sector banks only
INSTITUTIONAL INVESTMENT IN SMALL SAVINGS SCHEMES :

These schemes being primarily meant for small urban and rural investors; institutions
are not eligible to invest in major small savings schemes.

N.R.Is’ INVESTMENT IN SMALL SAVINGS SCHEMES :

The Non-Resident Indians (NRIs.) are not eligible to invest in small savings schemes
including Public Provident Fund (PPF) and Deposit Schemes For Retiring Employees.

SNAPSHOT OF THE POST OFFICE SCHEMES AVAILABLE 

SCHEME Interest Payable, Investment Limits Salient features including Tax

Rates, and Denominations Rebate
Periodicity etc.
PostOffice 3.5% per annum Minimum INR 50/-. Cheque facility available.
Savings Interest Tax Free.
on individual/
Account
joint accounts.
5-YearPost On maturity INR Minimum INR 10/- per One withdrawal upto 50% of
Office
10/- account month or any amount the balance allowed after one
Recurring
Deposit fetches INR in multiples of INR 5/-. year. Full maturity value
Account
728.90/-. Can be No maximum limit. allowed on R.D. Accounts
 continued for restricted to that of INR. 50/-
another 5 years denomination in case of death
on year to year of depositor subject to
basis. fulfillment of certain
conditions. 6 & 12 months
Rate of interest
advance deposits earn rebate.
7.5% (quarterly
compounded).
PostOffice Interest payable Minimum INR 200/- Account may be opened by
Time
annually but and in multiple thereof. individual. 2,3 & 5 year account
Deposit
Account calculated No maximum limit. can be closed after 1 year at
quarterly. discount. Account can also be
closed after six months but
Period Rate
before one year without
1 yr. A/c interest. The investment under
6.25%
this scheme qualify for the
2 yr. A/c benefit of Section 80C of the
6.50%
Income Tax Act, 1961 from
3 yr. A/c 1.4.2007.
7.25%

5 yr. A/c
7.50%
PostOffice 8% per annum In multiples of INR Maturity period is 6 years. Can
Monthly
payable i.e. INR 1500/- Maximum INR be prematurely encashed after
Income
Account 80/- will be paid 4.5 lakhs in single one year but before 3 years at
every month on a account and INR 9 the discount of 2% of the
deposit of INR lakhs in joint account. deposit and after 3 years at the
12000/-. discount of 1% of the deposit.
(Discount means deduction
from the deposit.) A bonus of
5% on principal amount is
admissible on maturity in
respect of MIS accounts opened
on or after 8.12.07.
15year 8% per annum Minimum INR. 500/- Deposits qualify for deduction
Public
(compounded Maximum INR. from income under Sec. 80C of
Provident
Fund yearly). 70,000/- in a financial IT Act. Interest is completely
Account
year. Deposits can be tax-free. Withdrawal is
made in lumpsum or in permissible every year from 7th
12 installments. financial year. Loan facility
available from 3rd Financial
year. No attachment under court
decree order.
KisanVikas Money doubles in No limit on investment. A single holder type certificate
Patra
8 years & 7 Available in may be issued to an adult for
months. Facility denominations of INR. himself or on behalf of a minor
for premature 100/-, INR. 500/-, INR. or to a minor, can also be
encashment. 1000/-, INR. 5000/-, purchased jointly by two adults.
INR. 10,000/-, in all
Rate of interest
Post Offices and INR.
8.4%
50,000/- in all Head
(compounded
Post Offices.
yearly)
National 8% Interest Minimum INR. 100/- A single holder type certificate
Savings
compounded six No maximum limit can be purchased by an adult
Certificate
(VIII issue) monthly but available in for himself or on behalf of a
payable at denominations of INR. minor or to a minor. Deposits
maturity. INR. 100/-, 500/-, 1000/-, quality for tax rebate under Sec.
100/- grows to 5000/- & INR. 10,000/- 80C of IT Act.
INR 160.10 after .
The interest accruing annually
6 years.
but deemed to be reinvested
will also qualify for deduction
under Section 80C of IT Act.
Senior 9% per annum, There shall be only one Maturity period is 5 years. A
Citizens
payable from the deposit in the account depositor may operate more
Savings
Scheme date of deposit of in multiple of than a account in individual
31st March/30th INR.1000/- maximum capacity or jointly with spouse.
Sept/31st not exceeding rupees Age should be 60 years or
December in the fifteen lakh. more, and 55 years or more but
first instance & less than 60 years who has
thereafter, retired on superannuation or
interest shall be otherwise on the date of
payable on 31st opening of account subject to
March, 30th June, the condition that the account is
30th Sept and opened within one month of
31st December. receipt of retirement benefits.
Premature closure is allowed
after one year on deduction of
1.5% interest & after 2 years
1% interest. TDS is deducted at
source on interest if the interest
amount is more than INR
10,000/- p.a. The investment
under this scheme qualify for
the benefit of Section 80C of
the Income Tax Act, 1961 from
1.4.2007.
POST OFFICE SAVINGS ACCOUNTS 

§ Who can open :

· A single adult or two-three adults jointly,

· A pensioner to receive/credit his monthly pension,
· Group Accounts by Provident Fund, Superannuation Fund or Gratuity Fund,
· Public Account by a local authority/body,
· An employee, contractor, or agent of a government or of a government company or of
a university for depositing security amounts,
· A Gazetted Officer or an officer of a government company or corporation or Reserve
Bank of India or of a local authority in his official capacity.
· A cooperative society or a cooperative bank for payment of pay, leave salary, pension
contribution of government servants on deputation with such society or bank.

§ Where can be opened :

· At any post office.

§ Deposits:

· Account can be opened with a minimum of Rs. 20.

· Maximum of Rupees One Lakh for single holder and Rs. Two lakhs for joint
holders. If depositors have more than one account (single, pension or joint), the
balances or shares of balances in all such accounts taken together should not exceed
Rs. One Lakh for each of the depositors.

§ Maturity period / withdrawal :

· There is no lock-in / maturity period prescribed.
· Withdrawals: Any amount subject to keeping a minimum balance of Rs. 50 in simple
and Rs. 500 for cheque facility accounts.

§ Interest :

· Interest at the rate (s) ‘as decided by the Central Government from time to time’, is
calculated on monthly balances and credited annually.
· Interest rate applicable w.e.f. 1.3.2001 is 3.5 per cent / per annum for general
public.

§ Pass Book::

· Depositor is provided with a pass book with entries of all transactions duly stamped by
the post Office.

§ Silent Accounts :

· An account, not operated during three complete years, shall be treated as ‘Silent
Account’.
· A service charge @ Rs. 20 per year is charged on the last day of each year until it is
reactivated.
· In a silent account from which after deduction of service charge, the balance becomes
NIL, the account stands automatically closed.

§ Final closure / withdrawal :

· Final withdrawal/ closure of account shall be allowed by Sub Postmaster/Extra

departmental Sub/Branch Postmaster on obtaining sanction from Head Postmaster.
POST OFFICE TIME DEPOSIT ACCOUNTS 

§ Types of Accounts:

· 1 Year maturity,
· 2 Years maturity,
· 3 Years maturity &
· 5 Years maturity.

§ Who can open :

· A single adult or two adults jointly,

· A pensioner to receive/credit his monthly pension,
· Group Accounts by Provident Fund, Superannuation Fund or Gratuity Fund, Authority
controlling funds of the Sanchayika.
· Public Account by a local authority/body,
· Institutional Accounts by the Treasurer of Charitable Endowments for India, Trust
Regimental Fund & Welfare Fund,
· A cooperative society / cooperative bank or scheduled bank on behalf of its members,
clients or employees
· Gazetted Officer in his official capacity.

§ Where can be opened :

· At any post office.

§ Deposits:

· A deposit with a minimum of Rs. 200 with no maximum limit.

§ Maturity period / withdrawal :

· Withdrawals: The deposited amount is repayable after expiry of the period for
which it is made viz: 1 year, 2 years, 3 years or 5 years.
 § Interest :

· Interest, ‘calculated on quarterly compounding basis’, is payable annually.

· Interest rates applicable w.e.f. the 1st day of March, 2003 are :

Period of deposit Rate of Interest per cent

/ per annum

1 YEAR 6.25

2 YEARS 6.50

3 YEARS 7.25

5 YEARS 7.50

§ Pass Book :

o Depositor is provided with a pass book with entries of the deposited amount
and other particulars duly stamped by the post office.

§ Premature withdrawal :

o Premature withdrawals from all types of Post Office Time Deposit accounts
are permissible after expiry of 6 months with certain conditions.

§ Post maturity interest :

· Post maturity interest “at the rate applicable to the post office savings accounts from
time to time”, is payable for a maximum period of 2 years.
POST OFFICE RECURRING DEPOSIT ACCOUNTS 

§ Who can open :

o A single adult or two adults jointly,

o A guardian on behalf of a minor or a person of unsound mind; or
o A minor who has attained the age of ten year, in his own name.

§ Where can be opened :

o At any post office.

§ Maturity :

o Period of maturity of an account is five years.

§ Deposits:

o Sixty equal monthly deposits shall be made in an account in multiples of Rs.

five subject to a minimum of ten rupees.

§ Defaults in deposits :

o Accounts with not more than four defaults in deposits can be regularized within a period of
two months on payment of a default fee.
o Account becomes discontinued after more than four defaults.

§ Interest & Repayment on maturity :

o On maturity of the accounts opened on or after 1st March, 2003, an amount

(inclusive of interest) of Rs. 728.90 is payable to a subscriber of
Rupees: Ten denomination account.
o Amount repayable, inclusive of interest, on an account of any other
denomination shall be proportionate to the amount specified above.

§ Pass Book :

o Depositor is provided with a pass book with entries of the deposited amount
and other particulars duly stamped by the post Office.
§ Premature closure :

o Premature closure of accounts is permissible after expiry of three

years provided that interest at the rate applicable to post office savings
account shall be payable on such premature closure of account.

§ Continuation after maturity :

· Permissible for a maximum period of five years.

POST OFFICE MONTHLY INCOME ACCOUNTS 

§ Who can open :

o A single adult or 2-3 adults jointly.

o More than one account can be opened subject to maximum deposit limits.

§ Where can be opened :

o At any post office.

§ Maturity :

o Period of maturity of an account is six years.

§ Deposits:

o Only one deposit shall be made in an account.

§ Deposit limits :

o Minimum: rupees one thousand.

o Maximum: rupees three lakhs in case of single and rupees six lakhs in
case of joint account. Deposits in all accounts taken together shall not
exceed Rs. three lakhs in single account and Rs. six lakhs in joint account.
The depositor’s shares in the balances of joint accounts shall be taken as
one half or one third of such balance according as the account is held by 2
or 3 adults.

§ Interest :

o Interest @ 8 per cent/ per annum, payable monthly in respect of the

accounts opened on or after the 1st March, 2003.
o In addition, bonus equal to ten per cent of the deposited amount is
payable at the time of repayment on maturity.

§ Pass Book :

o Depositor is provided with a pass book with entries of the deposited amount
and other particulars duly stamped by the post Office.

§ Premature closure :

o Premature closure facility is available after one year subject to condition.

§ Closure of account :
· Account shall be closed after expiry of 6 years, bonus equal to ten per cent of
deposits shall be paid alongwith principle amount.

NATIONAL SAVINGS CERTIFICATE (VIII Issue) 
§ Who can purchase :

o An adult in his own name or on behalf of a minor,

o A minor,
o A trust,
o Two adults jointly,
o Hindu Undivided Family.

§ Where available :

o Available for purchase/issue at Post Offices.

§ Maturity :

o Period of maturity of a certificate is six Years.

§ Nomination / Transferability:

o Nomination facility is available.

o Certificates can be transferred from one post office to any other post office.
o Transfer from one person to another person permissible in certain
conditions.

§ Denomination / Deposit limits :

o Certificates are available in denominations (face value) of Rs. 100, Rs.

500, Rs. 1000, Rs. 5000 & Rs. 10,000.
o There is no maximum limit for purchase of the certificates.

§ Interest/maturity value :

o With effect from 1st March, 2003, Maturity value a certificate of Rs. 100
denomination is Rs. 160.10.
o Maturity value of a certificate of any other denomination shall be at
proportionate rate.
o Interest accrued on the certificates every year is liable to income tax but
deemed to have been reinvested.

§ Premature encashment :

o Premature encashment of the certificate is not permissible except at a

discount in the case of death of the holder(s), forfeiture by a pledgee and
when ordered by a court of law.

§ Place of Encashment/discharge on maturity :

· Can be encashed/discharged at the post office where it is registered or any other post
office.
KISAN VIKAS PATRA 

§ Who can purchase :

o An adult in his own name or on behalf of a minor,

o A minor,
o A Trust,
o Two adults jointly.
§ Where available :

o Available for purchase/issue at Post Offices.

§ Maturity amount / period :

o With effect from 1st March, 2003, invested amount doubles on maturity
after Eight Years and Seven months.

§ Nomination :

o Nomination facility is available.

§ Denomination / Deposit limits :

o Certificates are available in denominations (face value) of Rs. 100, Rs.

500, Rs. 1000, Rs. 5000, Rs. 10,000 & Rs. 50,000.
o There is no maximum limit for purchase of the certificates.

§ Tax Benefits :

o No income tax benefit is available under the scheme. However the deposits
are exempt from Tax Deduction at Source (TDS) at the time of withdrawal.

§ Premature encashment :

o Premature encashment of the certificate is not permissible except at a

discount in the case of death of the holder(s), forfeiture by a pledgee and
when ordered by a court of law.

§ Place of Encashment/discharge on maturity :

· Can be encashed/discharged at the post office where it is registered or any other post
office.

Maturity value for Rs. 1,000/- denomination

After Amount Payable

2 years 6 months or more but less than 3 years 1170.51

3 years more but less than 3 years 6 months 1207.95
3 years 6 months or more but less than 4 years 1267.19
4 years or more but less than 4 years 6 months 1310.80
4 years 6 months or more but less than 5 years 1355.90
5 years or more but less than 5 years 6 months 1435.63
5 years 6 months or more but less than 6 years 1488.49
6 years or more but less than 6 years 6 months 1543.30
6 years 6 months or more but less than 7 years 1649.13
7 years or more but less than 7 years 6 months 1713.82
7 years 6 months or more but less than 8 years 1781.06
8 years or more but less than 8 years 7 months 1850.93

Interest accrued on yearly basis will be taken as income for Income Tax purposes

SENIOR CITIZEN SAVINGS SCHEME (SCSS) 

A new avenue of investment and return for Senior Citizen.

1. The account may be opened by an individual,

2. Who has attained age of 60 years or above on the date of opening of the account.
3. Who has attained the age 55 years or more but less than 60 years and has retired under
a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the
date of opening of the account within three months from the date of retirement.
 4. No age limit for the retired personnel of Defence services provided they fulfill other
specified conditions.
5. The account may be opened in individual capacity or jointly with spouse.
6. Non-resident Indians (NRIs) and Hindu Undivided Family (HUF) are not eligible to
open an account.
7. The individual may open one or more account in the multiple of INR.1000/-, subject
to a maximum limit of INR.15 lakh.
8. No withdrawal shall be permitted before the expiry of a period of five years from the
date of opening of the account. The depositor may extend the account for a further
period of 3 years.
9. Premature closure of account is permitted

After one year but before 2 years on deduction of 1 ½ % of the deposit.

After 2 years but before date of maturity on deduction of 1% of the deposit.

10. In case of death of the depositor before maturity, the account shall be closed and
deposit refunded without any deduction along with interest.
11. Interest @ 9% per annum from the date of deposit on quarterly basis. Interest can be
automatically credited to savings account provided both the accounts stand in the same
post office.
12. Interest rounded off to the nearest multiple of rupee one.
13. Post Maturity Interest at the rate applicable to the deposits under Post Office Savings
Accounts from time to time is admissible for the period beyond maturity.
14. Nomination facility is available in the Scheme.
15. The investment under this scheme qualify for the benefit of Section 80C of the Income
Tax Act, 1961 from 1.4.2007.

Monthly Income Scheme (MIS) and Senior Citizen Saving Scheme (SCSS) are
the best for Senior Citizens who desire monthly/quarterly interest. Invest in MIS
/ SCSS and transfer interest into RD account through SB account through
written request and earn a combined interest of 10.5 % (approx.).

This is the safest investment option for the Senior Citizens.

 PUBLIC PROVIDENT FUND SCHEME 

The Public Provident Fund is the darling of all tax saving investments. You invest in it and
you get a deduction on your income. Besides, the interest you earn on it is tax-free. Since it is
a scheme run by the Government of India, it is also totally safe.

§ Who can open account under the scheme :

· An individual :
o in his own name,
o on behalf of a minor of whom he is a guardian,
o a Hindu Undivided Family.

§ Where to open an account :

· at designated post offices throughout the country and

· at designated branches of Public Sector Banks throughout the country.

§ Maturity period :

· The account matures for closure after 15 years.

· Account can be continued with or without subscriptions after maturity for block periods
of five years.

§ Nomination :

· Nomination facility is available.

§ Deposit limits :

· Minimum deposit required is Rs. 500 in a financial year.

· Maximum deposit limit is Rs. 70,000 in a financial year.
· Maximum number of deposits is twelve in a financial year.

§ Loans :

· Loans from the amount at credit in PPF account can be taken after completion of one
year from the end of the financial year of opening of the account and before
completion of the 5th year. The amount of withdrawal cannot exceed 40% of the
amount that stood to credit at the end of fourth year preceding the year of withdrawal
or at the end of preceding year whichever is lower.

§ Withdrawal :

· Premature withdrawal is permissible every year after completion of 5 years from the
end of the year of opening the account.

§ Transferability :

· Account can be transferred from one post office to another post office,
· from a bank to another bank; and
· from a bank to post office and vice-versa.

§ Pass Book :

· Depositor is provided with a pass book with entries of the deposited amounts, interest
credited every year and other particulars duly stamped by the post Office.

§ Interest :
· Interest at the rate, notified by the Central Government from time to time, is
calculated and credited to the accounts at the end of each financial year.
· Present rate of interest is eight per cent / per year since: 1st March, 2003.

What are the differences and similarities between the National Savings Certificate
(NSC) and PPF?

National Savings Certificate (NSC) Public Provident Fund (PPF)

Interest Paid: 8%, compounded half- Interest Paid: 8%, compounded annually
yearly
No monthly/yearly payments No monthly/yearly payments
Minimum investment: Rs 100Maximum Minimum investment: Rs 500 (required
investment: No Limit annually)Maximum investment: Rs 70,000
Duration of investment: 6 years Duration of investment: 15 years
Can be used as a security for mortgage Cannot be used for such purposes
and other purposes
Tax benefit under Section 80 ‘C’ Tax benefit under Section 80 ‘C’
available.Maximum limit: Rs 100,000 available.Maximum limit: Rs 70,000 (limit
of the investment in PPF)
Good medium-term investment option Good long-term investment option
Interest if fully Taxable Interest is fully Exempt

DEPOSIT SCHEME FOR RETIRING GOVERNMENT EMPLOYEES 

§ Who can open an account :

· Retired Central and State Governments’ employees.

· Retired Judges of the Supreme Court and High Courts.

§ Where to open an account :

· At designated branches of Public Sector Banks throughout the country.

§ Maturity period :

· The account matures for closure after 3 years.

· Account can be continued with the whole or a part of the deposits after maturity.

§ Nomination :
· The account can be opened individually or jointly with his/her spouse.
· Nomination facility is available in respect of individual accounts.

§ Deposit limits :

· One time deposit with a minimum of Rs. 1000 to the maximum of the total
retirement benefits in multiple of one thousand rupees.

§ Retirement benefits means :

· (i) Balance at the credit of employee in any of the Government Provident Funds.
· (ii) Retirement/Superannuation gratuity.
· (iii) Commuted value of pension.
· (iv) Cash equivalent of leave,
· (v) Savings element of Government insurance scheme payable to the employee on
retirement, and
· Arrears of retirement benefits, as defined in (i) to (v) above on implementation of Fifth
Pay Commission’s recommendations.

§ Withdrawals :

· Whole or a part of the deposits can be withdrawn at any time after expiry of the
normal maturity period of 3 years.

§ Premature withdrawal :

· Not permissible before completion of one year.

· Permissible after completion of one year and before completion of three years on
reduced interest rate.

§ Interest :

· Interest at the rate, notified by the Central Government from time to time, is credited
and payable on half yearly basis at any time after 30th June and 31st December every
year.
· Present rate of interest is Seven per cent / per annum since: 1st March, 2003.

§ Transferability :

· Account can be transferred from one public sector bank to another public sector bank
operating the scheme due to change of residence.

§ Pass Book :

· Depositor is provided with a pass book with entries of the deposited amount, interest
etc. and other particulars by the bank.

§ Income Tax relief :

· Interest accrued / credited / paid is fully tax-free.
· Amount deposited under the scheme is free from wealth tax.

§ Banks authorised to accept deposits :

· Selected branches of the following banks are authorised to accept deposits under
the scheme :

DEPOSIT SCHEME FOR RETIRING EMPLOYEES OF PUBLIC SECTOR 
COMPANIES 

§ Who can open an account :

· Retired/retiring employees of Public Sector Undertakings, Institutions, Corporations,

viz:
o Public Sector Banks,
o Life Insurance Corporation of India,
o General Insurance Corporation,
o Public Sector Companies, etc.

§ Where to open an account :

· At designated branches of Public Sector Banks throughout the country.

§ Maturity period :

· The account matures for closure after 3 years.

· Account can be continued with the whole or a part of the deposits after maturity.

§ Nomination :
· The account can be opened individually or jointly with his/her spouse.
· Nomination facility is available in respect of individual accounts.

§ Deposit limits :

· One time deposit with a minimum of Rs. 1000 to the maximum of the total
retirement benefits in multiple of one thousand rupees.

§ Retirement benefits means :

· (i) Balance at the credit of employee in any of the Government Provident Funds.
· (ii) Retirement/Superannuation gratuity.
· (iii) Commuted value of pension.
· (iv) Cash equivalent of leave,
· (v) Savings element of Government insurance scheme payable to the employee on
retirement, and
· Arrears of retirement benefits, as defined in (i) to (v) above on implementation of Fifth
Pay Commission’s recommendations.

§ Withdrawals :

· Whole or a part of the deposits can be withdrawn at any time after expiry of the
normal maturity period of 3 years.

§ Premature withdrawal :

· Not permissible before completion of one year.

· Permissible after completion of one year and before completion of three years on
reduced interest rate..

§ Interest :

· Interest at the rate, notified by the Central Government from time to time, is credited
and payable on half yearly basis at any time after 30th June and 31st December every
year.
· Present rate of interest is Seven per cent / per annum since: 1st March, 2003.

§ Transferability :

· Account can be transferred from one public sector bank to another public sector bank
operating the scheme due to change of residence.

§ Pass Book :

· Depositor is provided with a pass book with entries of the deposited amount, interest
etc. and other particulars by the bank.

§ Income Tax relief :

· Interest accrued / credited / paid is fully tax-free.
· Amount deposited under the scheme is free from wealth tax.

§ Banks authorised to accept deposits :

· Selected branches of the following banks are authorised to accept deposits under
the scheme :

FAQ ON BANKING WITH POST OFFICE 

1. How can I claim payment of deceased account / certificate holder?

The claimant may be the nominee or legal heir.

If there is nomination, the nominee can prefer the claim in the prescribed form alongwith
death certificate.

If there is no nomination, any one of the legal heirs can prefer the claim in the prescribed
form [SB84]. For this death certificate and consent statements of all legal heirs are required.
Claim upto one lakh can be settled.

If the claim is exceeding one lakh, claims can be settled by legal evidence ie, by probate of
will or succession certificate.

2. How to transfer accounts and certificate?

For transfer of accounts- the depositor should apply in the prescribed form[lSB10(b)] or
manual application. The application can be given either in transferring office or transferee
office.

For transfer of certificates- the investor should apply in the prescribed form[NC32]. The
application may be given in either of the offices.

3. How to open an account in post office and its requirements?

To open an account [Savings Bank(SB), Recurring Deposit(RD), Time Deposit(TD),
Monthly Income Scheme(MIS) SB3, SB103 (pay-in-slip) and specimen signature slip for SB
and TD are required.

For senior citizen accounts, separate forms are to be used. For SB account introduction is
compulsory.

4. What is silent account and how to revive it?

When there is no transaction in an SB account continuously for 3 financial years, the account
will be treated as silent account.

For revival, one application from the customer is required. LSG/HSG offices can revive the
accounts independently. Remaining offices, HO will revive the accounts.

If the balance in the silent account is less than minimum, then INR. 20/- will be debited
towards service charges.

5. What are late payment fees for recurring deposits?

The monthly deposits should be credited on any day of the month. If the monthly instalment
is not credited for any particular month, then it becomes a default. The defaulted months can
be credited subsequently (for INR. 10/- denomination, 0.20 paise for each month of default)
maximum 4 defaults are allowed.

6. What is the procedure for the issue of duplicate certificates?

The investor should apply in the prescribed form for duplicate certificate om respect of lost,
stolen, destroyed, mutilated or defaced certificates (NC29).

The application shall be accompanied by a statement showing particulars of certificates and

furnish an indemnity bond in the prescribed form with one or more sureties or with a bank
guarantee is required.

In case of mutilated or defaced certificates, no indemnity bond is required.

7. How I get duplicate passbook?

Application in the prescribed form or manuscript application may be given by affixing

prescribed fee in the form of postage stamp. New duplicated Passbook will be issued by sub
post offices only.

8. What are the norms for issuing a Cheque Books?

Cheque books are issued in respect of cheque accounts

In cheque accounts, minimum balance should be INR. 500/-

 9. What are the service charges for outstations cheque?

Cheque realisation charges for outstation cheques.

INR. 30/- for first thousand or part

INR. 31/- for each additional thousand or part

In case of bouncing of cheque INR. 50/- is charges as service charge.

10.Can Monthly Income Scheme (MIS) interest be credited to RecurringDeposit (RD)

account?

No. There is no provision. Interest amount can be credited to SB account and after that from
SB to RD is permissible.

11. What is the minimum balance required for an account?

Minimum balances in respect of different types of account is given below.

SB(cheque account) INR. 500/-

SB(non cheque account) INR. 50/-
MIS INR. 1000/-
TD INR. 200/-
PPF INR. 500/-
Senior Citizen INR. 1000/-

12.How I can get encashment of certificates / account before maturity?

NSCs No premature encashment possible. Lock up period is six years

Premature encashment is possible after 2 years 6 months. Proportionate
KVPS
amount as per the table is payable
Different Savings Accounts
SB Can be closed at any time
RD Premature closure permissible after 3 years - only SB rate is permissible
TD Premature closure permissible after 6 months
MIS Premature closure permissible after 1 year
Senior Citizen Premature closure after 1 year

POST OFFICE DEPOSIT TO COME UNDER TAX NET 

In an attempt to monitor all deposits made under post office schemes and bring them at par 
with bank interest earnings, the Central Board of Direct Taxes (CBDT) has notified that 
income from post office savings schemes will be taxed from the financial year 2011‐12 

By making it mandatory for individuals to declare investments in their tax returns, I‐T 
department has brought all such deposits under its scanner. 

A CBDT notification said a declaration to this effect has to be made in the income tax returns 
filed by an individual. Any income earned beyond Rs 3,500 annually in case of individuals 
and Rs 7,000 in case of joint accounts will be taxable, the notification said. 

By setting a minimum limit of Rs 3,500 on interest earnings, the I‐T department has 
exempted small depositors who get 3.5% interest. Thus, a small depositor with a maximum 
saving of Rs 1 lakh, and Rs 2 lakh in case of joint account holders, won't have to pay any tax. 

Small and marginal farmers who generally invest in post office schemes would thus be 
exempt from the new levy. Tax will be applicable for only those who invest in post office 
instruments more than the prescribed limit. 

This is done to minimize and phase out tax deductions and exemptions. The government is
slowly moving towards the Direct Tax Code which seeks to phase out tax deductions. Interest
earnings from bank savings account are taxed by the government. This will also bring post
office earnings at par with earnings from banks.
POST OFFICE SCHEMES TO FETCH BETTER RETURNS 

The Economic Times – 12 Nov 2011

The government has announced a complete overhaul of the small savings scheme that has
benchmarked rates of interest on these schemes to government securities. These would be
implemented once a notification is issued for the same. Following are the changes which
have been announced:
1. Introduction of a 10 year National Saving Certificate (NSC)
2. Increase of ceiling of Public Provident Fund (PPF) to Rs.100000 from present
Rs.70000
3. Discontinuation of Kisan Vikas Patra
4. Interest  rates  on  postal  savings  to  go  up  to  4%  from  3.5%  at  present.  Monthly 
Income  Schemes  (MIS)  increase  to  8.2%  and  PPF  to  8.6%.  One  year  fixed‐deposits 
increased from 6.25% to 7.7% 
5. Maturity period of monthly investment schemes and national savings certificates to 
be reduced from six to five years. 
6. Scraped 5% bonus on MIS

As per the memorandum issued by the finance ministry, returns on small savings instruments
will be linked to government securities of similar maturities, pushing up the current rates on
all instruments by 0.2%- 1.3%.

The reforms will address the distortion caused by the small savings schemes in the overall
interest rate structure of the economy. Depending on the market rates, these schemes either
saw a large inflow of the big outflow, affecting the flows into banks in particular.

To reduce the cost of administration of the scheme, the government has also decided to lower
the commission charged by agents that sell these schemes. As per the memorandum, the
payment of agency commission on all schemes, except the Mahila Pradhan Kshetriya Bachat
Yojana, will be either discontinued or reduced by at least 0.5%. Women agents will continue
to receive 4%.
 GOLD 
Gold has traditionally been extremely popular with Indians. Almost every household
possesses gold in one form or the other and it forms part of important events like marriage,
religious ceremonies etc. It is also an important asset class, used as a currency and a
commodity.
Major Characteristics

• Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity.

• Gold is the world's oldest international currency.
• Gold is an important element of global monetary reserves.
• With regards to investment value, more than two-thirds of gold's total accumulated
holdings is with central banks' reserves, private players, and held in the form of high-
karat jewellery.

Less than one-third of gold's total accumulated holdings are used as “commodity” for
jewellery in the western markets and industry.
Demand and Supply Scenario

• Gold demand in 2010 reached a 10-year high of 3,812.2 tonnes, worth US$150billon,
as a result of;
o strong growth in jewellery demand;
o the revival of the Indian market;
o strong momentum in Chinese gold demand and
o a paradigm shift in the official sector, where central banks became net
purchasers of gold for the first time in 21 years.
• China was the world's largest gold producer with 340.88 tonnes in 2010, followed by
the United States and South Africa.
• In 2010, India was the world's largest gold consumer with an annual demand of 963
tonnes.

The total supply of gold coming onto the market in 2010 reached 4,108 tonnes, a rise of 2%
from 2009 levels.
Global Scenario
• London is the world’s biggest clearing house.
• Mumbai is under India's liberalised gold regime.
• New York is the home of gold futures trading.
• Zurich is a physical turntable.
• Istanbul, Dubai, Singapore, and Hong Kong are doorways to important consuming
regions.
• Tokyo, where TOCOM sets the mood of Japan.

Indian Scenario
• India is the largest market for gold jewellery in the world. 2010 was a record year for
Indian jewellery demand; at 745.7 tonnes, annual demand was 13% above the
previous peak in 1998. In local currency terms, Indian jewellery demand more than
doubled in 2010.
• A 20% rise in the rupee price of gold combined with a 69% rise in the volume of
demand, pushed up the value of gold demand by 101% to 1,342 billion. This
compares with 2009 demand of 669 billon.
• The rising price of gold, particularly in the latter half of 2010, created a 'virtuous
circle' of higher price expectations among Indian consumers, which fuelled purchases,
thereby further driving up local prices.

Factors Influencing the Market

• Above ground supply of gold from central bank's sale, reclaimed scrap, and official
gold loans.
• Hedging interest of producers/miners.
• World macroeconomic factors such as the US Dollar and interest rate, and economic
events.
• Commodity-specific events such as the construction of new production facilities or
processes, unexpected mine or plant closures, or industry restructuring, all affect
metal prices.
• In India, gold demand is also determined to a large extent by its price level and
volatility.
WHY INVEST IN GOLD 
Today, Gold is considered as an investment option, and has now become a part of portfolio of
many investors and hedge funds.
1. Diversification
As we all know, diversification is an important aspect of an investment strategy as it allows 
an  investor  to  maintain  the  right  balance  between  asset  classes  of  different  correlations. 
However,  many  of  us  rely  mainly  on  equities  and  debt  instruments  alone  to  achieve 
diversification  in  our  portfolios.  Though  we  Indians  always  fancy  owning  gold  for  various 
cultural and emotional reasons, not many of us consider it to be a part of the portfolio while 
deciding on the asset allocation. The truth, however, is that gold can be an integral part of 
the portfolio as it has a negative correlation with the other preferred asset classes such as 
equities  and  debt.  Ideally  you  should  invest  in  gold  ETFs  once  you  have  a  well  diversified 
portfolio of funds and restrict exposure to gold by allocating not more than 5‐10 per cent of 
your total investments. 

2. Low liquidity risk 

 A  wide  range  of  buyers  like  the  jewellery  sector,  financial  institutions,  manufacturers  of 
industrial products as well as various investment channels  including coins and bars,  futures 
and options as well as gold ETFs (Exchange Traded Funds)  make liquidity risk very low. 

3. Hedge against inflation 

The often‐heard term 'inflation' is the rate at which prices of goods and services rise. It eats 
away the future purchasing power of the wealth you create painstakingly through 
meticulous investments. If you find it difficult to meet your monthly expenditure, blame it 
on the inflation monster. 

Gold enjoys the reputation of being the protector of wealth against this monster. In other 
words, gold has the potential to maintain its purchasing power over the longer term 
through both inflationary and deflationary periods. The inflation‐adjusted returns from gold 
have been spectacular over the last few years. 
  

4. Good returns 

Besides, gold also has the potential to provide impressive returns over a sustained buoyant 
period, as is currently the case. 

5. Low credit risk

The new investment avenues like Gold ETF, Gold Funds and E-gold provide a safe
opportunity to invest in gold since it’s guaranteed by the Exchange (NSE, Spot exchange or
the respective mutual fund) and the underlying gold is also adequately insured.
6. Safe haven investment

Gold is considered as an all weather investment and as a currency in itself. In times of war,
financial markets uncertainty, geo-political tensions, gold provides a good hedge and remains
strong during such turbulent times.

Gold is pegged to the US dollar and has an inverse relationship with the dollar. In the event 
of a financial or economic turmoil in the US, the dollar could weaken against many other 
currencies, sending the gold price upwards. Political turmoil across the globe could send the 
gold price upwards too. 

AVENUES AVAILABLE TO INVEST IN GOLD 
1. JEWELLERY

Indians invest in jewellery for multiple reasons. They can use it for marriage, wear for
parties, and get it liquidated when in crisis. Moreover, accumulating jewellery is a sort
of tradition and hence many families still find it the best way to invest.

Pros Cons
Investment is You own it in
very easy. You physical form, so
only need cash to threat of theft.
invest.
Making charges
If you invest early offsets the profit in
 it saves you a terms of price
significant appreciation (varies
expense at the from 10% to 35% at
time of marriage. times).

Normally it's a virtual

investment as people
don't want to sell it.

2. GOLD COINS

Since most of the gold coins are sold by banks, the purity is guaranteed unlike
jewellery where you have to rely on your jeweller. Investors who do not want to take
any chance but still want to invest in physical gold go for gold coins.

Recently, India Post has introduced gold coins with India Post logo for sale to the customers
across India. The gold coins are of the denomination 0.5 g, 1 g, 5 g and 8 g of 24 carat with
99.99% purity. The gold coins are manufactured by Valcambi, Switzerland and have the
benefits of internationally recognized certification, quality packaging, and product
standardization and assayer certificate. This facility is available in 630 Post offices across
India.

Pros Cons
Value is quite You own it in
comparable to physical form, so
international gold threat of theft.
price.
You pay a
One of the most premium of 4% to
recognized and 10% while buying
reliable way to and same % is
 invest in gold discounted while
selling resulting in
Investment is very lesser overall
easy. You can buy it return.
from banks, local
shops etc.

Big investment is
not required to take
exposure as it's
available in smaller
denominations.

Easy to store.

Very liquid.

3. GOLD BARS

If you are comfortable with storage and large initial investment amount, this can be
one of the best options as loss in terms of premium/discount is the least.

Issues of fake purchases can be taken care if you buy from an authentic source.

Pros Cons
Value is quite You own it in
comparable to physical form, so
international gold threat of theft.
price.
Initial investment
Premium/discount can be large as
paid while smaller
purchasing and denominations are
selling is the least not available.

Most recognized and Increased risk of

reliable way to invest forgery.
in gold.
Storage cost for
Investment is very large bars.
easy. You can buy it
from banks, local
 shops etc.

Quite liquid.

4. ETF

Gold ETFs are units representing physical gold, which may be in paper or dematerialized
form. These units are traded on the exchange like a single stock of any company. Gold ETFs
are intended to offer investors a means of participating in the gold bullion market without the
necessity of taking physical delivery of gold, and to buy and sell that participation through
the trading of a security on the stock exchange. The charges applicable are just the brokerage
charges applicable for other stocks from your broker.

You will need a demat account to buy gold ETFs. Since Gold ETFs invest directly in physical 
gold which means the buying and selling price of all the gold ETFs is identical. The returns 
generated by gold ETFs at any given point of time are also similar though there will be a 
minuscule difference between the schemes because of their different expense ratios. So, 
look for the ETF with the least expense ratio to invest in. 

Can gold be used as collaterals or margins? 

Gold ETF can be considered as collaterals or margins. Most of the financial institutions 
accept gold as collaterals or margin with some hair cut applicable. 

Who guarantees the purity bought? 

The authorised custodian (safe keeper) sources gold from LBMA (London Bullion Market 
Association) approved refiners on behalf of investors. The amount of physical gold held by 
the custodians in all schemes is of fineness (purity) of 99 parts per 1000. In other words, this 
gold is 99.5 percent pure. This purity is also called a 24 carat gold in general parlance. 
What’s more the gold held with the custodian is fully insured.  

 
 

Pros Cons
Investment is very You don't
easy. You only need a possess it in
demat account for physical form so
investment. Can be might be at loss
easily traded through in crisis
 any NSE terminal. situations (war,
They are actively bankruptcy etc).
traded hence have
high liquidity. Might have
liquidity issue.
No concept of losses Currently, only
in terms of premium Gold Bees and
or discount. Reliance Gold
ETF are highly
Safe as no physical liquid.
possession. Also, no
issues of purity as in Complex
physical gold. structure.

Low initial Brokerage fee

investment. Minimum and annual
investment in one unit maintenance
(which equals 1 gram charges (expense
in most schemes) ratio)

Various options
available because of
technology
advancement like SIP
etc.

Transparency in gold
transactions since
investors get best
possible price

More tax efficient

than investing in
physical gold. Also,
gold held in paper
form is not liable for
wealth tax, VAT,
STT.
 5. GLOBAL MUTUAL FUNDS

Launched by domestic mutual funds to invest in gold mining companies through an 
international fund. Investing in a scheme like this provides investors access to fund 
manager’s expertise and active fund management, which is not available in GETFs. Also 
investing in gold mining companies offer investors the upside opportunity through 
organic/M&A growth as well as leverage the increasing price of gold. In other words, 
investors benefit as the profitability of gold mining companies increases with a rise in gold 
prices. You can invest in mutual funds that invest in gold mining funds such as AIG World
Gold and DSPBR World Gold Fund. 

Pros Cons
A way of taking You don't possess it in
indirect physical form so you
exposure. might be at loss if the
gold deposit yield is
Capital less than expected or
appreciation if the company faces
potential is more bankruptcy.
as compared to
direct Deep research
investment. required before
investing.
Safe as no
physical Volatile and risky as
possession. compared to other
options.
Low initial
investment.

Highly Liquid.

6. GOLD FUND OF FUND

Invests in domestic gold ETFs. These funds allow investors to invest in gold ETFs without 
having a demat account and without having to approach a stock broker. Besides, those who 
intend to invest in Gold ETFs through a SIP route can do so in these funds, whereas Gold 
ETFs do not provide this facility. There are many fund houses providing this facility with 
Reliance Mutual fund was the first fund to launch in this category in February 2011, it was 
followed by Kotak Mutual fund and SBI Mutual fund. Considering the mass appeal of this 
product, many more mutual funds (MFs) can be expected to join the band wagon soon. 

However, investors have to shell out a little more for availing the convenience of a gold 
fund. Since it is essentially a fund‐of‐fund, charges tend to be a little higher. The expense in 
a gold fund is capped at 1.5% while in gold ETFs it is 1‐1 .2% of investments.  

It’s interesting to note that it took more than four years for gold exchange traded funds 
(ETFs) to get past the Rs 4,000‐crore mark in assets under management (AUM). But gold 
funds have grown at frenetic pace and have accumulated net assets of over Rs 1,800 crore 
in just six months. The category is seeing average inflows of Rs 250‐300 crore every month! 
The main reason for this is its ease of investment since no demat is required. Also, SIP 
facility is made available which gives you the benefit of investing a fixed sum every month 
and get the benefit of rupee cost averaging which has become very important considering 
the volatility of the gold market. 

It may be noted that as compared to Gold Fund of Funds, Gold ETF is better for active 
traders since it provides the opportunity to benefit from sudden price movement of the 
gold as the prices of Gold ETF reflect the value of the underlying gold on real time basis 
rather than on the closing NAV price of the gold on yesterday for mutual fund.  
 
  

 
 7. GOLD DERIVATIVES (FUTURES) THROUGH MCX
MCX is India’s largest commodity exchange to trade bullion futures. These contracts are
highly liquid are also deliverable with internationally accepted gold bars.
MCX provides the flexibility to choose from four different contract sizes – Gold (1 Kg), Gold
Mini (100 grams), Gold Guinea (8 grams) and Gold Petal (1 gram).
Following are its contract specifications:
a. GOLD
B. GOLD MINI
C. GOLD GUINEA
Currently, contract months from January to December has been made available.

D. GOLD PETAL
 8. E-GOLD

E-Gold is a new incarnation of gold, innovated by National Spot Exchange (NSEL), which
enables investors to invest their funds into gold in smaller denomination and hold it in demat
form. It is available on the pan India electronic trading platform set-up by National Spot
Exchange, which can be accessed through members of NSEL or their franchises. It provided
a unique opportunity to buy, accumulate, hold and liquidate "Electronic Gold (E-Gold)" as
well as to convert the same into physical gold coin/ bar in a seamless manner.
Contract Specifications of E-GOLD (Demat Gold Units)

Commodity Details
Commodity E-GOLD (Demat Gold units)
Contract Symbol E-GOLD
Daily contract Daily contract for trading in Demat E-GOLD units
Trading Related Parameters
Trading period Mondays through Fridays (except Exchange specified
holidays)
Trading session 10:00 AM to 11:30 PM
Trading unit 1 unit of E-GOLD, which is equivalent to 1 gram of Gold
Price Quote/Base Value Per 1 gram Gold of 995 purity
Tick size (minimum
10 paisa per unit
price movement)
Daily Price Range 5%
Maximum order size 10000 units
Margin parameters
Initial Margin 5%
Delivery Margin 10%
Special Margin In case of additional volatility, a special margin of such
percentage, as deemed fit, will be imposed immediately on
both buy and sale side in respect of all outstanding position,
which will remain in force for the same trading day.
Demat Parameters
ICIN INC200000007
Market description T+2
Settlement cycle T+2
Delivery Related Parameters
Delivery unit 1 unit and multiple thereof. Delivery shall be accepted only
in demat form.
Quality Specifications Grade: 995 and Fineness: 995 Only dematerialized units of
E-GOLD are eligible for trading and delivery in this
contract.
Tender and Delivery day T+2 (2 working day from the date of transaction)
Delivery Logic Compulsory delivery. All open positions (buy and Sell
trades) must result into compulsory delivery in demat form
on the designated delivery day.
Other conditions a. Only such clients/ members shall create sale position
applicable in this contract, which are holding demat E-GOLD
units in their account. Persons holding gold bars/
coins in physical form must not create any sale
position in this contract, as it is compulsory demat
settlement contract.
b. Before creating any buy position in this contract, the
client must open his beneficiary account for NSEL
trading.
c. Intraday trading and netting is permitted, but short
sale is not allowed. In case of short sale, the position
will be settled by buying in auction of undelivered
position.

9. GOLD ACCUMULATION SCHEMES / SAVING FOR GOLD

SCHEMS
Gold accumulation schemes offered by jewellers are an easy investment opportunity you can
cash in on. Jewellers like Tanishq (promoted by the Tatas) and PN Gadgil Jewellers offer
schemes - similar to recurring deposit schemes offered by banks and the India Post - that
allow you to save small amounts for different tenures. At the end of the term, you can buy
gold jewellery of your choice worth the accumulated amount.

However, under these schemes cash refund is not allowed. Many local jewellers also offer
such plans. Most schemes allow a minimum investment of Rs 500 a month and in multiples
of it. While Tanishq offers 12-month and 18-month tenures, PN Gadgil runs three schemes
for one-, two- and three-year terms. For a 12-month scheme offered by Tanishq, the investor
pays only 11 monthly instalments, while the jeweller pays the last instalment. Similarly, in
case of the 18-month plan, the investor pays for 17 months. PN Gadgil also offers to pay one
month's instalment for a one-year plan. On maturity, the investor can buy gold or silver
ornaments of one's choice. Tanishq allows 22 karat pure gold and 18 karat diamond-studded
and platinum jewellery. However, gold and silver coins are not on offer.
The investor also has the option to increase or decrease the monthly instalments according to
his capacity. But, the maturity date is postponed if you fail to pay your instalments on time by
as many days you have delayed. If you need cash and withdraw early from the scheme, you
may have to forego the bonus.
Saving-for-gold schemes are good for retail jewellery buyers, who would not afford to make
huge one-time investment for buying gold jewellery. This method encourages them to start
planning in advance for their gold purchases especially for marriage buying.
RISKS
For those who are left with a decent surplus following monthly investments and expenses,
such schemes may be a good option to diversify their portfolio and save a little extra.
However, it’s not recommended to consider such plans as a core-investment avenue.
Such schemes run too many risks for a retail investor. Jewellery business is not regulated, so
it cannot guarantee safety of the money. Also, with a local jeweller the investor runs the risk
of defaulting.
Another important point is gold price movement. How would you know where gold will be
trading when the tenure ends? When you start it could be at 16,000 and by the time the tenure
is over, it could have moved way higher.' Higher price will mean a small buy and as these
schemes don't refund cash, you could be caught between the rock and the hard place.
The rate of return on these schemes is around 8-9 per cent. Bank recurring deposit schemes
offer an almost similar rate but are safer.
10. GOLD DEPOSIT SCHEMES

a. BY BANKS
Gold Deposit Schemes are offered by banks in which investors deposit gold for a period of
certain years earning a fixed rate of interest. Individuals, HUFs, Trusts and Companies can
invest in such schemes. You have to deposit a minimum of 500 grams gold deposit.
How does gold deposit works?
Customers willing to deposit their idle gold are taken by the bank. This is melted to check the
purity of the gold and then used by Indian Mint. The bank customers are provided gold cer-
tificates that need to be provided on maturity.
Benefits of gold certificate
1. The gold certificates can be used as loan collateral

2. Interest earned on gold certificates is free of income tax. (section 10(15)(vi) of the
Act)

3. No wealth tax is applicable on gold deposit.

4. No capital gains tax on the gold deposit.

The interest offered by banks on gold deposits is very low. Gold deposits can fetch you a
return of 1–4%. State Bank of India offer a return of 1% on gold deposit for a period of 5
years, similarly Corporation bank offers a return of 4% on gold deposit for a period of
7 years.
In case of premature withdrawal of gold deposit scheme, you have to pay a penalty of 25–
50% on the interest earned.
b. JEWELLERS GOLD DEPOSIT SCHEME
Similar to deposit schemes by the banks, some jewellers have also started offering gold
deposit schemes. However, such schemes are very few in number and not much popular.
Kothari Diamonds and Jewels, one of Pune’s contemporary jewellers has introduced 24
karat gold deposit scheme. The scheme includes deposition of Gold for a minimum period
of 1 month. The depositor earns Rs. 120-per 10 gms per month as interest on Gold deposit.
The depositor can deposit Gold in various forms including Gold bullion deposit, Gold
biscuit deposit, Gold coin deposit and many such forms. The depositors 99.50% pure Gold
deposited will be reused for various business projects.
Though interest made from gold deposit with these jewellers is a little higher compared with
the banks, it’s much safer to deposit with a bank.
COMMODITIES 
With globalisation of the Indian economy, nearly all its players – from tractor-driving farmers
to jet-flying corporate – are getting exposed to the vagaries of international fundamentals
affecting commodities that they are concerned with. Whether the Indian economy is truly
‘decoupled’ from the forces driving economies elsewhere in the world or not, particularly
during a crisis scenario like the current one, our domestic commodity markets, undeniably,
are linked to the global fundamentals of demand, supply, policy actions and market
expectations much more now than ever before.

Apart from the increased recognition of hedging in the commodity market, investment in
commodities is also seeking newer dimensions. You may have your debt and equity funds in
place, but investing in commodities could just be the one element to improve your portfolio.
Commodity trading provides an ideal asset allocation, also helps you hedge against inflation
and buy a piece of global demand growth.

Why invest in commodities?

Commodities allow a portfolio to improve overall return at the same level of risk. Unlike
stocks and bonds, commodities are real assets, comprising inherent intrinsic value based on
their actual commercial or industrial application. Commodities price fluctuations do not have
positive correlation with stock market and therefore, these are best tools to diversify
portfolio. Moreover, investing in commodities that rise with inflation provides a natural
hedge against inflation.

Therefore, commodities not only help in portfolio diversification, they also provide hedge
against inflation. Hence, off late, investing in commodities has become an essential part of
portfolio management.

Who should invest?

Any investor who wants to take advantage of price movements and wishes to diversify his
portfolio can invest in commodities. However, retail and small investors should be careful
while investing in commodities as the swings are volatile and lack of knowledge may result
in loss of wealth.

Investors must understand the demand cycles those commodities go through and should have
a view on what factors may affect this. Ideally, you should invest in select commodities that
you can analyse rather than speculate across products you have no idea about.
Investing in commodities should be undertaken as a kicker in your portfolio and not as the
first destination for your money.

What is commodity trading?

It's an age-old phenomenon. Modern markets came up in the late 18th century, when farming
began to be modernised. Though the trade's mechanisms have changed, the basics are still the
same.

In common parlance, commodities means all types of products. However, the Foreign
Currency Regulation Act (FCRA) defines them as 'every kind of movable property other than
actionable claims, money and securities.'

Commodity trading is nothing but trading in commodity spot and derivatives. If you are keen
on taking a buy or sell position based on the future performance of agricultural commodities
or commodities like gold, silver, metals, or crude, then you could do so by trading in
commodity derivatives.

Prior to launch of e- series by National Spot Exchange Limited (NSEL), there was no cash
segment of commodities, we had only futures. Launch of e series of products have opened up
new vistas of investment in commodities. The USPs of e-series products have been electronic
trading, settlement and holding in Demat form, uniform pricing, convertible into physical
form at any point of time and zero storage cost. This has attracted large number of retail
investors to invest money into commodities through e –series products.

How big is the Indian commodity trading market as compared to other Asian markets? 

The commodity market in India clocks a daily average turnover of Rs 12,000-15,000 crore
(Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to
have reached the equivalent of 66 per cent of the gross domestic product and the future will
only see the percentage rising.

Is there a regulator for the commodity trading market?  

The Forward Markets Commission is the regulatory body for the commodity market in India.
It is the equivalent of the Securities and Exchange Board of India (SEBI), which protects the
interests of investors in securities.

What are the factors that influence the commodity prices in the market?  

The commodity market is driven by demand and supply factors and inventory, when it comes
to perishable commodities such as agricultural products and high demand products such as
crude oil. Like any market, the demand-supply equation influences the prices.

Variables like weather, social changes, government policies and global factors influence the
balance.

What is the difference between directional trading and day trading?

The key difference between commodity markets and stock markets is the nature of products
traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the
prices of these commodities is low as supply goes up. There are traders who use these
patterns to trade in the commodity market, and this is termed directional trading.

Day trading in commodity markets is no different from day trading in the equity market,
where positions are bought in the morning and squared off by the end of the day.

Does commodity speculation affect agricultural income in India?

The vision for the commodity market in India is to reduce information asymmetry and make
a robust market available to the end producer or farmer. It is also expected to balance out
price information and give the producer a better price and a platform to hedge.

The futures market will allow the farmer to see the upside of the price over two to three
months and help him decide where to sell.
SOME MAJOR CATEGORIES OF COMMODITIES TRADED 

Industrial metals

Industrial commodities include aluminium, copper, nickel, zinc, steel, etc. The price
movement of industrial commodities depends on the macro-economic factors in the world
economy, for example, financial turbulence in China, border tensions in Korea, etc. These
commodities do well when investors are confident about consumption demand from large
economies like China. Investors can invest in industrial commodities by taking speculative
future positions through a commodities broker or investing in commodities-based stocks.
Though there is no one-to-one correlation between commodity prices and commodities stock
price movement, if all other things are equal, commodity prices form the most important
factor in the pricing of commodities-based stocks.

Precious metals: Bullion

This category includes precious metals like gold, silver and platinum. Gold and silver are
trading at all-time high levels and experts believe there is room for further appreciation in the
medium term. Investment appetite in precious metals has gone up tremendously in recent
years due to global economic uncertainties. Large global investors as well as central banks in
some countries are investing in precious metals to hedge against global economic
uncertainties.

Investments in precious metals have given very attractive returns over the last few years.
Price fluctuations in precious metals have opened opportunities for traders. People can invest
in precious metals in smaller quantities at regular intervals. Investment in precious metals can
be done by taking physical positions or by investing through ETFs (Exchange Traded Funds).
 GOLD: SILVER RATIO 

From Rs 18,500 per kg in December 2008 to Rs 30,200 in December 2009, and Rs 35,000 per 
kg in October 2010 to a whopping Rs 74,700 per kg in April 2011, Silver price has more than 
doubled in the last six months alone in rupee terms. One major reason cited for this rise in 
silver is the Gold: Silver ratio. 

Gold  and  silver  prices  traditionally  move  together  because  both  are  considered  stores  of 
value in inflationary times. The ratio between the price of gold and that of silver (the price 
of  gold  divided  by  the  price  of  silver)  is  a  key  indicator.  It  had  been  as  low  as  17  in  1980 
when silver hit an all‐time high. The ratio zoomed to 100 in the early 1990s. Gold was the 
first to take off after 2000. And by 2010, gold traded well above $1,000 an ounce while silver 
traded  at  $12‐$14  an  ounce  ‐  a  ratio  of  close  to  80  to  1.  This  was  unsustainable,  and  it 
resulted in the price rise of 2010‐11, which at its peak took silver to $50 an ounce and about 
a  30  to  1  ratio  to  the  price  of  gold  in  April  2011.  The  price  took  some  correction  and  is 
trading around $ 32 in October 2011. 

What does this tell us? When the ratio is high, silver is underperforming gold. It either fails 
to rise as much as gold, or falls faster. When the ratio is low, silver is gaining ground. The US 
recession  officially  ended  in  June  2009,  even  though  the  financial  markets  had  started 
moving up in anticipation a few months earlier. Silver, too, had begun rising leading to a fall 
in the ratio. 
The  other  reason  for  the  meteoric  rise  in  silver  prices  over  the  last  three  years  is  the 
economic crisis in Europe and the consistent industrial demand for silver, rising mining and 
production costs, and the fact that silver is rarely recycled. 

Agricultural commodities 

The agricultural commodities traded are mainly sugar, channa, chilli, pepper, soya, mustard 
oil, etc. The price fluctuation in agriculture‐based commodities depends upon various local 
factors, production/supply, government policies and the availability of alternatives. Trading 
in  agricultural  commodities  requires  knowledge  and  understanding  of  the  local  situations 
and  issues.  Therefore,  agricultural  commodities  are  difficult  investment  avenues  for  the 
small investors. However, there is a lot of price volatility in agricultural commodities which 
generates speculative opportunities for investors with a high risk appetite. 

Energy commodities 

Energy  commodities  include  crude  oil  and  natural  gas.  The  price  movement  of  energy 
commodities is driven by demand in large developed nations like USA, China, and India. We 
are  seeing  a  lot  of  volatility  in  the  price  of  energy  due  to  global  turbulence  and  cross 
currency movements. Investors with high risk appetite can look for trading opportunities in 
the energy commodities. 

 
 DOW JONES – AIG COMMODITY INDEX 

The Dow Jones - AIG Commodity Index is a benchmark for the commodity futures market.
The index consists of a diversified grouping of commodities. Commodities have historically
been positively correlated with the rate of inflation and negatively correlated with returns of
stocks and bonds.

The Dow Jones - AIG Commodity Index is composed of futures contracts on 19 physical
commodities. The commodities in the index are traded on U.S. exchanges, with the exception
of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME). The daily
settlement price for the index is published at approximately 5:00 pm ET.

To help insure diversified commodity exposure, the Dow Jones - AIG Commodity Index
relies on several diversification rules. Among these rules are the following:

• No related group of commodities (e.g., energy, precious metals, livestock and grains) may
constitute more than 33% of the index as of the annual reweightings of the components.
• No single commodity may constitute less than 2% or more than 15% of the index.

A  Supervisory  Committee  for  the  Dow  Jones  ‐  AIG  Commodity  Index  meets  annually  to 
determine the composition and any changes of the index. 
COMMODITY SPOT MARKET 

It  had  become  very  essential  in  the  Indian  context  to  have  a  spot  market  which  is 
transparent  and  driven  by  demand  and  supply  factors  alone.  Thus  it  was  necessary  to 
reduce  the  cost  of  intermediation  and  improve  producer’s  realization  without  increasing 
price  paid  by  the  consumers  through  making  structural  reforms  in  commodity  marketing 
process.  This  is  achievable  by  reducing  cost  of  intermediation  and  creating  an  electronic 
linkage between arrival centres and consumption centres across the country.  

Spot  exchange  thus  were  created  which  are  based  on  the  principle  that  it  provides  an 
organized  and  centralized  trading  environment  with  the  facility  to  access  the  market 
electronically  &  remotely  and  providing  trading  in  the  quality  and  quantity  specified 
commodities. Some other objectives of the Exchange are: 

ƒ To provide an effective method of spot price discovery in various commodities, in a

transparent manner from across the country
ƒ To create a market where farmers can sell their produce and realize sale proceeds at
the best prevailing price.
ƒ To create a market where the processors, end users, exporters, corporate (both private
and government) and other upcountry traders can procure agricultural produces at the
most competitive price, without any counter party and quality risk.
ƒ To create a transparent market where financiers, investors and arbitrageurs can invest
money in buying various commodities across the country without going through the
hassles of physical market.
ƒ To provide authentic spot price of various commodities that can be used by the futures
market as the benchmark price for settlement of their contracts on the date of expiry.
ƒ To help the futures exchanges, Forward Markets Commission (FMC) and the
Government in achieving the target of compulsory delivery in all agricultural
produces by way of creating a structured and standardized spot market.
ƒ To promote grading and standardization of agricultural produces and create a market,
where banks and money lending agencies can provide warehouse receipt financing to
farmers and traders.

Currently to trade in commodities in the spot market through an exchange, two options are 
available: 

1. National Spot Exchange (NSEL) and  
2. NCDEX Spot Exchange (NSPOT)   

NATIONAL SPOT EXCHANGE 
National Spot Exchange Ltd or NSEL is a national level, institutionalised, demutualised and 
transparent  electronic spot  exchange set  up  by  Financial  Technologies  India  Ltd  (FTIL)  and 
National  Agricultural  Co‐operative  Marketing  Federation  of  India  Ltd  (NAFED)  to  create  a 
delivery based pan‐India spot market for commodities. It facilitates risk free and hassle free 
purchase  and  sell  of  quality  and  quantity  specified  commodities  to  commodity  market 
participants  including  farmers,  traders,  processors,  exporters,  importers,  arbitrageurs, 
investors and the retail market participants. Exchange also offers various other services such 
as quality certification, warehousing, warehouse receipt financing, etc. 

NSEL  is  recognized  by  Ministry  of  Consumer  Affairs,  Food  &  Public  Distribution  and 
Government of  India.  It has obtained licenses from  various state governments to facilitate 
online  delivery  based  trading  in  various  agro‐commodities.  In  addition  the  Exchange 
provides delivery based trading in bullions and metals across the country. 

NSEL  commenced  its  live  operations  on  15th   October  2008.  It  has  created  efficient  spot 
delivery  platform,  helping  the  sellers/producers  to  sell  commodities  directly  to  the  end 
buyers  comprises  of  processors/  exporters.  Currently, NSEL  holds  a  market  share  of  over 
98%  of  the  Indian  electronic  commodity Spot  market,  and  has  more  than 495  registered 
members operating through over 3000 trader work stations, across India. 

What are the commodities being traded on NSEL platform? 

NSEL  conducts  spot  trading  in  various  agricultural  and  non‐agricultural  commodities, 
including gold and silver. The Exchange currently offers trading in 32 commodities. Contracts 
are  designed  and  customised  to  fulfil  the  requirement  of  big  corporate,  traders  and  small 
farmers. 
NSEL launched a new segment ‘e‐Series’ in 2010, which is exclusively designed to develop a 
cash segment in commodities. E‐Gold was the first product to be launched under e‐Series, 
followed  by  e‐Silver,  e‐Copper  and  e‐Zinc.  E‐Series  products  track  prices  of  physical 
commodities.  These  are  commodity  investment  products  in  demat,  available  in  small 
denominations to enable commodity investment, in the form of SIPs (Systematic Investment 
Planning), for retail and investors and portfolio diversification for HNIs. 

What is dematerialised or demat form of commodities? 

Dematerialisation  of  commodities  implies  that these  commodities  are  stored  in Exchange‐

designated  vaults/warehouses  and  the  record  of  the  ownership  is  in  electronic  form,  just 
like trading in equity shares. The legal and beneficial owner of the goods gets a credit in his 
account electronically, which is similar to holding a pass book in the bank. Similarly, transfer 
of ownership against buy and sale is done from one account to the other, just like money 
transfer  through  a  cheque.  The  depository  keeps  records  of  holding  and  transfers  in 
electronic  form.  The  opening  of  account  and  transfer  instructions  are  carried  out  by  the 
agents of the depository, called Depository Participants (DPs). 

What is the difference between delivery in physical form and delivery in demat form? 
In case of physical delivery, a person gets a warehouse receipt in paper form, while in case 
of delivery in demat form, he gets a credit entry in his demat account. 

Which are the commodities available for trading in demat form? 

Currently, gold, silver, copper and zinc are available. NSEL plans to introduce all other non‐
perishable commodities in demat soon. 

How do I buy commodities in demat form? 

You have to first register yourself as a client with any member of National Spot Exchange. 
You are also required to open a demat account with any of the DPs empanelled with NSEL. 
You  can  then  place  your  order  for  e‐Series  products  by  making  a  telephone  call  to  your 
broker or directly through online trading terminals. 

What are the timings for trading in demat commodities on NSEL platform? 

Trading  in  e‐Series  products  can  be  done  on  any  day  of  the  week  from  Monday  to  Friday 
between 10:00 am and 11:30 pm. Trading in e‐Series is not allowed on Saturdays and other 
holidays notified by the Exchange. 

What is the payment process for purchase/sale of e‐Series commodities? 

 The net position outstanding at the end of day is settled by delivery and payment on the 
T+2 basis. 

Will NSEL members and clients have to open separate accounts for trading in e‐Series? 

Yes. Any member of the Exchange willing to trade in e‐ Series is required to open a CM Pool 
Account. A client willing to trade in any of the e‐Series contracts is required to open a 
beneficiary account. 

Who are the DPs empanelled with NSEL? 

NSEL keeps on updating information relating to empanelled DPs on its website 
www.nationalspotexchange.com. At present, the following depository participants are 
empanelled with the Exchange: 
 
Karvy Stock Broking Ltd. 
Globe Capital Market Ltd. 
Religare Securities Ltd. 
Goldmine Stocks Pvt. Ltd. 
IL & FS Securities Services Ltd. 
Monarch Project and Finmarkets Ltd. 
SAM Global Securities Ltd. 
SSD Securities Private Ltd. 
Stock Holding Corporation of India Ltd. 
Zuari Investments Ltd. 
Aditya Birla Money Ltd. 
LSE Securities Ltd. 
Aditya Birla Money Ltd./ Apollo Sindhoori 
India Infoline Ltd. 
Master Capital Services Ltd. 
Geojit BNP Paribas Financial Services Ltd.  

What is the process of opening a demat beneficiary account? 

 The process is similar to opening demat account for equity. The investor is required to fill 
up  a  demat  account  opening  form  available  with  any  of  the  DPs  mentioned  above  and 
provide his KYC (know your client) documents. 

Is there any charge for opening a beneficiary account? 

The charges are notified by the DPs to all the clients holding beneficiary account with them. 
The DPs normally charge Annual Maintenance Charges (AMC) and transaction charges on all 
debit instructions. It is similar to the practice followed in equity market. 

How many days does it take to open a beneficiary account? 

It  takes  at  least  1  to  3  working  days  to  complete  all  formalities  of  opening  a  beneficiary 
account. 

Is there any difference between the procedures of opening pool and beneficiary accounts? 

Yes. Members of the Exchange can open a CM pool account with any of the DPs empanelled 
with NSEL. The Exchange issues a member ID intimation letter to the member, which has to 
be submitted along with the request for opening a CM Pool Account. Clients are required to 
submit their KYC documents for opening a beneficiary account. 

I am a member of MCX and I also have a pool account for MCX trading. Do I have to open 
another pool account if I want to trade on NSEL platform? 

Yes. A member is required to open separate pool accounts both under NSDL and CDSL 
depository for trading on the NSEL platform. 

I am an investor holding a demat account for equities. Do I have to open a separate demat 
account for trading on NSEL? 

Yes. You have to open a separate demat account for NSEL as separate demat accounts are 
required for holding equities and commodities. However, if you have a demat account for 
trading on MCX, then the same account can be used for NSEL. However, if you have demat 
accounts for trading on any other stock exchanges/commodity exchanges, then you have to 
open a separate demat account. 

 Are e‐Series products compulsory demat contracts? Can I get physical warehouse receipts 
on these? 
Yes. NSEL’s e‐Series products are compulsory demat contracts. For taking delivery of such 
units, you need to have a demat account. Similarly, for selling these contracts, you must 
hold demat units in your beneficiary account. 

What is the pay‐in and pay‐out time for e‐Series contracts? 

Funds and delivery pay‐in‐is at 1:00 pm and pay‐out is at 5:30 pm. Pay‐in and pay‐out for e‐
Series products are executed on the T+2 basis. Settlement is done from Monday to Friday, 
excluding holidays notified by the Exchange. 

What is the process of delivery if I sell e‐Series units? 

On the trading day or T+1 day, you have to issue a delivery instruction for sale (DIS) to your 
DP.  Please ensure  to  write  the correct settlement  number,  market  type,  ICIN  number  and 
quantity. Your member (broker) will provide you the market type and settlement number. 
Please  ensure  that  the  execution  date  is  same  or  prior  to  the  pay‐in  date  and  your 
instruction is executed by the DP before the scheduled pay‐in time. 

Are there any custody charges? 

No. There are no custody charges for holding the demat units. 

 Can I take physical delivery of goods on surrendering demat units? 

Yes. You can take physical delivery of goods on surrendering demat units anytime you like. 
The  delivery  locations  and  procedures  related  to  physical  delivery  are  specified  in  the 
respective product note. 

TRADE IN WAREHOUSE RECEIPTS LIKELY SOON 
Estimates suggest that India wastes almost 20 percent to 25 percent of its food grains due 
to  improper  or  inadequate  storage.  That  is  roughly  60  million  tonnes  of  food  grains  each 
year,  almost  as  much  as  what  India  actually  stores  in  its  official  godowns.  The  degree  of 
wastage  is  nearly  double  in  the  case  of  easily  perishable  commodities  like  fruits  and 
vegetables. 

It  was  in  this  context  that  the  government  instituted  the  Warehousing  Development  and 
Regulatory  Authority  (WDRA)  in  October  2010.  The  idea  was  to  improve  the  storage 
capacity in the country and also help producers and consumers get a better deal by cutting 
out the intermediaries and wastages. The 2011‐12 Budget also recognised cold chains and 
post‐harvest storage as an infrastructure sub‐sector eligible for income tax relief. 

The  WDRA,  on  its  part,  has  devised  the  system  of  Negotiable  Warehouse  Receipts  (WR) 
which allows farmers to get the best price for their produce and help bring down prices of 
commodities  by  cutting  out  the  arbitrage  earned  by  middlemen.  At  present,  the  scheme 
covers 40 agricultural commodities like cereals, pulses and spices. The WDRA has registered 
50  warehouses  across  the  country,  which  will  now  be  able  to  issue  such  negotiable 
warehouse  receipts.  300  more  warehouses  are  in  the  pipeline.  It  wishes  to  launch  the 
trading of negotiable warehouse receipts (WR) on online spot exchanges very soon. It has 
sent  a  proposal  for  the  same  to  the  Ministry  in  September  2011.    Currently,  WRs  are 
negotiable but not tradable on any platform. 

The tradability of negotiable WRs will help fetch higher prices for agri produce, depending 
upon demand in consuming centres. The tradability of negotiable WRs will also bring much 
needed  transparency  into  the  agri  commodity  trade  and  avoid  multiple  financing  of  the 
same receipt. Tradability of WRs is set to help marginal farmers to hold stocks with even a 
small quantity of agri produce. 

Domestic  online  stock  exchanges,  led  by  Financial  Technologies‐promoted  National  Spot 
Exchange, are currently generating an average daily turnover of Rs 1,000 crore, which will 
multiply several times with the launch of WR trade. 

COMMODITY DERIVATIVE MARKET 
It can be described as a derivative instrument whose value is derived from the underlying
commodity. The commodity derivatives market is a direct way to invest in commodities
rather than investing in the companies that trade in those commodities. For example, an
investor can invest directly in a steel derivative rather than investing in the shares of Tata
Steel.

The Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s
India had one of the world’s largest futures industry. The Forward Contract (Regulation) Act,
1952 banned cash settlement in forward contracts and options trading. In 1960, forward
trading was completely banned. Though the Government relaxed the forward contract rules in
later decades, the forward market never took off later.

The government of India has issued notifications on April 1, 2003 permitting futures trading
in commodities. Trading in commodity options, however, is still prohibited. The lifting of the
30-year ban on commodity futures trading in India has opened yet another avenue for
investors.

Why trade in futures?

Futures contract in the commodities market, similar to equity derivatives segment, will
facilitate the activities of speculation, hedging and arbitrage to all class of investors.

Speculation:

It facilitates speculation by providing opportunity to people, although not involved with the
commodity, to trade on the views in the movement of commodity prices. The speculative
position is taken with a small margin amount that is paid to the exchange, and the contract
can be squared-off anytime during the trading hours.

Hedging:

Futures exchanges exist and are successful based on the principle that hedgers may forgo
some profit potential in exchange for less risk of price movements and speculators will have
access to increased profit potential from assuming this risk.

For example, an oil-seed farmer may go short in oil-seed futures, thus ‘locking’ his sale price
and in the process hedging against any adverse price movements. On the other hand a
processor of oil seeds may buy oil-seed futures and thus assure him a supply of oil-seeds at a
pre-determined price. Similarly the oil-seed processor may go short in oil futures, which may
be bought by a wholesaler of oil.

Also, there is a saying that ‘Gold shines when everything fails’. Thus, gold can be used as a
hedging tool against other investments.

Arbitrage:

Traders may exploit arbitrage opportunities that arise on account of different prices between
the two exchanges or between different maturities in the same underlying.

Where do I need to go to trade in commodity futures? 
Though there are regional exchanges, on a national scale which have the highest volumes 
too, you have five options – 

1. National Commodity and Derivative Exchange (NCDEX),  
2. Multi Commodity Exchange of India Ltd  (MCX) and  
3. National Multi Commodity Exchange of India Ltd (NMCE) 
4. ACE Derivatives and Commodity Exchange (ACE) and   
5. Indian Commodity Exchange Limited (ICEX) 

All five have electronic trading and settlement systems and a national presence. 

MCX is the largest commodity futures exchange in the country with more than 80 % share 
and  has  more  than  2100  registered  members  operating  through  over  1,  80,000  trading 
terminals, across India. The Exchange was the sixth largest commodity futures exchange in 
the world, in terms of the number of contracts traded in CY2010.  

MCX offers more than 40 commodities across various segments such as bullion, ferrous and 
non‐ferrous metals, energy, weather and a number of agro‐commodities on its platform. 

How do I choose my broker? 

Several already‐established equity brokers have sought membership with NCDEX and MCX. 
The  likes  of  SSKI  (Sharekhan)  and  ICICIcommtrade  (ICICIdirect)  are  already  offering 
commodity futures services. Some of them also offer trading through Internet just like the 
way  they  offer  equities.  You  can  also  get  a  list  of  more  members  from  the  respective 
exchanges and decide upon the broker you want to choose from. 

What is the minimum investment needed? 

You  can  have  an  amount  as  low  as  Rs  5,000.  All  you  need  is  money  for  margins  payable 
upfront to exchanges through brokers. The margins range from 5‐10 per cent of the value of 
the commodity contract. 

The prices and trading lots in agricultural commodities vary from exchange to exchange (in 
kg,  quintals  or  tonnes),  but  again  the  minimum  funds  required  to  begin  will  be 
approximately Rs 5,000. 

Do I have to give delivery or settle in cash? 

You can do both. All the exchanges have both systems ‐ cash and delivery mechanisms. The 
choice is yours. If you want your contract to be cash settled, you have to indicate at the time 
of placing the order that you don't intend to deliver the item. 

If you plan to take or make delivery, you need to have the required warehouse receipts. The 
option to settle in cash or through delivery can be changed as many times as one wants till 
the last day of the expiry of the contract. 

What do I need to start trading in commodity futures? 
As of now you will need only one bank account. You will need a separate commodity demat 
account from the National Securities Depository Ltd to trade. 

What are the other requirements at broker level? 

You will have to enter into a normal account agreements with the broker. These include the 
procedure  of  the  Know  Your  Client  format  that  exist  in  equity  trading  and  terms  of 
conditions  of  the  exchanges  and  broker.  Besides  you  will  need  to  give  you  details such  as 
PAN no., bank account no, etc. 

What are the brokerage and transaction charges? 

The  brokerage  charges  range  from  0.10‐0.25  per  cent  of  the  contract  value.  Transaction 
charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different 
for  different  commodities.  It  will  also  differ  based  on  trading  transactions  and  delivery 
transactions.  In  case  of  a  contract  resulting  in  delivery,  the  brokerage  can  be  0.25  ‐  1  per 
cent of the contract value. The brokerage cannot exceed the maximum limit specified by the 
exchanges. 

In which commodities can I trade? 

Though  the  government  has  essentially  made  almost  all  commodities  eligible  for  futures 
trading, the nationwide exchanges have earmarked only a select few for starters. While the 
NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a 
large  number  of  agriculture,  metal  and  energy  commodities.  MCX  also  offers  many 
commodities for futures trading. 

8 major categories:

1. Vegetable oilseeds, oils and meals

2. Pulses
3. Spices
4. Metals
5. Energy products
6. Vegetables
7. Fibres and manufactures - Cotton
8. Other – Guarseed, guar gum, Sugar

FUTURES TRADING INITIATED IN COTTON 

Multi Commodity Exchange launched futures trading in cotton on the 3rd October 2011. The
new cotton contract for October 2011, December 2011 and January 2011 was launched by Mr
Ramesh Abhishek, Chairman, Forward Markets Commission. The contract recorded a trading
volume of 9,600 bales valued at Rs 17.73 crore. The open interest was 1,575 bales.
The trading unit of the cotton futures contract is 25 bales and price quote for the contract is 
ex‐warehouse  Rajkot  excluding  all  taxes,  duties,  levies  and  charge.  The  contract  will  be 
compulsory delivery with physical delivery available in multiples of 100 bales. 

India is a major producer and exporter of cotton. The cotton futures contract will meet the 
needs  of  the  whole  cotton  value  chain  including  farmers,  ginners,  traders,  spinners  and 
textile manufacturers. Cotton futures will also go a long way to stabilise prices by reducing 
variations  in  seasonal  and  short‐term  price  trends,  thus  benefiting  millions  of  cotton 
growers in the country. 

Where do I look for information on commodities? 

Daily  financial  newspapers,  TV  business  channels  carry  spot  prices  and  relevant  news  and 
articles  on  most  commodities.  Besides,  there  are  specialised  magazines  on  agricultural 
commodities  and  metals  available  for  subscription.  Brokers  also  provide  research  and 
analysis support. 

But  the  information  easiest  to  access  is  from  websites.  Though  many  websites  are 
subscription‐based, a few also offer information for free. You can surf the web and narrow 
down you search. 

Do I have to pay sales tax on all trades? Is registration mandatory? 

No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in 
case  of  trade  resulting  into  delivery.  Normally  it  is  the  seller's  responsibility  to  collect and 
pay sales tax. 

The sales tax is applicable at the place of delivery. Those who are willing to opt for physical 
delivery need to have sales tax registration number. 

What happens if there is any default? 

Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges 
have  a  penalty  clause  in  case  of  any  default  by  any  member.  There  is  also  a  separate 
arbitration panel of exchanges. 

Are any additional margin/brokerage/charges imposed in case I want to take delivery of 
goods? 

Yes. In case of delivery, the margin during the delivery period increases to 20‐25 per cent of 
the contract value. The member/ broker will levy extra charges in case of trades resulting in 
delivery. 

Is stamp duty levied in commodity contracts? What are the stamp duty rates? 

As  of  now,  there  is  no  stamp  duty  applicable  for  commodity  futures  that  have  contract 
notes  generated  in  electronic  form.  However,  in  case  of  delivery,  the  stamp  duty  will  be 
applicable  according  to  the  prescribed  laws  of  the  state  the  investor  trades  in.  This  is 
applicable in similar fashion as in stock market. 

How much margin is applicable in the commodities market? 

As  in  stocks,  in  commodities  also  the  margin  is  calculated  by  (value  at  risk)  VaR  system. 
Normally it is between 5 per cent and 10 per cent of the contract value. 

The margin is different for each commodity. Just like in equities, in commodities also there 
is  a  system  of  initial  margin  and  mark‐to‐market  margin.  The  margin  keeps  changing 
depending on the change in price and volatility. 

Are there circuit filters? 

Yes  the  exchanges  have  circuit  filters  in  place.  The  filters  vary  from  commodity  to 
commodity but the maximum individual commodity circuit filter is 6 per cent. The price of 
any  commodity  that  fluctuates  either  way  beyond  its  limit  will  immediately  call  for  circuit 
breaker. 

What are the risk factors?  

Commodity trading throws up a huge potential for profit and loss as it involves predictions 
of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to 
futures trading in equity markets. 

A  major  difference  is  that  the  information  availability  on  supply  and  demand  cycles  in 
commodity markets is not as robust and controlled as the equity market. 

CURRENCY 
The foreign exchange market, which is usually known as "forex" or "FX," is the largest
financial market in the world. Compared to the measly $74 billion a day volume of the New
York Stock Exchange, the foreign exchange market looks absolutely gigantic with its $4
TRILLION a day trade volume.

Currency trading also is also known as foreign exchange, or forex, and it is the process of
buying or selling international currencies for commerce or as an investment. By trading
currencies, an investor is provided with a way to invest in a currency's future. However,
currency is not traded in a financial market per se, because there is no exchange. Rather, it is
totally electronic, run by a number of international banks, and it is available to investors or
buyer 24 hours a day, from Sundays through Fridays.

In the past few years this highly attractive market has become more and more accessible to
individual clients. The market participants, who are linked world-wide by modern
communication systems, control the prices (rates), as this market too, follows the laws of
supply and demand. The special advantage of this investment as opposed to traditional
investments such as fixed interest shares etc. is that profits can also be made in case of the
USD falling instead of rising compared to other currencies.

The Foreign exchange market is volatile by nature. The practice of trading it by way of
margin increases that volatility exponentially. In order to make a successful trade, a trader
has to take into account technical and fundamental data and make an informed decision based
on his perception of market sentiment and market expectation. Timing a trade correctly is
probably the most important variable in trading successfully. Invariably there will be times
when a traders' timing will be off. So don't expect to generate returns on every trade.

THE INDIAN CURRENCY MARKET 

The Indian foreign exchange market has seen a massive transformation over the past decade.
From a closed and heavily controlled setting of the 1970s and 1980s, it has moved to a more
open and market-oriented regime during the 1990s. Turnover has increased in both the spot
and forward segments of the market. Globalization and integration of financial markets,
coupled with progressive increase of cross-border flow of capital, have transformed the
dynamics of Indian financial markets. The steady rise in India’s foreign trade along with
liberalization in foreign exchange regime has led to large inflow of foreign currency into the
system in the form of FDI and FII investments. This has increased the need for dynamic
currency risk management.
It is to be noted that unlike in foreign countries where currency is fully convertible, the Indian
Rupee is completely convertible on the current account but is partially convertible on the
capital account. The resultant is that the rupee is not completely governed by the market
forces of demand and supply.

Under the Indian Law, one can buy or sell foreign currency on current account for export, 
import etc. Also, trading on capital account is allowed with some restrictions. However, the 
regulations under Foreign Exchange Management Act (FEMA), 1999, do not permit resident 
Indians to do spot currency trading for speculation purpose. The forward currency market is 
also  governed  by  stringent  government  regulations  and  other  than  authorised  banks  and 
brokers,  trading  on  forwards  is  not  allowed  by  retail  participants.  It  is  to  be  noted  that 
remittances  under  the  Liberalised  Remittance  Scheme  are  allowed  only  in  respect  of 
permissible  capital  or  current  account  transactions  or  a  combination  of  both.  All  other 
transactions,  which  are  otherwise  not  permissible  under  FEMA,  1999,  including  the 
transactions  in  the  nature  of  remittance  for  margins  or  margin  calls  to  overseas 
exchanges/overseas counterparty, are not allowed under the scheme. 

RBI WARNS AGAINS ILLEGAL FOREX TRADING ON THE INTERNET 

In  April  2011,  the  RBI  has  issued  strict  warning  against  illegal  forex  trading  in  the  Indian 
Market.  The  instruction  comes  in  the  wake  of  introduction  of  overseas  foreign  exchange 
trading  on  a  number  of  Internet  and  electronic  trading  portals,  luring  the  residents  with 
offers  of  guaranteed  high  returns  based  on  such  forex  trading. Several  people  have  lost 
heavily in forex trade through Internet portals in the recent past. 

The circular says, “The advertisements by these Internet or online portals exhort people to 
trade  in  forex  by  way  of  paying  the  initial  investment  amount  in  Indian  rupees.  Many 
companies  even  engage  agents  who  personally  contact  gullible  people  to  undertake  forex 
trading  and  investment  schemes  and  entice  them  with  promises  of  disproportionate  or 
exorbitant returns. Such companies ask public to make the margin payments for such online 
forex trading transactions through credit cards  or deposits in various accounts maintained 
with banks in India”. 

The  apex  bank  said  it  has  also  observed  that  accounts  are  being  opened  in  the  name  of 
individuals or proprietary concerns at different bank branches for collecting the margin and 
investment  money.  The  banks  have  been  asked  to  exercise  “due  caution  and  be  extra 
vigilant” in respect of such transactions, the RBI’s circular said. 

Any  resident  Indian  collecting  or  remitting  such  payments  outside  India  is  liable  to  be 
proceeded against with, for contravention of FEMA and violation of regulations relating to 
Know Your Customer (KYC) norms and Anti Money Laundering (AML) standards, the circular 
added. 

A person resident in India may enter into currency futures or currency options on a stock
exchange recognized under section 4 of the Securities Contract (Regulation) Act, 1956, to
hedge an exposure to risk or otherwise, subject to such terms and conditions as may be set
forth in the directions issued by the RBI from time to time.

CURRENCY FUTURES 

In order to provide a liquid, transparent and vibrant market for foreign exchange rate risk
management, Securities & Exchange Board of India (SEBI) and Reserve Bank of India (RBI)
have allowed trading in currency futures on stock exchanges for the first time in India,
initially based on the USDINR exchange rate and subsequently on three other currency pairs
– EURINR, GBPINR and JPYINR.

Trading in currency futures is allowed on three exchanges:

1. Multi Commodity Exchange – Stock Exchange (MCX-SX)
2. National Stock Exchange (NSE)
3. United Stock Exchange (USE)
Trading in currency futures would give Indian businesses another tool for hedging their
foreign exchange risk effectively and efficiently at transparent rates on an electronic trading
platform. The primary purpose of exchange-traded currency derivatives is to provide a
mechanism for price risk management and consequently provide price curve of expected
future prices to enable the industry to protect its foreign currency exposure. The need for such
instruments increases with increase of foreign exchange volatility. These contracts also offer
a better flexibility than the over-the-counter (OTC) market in terms of transparency in rates
that is ensured by an electronic trading platform.

BENEFITS OF CURRENCY FUTURES TO MARKET PARTICIPANTS 

A wide range of financial market participants ‐‐ hedgers (i.e. exporters, importers, corporate 
and  banks),  investors  and  arbitrageurs  are  benefitted  by  price  discovery  and  price  risk 
management on the transparent trading platform of the stock exchanges. 

Hedgers: 

 The  stock  exchanges  provide  a  high‐liquidity  platform  for  hedging  against  the  effects  of 
unfavourable  fluctuations  in  foreign  exchange  rates.  Banks,  importers,  exporters  and 
corporate can hedge their foreign exchange risk effectively. 

Investors: 

 All those interested in taking a view on appreciation (or depreciation) of exchange rates in 
the  long  and  short  term,  can  participate  in  currency  futures.  For  example,  if  one  expects 
depreciation of Indian rupee against US dollar, then he can hold on long (buy) position in the 
USD/INR contract for returns. Contrarily, he can sell the contract if he sees appreciation of 
the  Indian  rupee.  Similar,  long  or  short  positions  can  be  taken  in  EURINR,  GBPINR  and 
JPYINR  if  investors  see  any  fluctuation  in  the  Indian  currency  against  other  currencies  like 
Euro, Sterling Pound and Japanese Yen. 

Arbitrageurs: 

 Arbitrageurs  get  the  opportunity  of  trading  in  currency  futures  by  simultaneous  purchase 
and  sale  in  two  different  markets,  taking  advantage  of  price  differential  between  the 
markets.  

CONTRACT SPECIFICATIONS (AS ON MCX­SX) 
  

The currency futures contracts on other exchanges are similar to those on the MCX-SX.

HEDGING THROUGH CURRENCY FUTURES 

Hedging scenarios

Exchange-traded currency futures are used to hedge against the risk of rate volatilities in the
foreign exchange markets. Here, we give two examples to illustrate the concept and
mechanism of hedging:

Example

1: Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places
his import order on July 15, 2008, with the delivery date being 4 months ahead. At the time
when the contract is placed, in the spot market, one USD was worth say INR 44.50. But,
suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in
October 2008, the value of the payment for the importer goes up to INR 4,475,000 rather than
INR 4,450,000. The hedging strategy for the importer, thus, would be:

Current Spot Rate (15th July '08) : 44.5000

Buy 100 USD - INR Oct '08 Contracts (1000 * 44.5500) * 100 (Assuming the Oct '08
on 15th July ’08 contract is trading at 44.5500 on 15th July, '08)
Sell 100 USD - INR Oct '08 Contracts in : 44.7500
Oct '08 Profit/Loss (futures market) 1000 * (44.75 – 44.55) * 100 = 20,000
Purchases in spot market @ 44.75 Total : 44.75 * 100,000
cost of hedged transaction 100,000 * 44.75 – 20,000 = INR 4,455,000

Example

2: A jeweller who is exporting gold jewellery worth USD 50,000, wants protection against
possible Indian Rupee appreciation in Dec ’08, i.e. when he receives his payment. He wants
to lock-in the exchange rate for the above transaction. His strategy would be:

One USD - INR contract size : USD 1,000

Sell 50 USD - INR Dec '08 Contracts : 44.6500
(on 15th Jul '08)
Buy 50 USD - INR Dec '08 Contracts in Dec '08 : 44.3500
Sell USD 50,000 in spot market @ 44.35 in Dec '08 (Assume that initially Indian rupee
depreciated , but later appreciated to 44.35 per USD as foreseen by the exporter by end of
Dec '08)
Profit/Loss from futures (Dec '08 contract) : 50 * 1000 *(44.65 – 44.35)
= 0.30 *50 * 1000
= INR 15,000

The net receipt in INR for the hedged transaction would be: 50,000 *44.35 + 15,000 =
2,217,500 + 15,000 = 2,232,500. Had he not participated in futures market, he would have
got only INR 2,217,500. Thus, he kept his sales unexposed to foreign exchange rate risk.

How it works

• Presently, all futures contracts on are cash settled. There are no physical contracts.
• All trade on takes place on a nationwide electronic trading platform that can be
accessed from dedicated terminals at locations of the members of the exchange.
 • All participants on the trading platform have to participate only through trading
members of the Exchange.
o Participants have to open a trading account and deposit stipulated
cash/collaterals with the trading member.
• The exchange stands in as the counterparty for each transaction; so participants need
not worry about default.
o In the event of a default, the exchange will step in and fulfil the obligations of
the defaulting party, and then proceed to recover dues and penalties from
them.
• Those who entered either by buying (long) or selling (short) a futures contract can
close their contract obligations by squaring-off their positions at any time during the
life of that contract by taking opposite position in the same contract.
o A long (buy) position holder has to short (sell) the contract to square off
his/her position or vice versa.
o Participants will be relieved of their contract obligations to the extent they
square off their positions.
• All contracts that remain open at expiry are settled in Indian rupees in cash at the
reference rate specified by RBI.

 
SOME FREQUENTLY ASKED QUESTIONS ON CURRENCY FUTURES 
What is currency trading?

While trade is international, currencies are national. As international transactions are settled
in global currencies,
usually they are brought/sold for one another and this constitutes ‘currency trading’.

What are the factors that affect the exchange rate of a currency?

A country’s currency exchange rate is typically affected by the supply and demand for the
country’s currency in the international foreign exchange market. The demand and supply
dynamics is principally influenced by factors like interest rates, inflation, trade balance and
economic & political scenarios in the country. The level of confidence in the economy of a
particular country also influences the currency of that country.

How and why does the demand and supply of a currency increase and decrease?

There are several reasons. A rise in export earnings of a country increases foreign exchange
supply. A rise in imports increases demand. These are the objective reasons, but there are
many subjective reasons too. Some of the subjective reasons are: directional viewpoints of
market participants, expectations of national economic performance, confidence in a
country’s economy and so on.

What is a currency futures contract?

A currency futures contract is a standardized version of a forward contract that is traded on a

regulated exchange. It is an agreement to buy or sell a specified quantity of an underlying
currency on a specified date in future at a specified rate (e.g., USD 1 = INR 46.00). (Note:
USD is abbreviation for the US Dollar, and INR for the
Indian Rupee).
What is the need of currency futures?

Currency futures are needed if your business is influenced by fluctuations in currency

exchange rates. If you are in India and are importing something, you have done the costing of
your imports on the basis of a certain exchange rate between the Indian Rupee and the
relevant foreign currency. By the time you actually import, the value of the Indian Rupee
may have gone down and you may lose out on your income in terms of Indian
Rupees by paying higher. On the contrary, if you are exporting something and the value of
the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated.
Currency futures help you hedge against these exchange rate risks.

Does the national economy of India need currency futures?

Every business exposed to foreign exchange risk needs to have a facility to hedge against
such risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for such
hedging because of greater transparency, liquidity, counterparty guarantee and accessibility.
Since the economy is made up of businesses of all sizes, anything that is good for business is
also good for the national economy.

Why exchange-traded futures? What’s wrong with the currency forward market that
has been existing in India for a long time?

The exchange-traded futures, as compared to OTC forwards, serve the same economic
purpose, yet differ in fundamental ways. Exchange-traded contracts are standardised. In an
exchange-traded scenario where the market lot is fixed at a much lesser size than the OTC
market, equitable opportunity is provided to all classes of investors whether large or small to
participate in the futures market. The other advantages of an Exchange traded market would
be greater transparency, efficiency and accessibility. The counterparty risk (credit risk) in a
futures contract is eliminated by the presence of a clearing house/ corporation, which by
assuming counterparty guarantee, eliminates default risk. Thus, introduction of exchange-
traded futures help in overall development of the forex market in the country.

Who can participate in a currency futures market?

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

What are the terms and conditions set by RBI for Banks to participate in exchange
traded fx futures?

RBI has allowed Banks to participate in currency futures market. The AD Category I Banks
which fulfil stipulated prudential requirements are eligible to become a clearing member and
/ or trading member of the currency derivatives segment of MCX-SX. AD Category I Banks
which are urban co-operative banks or state co-operative banks can participate in the
currency futures market only as a client, subject to approval thereof, from the
respective regulatory department of RBI.
If I am an AD Category I Bank, why should I become a member of a currency futures
exchange? I have the interbank market, anyway.

The interbank market is a market for Banks. Small and medium sized clients of Banks cannot
directly participate in the interbank market. If a Bank is a member of a currency futures
exchange, it can trade on behalf of its small and medium-sized clients, who otherwise would
not have been able to benefit from fluctuations in currency exchange rates. Thus, Banks can
increase their customer base if they become a member of a currency futures exchange. Banks
themselves can also benefit from a currency futures exchange by arbitraging between the
existing interbank market and the currency futures exchange. Larger participation in a
currency futures exchange gives the exchange platform a greater vibrancy than the interbank
market, which is limited to Banks.

Can currency futures help small traders?

Yes. The minimum size of the USDINR futures contract is USD 1,000. Similarly EURINR
future contract is EURO 1000, GBPINR future contract is GBP 1000 and JPYINR future
contract is YEN 1, 00,000. These are well within the reach of most small traders. All
transactions on the Exchange are anonymous and are executed on a price time priority
ensuring that the best price is available to all categories of market participants irrespective of
their size. As the profits or losses in the futures market are also paid / collected on a daily
basis, the scope of accumulation of losses for participants gets limited.

If I am an individual with no exposure to foreign exchange risks, does a currency

futures exchange mean anything to me?

Yes, it does, if you want to invest purely as an investor. You can benefit from exchange rate
fluctuations just as you can benefit by investing in equities in the stock market. However, as
in the stock markets, you also stand to lose money if the price movements are not in keeping
with what you had anticipated. Participating in a currency futures exchange is risky, just as
the stock market is. You should therefore be knowledgeable about the currency market if you
want to participate as an investor.

How do exchange-traded currency futures enable hedging against currency risk?

On a currency exchange platform, you can buy or sell currency futures. If you are an
importer, you can buy Futures to “lock in” a price for your purchase of actual foreign
currency at a future date. You thus avoid exchange rate risk that you would otherwise have
faced. On the other hand, if you are an exporter, you sell currency futures on the exchange
platform and “lock in” a sale price at a future date. However, it may be noted that the contract
will be marked to market at the daily settlement price and profit or loss will be paid /
collected on a daily basis.

What are the risks involved in currency futures market?

Risks in currency futures pertain to movements in the currency exchange rate. There is no
rule of thumb to determine whether a currency rate will rise or fall or remain unchanged. A
judgement on this will depend on the knowledge and understanding of the variables that
affect currency rates.
Which are the global exchanges that provide trading in currency futures?

Internationally, exchanges such as Chicago Mercantile Exchange (CME), Johannesburg

Stock Exchange, Euronext.liffe, BM&FBOVESPA and Tokyo Financial Exchange provide
trading in currency futures.

Why should one trade in Indian exchanges as compared to international exchanges?

Indian currency futures enable individuals and companies in India to hedge and trade their
Indian Rupee risk. Most international exchanges offer contracts denominated in other
currencies.

What is the minimum trading unit (i.e. contract size) and tenure of the USDINR,
EURINR, GBPINR and JPYINR futures contract?

The contract size of the USDINR futures contract is USD 1,000, EURINR future contract is
EURO 1,000, GBPINR future contract is GBP 1,000 and JPYINR future contract is YEN 1,
00,000. The contracts shall have a maximum maturity of twelve months. All monthly
maturities from 1 to 12 months are available.

What is the last trading day of these currency futures contract?

The last trading day of a futures contract on MCX-SX shall be two working days prior to the
last working day (excluding Saturdays) of the month. The settlement price is the Reserve
Bank of India’s reference rate on the last trading day.

In which currency are the currency futures contracts settled?

They are settled in cash in Indian Rupees.

What are the various types of margins that are levied to manage the risk?

The trading of currency futures is subject to maintenance of initial, extreme loss, and calendar
spread margins with the clearing house / corporation. The details of the margins levied are
mentioned in the respective product specifications.

What are the currencies traded on MCX-SX?

In the first phase of operations, only the USDINR currency pair was traded on MCX-SX.
With the changing need of the participants, the regulators have allowed MCX-SX to facilitate
trading in other major currency pairs as EURINR, GBPINR and JPYINR future contracts.

What are the trading hours on MCX-SX?

Trading in currency futures is on all working days from Monday- to Friday and is between
9.00 am to 5.00 pm.
MCX Stock
CURRENCY OPTIONS 
In July 2010, The Securities and Exchanges Board of India (Sebi) has allowed exchanges to
introduce currency options on US dollar pairing with rupee, providing another alternative to
corporate for hedging against currency fluctuations. At present, currency options are allowed
on the NSE and USE. MCX-SX has not yet got the regulatory approval to transact in
currency options.
Exchange traded currency options are standardized products with pre-defined maturities.
They are easily accessible when compared with OTC derivatives contracts. Now both
individuals and corporate can reap benefits of out of currency options. Rupee options would
introduce greater flexibility in risk management of corporate and cost control.
The trading volume in the currency options market has grown over threefold on the National
Stock Exchange (NSE) between November2010— when the product was launched—and
February 2011.
PRODUCT SPECIFICATIONS

US Dollar - Rupee Currency Options Contract (as on USE)

Symbol USDOPT
Instrument Type OPTCUR
Size of Contract 1 contract is for 1000 USD (Lot size)
Underlying US Dollar - Indian Rupee spot rate
Quotation Premium in Rupee terms. Outstanding position in USD terms
Type of option Premium styled European Call and Put options
Tick size 0.25 paisa or INR 0.0025
Trading hours Monday to Friday (9:00 a.m. to 5:00 p.m.)
Three serial monthly contracts followed by three quarterly
Available contracts
contracts of the cycle March/June/September/December
Two working days prior to the last business day of the expiry
Last trading day
month at 12 noon.
Minimum of twelve in-the-money, twelve out-of the-money
Strike price and one near-the-money strikes would be provided for all
available contracts
Strike interval 25 paise or INR 0.25
Last working day (excluding Saturdays) of the expiry month.
The last working day would be taken to be the same as that for
Final settlement day Interbank Settlements in Mumbai. The rules for Interbank
Settlements, including those for ‘known holidays’ and
‘subsequently declared holiday’ would be those as laid down
by FEDAI.
On expiry date, all open long in-the-money contracts, on a
particular strike of a series, at the close of trading hours would
be automatically exercised at the final settlement price and
Exercise at Expiry
assigned
on a random basis to the open short positions of the same strike
and series
Position limits Trading Clearing Member
Clients Banks
Members Level
Higher of 6%Higher of 15%Higher of 15%The clearing
of total openof the totalof the totalmember shall
interest oropen interestopen interestensure that his
USD 10or USD 50or USD 100own trading
million acrossmillion acrossmillion acrossposition and the
all contractsall contractsall contractspositions of each
 (both futures(both futures(both futurestrading member
and options) and options) and options) clearing through
him is within the
limits specified
here
The Initial Margin requirement would be based on a worst
scenario loss of a portfolio of an individual client comprising
his positions in options and futures contracts on the same
underlying across different maturities and across various
scenarios of price and volatility changes. In order to achieve
this, the price range for generating the scenarios would be 3.5
standard deviation and volatility range for generating the
Initial margin scenarios would be 3%. The sigma would be calculated using
the methodology specified for currency futures in SEBI circular
no. SEBI/DNPD/Cir-38/2008 dated August 06, 2008 and
would be the standard deviation of daily logarithmic returns of
USD-INR futures price. For the purpose of calculation of
option values, Black-Scholes pricing model would be used. The
initial margin would be deducted from the liquid net worth of
the clearing member on an online, real time basis.
Extreme loss margin equal to 1.5% of the Notional Value of the
open short option position would be deducted from the liquid
Extreme loss margin assets of the clearing member on an on line, real time basis.
Notional Value would be calculated on the basis of the latest
available Reserve Bank Reference Rate for USD-INR
A long currency option position at one maturity and a short
option position at a different maturity in the same series, both
having the same strike price would be treated as a calendar
spread. The margin for options calendar spread would be the
same as specified for USD-INR currency futures calendar
spread. The margin would be calculated on the basis of delta of
Calendar spreads
the portfolio in each month. A portfolio consisting of a near
month option with a delta of 100 and a far month option with a
delta of – 100 would bear a spread charge equal to the spread
charge for a
portfolio which is long 100 near month currency futures and
short 100 far month currency futures.
The Net Option Value is the current market value of the option
times the number of options (positive for long options and
negative for short options) in the portfolio. The Net Option
Net Option Value
Value would be added to the Liquid Net Worth of the clearing
member. Thus, mark to market gains and losses would not be
settled in cash for options positions.
Premium would be paid in by the buyer in cash and paid out to
the seller in cash on T+1 day. Until the buyer pays in the
Settlement of Premium
premium, the premium due shall be deducted from the
available Liquid Net Worth on a real time basis.
Mode of settlement Cash settled in Indian Rupees
FREQUENTLY ASKED QUESTIONS ON CURRENCY OPTIONS 
What are Currency Options?

Currency Options are contracts that grant the buyer of the option the right, but not the
obligation, to buy or sell underlying currency at a specified exchange rate during a
specified period of time. For this right, the buyer pays premium to the seller of the option.

What is the need for Exchange traded Currency Options?

The need for Exchange traded currency options arises on account of the following
reasons:

1. Options have the comparative advantage of maintaining a certain degree of

flexibility in hedging, as, while protecting against a downside risk, they allow the
investor from profiting from favourable movements of the foreign exchange rates
by simply not exercising the option.

2. The exchange platform brings in all attendant benefits of transparency, finer

spreads, access, safety, central counterparty, etc.

What is the underlying for USD-INR options?

Underlying is US Dollar – Indian Rupee (US$-INR) spot rate.

What is the type of options?

USD-INR option contracts are Premium styled European Call and Put Options.

What is the trading hour and size of USD-INR options contract?

The trading hours are from 9 a.m. to 5.00 p.m. on all working days from Monday to
Friday and the contract Size is US$ 1,000.

What is the quotation of USD-INR options?

The premium is quoted in rupee terms. However, the outstanding position is in USD
terms.

What is the contract cycle for USD-INR options?

The contract cycle consists of three serial monthly contracts followed by three quarterly
contracts of the cycle March/June/September/December.

What is the settlement mechanism for USD-INR options?

USD-INR options contracts are cash settled in Indian Rupee.

Which day is the expiry/last trading day?

The expiry / last trading day for the options contract is two working days prior to the last
working day of the expiry month.

How settlement price is derived?

The final settlement price is the Reserve Bank of India USD-INR Reference Rate on the
date of expiry of the contracts.

Which day is the final settlement day?

The options contract would expire on the last working day (excluding Saturdays) of the
contract month. The last working day would be taken to be the same as that for
Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those
for ‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down by
FEDAI.

How would contracts be settled at expiry?

On expiry date, all open long in-the-money contracts, on a particular strike of a series, at
the close of trading hours would be automatically exercised at the final settlement price
and assigned on a random basis to the open short positions of the same strike and
series.

What is the Initial Margin levied in USD-INR Options?

The Initial Margin is based on a worst scenario loss of a portfolio of an individual client
comprising his positions in options and futures contracts on the same underlying across
different maturities and across various scenarios of price and volatility changes. In order
to achieve this, the price range for generating the scenarios is 3.5 standard deviation
and volatility range for generating the scenarios is 3%. The initial margin is deducted
from the liquid net-worth of the clearing member on an online, real time basis.
The sigma is calculated using the methodology specified for currency futures in SEBI
circular no. SEBI/DNPD/Cir-38/2008 dated August 06, 2008 and is the standard
deviation of daily returns of USD-INR futures price.

What is the Extreme Loss margin?

Extreme loss margin of 1.5% of the notional value of the open short option position is
deducted from the liquid assets of the clearing member on an on line, real time basis.
Notional Value is calculated on the basis of the latest available Reserve Bank Reference
Rate for USD-INR.

What is Net Option Value?

The Net Option Value is the current market value of the option times the number of
options (positive for long options and negative for short options) in the portfolio. The Net
Option Value is added to the Liquid Net Worth of the clearing member. Thus, mark to
market gains and losses are not settled in cash for options positions.

What is the Calendar Spread Margin levied on USD-INR Options?

A long currency option position at one maturity and a short option position at a different
maturity in the same series, both having the same strike price is treated as a calendar
spread. The margin for options calendar spread is same as specified for USD-INR
currency futures calendar spread.
The calendar spread margin is calculated on the basis of delta of the portfolio in each
month. A portfolio consisting of a near month option with a delta of 100 and a far month
option with a delta of –100 would bear a spread charge equal to the spread charge for a
portfolio which is long 100 near month currency futures and short 100 far month
currency futures.

How premium paid by the buyer is settled?

Premium is paid by the buyer in cash and paid out to the seller in cash on T+1 day. Until
the buyer pays in the premium, the premium due is deducted from the available Liquid
Net Worth on a real time basis.

What is the Position Limit at Client level?

The gross open positions of the client across all contracts (both futures and options
contracts) not to exceed 6% of the total open interest or USD 10 million whichever is
higher. The Exchange disseminates alerts whenever the gross open position of the client
exceeds 3% of the total open interest at the end of the previous day’s trade.

What is the Position Limit at Trading Member level?

The gross open positions of the trading member across all contracts (both futures and
options contracts) not to exceed 15% of the total open interest or USD 50 million
whichever is higher

What is the Position Limit for Banks?

The gross open positions of the bank across all contracts (both futures and options
contracts) not to exceed 15% of the total open interest or USD 100 million whichever is
higher

What is the Position Limit at Clearing Member level?

No separate position limit is prescribed at the level of clearing member. However, the
clearing member ensures that his own trading position and the positions of each trading
member clearing through him is within the limits specified above

DGCX to launch options trading in Indian rupee 

After the success of rupee futures trading, the Dubai Gold and Commodity Exchange (DGCX) 
will  launch  options  contract  in  rupee‐dollar  from  September  26,  2011.  This,  say  market 
players  will put  pressure  on  the  domestic exchanges, as  options  contracts  in any  segment 
are  much  favoured  due  to  less  margin,  and  the  competition  will  heat  up.  India’s  Financial 
Technologies owns 44 per cent stake in DGCX. 
In Dubai, the size of the options contract in rupee-dollar will be Rs 20 lakh. Prices will be
quoted in US cents per 100 Indian rupees, with a minimum premium fluctuation of 0.000001
US dollars per rupee ($2 per contract). At launch, the October 2011 expiry month will be
available to trade.

Currency  trading  could  witness  a  scenario  similar  to  trading  in  Nifty  futures,  which  had 
shifted  to  the  Singapore  exchange.  Apart  from  India,  the  Nifty  index  is  also  listed  in 
Singapore.  The  rupee‐dollar  futures  contracts  generate  average  daily  trades  of  around  Rs 
1,500  crore  on  DGCX.  Volumes  are  hitting  new  records  every  month  and  the  rupee‐dollar 
contracts  have  become  the  fastest  growing  derivative  instruments  on  DGCX  with  a  rise  of 
over 16 times in 2011, compared to the last year. 

Non Domestic Forward (NDF) Market 

NDF market is an offshore market to trade and hedge in currencies of countries wherein there
is no full convertibility (both capital account and Current Account). Few of the NDF market
traded currencies are Indian Rupee, Chinese Yuan, Philippine Peso, Taiwan Dollar, and
Korean Won. NDFs are distinct from deliverable forwards as the NDF s trade outside the
countries of the corresponding currencies.

NDF is a Non-Deliverable Forward contract which is settled in cash and only in US Dollars.
The difference between the Spot rate and the outright NDF rate is arrived on an agreed
notional amount and settled between the two counterparties.

NDF markets remain a platform for hedging, speculation and arbitrage. The participants in
the NDF market comprise MNC’s, commercial and investment banks, hedge funds, exporters
and importers. The trading locations for NDF s are in Dubai, Singapore, Hong Kong, Tokyo
and London.

Traders take position in the INR NDF market based on their view on where the INR spot
would be after a certain time period in the onshore market (Indian forex market). Entities who
have access to both the markets take advantage of the arbitrage opportunities. Arbitrage
opportunity is available occasionally between the offshore INR NDF market and the onshore
Indian Rupee market including the Spot market and Futures market, which provides a trading
opportunity for the retail investors and the onshore players.

The domestic exchanges (NSE, MCX and USE) face tough competition from the non-
deliverable forward (NDF) market for currency based in Singapore and New York. Dubai has
been a recent addition.

The bulk of price discovery for the Indian rupee has migrated offshore and the onshore
market closely follows its now full-grown foreign cousin (NDF market) as arbitrage channels
have widened. In April 2011, NDF volumes, at nearly $43 billion a day, were more than
double those of the onshore OTC market (about $21 billion a day), and nearly 40 per cent
higher than the combined OTC and futures onshore volume.

Most intra-day action in rupee-dollar takes place when Indian market is closed. The offshore
gap (the difference between any day’s Indian opening rate and the previous day’s closing) has
been higher than the onshore gap (the difference between the day’s opening and closing in
the domestic market) for the past four years. This means Indian companies could end up
missing levels, particularly when the markets are trending.

Needless to say, the central bank’s influence on the rupee will decrease with an increasing
proportion of trading happening overseas. Policy steps must be taken to correct this. Of
course, this is not to say that the central bank should allow unrestrained access in onshore
markets to compete with NDF markets. But some steps can clearly be taken.

Source: The Business Standard

CURRENT SCENARIO & HOW IT AFFECTS YOU 

Story of a weak Rupee as on Oct. 2011 

The Indian rupee has depreciated close to 10% in the last one month or so vis-a-vis the US
dollar. It fell to almost 50 against a dollar on 23 September from the level of 44.4 in July-end
and is now around 49. According to rating agency Crisil Ltd, the main reason for such a sharp
fall is rising demand for the US dollar by Indian companies amid poor foreign institutional
investor participation. In other words, the demand for dollar is higher than its supply,
resulting in depreciation of the Indian currency.
Besides affecting the macroeconomic situation, the depreciating rupee would also have a
bearing on your personal finances. A lower value of rupee compared with the dollar may
make certain things costlier for you and others cheaper.

Where you may lose

Foreign investment: Any investment abroad, whether in stocks or real estate, would become
dearer for you. For instance, to buy stocks worth a dollar, you would be required to pay
around Rs. 50 at present compared with Rs. 45 about a month ago.

However, since different countries have different currencies, the actual impact would depend
upon the fluctuations of currency of a country in which you are investing. Normally, the
rupee is first converted into dollars, which in turn is converted into the currency of the third
country. Hence, the actual impact would vary according to the level of depreciation in rupee
vis-a-vis the third currency. So if rupee depreciates, while the third currency remains at the
earlier level compared with the dollar, you would spend more money for the same amount of
investment in the third currency.

Foreign education (for aspiring students and existing students): Students who plan for
next year admissions will end up paying more for the forms of exams such as Test of English
as a Foreign Language (TOEFL), Graduate Record Exam (GRE) and Graduate Management
Admission Test (GMAT). These are entrance exams that students take to prove their
eligibility for studying abroad in terms of basic language, skills and IQ.

Moreover, the application forms of foreign universities, which cost $50-1,000, will be more
expensive for Indian students.

Students may now have to pay Rs. 50,000-1 lakh over the fee which they were to pay earlier
this year in case of existing students.
Students who are on an education loan may also face problems. Paying fees in
instalments will add to the problem if the loan sanctioned is less. In that case, students will
have to take out the remaining money from their pocket.

Foreign travel: If you are planning to go abroad this holiday season, the depreciating rupee
is sure to burn a hole in your pocket. Add to that, the recent hike in fuel prices, which has
pushed up airfare. For instance, when rupee was at 45 compared with the dollar, you paid Rs.
90 for a service that cost $2. Now, assuming the rupee is at 50, you need to shell out Rs. 100
for the same service.

If you had made your bookings in advance, you may not feel the pinch. If a customer has
booked and paid for the holiday then the cost is frozen and the customer need not pay
additional funds. However, the customer would feel marginally affected when they want to
avail foreign exchange for their personal use overseas.

Where you may gain

Remittance to India: If you are dependant for funds on your son, daughter or relatives
settled abroad, you would get more money for the same amount of dollars. Rupee
depreciation would have no bearing on the level of remittances but those receiving
remittances would benefit as upon conversion to Indian currency the amount would be
higher.

Redemption of foreign investments: While investing abroad has become costlier, you stand
to gain (compared with about a month ago) if you redeem some of your investments in
foreign instruments. For instance, a person redeeming investments worth $1,000 would have
received around Rs. 45,000 in July this year, the same investment would now give Rs.
50,000.

When it is a mixed bag

For equity investors, the rupee depreciation would have a twin impact. Some sectors that are
primarily export oriented stand to gain from rupee depreciation while sectors dependent on
import may be affected adversely.

In fact, investors with exposure to export-oriented sectors, including information technology

and textile, have benefited in the last one month. Out of the 13 sector indices of Bombay
Stock Exchange, only two indices—BSE IT and BSE TecK—have yielded positive returns in
the last one month. However, rupee depreciation may not be the only factor to add to their
returns.

In sharp contrast, rupee depreciation adversely impacts sectors that are dependant on imports.
These include metals, capital goods and power. Interestingly, all these sectors have turned out
to be worst performers in the last one month, among the 13 sectoral indices. Here again, other
factors may have had a bearing on their performance.

What you should do

You need to stick to your budget as far as possible and need to curtail unnecessary
expenditure. While on a foreign trip, you may curtail on shopping to stick to your original
budget. If possible, one can even cancel the trip. In case of foreign education and other such
mandatory expenses, you would have no option. As far as equity investment is concerned,
invest only if your time horizon is long enough to overlook periodic fluctuations.

Fall in the market of currency derivatives

The Indian currency derivatives market shrank nearly 40% in October 2011, a month after 
two  major  exchanges,  the  National  Stock  Exchange  of  India  Ltd  (NSE)  and  MCX  Stock 
Exchange  Ltd  (MCX‐SX),  introduced  transaction  charges  in  the  segment  in  deference  to  a 
ruling by the Competition Commission of India (CCI). 

The imposition of transaction charges has raised the cost of trading in a segment where
margins are wafer-thin. NSE and MCX-SX, India’s two largest currency exchanges with
about 90% market turnover, introduced transaction charges on 22 August. CCI had asked
NSE to start charging fees in the currency segment after MCX-SX filed a complaint with the
commission alleging NSE’s waiver of transaction charges was an abuse of monopoly power.

FOREX FACILITIES FOR INDIVIDUALS – RBI GUIDELINES 

I. Guidelines on Travel Related Matters

Q.1. Who are authorized by the Reserve Bank to sell foreign exchange for travel
purposes?

Ans. Foreign exchange can be purchased from any authorised person, such as Authorised
Dealer (AD) Category-I bank and AD Category II. Full-Fledged Money Changers (FFMCs)
are also permitted to release exchange for business and private visits.

Q.2. Who is an Authorized Dealer?

Ans. An Authorised Dealer is normally a bank specifically authorized by the Reserve Bank
under Section 10(1) of FEMA, 1999, to deal in foreign exchange or foreign securities (the list
of ADs is available on www.rbi.org.in ).
Q.3. How much foreign exchange can one buy when travelling abroad on private visits
to a country outside India?

Ans. For private visits abroad, other than to Nepal and Bhutan, viz., for tourism purposes,
etc., any resident can obtain foreign exchange up to an aggregate amount of USD 10,000,
from an Authorised Dealer, in any one financial year, on self-declaration basis, irrespective of
the number of visits undertaken during the year. This limit of USD 10,000 or its equivalent
per financial year for private visits can also be availed of by a person who is availing of
foreign exchange for travel abroad for any purposes, such as, for employment or immigration
or studies.

No foreign exchange is available for visit to Nepal and/or Bhutan for any purpose.

A resident Indian is allowed to take INR of denomination of Rs.100 or lesser denomination to

Nepal and Bhutan without limit.

Q. 4. How much foreign exchange is available for a business trip?

Ans. For business trips abroad to countries, other than to Nepal and Bhutan, a person can
avail of foreign exchange up to USD 25,000 per visit. Visits in connection with attending of
an international conference, seminar, specialised training, study tour, apprentice training, etc.,
are treated as business visits. Release of foreign exchange exceeding USD 25,000 for
business travel abroad (other than to Nepal and Bhutan), irrespective of the period of stay,
requires prior permission from the Reserve Bank.

No release of foreign exchange is admissible for any kind of travel to Nepal and Bhutan or
for any transaction with persons resident in Nepal.

Investments in Bhutan are permitted in Indian Rupees as well as in freely convertible

currencies. If investment is made in freely convertible currency/ ies, sale/winding up
proceeds are required to be repatriated to India in freely convertible currencies.

Q. 5. How much foreign currency can be taken while buying foreign exchange for travel
abroad?

Ans. Travellers going to all countries other than (a) and (b) below are allowed to purchase
foreign currency notes / coins only up to USD 3000. Balance amount can be carried in the
form of traveller’s cheque or banker’s draft. Exceptions to this are (a) travellers proceeding to
Iraq and Libya who can draw foreign exchange in the form of foreign currency notes and
coins not exceeding USD 5000 or its equivalent; (b) travellers proceeding to the Islamic
Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent
States who can draw entire foreign exchange in the form of foreign currency notes or coins.

Q.6. How much foreign exchange can be drawn for medical treatment abroad?

Ans. AD Category I banks and AD Category II, may release foreign exchange up to USD
100,000 or its equivalent to resident Indians for medical treatment abroad on self declaration
basis, without insisting on any estimate from a hospital/doctor in India/abroad. A person
visiting abroad for medical treatment can obtain foreign exchange exceeding the above limit,
provided the request is supported by an estimate from a hospital/doctor in India/abroad.
An amount up to USD 25,000 is allowed for maintenance expenses of a patient going abroad
for medical treatment or check-up abroad, or to a person for accompanying as attendant to a
patient going abroad for medical treatment/check-up.

The amount of USD 25,000 allowed to the patient going abroad is in addition to the limit of
USD 100,000 mentioned above.

Q.7. What are the facilities available to students for pursuing their studies abroad?

Ans. For studies abroad the estimate received from the institution abroad or USD 100,000,
per academic year, whichever is higher, may be availed of from an AD Category I bank and
AD Category II. Students going abroad for studies are treated as Non-Resident Indians
(NRIs) and are eligible for all the facilities available to NRIs under FEMA, 1999. Educational
and other loans availed of by students as residents in India can be allowed to continue. A
student holding NRO account may withdraw and repatriate up to USD 1 million per financial
year from his NRO account. The student may avail of an amount of USD 10,000 or its
equivalent for incidental expenses out of which USD 3000 or its equivalent may be carried in
the form of foreign currency while going for study abroad.

Q. 8. What are the documents required for withdrawal of Foreign Exchange for the
above purpose?

Ans. Documentation may be done as advised by the Authorised Dealer.

Q. 9. How much foreign exchange is available to a person going abroad on

employment?

Ans. A person going abroad for employment can draw foreign exchange up to USD 100,000
from any Authorised Dealer in India on the basis of self-declaration.

Q. 10. How much foreign exchange is available to a person going abroad on emigration?

Ans. A person going abroad on emigration can draw foreign exchange from AD Category I
bank and AD Category II up to the amount prescribed by the country of emigration or USD
100,000. He can draw foreign exchange up to USD 100,000 on self- declaration basis from an
Authorised Dealer in India This amount is only to meet the incidental expenses in the country
of emigration. No amount of foreign exchange can be remitted outside India to become
eligible or for earning points or credits for immigration. All such remittances require prior
permission of the Reserve Bank. If requirement exceeds USD 100,000, the person requires to
obtain the prior approval from the Reserve Bank.

Q.11. Is there any category of visit which requires prior approval from the Reserve
Bank or the Government of India?

Ans. Dance troupes, artistes, etc., who wish to undertake cultural tours abroad, should obtain
prior approval from the Ministry of Human Resources Development (Department of
Education and Culture), Government of India, New Delhi.

Q.12. Whether permission is required for receiving grant/donation from abroad under
the Foreign Contribution Regulation Act, 1976?
Ans. The Foreign Contribution Regulation Act, 1976 is administered and monitored by the
Ministry of Home Affairs whose address is given below:

Foreigners Division,
Jaisalmer House,
26, Mansingh Road,
New Delhi-110 011

No specific approval from the Reserve Bank is required in this regard.

Q.13. How many days in advance one can buy foreign exchange for travel abroad?

Ans. Permissible foreign exchange can be drawn 60 days in advance. In case it is not
possible to use the foreign exchange within the period of 60 days, it should be immediately
surrendered to an authorised person. However, residents are free to retain foreign exchange
up to USD 2,000, in the form of foreign currency notes or TCs for future use or credit to their
Resident Foreign Currency (Domestic) [RFC (Domestic)] Accounts.

Q. 14. Can one pay by cash full rupee equivalent of foreign exchange being purchased
for travel abroad?

Ans. Foreign exchange for travel abroad can be purchased from an authorized person against
rupee payment in cash only up to Rs.50, 000/-. However, if the Rupee equivalent exceeds
Rs.50,000/-, the entire payment should be made by way of a crossed cheque/ banker’s
cheque/ pay order/ demand draft/ debit card / credit card / prepaid card only.

Q.15. Is there any time-frame for a traveller who has returned to India to surrender
foreign exchange?

Ans. On return from a foreign trip, travellers are required to surrender unspent foreign
exchange held in the form of currency notes and travellers cheques within 180 days of return.
However, they are free to retain foreign exchange up to USD 2,000, in the form of foreign
currency notes or TCs for future use or credit to their Resident Foreign Currency (Domestic)
[RFC (Domestic)] Accounts.

Q.16. Should foreign coins be surrendered to an Authorised Dealer on return from

abroad?

Ans. The residents can hold foreign coins without any limit.

Q.17. How much foreign exchange can a resident individual send as gift / donation to a
person resident outside India?

Ans. Any resident individual, if he so desires, may remit the entire limit of USD 200,000 in
one financial year under LRS as gift to a person residing outside India or as donation to a
charitable/educational/ religious/cultural organization outside India. Remittances exceeding
the limit of USD 200,000 will require prior permission from the Reserve Bank.

Q.18. Is it permitted to use International Credit Card (ICC)/ATM/Debit card for

undertaking foreign exchange transactions?
Ans. Use of International Credit Cards (ICCs) / ATMs/ Debit Cards can be made for travel
abroad in connection with various purposes and for making personal payments like
subscription to foreign journals, internet subscription, etc. The entitlement of foreign
exchange on International Credit Cards (ICCs) is limited by the credit limit fixed by the card
issuing authority only. With ICCs one can (i) meet expenses/make purchases while abroad
(ii) make payments in foreign exchange for purchase of books and other items through
internet in India. If the person has a foreign currency account in India or with a bank
overseas, he/she can even obtain ICCs of overseas banks and reputed agencies.

Use of these instruments for payment in foreign exchange in Nepal and Bhutan is not
permitted.

Q.19. How much Indian currency can a person carry while going abroad?

Ans. Residents are free to take outside India (other than to Nepal and Bhutan) currency notes
of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.
7,500/ - per person. They may take or send outside India (other than to Nepal and Bhutan)
commemorative coins not exceeding two coins each.

Explanation: 'Commemorative Coin' includes coin issued by Government of India Mint to

commemorate any specific occasion or event and expressed in Indian currency.

Q. 20. How much Indian currency can be brought in while coming into India?

Ans. A resident of India, who has gone out of India on a temporary visit may bring into India
at the time of his return from any place outside India (other than Nepal and Bhutan), currency
notes of Government of India and Reserve Bank of India notes up to an amount not
exceeding Rs.7,500.

A person can take or send out of India to Nepal or Bhutan, currency notes of Government of
India and Reserve Bank notes, in denominations not exceeding Rs.100.

Q. 21. How much foreign exchange can be brought in while visiting India?

Ans. A person coming into India from abroad can bring with him foreign exchange without
any limit. However, if the aggregate value of the foreign exchange in the form of currency
notes, bank notes or travellers cheques brought in exceeds USD 10,000 or its equivalent
and/or the value of foreign currency alone exceeds USD 5,000 or its equivalent, it should be
declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF),
on arrival in India.

Q. 22. Is it required to follow complete export procedure when a gift parcel is sent
outside India?

Ans. A person resident in India is free to send (export) any gift article of value not exceeding
Rs.5, 00,000 provided export of that item is not prohibited under the extant Foreign Trade
Policy and the exporter submits a declaration that goods of gift are not more than Rs.5,
00,000 in value.
Export of goods or services up to Rs.5, 00,000 may be made without furnishing the
declaration in Form GR/ SDF/ PP/ SOFTEX, as the case may be.

Q.23. How much jewellery can be carried while going abroad?

Ans. Taking personal jewellery out of India is as per the Baggage Rules, governed and
administered by Customs Department, Government of India. While no approval of the
Reserve Bank is required in this case, approvals, if any, required from Customs Authorities
may be obtained.

Q.24. Can a resident extend local hospitality to a non-resident?

Ans. A person resident in India is free to make any payment in Indian Rupees towards
meeting expenses, on account of boarding, lodging and services related thereto or travel to
and from and within India, of a person resident outside India, who is on a visit to India.

Q. 25. Can residents purchase air tickets in India for their travel not touching India?

Ans. Residents may book their tickets in India for their visit to any third country. For
instance, residents can book their tickets for travel from London to New York, through
domestic/foreign airlines in India itself.

Q. 26. Can a resident open a foreign currency denominated account in India?

Ans. Persons resident in India are permitted to maintain foreign currency accounts in India
under the following three Schemes:

a. Exchange Earners Foreign Currency Accounts:-

All categories of resident foreign exchange earners can credit up to 100 per cent of their
foreign exchange earnings, as specified in the paragraph 1 (A) of the Schedule to Notification
No. FEMA 10/2000-RB dated 3rd May, 2000 and as amended from time to time, to their
EEFC Account with an Authorised Dealer in India. Funds held in EEFC account can be
utilised for all permissible current account transactions and also for approved capital account
transactions as specified by the extant Rules/Regulations/ Notifications/ Directives issued by
the Government/RBI from time to time. The account is maintained in the form of a non-
interest bearing current account.

b. Resident Foreign Currency Accounts: -

A person resident in India may open, hold and maintain with an Authorised Dealer in India a
Resident Foreign Currency (RFC) Account to keep their foreign currency assets which were
held outside India at the time of return can be credited to such accounts. The foreign
exchange received as (i) pension of any other superannuation or other monetary benefits from
the employer outside India; (ii) received or acquired as gift or inheritance from a person
referred to sub-section (4) of section 6 of FEMA, 1999 or (iii) referred to in clause (c) of
section 9 of the Act or acquired as gift or inheritance there from or (iv) received as the
proceeds of life insurance policy claims/maturity/ surrender values settled in foreign currency
from an insurance company in India permitted to undertake life insurance business by the
Insurance Regulatory and Development Authority; may also be credited to this account.
RFC account can be maintained in the form of current or savings or term deposit accounts.

The funds in RFC account are free from all restrictions regarding utilisation of foreign
currency balances including any restriction on investment outside India.

c. Resident Foreign Currency (Domestic) Account:-

A resident Individual may open, hold and maintain with an Authorized Dealer in India, a
Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the
form of currency notes, Bank notes and travellers cheques, from any of the sources like,
payment for services rendered abroad, as honorarium, gift, services rendered or in settlement
of any lawful obligation from any person not resident in India. The account may also be
credited with/opened out of foreign exchange earned abroad like proceeds of export of goods
and/or services, royalty, honorarium, etc., and/or gifts received from close relatives (as
defined in the Companies Act) and repatriated to India through normal banking channels. The
account shall be maintained in the form of Current Account and shall not bear any interest.
There is no ceiling on the balances in the account. The account may be debited for payments
made towards permissible current and capital account transactions.

Q.27. Can a person resident in India hold assets outside India?

Ans. In terms of sub-section 4, of Section (6) of the Foreign Exchange Management Act,
1999, a person resident in India is free to hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India if such currency, security
or property was acquired, held or owned by such person when he was resident outside India
or inherited from a person who was resident outside India. (Please also refer to the
Liberalised Remittance Scheme of USD 200,000 discussed below).

II. Liberalised Remittance Scheme (LRS) of USD 200,000

Q.28. What is the Liberalised Remittance Scheme of USD 200,000?

Ans. Under the Liberalised Remittance Scheme, all resident individuals, including minors,
are allowed to freely remit up to USD 200,000 per financial year (April – March) for any
permissible current or capital account transaction or a combination of both.

Q.29. Please provide an illustrative list of capital account transactions permitted under
the scheme.

Ans. Please refer to Q. 29. Under the Scheme, resident individuals can acquire and hold
immovable property or shares or debt instruments or any other assets outside India, without
prior approval of the Reserve Bank. Individuals can also open, maintain and hold foreign
currency accounts with banks outside India for carrying out transactions permitted under the
Scheme.

Q. 30. What are the prohibited items under the Scheme?

Ans. The remittance facility under the Scheme is not available for the following:
i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of
lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule
II of Foreign Exchange Management (Current Account Transactions) Rules, 2000;

ii) Remittance from India for margins or margin calls to overseas exchanges / overseas
counterparty;

iii) Remittances for purchase of FCCBs issued by Indian companies in the overseas
secondary market;

iv) Remittance for trading in foreign exchange abroad;

v) Remittance by a resident individual for setting up a company abroad;

vi) Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan;

vii) Remittances directly or indirectly to countries identified by the Financial Action Task
Force (FATF) as “non co-operative countries and territories”, from time to time; and

viii) Remittances directly or indirectly to those individuals and entities identified as posing
significant risk of committing acts of terrorism as advised separately by the Reserve Bank to
the banks.

Q.31. Whether LRS facility is in addition to existing facilities detailed in Schedule III
under remittances?

Ans. The facility under the Scheme is in addition to those already available for private travel,
business travel, studies, medical treatment, etc., as described in Schedule III of Foreign
Exchange Management (Current Account Transactions) Rules, 2000. The Scheme can also be
used for these purposes.

However, gift and donation remittances cannot be made separately and have to be made
under the Scheme only. Accordingly, resident individuals can remit gifts and donations up to
USD 200,000 per financial year under the Scheme.

Q. 32. Are resident individuals under this Scheme required to repatriate the accrued
interest/dividend on deposits/investments abroad, over and above the principal
amount?

Ans. The investor can retain and reinvest the income earned on investments made under the
Scheme. At present, the residents are not required to repatriate the funds or income generated
out of investments made under the Scheme.

Q.33. Are remittances under the Scheme on gross basis or net basis (net of repatriation
from abroad)?

Ans. Remittance under this scheme is on a gross basis.

Q. 34. Can remittances under the facility be consolidated in respect of family

members?
Ans. Remittances under the facility can be consolidated in respect of family members subject
to the individual family members complying with the terms and conditions of the Scheme.

Q. 35. Can one use the Scheme for purchase of objects of art (paintings, etc.) either
directly or through auction house?

Ans. Remittances under the Scheme can be used for purchasing objects of art subject to the
provisions of other applicable laws such as the extant Foreign Trade Policy of the
Government of India.

Q.36. Is the AD required to check permissibility of remittances based on nature of

transaction or allow the same based on remitters declaration?

Ans. AD will be guided by the nature of transaction as declared by the remitter and will
certify that the remittance is in conformity with the instructions issued by the Reserve Bank.

Q.37. Can remittance be made under this Scheme for acquisition of ESOPs?

Ans. The Scheme can also be used for remittance of funds for acquisition of ESOPs.

Q.38. Is this scheme in addition to acquisition of ESOPs linked to ADR/GDR (i.e. USD
50,000/- for a block of 5 calendar years)?

Ans. The remittance under the Scheme is in addition to acquisition of ESOPs linked to
ADR/GDR.

Q.39. Is this Scheme is in addition to acquisition of qualification shares (i.e. USD 20,000
or 1% of paid up capital of overseas company, whichever is lower)?

Ans. The remittance under the Scheme is in addition to acquisition of qualification shares.

Q.40. Can a resident individual invest in units of Mutual Funds, Venture Funds,
unrated debt securities, promissory notes, etc., under this scheme?

Ans. A resident individual can invest in units of Mutual Funds, Venture Funds, unrated debt
securities, promissory notes, etc. under this Scheme. Further, the resident can invest in such
securities out of the bank account opened abroad under the Scheme.

Q.41. Can an individual, who has availed of a loan abroad while as a non-resident
Indian can repay the same on return to India, under this Scheme as a resident?

Ans. This is permissible.

Q. 42. Is it mandatory for resident individuals to have PAN number for sending
outward remittances under the Scheme?

Ans. It is mandatory to have PAN number to make remittances under the Scheme.

Q. 43. In case a resident individual requests for an outward remittance by way of

issuance of a demand draft (either in his own name or in the name of the beneficiary
with whom he intends putting through the permissible transactions) at the time of his
private visit abroad, whether the remitter can effect such an outward remittance
against self declaration?

Ans. Such outward remittance in the form of a DD can be effected against the declaration by
the resident individual in the format prescribed under the Scheme.

Q. 44. Are there any restrictions on the frequency of the remittance?

Ans. There is no restriction on the frequency. However, the total amount of foreign exchange
purchased from or remitted through, all sources in India during a financial year should be
within the cumulative limit of USD 200,000.

Q.45. What are the requirements to be complied with by the remitter?

Ans. The individual will have to designate a branch of an AD through which all the
remittances under the Scheme will be made. The applicants should have maintained the bank
account with the bank for a minimum period of one year prior to the remittance. If the
applicant seeking to make the remittance is a new customer of the bank, Authorised Dealers
should carry out due diligence on the opening, operation and maintenance of the account.
Further, the AD should obtain bank statement for the previous year from the applicant to
satisfy themselves regarding the source of funds. If such a bank statement is not available,
copies of the latest Income Tax Assessment Order or Return filed by the applicant may be
obtained. He has to furnish an application-cum-declaration in the specified format regarding
the purpose of the remittance and declare that the funds belong to him and will not be used
for purposes prohibited or regulated under the Scheme.

Q. 46. Can an individual, who has repatriated the amount remitted during the financial
year, avail of the facility once again?

Ans. Once a remittance is made for an amount up to USD 200,000 during the financial year,
he would not be eligible to make any further remittances under this scheme, even if the
proceeds of the investments have been brought back into the country.

Q. 47. Can remittances be made only in US Dollars?

Ans. The remittances can be made in any freely convertible foreign currency equivalent to
USD 200,000 in a financial year.

Q. 48. In the past resident individuals could invest in overseas companies listed on a
recognised stock exchange abroad and which has the shareholding of at least 10 per
cent in an Indian company listed on a recognised stock exchange in India. Does this
condition still exist?

Ans. Investment by resident individual in overseas companies is subsumed under the Scheme
of USD 200,000. The requirement of 10 per cent reciprocal shareholding in the listed Indian
companies by such overseas companies has since been dispensed with.

III. Guidelines for Financial Intermediaries offering special schemes,

protection under the Scheme.
Q. 49. Are intermediaries expected to seek specific approval for making overseas
investments available to clients?

Ans. Banks including those not having operational presence in India are required to obtain
prior approval from Reserve Bank for soliciting deposits for their foreign/overseas branches
or for acting as agents for overseas mutual funds or any other foreign financial services
company.

Q.50. Are there any restrictions on the kind/quality of debt or equity instruments an
individual can invest in?

Ans. No ratings or guidelines have been prescribed under the Liberalised Remittance
Scheme of USD 200,000 on the quality of the investment an individual can make. However,
the individual investor is expected to exercise due diligence while taking a decision regarding
the investments which he or she proposes to make.

Q. 51. Whether credit facilities in Indian Rupees or foreign currency would be

permissible against security of such deposits?

Ans. No. The Scheme does not envisage extension of credit facility against the security of
the deposits. Further, the banks should not extend any kind of credit facilities to resident
individuals to facilitate remittances under the Scheme.

Q. 52. Can bankers open foreign currency accounts in India for residents under the
Scheme?

Ans. No. Banks in India cannot open foreign currency accounts in India for residents under
the Scheme.

Q. 53. Can an Offshore Banking Unit (OBU) in India be treated on par with a branch of
the bank outside India for the purpose of opening of foreign currency accounts by
residents under the Scheme?

Ans. No. For the purpose of the Scheme, an OBU in India is not treated as an overseas
branch of a bank in India.

General Information

For further details/guidance, please approach any bank authorised to deal in foreign exchange
or contact Regional Offices of the Foreign Exchange Department of the Reserve Bank.
 FOREX LIMITS 
Retail Foreign Exchange Sale Limits at a glance.

Purpose Limit Documentation

Basic Travel Quota (BTQ) - USD $10,000.00

Application Form, Form A2 and Self
For Holidays, Personal vists per financial
Declaration
etc year

Application Form with authorisation

from the Company, Form A2, Letter
USD $25,000.00
Business Travel from the Company stating that the
per Trip
employee is going abroad on business
with details of places of stay

Immigration - For people who USD

Application Form, Form A2 and Self
settle abroad in countries like $100,000.00 per
Declaration
Canada, New Zealand etc. year

Employment Abroad - For a USD

Application Form, Form A2 and Self
person who is going to work $100,000.00 per
Declaration
abroad year

Medical Treatment - For USD

Application Form, Form A2 and Self
people who are travelling $100,000.00 per
Declaration
abroad for treatment year

USD
Studies Abroad - For students Application Form, Form A2 and Self
$100,000.00 per
pursuing studies abroad Declaration
academic year

USD
Maintenance of close relatives Application Form, Form A2 and Self
$100,000.00 per
abroad Declaration
year

Investments overseas in Application form, Declaration for

shares, property, Gifts & USD 200,000/- purchase of foreign exchange under the
Donations etc (under per financial liberalised remittance scheme of USD
liberalised remittance scheme year 200,000 and Form A2 (Only for
me only) Individual residents a/c holders)

Important points to note:

ƒ Out of the overall foreign exchange being sold to a traveller, exchange in the form of
foreign currency notes and coins may be sold up to the limit indicated below:
 i. Travellers proceeding to countries other than Iraq, Libya, Islamic Republic of
Iran, Russian Federation and other Republics of Commonwealth of
Independent States - not exceeding USD 3000 or its equivalent.
ii. Travellers proceeding to Iraq or Libya - not exceeding USD 5000 or its
equivalent
iii. Travellers proceeding to Islamic Republic of Iran, Russian Federation and
other Republics of Commonwealth of Independent States - full exchange may
be released.

DERIVATIVES 
Derivatives, such as futures or options, are financial contracts which derive their value from a
spot price, which is called the “underlying”. For example, wheat farmers may wish to enter
into a contract to sell their harvest at a future date to eliminate the risk of a change in prices
by that date. Such a transaction would take place through a forward or futures market. This
market is the “derivatives market”, and the prices of this market would be driven by the spot
market price of wheat which is the “underlying”. The term “contracts” is often applied to
denote the specific traded instrument, whether it is a derivative contract in wheat, gold or
equity shares. The world over, derivatives are a key part of the financial system. The most
important contract types are futures and options, and the most important underlying markets
are equity, treasury bills, commodities, foreign exchange, real estate etc.

With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included in the
definition of Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:-

A Derivative includes: -

A. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security;

B. a contract which derives its value from the prices, or index of prices, of underlying
securities;

What is a forward contract?

In a forward contract, two parties agree to do a trade at some future date, at a stated price and
quantity. No money changes hands at the time the deal is signed.

Why is forward contracting useful?

Forward contracting is very valuable in hedging and speculation. The classic hedging
application would be that of a wheat farmer forward -selling his harvest at a known price in
order to eliminate price risk. Conversely, a bread factory may want to buy bread forward in
order to assist production planning without the risk of price fluctuations. If a speculator has
information or analysis which forecasts an upturn in a price, then he can go long on the
forward market instead of the cash market. The speculator would go long on the forward,
wait for the price to rise, and then take a reversing transaction making a profit.

What are the problems of forward markets?

Forward markets worldwide are afflicted by several problems:

(a) lack of centralisation of trading,

(b) illiquidity, and
(c) counterparty risk.

In the first two of these, the basic problem is that of too much flexibility and generality. The
forward market is like the real estate market in that any two persons can form contracts
against each other. This often makes them design terms of the deal which are very convenient
in that specific situation for the specific parties, but makes the contracts non-tradable if more
participants are involved. Also the “phone market” here is unlike the centralisation of price
discovery that is obtained on an exchange, resulting in an illiquid market place for forward
markets. Counterparty risk in forward markets is a simple idea: when one of the two sides of
the transaction chooses to declare bankruptcy, the other suffers. Forward markets have one
basic issue: the larger the time period over which the forward contract is open, the larger are
the potential price movements, and hence the larger is the counter- party risk. Even when
forward markets trade standardized contracts, and hence avoid the problem of illiquidity, the
counterparty risk remains a very real problem.

What is a futures contract?

Futures markets were designed to solve all the three problems of forward markets. Futures
markets are exactly like forward markets in terms of basic economics. However, contracts are
standardised and trading is centralized (on a stock exchange). There is no counterparty risk
(thanks to the institution of a clearing corporation which becomes counterparty to both sides
of each transaction and guarantees the trade). In futures markets, unlike in forward markets,
increasing the time to expiration does not increase the counter party risk. Futures markets are
highly liquid as compared to the forward markets.

What is a forward rate agreement?

A forward rate agreement is an agreement to lend money on a particular date in the future at a
rate that is determined today. It is like a forward contract where the underlying asset is a
bond.

What are interest rate swaps?

Interest rate swaps are agreements where one side pays the other a particular interest rate
(fixed or floating) and the other side pays the other a different interest rate (fixed or floating).

Accordingly, swaps are:

Fixed v/s Floating swaps: Where one side pays the other a fixed interest rate and the other
pays a floating rate determined by some benchmark and reset at fixed time intervals.

Basis swaps: Where the two sides pay each other rates determined by different benchmarks.

What are Overnight Interest Swaps?

Overnight interest rate swaps are currently prevalent to the largest extent. They are swaps
where the floating rate is an overnight rate (such as NSE MIBOR) and the fixed rate is paid in
exchange of the compounded floating rate over a certain period.

What are various types of derivative instruments traded on the Exchange?

There are two types of derivatives instruments traded on an Exchange; namely Futures and
Options:

Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time
in the future at a certain price. All the futures contracts are settled in cash at NSE.

Options:

An Option is a contract which gives the right, but not an obligation, to buy or sell the
underlying at a stated date and at a stated price. While a buyer of an option pays the premium
and buys the right to exercise his option, the writer of an option is the one who receives the
option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.

Options are of two types - Calls and Puts options:

“Calls” give the buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.

“Puts” give the buyer the right, but not the obligation to sell a given quantity of underlying
asset at a given price on or before a given future date. All the options contracts are settled in
cash.

Further the Options are classified based on type of exercise. At present the Exercise style can
be European or American.

American Option - American options are options contracts that can be exercised at any time
up to the expiration date.

European Options - European options are options that can be exercised only on the expiration
date.

Why Should I trade in derivatives?

Futures trading will be of interest to those who wish to:

1) Invest - take a view on the market and buy or sell accordingly.

2) Price Risk Transfer- Hedging - Hedging is buying and selling futures contracts to offset
the risks of changing underlying market prices. Thus it helps in reducing the risk associated
with exposures in underlying market by taking counter- positions in the futures market. For
example, an investor who has purchased a portfolio of stocks may have a fear of adverse
market conditions in future which may reduce the value of his portfolio. He can hedge against
this risk by shorting the index which is correlated with his portfolio, say the Nifty 50. In case
the markets fall, he would make a profit by squaring off his short Nifty 50 position.
This profit would compensate for the loss he suffers in his portfolio as a result of the fall in
the markets.

3) Leverage- Since the investor is required to pay a small fraction of the value of the total
contract as margins, trading in Futures is a leveraged activity since the investor is able to
control the total value of the contract with a relatively small amount of margin. Thus the
Leverage enables the traders to make a larger profit (or loss) with a comparatively small
amount of capital.

Options trading will be of interest to those who wish to:

1) Participate in the market without trading or holding a large quantity of stock.

2) Protect their portfolio by paying small premium amount.

Benefits of trading in Futures and Options:

1) Able to transfer the risk to the person who is willing to accept them
2) Incentive to make profits with minimal amount of risk capital
3) Lower transaction costs
4) Provides liquidity, enables price discovery in underlying market
5) Derivatives market is lead economic indicators.

What is the concept of In the money, At the money and Out of the money in respect of
Options?

In- the- money options (ITM) –

An in-the-money option is an option that would lead to positive cash flow to the holder if it
were exercised immediately. A Call option is said to be in-the-money when the current price
stands at a level higher than the strike price. If the Spot price is much higher than the strike
price, a Call is said to be deep in-the-money option. In the case of a Put, the put is in-the-
money if the Spot price is below the strike price.

At-the-money-option (ATM) –

An at-the money option is an option that would lead to zero cash fl ow if it were exercised
immediately. An option on the index is said to be “at-the-money” when the current price
equals the strike price.

Out-of-the-money-option (OTM) –
An out-of- the-money Option is an option that would lead to negative cash flow if it were
exercised immediately. A Call option is out-of-the-money when the current price stands at a
level which is less than the strike price. If the current price is much lower than the strike price
the call is said to be deep out-of-the money. In case of a Put, the Put is said to be out-of-
money if current price is above the strike price.

What is the structure of Derivative Markets in India?

Derivative trading in India takes can place either on a separate and independent Derivative
Exchange or on a separate segment of an existing Stock Exchange. Derivative
Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the
oversight regulator. The clearing & settlement of all trades on the Derivative
Exchange/Segment would have to be through a Clearing Corporation/House, which is
independent in governance and membership from the Derivative Exchange/Segment.

Which derivative contracts are permitted by SEBI?

Derivative products have been introduced in a phased manner starting with Index Futures
Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and
July 2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for
derivatives trading in December 2002. During December 2007 SEBI permitted mini
derivative (F&O) contract on Index (Sensex and Nifty). Further, in January 2008, longer
tenure Index options contracts and Volatility Index and in April 2008, Bond Index was
introduced. In addition to the above, during August 2008, SEBI permitted Exchange traded
Currency Derivatives.

What measures have been specified by SEBI to protect the rights of investor in
Derivatives Market?

The measures specified by SEBI include:

a. Investor's money has to be kept separate at all levels and is permitted to be used only
against the liability of the Investor and is not available to the trading member or clearing
member or even any other investor.

b. The Trading Member is required to provide every investor with a risk disclosure document
which will disclose the risks associated with the derivatives trading so that investors can take
a conscious decision to trade in derivatives.

c. Investor would get the contract note duly time stamped for receipt of the order and
execution of the order. The order will be executed with the identity of the client and without
client ID order will not be accepted by the system. The investor could also demand the trade
confirmation slip with his ID in support of the contract note. This will protect him from the
risk of price favour, if any, extended by the Member.

d. In the derivative markets all money paid by the Investor towards margins on all open
positions is kept in trust with the Clearing House/Clearing Corporation and in the event of
default of the Trading or Clearing Member the amounts paid by the client towards margins
are segregated and not utilized towards the default of the member. However, in the event of a
default of a member, losses suffered by the Investor, if any, on settled / closed out position
are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations
of the derivative segment of the exchanges.

e. The Exchanges are required to set up arbitration and investor grievances redressal
mechanism operative from all the four areas / regions of the country.

INTEREST RATE DERIVATIVES 
In interest rate derivative is a financial derivative where the underlying asset (interest-bearing
instrument) is the right to pay or receive a notional amount of money at a given interest rate.
Interest rate futures are used to hedge against the risk of interest rate movements (such as
volatility movements or simple directional movements) in an adverse direction, causing a
cost to the company. Examples include Treasury-bill and Treasury-bond futures.
NSE launched trading in Interest Rate Futures from 30th August 2009. The underlying
instrument is a Notional 10 year 7% coupon bearing Government of India (GOI) security.
Interest Rate Futures contract offers market participants a standardised product taking a view
of the future directions of the market, hedging and creating income strategies. Electronic
trading platform of NSE ensures transparency of prices, volumes and trade data.
Underlying for Interest Rate Futures
The list of securities on which Futures Contracts would be available and their symbols for
trading are as under:

S. No. Symbol Description

1 NSETB91D Futures contract on Notional 91 day T bill
2 NSE10Y06 Futures contract on Notional 10 year coupon bearing bond
3 NSE10YZC Futures contract on Notional 10 year zero coupon bond.

Security descriptor
The security descriptor for the interest rate future contracts is:
Market type : N
Instrument Type : FUTINT
Underlying : Notional T- bills and Notional 10 year bond (coupon bearing and non-coupon
bearing)
Expiry Date : Last Thursday of the Expiry month.

Instrument type represents the instrument i.e. Interest Rate Future Contract.
Underlying symbol denotes the underlying.
Expiry date identifies the date of expiry of the contract

Underlying Instrument
Interest rate futures contracts are available on Notional T- bills , Notional 10 year zero
coupon bond and Notional 10 year coupon bearing bond stipulated by the Securities &
Exchange Board of India (SEBI).

Trading cycle
The interest rate future contract shall be for a period of maturity of one year with three
months continuous contracts for the first three months and fixed quarterly contracts for the
entire year. New contracts will be introduced on the trading day following the expiry of the
near month contract.
Expiry day

Interest rate future contracts shall expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts shall expire on the previous trading day.

Further, where the last Thursday falls on the annual or half-yearly closing dates of the bank,
the expiry and last trading day in respect of these derivatives contracts would be pre-poned to
the previous trading day.

Product Characteristics
 Notional 10 year
Notional 10 year zero Notional 91 day T-
Contract underlying bond
coupon bond Bill
(6 % coupon )
N FUTINT N FUTINT N FUTINT
Contract descriptor NSE10Y06 NSE10YZC NSETB91D
26JUN2003 26JUN2003 26JUN2003
Contract Value Rs.2,00,000
Lot size 2000
Tick size Re.0.01
Expiry date Last Thursday of the month
The contracts shall be for a period of a maturity of one year with three
Contract months months continuous contracts for the first three months and fixed
quarterly contracts for the entire year.
Price limits Not applicable
Settlement Price As may be stipulated by NSCCL in this regard from time to time.

Trading Parameters

Contract size
The permitted lot size for the interest rate futures contracts shall be 2000. The minimum
value of a interest rate futures contract would be Rs. 2 lakhs at the time of introduction.

Price steps
The price steps in respect of all interest rate future contracts admitted to dealings on the
Exchange is Re.0.01.

The Futures contracts having face value of Rs 100 on notional ten year coupon bearing bond
and notional ten year zero coupon bond would be based on price quotation and Futures
contracts having face value of Rs. 100 on notional 91 days treasury bill would be based on
Rs. 100 minus (-) yield.

Base Price & operating ranges

Base price of the Interest rate future contracts on introduction of new contracts shall be
theoretical futures price computed based on previous days’ closing price of the notional
underlying security. The base price of the contracts on subsequent trading days will be the
closing price of the futures contracts. However, on such of those days when the contracts
were not traded, the base price will be the daily settlement price of futures contracts.

There will be no day minimum/maximum price ranges applicable for the futures contracts.
However, in order to prevent / take care of erroneous order entry, the operating ranges for
interest rate future contracts shall be kept at +/- 2% of the base price. In respect of orders
which have come under price freeze, the members would be required to confirm to the
Exchange that the order is genuine. On such confirmation, the Exchange at its discretion may
approve such order. If such a confirmation is not given by any member, such order shall not
be processed and as such shall lapse.

Quantity freeze
Orders which may come to the Exchange as a quantity freeze shall be 2500 contracts
amounting to 50, 00,000 which works out on the day of introduction to approximately Rs 50
crores.

In respect of such orders which have come under quantity freeze, the member shall be
required to confirm to the Exchange that the order is genuine. On such confirmation, the
Exchange at its discretion may approve such order subject to availability of
turnover/exposure limits, etc. If such a confirmation is not given by any member, such order
shall not be processed and as such shall lapse.
For FAQ on 91 Day Treasury Bill Futures, please refer the section on Fixed Income.

EQUITY DERIVATIVES 
Please refer the chapter on Equity for details.
CURRENCY DERIVATIVES 
Please refer the chapter on Currency for details.
COMMODITY DERIVATIVES 
Please refer the chapter on Commodity and Gold for details.

 
MUTUAL FUNDS 
 
  
   A Mutual Fund is a trust that pools the savings of a number of investors who share a 
common financial goal. The money thus collected is then invested in capital market 
instruments such as shares, debentures and other securities.  
            The income earned through these investments and the capital appreciation realized 
is shared by its unit holders in proportion to the number of units owned by them. Thus a 
Mutual  Fund  is  the  most  suitable  investment  for  the  common  man  as  it  offers  an 
opportunity  to  invest  in  a  diversified,  professionally  managed  basket  of  securities  at  a 
relatively low cost. 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 What is the organization of a mutual fund? 
 
 

 
 
 
 
 
The various entities can be explained as follows: 
 
SPONSORS:   
 
The sponsor is the promoter of mutual funds. The sponsor establishes the mutual fund and 
registers the same with the SEBI. 
Sponsor appoints the trustees, custodians and the AMC with prior approval of SEBI, and in 
accordance with SEBI regulations. What a promoter is to a company a sponsor is to a mutual 
fund. The sponsor initiates the idea to set up a mutual fund. It could be a financial services 
company, a bank or a financial institution. It could be Indian or foreign. 
 
TRUSTEES: 
 
Trustees are like internal regulators in a mutual fund, and their job is to protect the rights of 
the  investors.  Trustees  are  appointed  by  the  Sponsors  and  can  be  either  individuals  or 
corporate  bodies.  In  order  to  ensure  that  they  are  impartial  and  fair,  SEBI  rules  mandate 
that at least two third of the trustees be independent‐ that is not have any association with 
the sponsor. 
 
Trustees appoint the AMC, which subsequently seeks their approval for the work done by it 
and reports periodically to them. 
 
ASSET MANAGEMENT COMPANY (AMC): 
 
AMC is a legal entity formed by the sponsor to manage the mutual fund. The AMC is usually 
a  private  limited  company,  in  which  the  sponsor  and  their  associates  or  joint  venture 
partners are shareholders. The AMC has to be a SEBI registered entity, and should have  a 
minimum  net  worth  of  Rs.10  crores.  The  trustees  sign  an  investment  management 
agreement with the AMC, which spells out the functions of the AMC. 
 
OTHER CONSTITUENTS: 
1.) CUSTODIANS. 
2.) REGISTRARS AND TRANSFER AGENTS (R&T AGENT). 
3.) BROKERS. 
4.) SELLING AND DISTRIBUTION AGENTS. 
5.) DEPOSITORY PARTICIPANTS. 
6.) LEGAL ADVISOR AND AUDITORS. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
What are the different terms associated with Mutual Funds?  
 
Net Asset Value (NAV) 
Net Asset Value is the market value of the assets of the scheme minus its liabilities. Per unit 
NAV is the net asset value of the scheme divided by the number of units outstanding on the 
Valuation Date. 
 
Sale Price 
Sale price is the price you pay when you invest in a scheme. This is also called Offer Price. It 
may include a sales load. 
 
Repurchase Price  
Repurchase price is the price at which a close‐ended scheme repurchases its units and it 
may include a back‐end load. This is also called Bid Price. 
 
Redemption Price  
 Redemption Price is the price at which open‐ended schemes repurchase their units and 
close‐ended schemes redeem their units on maturity. Such prices are NAV related. 
 
Sales Load  
Sales Load is a charge collected by a scheme when it sells the units. This is also called, 
‘Front‐end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. 
 
 Repurchase or ‘Back‐end’ Load 
This is a charge collected by a scheme when it buys back the units from the unit holders. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
What are the Advantages of investing in a Mutual Fund?  
 
 The benefits of investing through a mutual fund are:                                                    
1) Affordability 

Mutual funds allow you to invest small sums. For instance, if you want to buy a portfolio of 
blue  chips  of  modest  size,  you  should  at  least  have  a  few  lakhs  of  rupees.  A  mutual  fund 
gives you the same portfolio for meager investment of Rs. 1, 000 ‐5,000. A mutual fund can 
do that because it collects money from many people and it has a large corpus. 

2) Professional management 
 
The major advantage of investing in a mutual fund is that you get a professional money 
manager to manage your investments for a small fee. You can leave the investment 
decisions to him and only have to monitor the performance of the fund at regular intervals. 
 
3) Diversification 
Considered the essential tool in risk management; mutual funds make it possible for even 
small investors to diversify their portfolio. A mutual fund can effectively diversify its 
portfolio because of the large corpus. However, a small investor cannot have a well‐
diversified portfolio because it calls for large investment. For example, a modest portfolio of 
10 blue‐chip stocks calls for a few a few thousands. 
 
4)  Convenience 
 
Mutual funds offer tailor‐made solutions like systematic investment plans and systematic 
withdrawal plans to investors, which is very convenient to investors. Investors also do not 
have to worry about investment decisions, they do not have to deal with brokerage or 
depository, etc. for buying or selling of securities. 
 
 Mutual funds also offer specialized schemes like retirement plans, children’s plans, industry 
specific schemes, etc. to suit personal preference of investors. These schemes also help 
small investors with asset allocation of their corpus. It also saves a lot of paper work. 
 
5) Cost‐Effectiveness: 
 
A small investor will find that the mutual fund route is a cost‐effective method (the AMC fee 
is normally 2.5%) and it also saves a lot of transaction cost as mutual funds get concession 
from brokerages. Also, the investor gets the service of a financial professional for a very 
small fee. If he were to seek a financial advisor's help directly, he will end up paying 
significantly more for investment advice. Also, he will need to have a sizeable corpus to offer 
for investment management to be eligible for an investment adviser’s services. 
 
6) Liquidity 
 
You can liquidate your investments within 3 to 5 working days (mutual funds dispatch 
redemption cheques speedily and also offer direct credit facility into your bank account i.e. 
Electronic Clearing Services). 
 
7) Tax breaks 
 
You do not have to pay any taxes on dividends issued by mutual funds. You also have the 
advantage of capital gains taxation. Tax‐saving schemes and pension schemes give you the 
added advantage of benefits under section 80C 
 
8) Transparency 
 
Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a 
regular basis. They also send quarterly newsletters, which give details of the portfolio, 
performance of schemes against various benchmarks, etc. They are also well regulated and 
SEBI monitors their actions closely. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
What are the factors to consider before investing in a Mutual Fund? 
 
1. Know Yourself:  
 
The  first  step  towards  achieving  your  goals  is  that  you  must  know  yourself.  Try  to  get  an 
idea  of  how  much  risk  you  can  handle.  Do  a  tolerance  test  for  yourself.  If  your  Rs  10,000 
investment  turning  into  Rs  6,000  upsets  you‐‐even  though  it  could  subsequently  bounce 
back‐‐an  aggressive  equity  fund  is  not  for  you.  
 
2. Reality Check: 
 
 What are your goals? If you need to turn Rs 10,000 into Rs 50,000 in two years, a medium 
term bond fund may not be the right answer. Work on setting realistic expectations for both 
your goals and your funds.  
 
3. Know What You Are Buying: 
 
 Once you discovered yourself, spend some time for a close understanding of the funds. The 
stated objective of a fund as given in a prospectus is often incomplete and does not reveal 
much.  Based  on  the  readily  available  portfolio  and  fund  manager's  commentary,  you  can 
broadly  understand  the  style  and  strategy  followed  by  a  fund.  This  will  help  you 
meaningfully  diversify  your  portfolio.  This  will  also  help  you  assess  potential  risks.  In 
general, large‐cap value funds are less risky than small‐cap growth funds.  
 
4. Portfolio: 
 
 Unlike performance and risk, portfolio is one of the 'internals' of a fund. It is internal in the 
sense  that  the  result  of  good,  bad  or  ugly  portfolios  is  already  reflected  in  the  first  two 
measures and it's perfectly OK for you to choose funds on the basis of those two measures 
alone  without  actually  bothering  about  what  they  own.  Our  basic  analysis  of  portfolios 
measures  whether  a  fund  (we  are  talking  about  equity  funds  here)  holds  mostly  large, 
medium or small companies. It also looks at whether a fund prefers companies that may be 
overpriced but which are growing fast or whether it prefers low‐priced stocks belonging to 
companies  that  are  growing  at  a  more  gentle  pace.  For  fixed  income  funds,  an  analogous 
analysis tells one whether a fund prefers volatile but potentially high return long‐duration 
securities or stable and low return short‐duration securities. Also, one can analyse whether 
a  fund  prefers  safer  (lower  returns)  securities  or  riskier  (higher  returns)  securities. 
 
      4.1. Examine Sector Weightings: You must know that funds with large stakes in just one 
or two sectors will likely be more volatile than the more evenly diversified funds. Looking at 
a fund's sectoral history will help you gain a good perspective. Does the manager move in 
and out of sectors frequently and dramatically? If so, the fund might get hurt, if the 
manager is ever caught on the wrong foot.  
 
      4.2. Check Out the Fund's Concentration: A portfolio with just 20 or 30 stocks or one 
that puts most of its assets in just a few stocks will likely be more volatile than a fund that's 
spread among hundreds of stocks. But there could be rewards of concentration. A 
concentrated portfolio will also get more bang for its buck if its stocks work out. You may 
want to add a concentrated fund, one that owns fewer stocks or puts most of its assets in 
the top 10 or 20 stocks, to your portfolio.  
 
But largely, your core funds should probably be well a diversified and more predictable. 
Though a small allocation to a sector‐oriented fund, a more‐flexible fund, or a more‐
concentrated fund could boost your returns.  
 
5. Performance:  
 
Performance comparisons must be used only to compare the same type of fund. They are 
meaningless otherwise. Only when used within the same category of funds do performance 
numbers tell you anything at all. By the time you come to the stage when you are comparing 
performance numbers of different funds, you should already have a good idea of how much 
you will invest in that category. 
 
6. Risk: 
 
 Almost all investing is risky, at least those investments that get you any meaningful returns. 
In general it is said that the riskier a fund, the more its potential for earning high returns, at 
least most of the time. However, this is a simplified view that implies that a given amount of 
risk always gets you the same returns. This is simply not true because not all funds are 
equally well‐run.  
 
The true measure of risk is whether a fund is able to give you the kind of returns that justify 
the kind of risk it is taking.  
 
7. Management: 
 
 Fund management is a fairly creative and personality‐oriented activity. This may not be true 
of some types of funds like shorter‐term fixed‐income funds and, of course, index funds, but 
equity investment is more of an art than a science. When you are buying a fund because you 
like  its  track  record  (and  unless  you  can  foresee  the  future,  that's  the  only  way  to  buy  a 
fund), what you are actually buying is a fund manager's (or sometimes a fund management 
team's)  track  record.  What  you  need  to  make  sure  is  that  the  fund  manager  who  was 
responsible for the part of the fund's track record that you are buying into is still there. A 
high‐performance  equity  fund  with  a  new  manager  is  a  like  a  new  fund. 
 
8. Cost: 
 Funds are not run for free and nor are they run at an identical cost. While the difference in 
different funds' cost is not large, these can compound to significant variations,especially for 
fixed  income  funds  where  the  performance  differential  between  funds  is  quite  small  to 
begin  with.  Even  for  equity  funds,  it  may  not  be  worth  buying  a  higher  cost  fund  that 
appears to be only slightly better than a lower cost one. Remember, there is no reason for 
one AMC to have much higher costs than others, apart from the fact that it wants to have a 
higher  margin,  or  that  it  wants  to  spend  more  on  things  like  marketing,  which  are  of  no 
relevance to you. If an AMC wants higher returns from its business, then it must justify it by 
giving you higher returns on your investments. 
 
9. Be A Disciplined Investor: 
 
 After you've chosen some funds, stick with them. Don't be afraid when the markets turn 
volatile and you see traces of red in your portfolio. Remember, that your investment is for a 
long time horizon and only disciplined and systematic investing will help you reap rewards in 
this industry. 
 
10. Monitoring Mutual Fund Investments: 
 
If you are one of those who track their mutual fund investments with the same enthusiasm 
and care as they put in while choosing where to invest in, then we can assure you that you 
are in a minority. Most people think that once they invest in a fund, the job of taking care of 
their investments has been successfully passed on to the fund manager. But this can be a 
dangerous strategy to adopt. 
  
The performance of a fund, especially equity‐oriented funds, is to quite an extent 
dependant on the calls of the fund manager. If your fund manager quits, the investment 
style may change, and the fund's performance could suffer. Hence, you should carefully 
monitor the fund's performance any time such changes occur, and exit the fund if its 
performance dips drastically. 
 
How do you keep track of your fund's performance? All AMCs provide you with their annual 
report, a half‐yearly report (unaudited results) and a quarterly and monthly 
factsheet/newsletter. Over and above this, public disclosure of the NAV of a scheme 
happens on the AMFI website, on the AMC's own website, as well as in the financial dailies. 
While NAV information tells you very little other than how well your investments are doing, 
it is basically the portfolio disclosure that happens through the newsletters and AMC reports 
that one should be interested in. Also, try to gauge the fund's performance vis‐à‐vis its 
benchmark and its peers (at least to the extent possible). 
 
The fund manager will not tell you when to exit the fund. This is something you will have to 
decide, based on the information available. So, keep track of the fund's performance. After 
all, it's your money and you should know what the fund is doing with it. 
 
 
 
 
 
 
 
 
 
 
 

What are the different types of mutual fund schemes?  
 
TYPES OF MUTUAL FUND SCHEMES     
 
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, 
risk tolerance and return expectations etc. The table below gives an overview into the 
existing types of schemes in the Industry. 
 
BY STRUCTURE: 
• open‐ended schemes 
• Close‐ended schemes 
• Interval schemes 
BY INVESTMENT OBJECTIVE 
• Growth schemes 
• Diversified Equity schemes 
• Income schemes 
• Balanced schemes 
• Money market schemes 
OTHER SCHEMES 
• Gilt Fund schemes 
• Index schemes 
• Sector specific schemes 
• Tax savings schemes 
• Hybrid schemes 
• Fund of Fund schemes 
• Floating Rate schemes 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Schemes according to Maturity Period:  
 
A mutual fund scheme can be classified into open‐ended scheme or close‐ended scheme 
depending on its maturity period.  
 
•  Open‐ended Fund/ Scheme  
 
An open‐ended fund or scheme is one that is available for subscription and repurchase on a 
continuous basis. These schemes do not have a fixed maturity period. Investors can 
conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on 
a daily basis. The key feature of open‐end schemes is liquidity.  
 
• Close‐ended Fund/ Scheme  
 
A close‐ended fund or scheme has a stipulated maturity period e.g. 5‐7 years. The fund is 
open for subscription only during a specified period at the time of launch of the scheme. 
Investors can invest in the scheme at the time of the initial public issue and thereafter they 
can buy or sell the units of the scheme on the stock exchanges where the units are listed. In 
order to provide an exit route to the investors, some close‐ended funds give an option of 
selling back the units to the mutual fund through periodic repurchase at NAV related prices. 
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor 
i.e. either repurchase facility or through listing on stock exchanges. These mutual funds 
schemes disclose NAV generally on weekly basis.  
 
• Interval funds 

 In India, mutual funds are categorized as open‐ended schemes or closed‐ended schemes. 
With an open‐ended scheme, investors can enter and exit the scheme at any time. With a 
closed‐ended scheme, investors can enter during the NFO period and exit upon the end of 
the tenure of the fund. 
Interval funds are a hybrid between these two models. While they can be invested in during 
the NFO time, there are specified pre‐determined time slots during which redemptions/re‐
investments can be made from/into the fund. Example funds in this category are HDFC 
Quarterly Interval Plan and Birla Sunlife’s Income quarterly series funds. 
 
 
 
 
 
 
 
 
 
 
 
 
 
Schemes according to Investment Objective:  
 
A scheme can also be classified as growth scheme, income scheme, or balanced scheme 
considering its investment objective. Such schemes may be open‐ended or close‐ended 
schemes as described earlier. Such schemes may be classified mainly as follows:  
 
• Growth / Equity Oriented Scheme  
 
The aim of growth funds is to provide capital appreciation over the medium to long‐ term. 
Such schemes normally invest a major part of their corpus in equities. Such funds have 
comparatively high risks. These schemes provide different options to the investors like 
dividend option, capital appreciation, etc. and the investors may choose an option 
depending on their preferences. The investors must indicate the option in  
the application form. The mutual funds also allow the investors to change the options at a 
later date. Growth schemes are good for investors having a long‐term outlook seeking 
appreciation over a period of time.  
 
• Diversified Equity mutual funds:

These are the bread and butter of the retail mutual fund industry. These funds invest in 
stocks across the equity market according to their mandate. They are further classified into 
large‐cap funds, small and mid cap funds, micro cap funds depending on the market 
capitalization they invest in. They could also be classified as active or passive funds (such as 
index funds) depending on how they are managed. Broadly diversified funds created as tax 
saving vehicles also fall in this category. Funds such as HDFC Top 200, Franklin India 
Bluechip, DSP Blackrock Top 100, ICICI Prudential Dynamic, Reliance Regular savings equity 
fund fall under this category. 
 
 
• Income / Debt Oriented Scheme  
 
The aim of income funds is to provide regular and steady income to investors. Such schemes 
generally invest in fixed income securities such as bonds, corporate debentures, 
Government securities and money market instruments. Such funds are less risky compared 
to equity schemes. These funds are not affected because of fluctuations in equity markets. 
However, opportunities of capital appreciation are also limited in such funds. The NAVs of 
such funds are affected because of change in interest rates in the country. If the interest 
rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, 
long‐term investors may not bother about these fluctuations.  
 
• Balanced Fund  
 
The aim of balanced funds is to provide both growth and regular income as such schemes 
invest both in equities and fixed income securities in the proportion indicated in their offer 
documents. These are appropriate for investors looking for moderate growth. They 
generally invest 40‐60% in equity and debt instruments. These funds are also affected 
because of fluctuations in share prices in the stock markets. However, NAVs of such funds 
are likely to be less volatile compared to pure equity funds.  
 
• Short Term Money Market or Liquid Fund  
 
These funds are also income funds and their aim is to provide easy liquidity, preservation of 
capital and moderate income. These schemes invest exclusively in safer short‐term 
instruments such as treasury bills, certificates of deposit, commercial paper and inter‐bank 
call money, government securities, etc. Returns on these schemes fluctuate much less 
compared to other funds. These funds are appropriate for corporate and individual 
investors as a means to park their surplus funds for short periods.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other schemes: 
 
• Gilt Fund  
  
These funds invest exclusively in government securities. Government securities have no 
default risk. NAVs of these schemes also fluctuate due to change in interest rates and other 
economic factors as is the case with income or debt oriented schemes. . Examples of such 
schemes are Birla Sunlife Gilt Long term, HDFC Gilt Long term, and ICICI Prudential Gilt 
Investment funds. 
 
• Index Funds  
 
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P 
NSE 50 index (Nifty), etc .These schemes invest in the securities in the same weight age 
comprising of an index. NAVs of such schemes would rise or fall in  
accordance with the rise or fall in the index, though not exactly by the same percentage due 
to some factors known as "tracking error" in technical terms. Necessary disclosures in this 
regard are made in the offer document of the mutual fund scheme.  
There are also exchange traded index funds launched by the mutual funds which are traded 
on the stock exchanges.  
 
• Sector specific funds/schemes 
 
These are the funds/schemes that invest in the securities of only those sectors or industries 
as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer 
Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the 
performance of the respective sectors/industries. While these funds may give higher 
returns, they are more risky compared to diversified funds. Investors need to keep a watch 
on the performance of those sectors/industries and must exit at an appropriate time. They 
may also seek advice of an expert. Funds such as ICICI Prudential Infrastructure, Reliance 
Banking Retail, Franklin Pharma fund fall in this category 
   
• Tax Saving Schemes 
 
These schemes offer tax rebates to the investors under specific provisions of the Income Tax 
Act, 1961 as the Government offers tax incentives for investment in specified avenues. E.g. 
Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also 
offer tax benefits. These schemes are growth oriented and invest pre‐dominantly in 
equities. Their growth opportunities and risks associated are like any equity‐oriented 
scheme.  

• Hybrid funds:

These funds invest in a mix of debt and equity markets (also include Gold in some cases). 
They could be debt‐oriented funds – also called monthly income plans ‐ that invest 
predominantly in debt instruments and about 15‐20% in the equity market. Or they could be 
equity‐oriented hybrid funds – sometimes called balanced funds – that invest 
predominantly (at least 65%) in the equity market. Popular funds in this category are HDFC 
Prudence, Reliance MIP, DSP Blackrock Balanced and others. 

• Fund of Funds:

These are mutual funds that invest in other mutual funds. Why would such funds exist, 
what would be the reason for creating them? There are three possible reasons: 
 
One, they could be asset allocation funds that could invest in debt and equity in dynamic 
proportions. Instead of manage both the ratio and the underlying investments, it would be 
better for the fund to manage only the debt:equity ratio and leave the management of debt 
and equity to other fund managers. This can be achieved if the fund invests in other funds. 
Example of such a fund is, as mentioned earlier, the Franklin Templeton Dynamic PE ratio 
fund of funds. 
 
Second, they could be providing a single‐point solution for portfolio management. Every 
investor wants to invest in more than one mutual fund to achieve broad market 
diversification and to choose best of breed funds across fund houses. So, why not have a 
fund of fund that does this for the investor, and manages the distribution across the various 
schemes? For an investor, this fund of fund would practically work like an advisory solution 
for their portfolio. Quantum mutual fund’s Equity Fund of Fund is one such fund. 
 
Third, there are situations where a mutual fund is a more convenient vehicle for investing in 
an underlying asset than directly in the asset itself. For example, investing in an exchange‐
traded fund requires a demat/brokerage account that is not required for investing in a 
mutual fund. So, a fund of fund that invests in an ETF provides the convenience of investing 
in the same ETF without demat account to the investors. Recent Gold offerings such as 
Reliance Gold savings fund belong to this category. 
 
Investors need to be aware of increased expenses when choosing to invest in Fund of funds. 
The top‐level fund charges additional fund management fees of up to 0.75% on top of the 
fees of the underlying funds. However, some fund of funds such as the Reliance Gold savings 
fund provide a cap for the total combined expenses.

• Floating rate funds:

 Typically debt funds invest in deposit instruments that have a fixed interest rate or coupon 
rate. They invest in a diverse set of such fixed rate instruments of different tenures and 
manage a portfolio of these assets. However, a floating rate fund invests in instruments 
whose rates are not fixed. They move with the prevailing interest rates – up or down. 
Theoretically, such funds provide an attractive opportunity to investors because the yield on 
their investments will move with the interest rates and thus provide a cushion from the 
interest rate risk. However, in reality, there is a paucity of such floating rate debt 
instruments to invest in the Indian debt market. Due to this, floating rate funds end up 
simulating a varying rate by “laddering” their investments across timelines, and this affects 
the returns of the funds. 
 

A DETAILED NOTE ON SOME TYPES OF MUTUAL FUNDS 
 

1. Equity Linked Saving Schemes: 

Equity  Linked  Savings  Schemes  (ELSS)  is  an  ideal  way  to  save  on  tax  as  well  as  staying 
invested  in  equity  mutual  funds.  ELSS  schemes  have  been  introduced  in  India  to  promote 
investments  in  equity  markets  by  giving  tax  concessions  to  the  investors.  ELSS  is  basically 
equity‐diversified scheme and has a lock in period of three‐years. ELSS invests more then 80 
percent of their money in equity and related Instruments. 

Types of ELSS options

There are two types of ELSS plans, growth option and dividend option:

1. Growth option: In this option, the investor does not get regular income during the
duration of the investment. It is only when the tenure is complete or when the investment is
prematurely cancelled that he receives the interest generated. The advantage of this is that the
investor gets a lump sum amount when the investment matures but the disadvantage is that
there will be no steady income until maturity.

2. Dividend option: This is the exact opposite of the growth option and the investor will
have a steady amount flowing every month through the duration of the investment. But this is
a risk as the income will be unpredictable and erratic. The main disadvantage of this type of
investment is that at the end of the 3 years the final value of the investment will not be much.

3. Dividend reinvestment option: There is a third option wherein the investor can invest the
dividends generated from the ELSS fund. But according to Section 80 C, the reinvested
dividends are not liable for tax deductions and hence people usually opt for either the growth
option or the dividend option instead of the dividend reinvestment option.

Benefit of capital appreciation: 

The  lock‐in‐period  in  the  case  of  ELSS  is  3  years  and  it  provides  certain  advantages  to  the 
investors. Due to this lock‐in‐period the Asset under Management remains more stable and 
the cash flow is more predictable. This provides the fund manager with greater freedom to 
take  a  medium  to  long‐term  view  on  certain  stocks,  without  having  to  keep  liquidity 
provision. This helps the scheme to produce better returns. 

Investment in equity as an asset class is recommended for a long‐term horizon, say 2 years 
or  more.  However,  the  average  investment  period  for  most  investors  in  equity  schemes 
today  is  around  13‐14  months  and  hence  the  investors  are  unable  to  lock‐in  the  true 
potential  of  their  investments.  The  lock‐in‐period  of  3  years  in  ELSS  helps  investors  to 
become more disciplined and facilitates them to realize true potential of their investments. 

The latest ELSS notification has made it mandatory for ELSS to be launched as close‐ended 
schemes that have to be would up after 10 years of allotment of the units.  

Tax benefits: 

From 01.04.2005, the investment is included in the overall Rs.100, 000 limit set by the new 
budget under the new Section 80C. Thus one can now take the tax benefit by investing 
Rs.100, 000 in one instrument only, which means one can invest Rs.100,000 in ELSS and 
attain tax benefit on the same amount. 

 
 

The story of ELSS: Before and after DTC 
What is the current state of ELSS? 

Until  now,  Equity  Linked  Service  Scheme  (ELSS)  has  been  one  of  the  first‐choice  mutual 
funds  for  investors.  It  has  two  benefits  as  it  helps  you  save  on  tax  and  at  the  same  time 
helps you invest in the stock market. The 3 year lock‐in period ensures that the investment 
is  long‐term  and  also  is  protected  from  market  fluctuations.  Studies  reveal  that  Rs  23,700 
crores worth of ELSS schemes have been invested in May 2010 as  compared to Rs 11,800 
crores in May 2007. Between 60‐120 lakh people regard ELSS as a tax‐saving investment. 

Impact of DTC 2011 on ELSS  

But  all  this  interest  in  ELSS  is  set  to  change  very  soon  with  the  advent  of  the  2011‐2012 
Direct Tax Code (DTC). Starting April 1, 2012, no new ELSS Mutual Funds will be exempted 
from taxes taking away one of the biggest USPs of ELSS. This is likely to hit the investors as 
well as the Mutual Funds industry hard. 

Despite the fact that tax benefits for ELSS funds already in existence will continue, there has 
been a rush among investors to exit these schemes. ELSS was considered a sort of starting 
point  for  budding  investors  as  they  made  their  entry  into  the  equity  market,  but with  the 
coming of the DTC this looks certain to change. 

Another  reason  people  were  attracted  to  ELSS  Mutual  Funds  was  the  fact  that  it  was  the 
only investment option that allowed interim cash flow during lock‐in periods under the 1961 
Income  Tax  Act.  Investors  could  opt  for  the  dividends  option  thereby  ensuring  that  they 
received regular dividends during the duration of the investment. 

Is it sensible to still invest in ELSS? 

The important point to be noted here is that according to the revised 2011 Direct Tax Code, 
only  ELSS  Mutual  Funds  initiated  after  April  1,  2012  will  not  be  exempted  from  tax 
deductions. This does not apply to already existing ELSS funds and funds made before the 
aforementioned date, so it would be to wise to avail this offer while it is still available. 

How to best reap ELSS benefits? 

It should be remembered that the DTC is just a draft bill and is yet to be passed as a law. 
There is still a lot of time for that and significant changes are likely to happen in that time. 
So until it becomes an act, investors should wait and not act in haste. There is still a lot of 
time before the DTC comes into effect during the 2012‐13 fiscal year. So it is important for 
the  investor  to  have  a  strategy  during  the  interim  period.  This  is  especially  important  for 
those  who  are  using  the  ELSS  funds  for  completing  their  tax  saving  investments.  It  should 
also  be  noted  that  one  can  add  to  the  ELSS  investment  before  the  transition  to  the  DTC, 
which is a year from now.  

2. ARBITRAGE FUNDS 
 
What are they??? 

Quite often referred to as equity‐and‐derivative funds, arbitrage funds are an ideal way of 
earning a reasonable income from equities with the modest amount of risk. The objective of 
an arbitrage fund is to capitalize on a stock's price difference between the spot market (cash 
segment) and the derivatives market (futures & options segment). These funds basically 
generate income by taking advantage of the arbitrage opportunities arising out of the mis‐
pricing between the two markets (spot and derivative).  

An Example 

Let's illustrate this concept with a hypothetical situation. Let's suppose that the stock of 
Company XYZ is trading at Rs. 500 in the spot market. Simultaneously, the stock is also being 
traded in the derivatives market where the stock future is priced at Rs. 510. Now, when an 
arbitrage fund manager sees such a mis‐pricing, he sells a contract of the XYZ stock future at 
Rs. 510 and buys an equivalent number of shares at Rs. 500 from the cash segment. In this 
way, he earns a risk‐free profit of Rs. 10 per share (minus relevant transaction costs). The 
best part about such profit earnings is that they can come irrespective of the overall market 
movement. 

Furthermore, on the settlement day of the derivatives segment, the stock prices in both the 
markets tend to coincide. So, the fund manager will reverse his transaction ‐ buy a contract 
in the futures market and sell off his equity holdings in the spot markets ‐ and earn more 
profits. An arbitrage fund carries out a number of such transactions to generate favourable 
returns.  

Some concerns 

The main concern would be a bloating asset size. If the AUM of an arbitrage fund increases 
heavily, then a majority of the assets would remain parked in money market instruments 
simply because of the lack of enough arbitrage opportunities.  

Also, when the markets are relatively calm, the price gap tends to reduce, impacting the 
spread and, thereby, the returns from these funds. Also, as arbitrage funds involve more 
transactions (buying and selling in the cash and futures market), the cost incurred eats into 
the returns. So the spread should be sufficient to cover these expenses while earning a 
reasonable profit.  
 
Though arbitrage funds offer risk‐free returns, do not expect them to deliver high returns. 
Though these funds are a play on equity instruments, they deliver returns similar to those 
from debt funds. However, when the markets become volatile, there is a higher chance of 
mispricing and the spread being wider. 

Arbitrage funds tend to perform only over short time intervals. So, investors need to remain 
alert and shift to ultra short‐term funds when volatility subsides. 

Tax treatment  
 
Arbitrage funds may be classified as equity or non‐equity for the purpose of taxation. For 
instance, if the fund house maintains an average equity component of over 65%, the 
arbitrage fund will be counted as an equity fund and, hence, be entitled to the same 
taxation benefits (no dividend distribution tax, and after one year, the capital gain is tax‐
free). However, if the fund house cannot maintain this cut‐off level, it will be treated as a 
non‐equity fund and taxed as a debt fund. Here the short‐term gains will be clubbed with 
your income and taxed at normal rates, while the long‐term gains will be taxed at 10% 
without indexation and 20% with indexation. 

WHY AND WHEN TO INVEST 
 
The deciding factor is that arbitrage funds generally thrive on volatility. The higher the 
volatility in the markets, the higher is the potential of mis‐pricing between the spot and 
derivatives markets. Hence, at a time like now, when the markets are at their volatile best, 
arbitrage funds might just turn out to be the most favourable form of investment. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3. DYNAMIC FUNDS 
 
Most investors are likely to be in a quandary over the desired asset allocation, given the 
existing uncertainty in the equity markets and the impact of high interest rates on debt. 
Should you reduce the exposure to equities, or continue with it hoping to benefit from a 
possible bounce‐back from the current levels? Your actions today will determine the shape 
of your portfolio at the end of the year. Since it's not advisable to time the markets, what 
should you do? One way out of this predicament is to go for dynamic equity‐oriented funds.  
 
WHAT ARE THEY 
 
Dynamic funds are specifically designed to switch seamlessly between equity and debt, 
depending on the market conditions. The fund manager of this scheme shifts between the 
asset classes based on their attractiveness as indicated by certain valuation metrics. Hence, 
in a rising market scenario, these funds will invest a larger portion of the corpus in equities 
and hold a lesser amount in debt and cash. In the case of a falling market, the scheme will 
allocate more money to debt and, perhaps, hold more cash, while slashing the exposure to 
equities.  
 
How different are they from Balanced Funds 
 
Even balanced funds can switch between asset classes, but not as aggressively as dynamic 
funds can. Balanced funds have to maintain a certain minimum exposure to equity or debt, 
depending on their investment mandate (65% of total corpus). Dynamic funds, on the other 
hand, usually enjoy greater flexibility in tilting towards a particular asset class, if required. In 
the current environment of volatility, the dynamic fund is best suited to capture the 
opportunity presented by the market. 
 
However, even within the universe of dynamic funds, there are different aspects to each 
scheme in terms of flexibility, investing style and switching parameters. Therefore, while 
some can oscillate freely between a 100% exposure to equities at one point to being almost 
rid of equity holdings at another, others follow a slightly less aggressive asset reallocation 
strategy. Consequently, a particular scheme may look like a pure equity fund for a while and 
warp into a debt fund within a matter of time. For instance, schemes like Franklin 
Templeton Dynamic PE Fund and Pramerica Dynamic Fund, have the option of sitting only 
on cash at any given point.  
 
Others like HSBC Dynamic Fund and ICICI Prudential Dynamic Fund restrict this freedom of 
moving out of equities completely and limit the exposure to cash to a certain level, 
regardless of market circumstances.  
 
Optimum allocation  
 
Dynamic funds also differ in the parameters they use to determine the allocation to debt 
and equity. While some use simple valuation metrics to arrive at the optimum allocation, 
others rely on the fund manager's judgement and expertise. Schemes like the Principal 
Smart Fund and Franklin Templeton Dynamic PE Fund take exposure to equities based on 
the price to earnings ratio (PE) of the Nifty Index.  
 
 
Other  dynamic  funds  invest  actively,  choosing  individual  stocks  and  debt  instruments  for 
their portfolios.  
 
Based on their fund management experience, the valuation gap percentages are defined in 
the model, which helps the fund manager decide on the optimal cash levels in the fund. To 
select stocks for the equity portfolio, the scheme integrates in its model a variety of stock 
valuation techniques, such as dividend yield, price to earnings ratio, discounted cash flow, 
earnings outlook and cyclical status of the stock. Pramerica Dynamic Fund combines several 
metrics to arrive at its equity‐debt position, instead of relying only on one indicator.  
 
Taxation  
 
Since most dynamic funds are perennially in transition as they move in and out of debt and 
equities, the taxation on returns is also bound to vary. Hence, at the time of exiting such a 
scheme, if it has maintained, on an average, 65% of its corpus in equities for that particular 
year, the scheme is treated as an equity fund for taxation purpose (making long‐term capital 
gains tax‐free). Otherwise, any realised gains are taxed along the lines of a debt fund.  
 
WHY AND WHEN TO INVEST 
 
Would it make sense to invest in a dynamic fund at this juncture? It all boils down to 
whether dynamic funds are adept at taking the right calls at the right time. To get an idea, 
let us look at how dynamic funds have performed over different time intervals. Since 
January this year, when the Sensex tanked 18%, dynamic funds have, on an average, 
witnessed only a 9% drop in value. This means that these dynamic funds had reduced their 
equity exposure and kept a higher portion of corpus in debt or cash.  
 
 
However,  aggressive manoeuvrability can sometimes act as a handicap for dynamic funds. 
Since they are forced to shed equity exposure when valuations become rich and move to 
cash, dynamic funds tend to be underexposed to equities when the markets are rising 
continuously. This may cause them to underperform the markets and other equity funds. 
For instance, for the past three years, dynamic funds have not done as well, clocking 7.1% 
returns, compared with more than 15% yielded by the Sensex.  
 
It is evident that dynamic funds exhibit relative advantage during market downturns, 
managing to hold their ground when the broader indices witness erosion in value. However, 
it is not advisable to go by the short‐term performance of these funds alone. They can 
provide good results if held for a reasonable time, at least three to five years. They will be 
able to make the most of the market ups and downs given adequate room to work.  
These funds would be suitable for newbie investors and those looking for relative stability 
rather than those looking for a pure equity exposure.  
 
You could consider such a fund for stability in your investments in a volatile climate. 
However, remember that aggressive rebalancing may not always work in the fund's favour. 
4. FIXED MATURITY PLANS 
 
WHAT ARE THEY 
 
A Fixed Maturity Plan (FMP) is a fixed income scheme offered by mutual funds and 
generally is 100% equity free. FMPs have a fixed life and a definite maturity date i.e. they 
are closed ended schemes and hence the name Fixed Maturity. Post the maturity date the 
fund ceases to exist and your investment along with the appreciation is automatically 
returned back to you. 
Fixed Maturity Plans seek to generate regular return by investing in debt and money market 
instruments maturing on or before the date of the maturity of the Scheme. 
 
 FMPs do not guarantee returns but their returns are fairly predictable 
 
Though Fixed Maturity plans do not guarantee returns they are relatively more predictable 
in their returns. Here’s how. 
 
As investments generally do not flow in or out during the tenure of the scheme it allows the 
Fund manager of the FMP to lock into a pre‐decided fixed instrument (could be debentures, 
Commercial Paper, Certificate of Deposit, Gilts i.e. securities issued by the Government of 
India.) and hold on to it till the expiry of the instrument. Quite naturally the maturity profile 
of this fixed income instrument would be similar to the maturity profile of the scheme thus 
lending FMPs their relative predictability. Thus unlike an open ended fixed income fund, the 
fund manager here generally does not trade. 
 

What are FMP maturity periods? 
 
FMPs come in various maturities. Typical maturity periods are 90 day, 180 days, yearly 
(though the maturity tends to be slightly more than a year to avail of double indexation 
benefits), 3 years etc. A 90 day FMP simply means a FMP with a maturity of 90 days.  

Can I withdraw before maturity? 
 
FMPs that have a maturity of more than 90 days, have to provide investors specific exit 
dates where investors can withdraw. But this comes at a price. These exit dates are pre‐
decided and known beforehand. 
 
All FMPs are exchange‐listed, so investors can sell their units in the exchange and the 
mutual fund does not provide redemption facility before the maturity date. As trading of 
units of FMPs in the Exchanges is currently limited, it may cause difficulties for early exit. 
Only investors who are comfortable locking in their investment until maturity may opt for 
them. 

Who can invest in FMPs and what are the risks? 

Investors across risk profiles may look at investing in FMPs though it comes with a caveat 
that they are not completely risk free. FMPs face credit risk, i.e. the chance of loss to an 
investor arising from the loan default of a borrower who fails to make the promised interest 
or principal payments (on a security in the portfolio) when due. The risk of default is lower if 
the FMP invests in high rated debt instruments. Hence it is important for investors to 
monitor FMP portfolio disclosures. Investors must note that FMPs are structured to offer a 
combination of capital appreciation and preservation, however, without a guarantee. 
Hence, FMPs may not necessarily fit into the definition of conventional capital protection 
debt instruments. Investors may also note that bank FDs upto Rs 1 lakh are guaranteed by 
the government through the Deposit Insurance and Credit Guarantee Corporation of India 
unlike FMPs. Further, FDs are relatively more liquid as premature redemption is allowed, 
albeit at a fee. 

What are their tax advantages? 

FMPs are a more attractive alternative where tax advantage is concerned vis‐àvis FDs. The 
interest received from FDs is subject to tax at the investor's marginal rate of tax, which can 
range from 10 to 30%. However, returns from FMPs are subject to tax as follows: 
 
1. If investors opt for the 'dividend' option (returns are received as dividends), they are 
subject to Dividend Distribution Tax (DDT) @ 12.5% (for retail investors) plus applicable 
surcharge and cess, which is paid by the fund and is tax‐free in the hands of the investor. 
 
2. If investors opt for the 'growth' option, they are subject to Capital Gains Tax. For example, 
in case of a growth option with a maturity of more than 1 year, one can use the benefit of 
long term capital gains where the tax rate is 10% (without indexation benefits) or 20% (with 
indexation benefits). 
 
3. It should, however, be noted that the DDT on corporate plans of money market, liquid 
and debt funds (including FMPs) has been increased to 30% from 25% and thus will now be 
taxed at par with bank fixed deposits (30%) 
 
For FMPs with tenure of less than a year, the dividend option is more appropriate as it 
results in lower tax incidence compared to the growth option, which would be taxed at 
individual income tax slab rates. 
FMPs also offer double indexation benefits, which comes into play when the scheme 
purchase is made in one financial year and the maturity of the scheme is after two financial 
years. Indexation (for tax purposes) allows returns generated on FMPs to be adjusted for 
inflation so that investors are taxed only on the real returns. For example, if a 13‐month 
FMP is launched in March 2010 i.e. FY 2009‐10, it will mature in April 2011 i.e. FY 2011‐12. 
While the investment is made in FY 2009‐10, the redemption takes place in FY 2011‐12. 
Thus, by investing in FMPs with maturity of a little over a year, the purchase and sale years 
are spread over two financial years, called double indexation, which effectively reduces 
one's tax liability 
 

WHY AND WHEN TO USE THEM 

FMPs offer many benefits like tax efficiency, fixed tenure and low sensitivity to interest 
rates. The minimum investment amount is usually Rs 5,000, which a retail investor can easily 
invest. 
 
Capital protection: FMPs have less risk of capital loss than equity funds due to their 
investment in debt and money market instruments. 
 
Low interest rate sensitivity: As the securities are held till maturity, FMPs are not affected 
by interest rate volatility. The actual returns are more or less close to the indicative returns 
declared at the scheme's launch. 
 
Lower cost: FMPs involve minimum expenditure on fund management, as there is no 
requirement for a time‐to‐time review by fund managers to buy/sell the instruments 
constituting the fund. Since these instruments are held till maturity, there is a cost saving in 
respect of buying and selling of instruments. 
 
Tax benefits: FMPs score over fixed deposits because of their tax efficiencies both in the 
short‐term as well in the long‐term.  
 
Low credit & liquidity risk: They primarily invest in AAA, P1+ or such kind of good rated 
credit instruments with maturity profile of the securities in line with the maturity of the plan 
so there is also low credit risk with minimal liquidity risk involved. 
 
Portfolio balancing: FMP not only suits a Fixed Income Investor but also complements the 
portfolio of Equity Oriented Investors. Equity investor can route his gains and invest in this 
product thereby utilizing his gains/surplus money in an effective way. 
 
Currently, as interest rates are at higher levels, this is an ideal time for investors to lock‐in 
their money at existing rates by investing in Fixed Maturity Plans. Debt schemes are now 
offering attractive returns with short‐term rates in the region of 8‐10%. Call money rates 
have been moving higher to about 7.5‐8% due to tight liquidity conditions. With the RBI 
deciding to raise the cash reserve ratio (CRR), liquidity conditions have worsened. Tightness 
in the money markets is expected to continue till the end of the current financial year and 
investors can consider investing in short term options like FMPs. 

 
 
 
 
 
 
 
 
 
 

5. INTERNATIONAL MUTUAL FUNDS 
 
International MF are funds whose core theme is to invest in the international markets rather 
than the domestic market. So these funds may be invested in international commodities, 
specific emerging economies or so on. Adding a small amount of international flavor to a 
portfolio could go a long way to increase returns without significantly raising the associated 
risk. 
 
In 2007 the Securities and Exchange Board of India announced that mutual funds could 
increase their investment ceiling in foreign securities to $5 billion. At the time in the same 
year 12 international funds were launched. 
 
Today, International mutual funds have been on a roll. Seven of the top‐10 equity funds in 
the past year have been international funds. 

Types of international funds 
Basically international funds are of two types: one that abides by the income tax rules in the 
country and invests partly ‐‐ that is 65 per cent ‐‐ in Indian markets and the remaining in 
foreign markets. Funds like the Fidelity International Opportunities Fund and ICICI  
Prudential Indo Asia Equity Fund fall in this category. Also, funds like Fortis China India Fund 
and Mirae Asset China Advantage Fund invest only in one country (China) other than India. 

The second type of international funds is just the opposite; that is, the entire corpus is 
invested in international markets either through their foreign source companies or directly. 
Funds like Birla Sun Life International Equity Fund and HSBC Emerging Markets Fund belong 
to this category. 

 
 WHY TO GO FOR INTERNATIONAL FUNDS 
 
1. FOOD PRICES TO GO UP  
 
So how do you benefit from this trend of rising food prices? The opportunities 
available in the Indian market are fairly limited. But you can look to exploit the 
opportunity by investing in funds like the DWS Global Agribusiness Offshore Fund 
and Birla Sun Life Commodity Equities ‐Global Agri Ret Fund.  
 
2. ABUNDANT COMMODITIES NO MORE  
 
So the international mutual fund route makes sense. You could look at mutual funds 
like DSP Blackrock World Mining Fund, DSP Blackrock World Energy Fund, Fidelity 
Global Real Assets Fund and ING Optimix Global Commodities Fund. These funds 
have done well over the past year and are likely to continue to do well, given the 
strength of their underlying theme. 
 
3.  MONEY PRINTING  
 
Governments the world over have been printing more and more money to revive 
their moribund economies. This has led to a set of investors questioning the future 
of paper money. Also, more money is being diverted into precious metals like gold 
and silver. While investors in India can invest in gold through gold exchange traded 
funds (ETFs), there is also the option of investing in international funds primarily 
investing in gold and silver mining companies. This is slightly risky than investing in 
gold ETFs because the share prices of gold and silver mining companies tend to fall 
faster than the price of gold, ie, if the price of gold falls. Investors looking to play this 
theme could look at AIG World Gold Fund and DSP Blackrock World Gold Fund. 
 
FACTORS TO CONSIDER BEFORE INVESTING IN INTERNATIONAL FUNDS 
 
        1.  GLOBAL FUND SHOULD BE GLOBAL:  
 
If you are looking for global exposure, it's very important to choose the right fund, 
because in India, some mutual fund schemes, although mandated to invest in global 
equities,  have  allocations  heavily  tilted  towards  domestic  stocks.  The  global 
exposure  can  be  as  low  as  20%  to  25%  of  the  fund's  assets.  Such  low  allocation 
dilutes  your  portfolio's  consolidated  exposure  to  the  global  markets.  Your 
investment  goals  could  then  go  for  a  toss.  
 
2. DIVERSIFICATION:  
 
Investors  often  invest  in  global  funds  without  caring  about  the  economies  and 
regions  the  fund  is  targeting.  It's  important  to  note  that  the  true  benefit  of  global 
diversification will be achieved only when you diversify across economies that react 
differently to global events or at least share low correlation with each other. With a 
majority  of  your  portfolio  invested  in  India,  you  would  not  derive  much  global 
diversification if your fund invests in other emerging economies like Brazil and China 
as  these  markets  usually  move  in  tandem.  
 
3. HIDDEN EXPENSES:  
 
Some  global  funds  are  feeder  funds  ‐  they  invest  their  corpus  in  their  parent  fund 
abroad, which, in turn, would invest in global equities. This three‐tier structure adds 
to the expense quotient of your fund, which can eat into your yield in a big way in 
the  long  term.  For  instance,  Blackrock  World  Gold  Fund  ‐  the  parent  fund  of  DSP 
World Gold Fund ‐ has an initial charge of 5% and annual management fee of 1.75%. 
This  is  over  and  above  what  your  domestic  fund  charges  you.  
 
4. ADDITIONAL RISKS :  
 
If your investment goes global, your risk does, too. Global investments will be subject 
to geo‐political, economic, and country‐specific risks, and also currency fluctuations. 
So, your global fund will be more prone to the Japanese tsunami and Greece default 
than an Indian fund. This, however, need not necessarily be the case, as India itself is 
a  high‐beta  emerging  economy  and  different  countries  react  differently  to  news 
flows.  
 
5. TAXATION:  
 
Global funds are treated as non‐equity funds and taxed accordingly. Thus, long‐term 
capital gain, ie, profits booked after one year of investment, would be taxed at 10% 
without  indexation  or  at  20%  with  indexation.  Short‐term  capital  gain  would  be 
taxed as per your tax slab. Thus, it could be as high as 30%. But, if your fund has a 
mandate to invest at least 65% in Indian equities and the rest in foreign securities, it 
will  be  at  par  with  Indian  equity  funds  and  treated  accordingly  for  tax  purposes.  
 
6. TRACK‐RECORD: 
 
 If you are going for a global fund‐of‐fund, your fund‐selection task can be easier as 
these  funds  invest  their  corpus  in  their  parent  global  funds  that  have  been  in 
existence for some time. You can track the performance of the parent funds for the 
 last three to five years (wherever possible) and benchmark the same against global 
indices like MSCI World Index or MSCI EMEA. Thereafter, you can take the final call 
on  whether  to  invest  in  it  or  not.  
 
7. NOT MEANT FOR EVERY INVESTOR : 
 
 If you are a new investor, global funds may not be for you not only because of the 
risks  involved  in  them  but  also  because  India  is  now  amongst  the  best‐performing 
markets  globally.  Global  funds  are  ideally  suited  for  those  who  already  have  their 
core  equity  portfolio  in  place  and  are  looking  for  some  additional  equity 
diversification  globally.  However,  make  sure  these  funds  do  not  constitute  more 
than 15‐20% of your portfolio. Amongst global funds, after some introspection, one 
needs  to  choose  a  fund  that  matches  his/her  investment  needs  ‐  both  in  terms  of 
economy‐wise diversification and asset‐wise allocation.  

6. MONTHLY INCOME PLANS 

WHAT ARE THEY 

These are open‐ended schemes that invest a majority of their assets in fixed income 
instruments with a small allocation to equity and equity‐related instruments. The objective 
of this category of funds is to provide a regular income to the investor. An MIP typically 
invests the bulk of its assets in debt, while a small equity exposure is maintained to earn 
something extra. Generally, the equity allocation is capped between 5% and 25% of the 
total assets. Investors who target a regular monthly income and still want to dabble a bit in 
equities can consider the MIP option.  

What are the income options? 

Monthly Income plans offer options of monthly and quarterly income. Neither the 
frequency nor the volume of the dividend is guaranteed. The investments made by these 
schemes bear market / interest rate risks and move with their respective benchmarks and at 
times, when the markets remain volatile with a downward bias, the fund manager may 
choose to skip the dividend. However, with the fixed income component strongly 
embedded in the system, these plans do not suffer much on the downside. 

Dividend and growth option 

Like all other mutual funds, MIPs too come with the Growth & Dividend (Payout and Re‐
investment) option. The 'Growth' option of an MIP is ideal for a ‘Moderate’ risk profile, since 
it typically falls between a pure income fund and a balanced fund. It is a viable option for 
HNIs, Institutions, Trusts etc. as these investors typically do not require a regular monthly 
dividend inflow, but still would offer capital appreciation at controlled risk levels.  

The other option of Dividends will offer regular payouts which will essentially assume the 
form of monthly income.  

MIP are more tax efficient 

Dividends declared under MIPs are tax‐free. MIPs are thus more tax efficient than FDs; 
income from bank FDs is taxable as "income from other sources" and is taxed depending on 
the tax bracket of the individual. 

If you sell the fund units before a year and there is a gain, short‐term capital gains (STCG) 
tax is applicable ‐ the net gain will be added to current taxable income and tax will be levied 
at normal tax rates. If you sell units after a year and there is a gain, a long‐term capital gains 
(LTCG) tax is applicable ‐ 10% tax will be levied (without indexation benefit) or 20% tax with 
indexation benefit, whichever is lower. 

WHY AND WHEN TO USE THEM 

Suitability 

MIPs are suitable for an investor who is conservative but wants some exposure to equity. 
Individuals who are looking at fixed deposits as an investment option, could evaluate 
monthly income plan which would provide better returns in the long run while being 
relatively tax efficient. It may also suit senior citizen individuals who are nearing retirement. 

Current Scenario 

The recent 50 bps hike by RBI was an aggressive means to control inflation, there is also 
consensus that this might be the last of the rate hikes that the RBI will carry out. This 
suggests that the interest rates have peaked; from here‐on it is highly likely that the interest 
rates could tend to fall, thereby the existing bond prices will start to increase. MIPs invest 
almost 75%‐ 90% in debt instruments; therefore they appear well positioned to deliver 
impressive returns, with interest rates tending towards moderation going forward. 

It is important to evaluate the fund before investing; one also needs to compare across 
Monthly income plans which have the same equity exposure. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7. MULTI CAP FUNDS 
 
WHAT ARE THEY 
 
When you put your money in an equity mutual fund, do you also tell the fund manager 
which stocks to buy? No, and yes. While investors don't give any instructions, a fund with a 
fixed investment mandate picks only those type of stocks.  
 
For instance, a large‐cap fund will invest only in index‐based heavyweights and other blue 
chips. You won't find a small‐cap company in its portfolio. This is why large‐cap funds tend 
to move slowly and surely compared with other categories. Similarly, a small‐cap fund will 
focus on smaller companies, forever hoping to zero in on the next Infosys that will turn it 
into a multibagger.  
 
On the other hand, multi‐cap funds invest across the entire spectrum of stocks, starting 
from large‐caps all the way down to small‐caps. They have a flexible mandate, which helps 
them pick winners from across market capitalisations. Multi‐cap funds provide the investors 
with the offer to build a diversified portfolio by giving them access to all kinds of equities 
 
WHY TO INVEST 
 
1. Work in all market conditions  
 
The flexible mandate of multi‐cap funds gives them access to greener pastures in all 
market conditions. At the beginning of a bullish phase, it is usually the large‐cap 
bellwether stocks that do well. Midway through the bull run, these large‐cap stocks 
reach high valuations and the focus of the investing community shifts to mid‐cap and 
then finally small‐cap stocks.  
 
The 'go anywhere' strategy works well during downturns as well. While a given set of 
conditions may not benefit one part of the multi‐cap fund portfolio, it could benefit 
the other, thereby creating a counter‐balance effect that generates long‐term 
results. 
When the bears are on the prowl, small‐cap and mid‐cap stocks fall harder than 
large‐caps. Multi‐cap funds are able to cushion themselves better than funds which 
are focused only on these vulnerable segments.  
 
A deft fund manager can realign the fund's portfolio rapidly and thus benefit from 
the changing market mood. Besides, in a black swan kind of a scenario, such as the 
financial crisis that we experienced in 2008, a multi‐cap fund will be able to bear 
redemption pressures better compared with a mid‐ and small‐cap fund as it is likely 
to be more liquid. 
 

2. Works in all investing style 

 
Apart from the freedom to invest in stocks of any market capitalisation, multi cap 
funds are also not shackled by any particular investing style. These funds can benefit 
from both value and growth investing, depending on their objectives.  
 
 

SOME ISSUES 
 1. Betting on the fund manager's ability 

The fund manager's ability to select stocks is crucial to the success of a mutual fund. 
However, this becomes even more critical in case of a multi‐cap fund. This is because the 
risk levels of a multi‐cap fund can rapidly change, which requires deft handling by the 
manager. Not only does he have to monitor a larger universe of stocks, but the possibility of 
making the wrong choice widens due to the freedom granted to him.  
 
If he fails to read the market conditions correctly or is not able to change the allocation of 
the fund's portfolio, the returns are likely to fall behind. The multi‐cap fund manager must 
also manage his sectoral allocations well. Sectors tend to move in cycles and he should be 
able to change his allocations depending on the economic cycle. This is why multi‐cap funds 
carry a higher risk than index funds or large‐cap funds. Look up the fund manager's track 
record carefully before you invest in one.  
 
 2.   Higher churn, higher costs  
 
Since multi‐cap funds have a larger universe of stocks to buy from, their churn also tends to 
be higher than that of other fund categories. The average portfolio turnover of the multi‐
cap funds is 79%, while that of large‐cap and mid‐ and small‐cap funds are 73% and 64%, 
respectively. Portfolio turnover is a measure of how frequently assets were bought and sold 
in a fund by the manager during the course of a year.  
 
The higher the turnover rate, the higher will be the transaction or trading costs for the fund. 
Although these costs are not included in the fund's expense ratio, they are paid for by the 
investors' money, not the fund manager's salary. Thus, funds with higher portfolio turnover 
eat away into the returns. Over the long term, this can affect the returns from the fund 
significantly.  
 
However, churning depends on the style of investing as well. Both the DSPBR Equity and the 
Templeton India Equity Income funds are multi‐cap schemes. While the former has a 
portfolio turnover of 216%, the latter's measurement is only 3.49% as it functions on value 
investing.  
 
3.   Not taking enough risks  
 
Another drawback of multi‐cap funds is that fund managers are somewhat reluctant to 
allocate a higher percentage of corpus to small‐ and mid‐cap companies. Hence, they are 
not able to effectively capitalise on the USP of the category. "At the time of redemption 
pressure, it is difficult to exit mid‐ and small‐cap stocks. Due to liquidity concerns, a multi‐
cap fund manager may exhibit a large‐cap bias to be on the safe side. The non‐availability of 
information could be another reason why the exposure to small‐cap and mid‐cap stocks is 
restricted.  

WHY AND WHEN TO INVEST  
 
Multi‐cap funds are not of much utility for investors who understand asset allocation and 
base their investment decisions on it. It becomes difficult for investors who follow asset 
allocation principles to ascertain as to how these funds will fit in their portfolios as these 
virtually buy anything irrespective of capitalisation or sector.  
 
Asset allocation is the most important factor determining a portfolio's performance. Studies 
show that 94% of the portfolio's returns variance is determined by how funds are spread 
across asset classes. Only a small portion is determined by market timing and security 
selection.  
 
If you have a large portfolio, the asset allocation call is best taken between the investor and 
the financial adviser. In such cases, multi‐cap funds lose their relevance. However, if you 
have a small portfolio, then multi‐cap funds can make an excellent investment option. 

8. QUANT FUNDS 
 
WHAT ARE THEY 

Stock picking is as much a game of skill as sentiment, leaving the most seasoned 
professionals in a quandary. Taking the right decisions consistently is difficult because these 
are often clouded by emotions and biases. To circumvent such human frailties, 
mathematical tools were brought in. Making the most of such tools are quant funds, which 
essentially pick funds based on a given set of parameters.  
 
 
How quant funds work?  
 
Quant funds arrive at a stock portfolio based on a pre‐programmed model involving 
mathematical formulae and quantitative parameters. They select only those stocks that fit 
these predetermined criteria. Usually, such models incorporate a blend of fundamental and 
valuation metrics like earnings growth, profit growth, cash flow, price‐to‐earnings ratio, 
price‐to‐sales ratio, apart from factors like stock price momentum. These models also 
provide for specific triggers for selling stocks built around these criteria. However, the 
parameters vary across different fund houses as each develops its own proprietary 
mathematical model.  
 
What schemes are currently available? 

Currently, there are a few mutual fund schemes that work on the quant model, the more 
prominent ones being Reliance Quant Plus, Religare AGILE, Religare AGILE Tax (an equity‐
linked savings scheme) and Canara Robeco Large Cap Plus. Apart from these, ING offers a 
set of schemes based on the quant model under its portfolio management services. These 
mostly employ a screening‐and‐scoring approach (filtering stocks based on predefined cut‐
offs and ranking them on chosen parameters), while others use variants of this approach. 
For instance, Reliance Quant Plus Fund's proprietary model shortlists 15‐20 S&P CNX Nifty 
stocks through a screening mechanism at predetermined intervals. The stocks are selected 
on factors such as valuation, earnings, price, momentum and quality.  

 
Achieving a balance  
 
Since such funds are based on a programmed mathematical model, they help eliminate 
human error to an extent. This ensures that no external factor influences the selection of 
stocks. It also brings in a more wholesome approach to stock picking than the traditional 
strategy followed by the existing mutual funds.  
 
Fallacy and risk factors 
 
Lack of human intervention can also be a bane. Most quant models rely on historical data to 
predict the future growth and throw up stocks based on this information.  
 
They assume that the companies and stock prices will follow a similar trend in the future. 
This could spell disaster if the model fails to provide for certain events that may not have 
occurred in the past. It may be argued that mathematical models are not responsive enough 
to identify an impending shift in the business fundamentals or market trends. For instance, 
an unprecedented event like the financial crisis of 2008 could bring out inefficiencies in any 
financial model. In fact, after the stock market crash, many quant funds have sought to 
bring in a higher level of human intervention to make them more responsive to changing 
circumstances.  
 
The fact remains that the most proficient number crunching cannot be substituted for 
awareness, knowledge and intuition. Fund managers may have access to crucial information 
not available in the public domain. They can use their expertise to zero in on the impending 
shift in trend or developing opportunities. The use of mathematical models to screen and 
filter stocks is warranted. Ideally, the final decision of picking or dropping a stock from this 
sample set should be left to the judgement of a fund manager.  
 
Some existing quant funds follow a concentrated portfolio approach, holding a basket of 
only 15‐20 stocks and, thereby, carrying a high degree of risk. Religare AGILE, for instance, 
limits its selection to 11 stocks. Such an aggressive approach may reap rich rewards during a 
bull period, but could easily turn sour in a falling market. Also, since these funds are 
reluctant to reveal the building blocks of their model for fear of duplication by others, the 
lack of transparency in stock selection process proves to be a blindfold for the investor.  
 
WHY AND WHEN TO USE THEM 
 
Since these funds are based purely on a mathematical formula with some human 
intervention, the funds may or may not work in specific market condition. Hence, one can 
never say for sure if one is going to make money through it. But one thing is sure. This 
product is risky than other mutual funds that are more large cap based. Some financial 
planners advise retail investors to stay away from these. They feel that quant funds are only 
meant for sophisticated investors who have a higher risk appetite. Consider the pros and 
cons as well as your risk appetite before zeroing in on such funds.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOME FREQUENTLY ASKED QUESTIONS 
 
1. What is a sale or repurchase/redemption price?  
 
The price or NAV a unit holder is charged while investing in an open‐ended scheme is called 
sales price. It may include sales load, if applicable.  
Repurchase or redemption price is the price or NAV at which an open‐ended scheme 
purchases or redeems its units from the unit holders. It may include exit load, if applicable.  
     
2. What is an assured return scheme?  
 
Assured return schemes are those schemes that assure a specific return to the unit holders 
irrespective of performance of the scheme.  
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or 
AMC and this is required to be disclosed in the offer document.  
Investors should carefully read the offer document whether return is assured for the entire 
period of the scheme or only for a certain period. Some schemes assure returns one year at 
a time and they review and change it at the beginning of the next year.  
   
3. Can a mutual fund change the asset allocation while deploying funds of 
investors?  
 
Considering the market trends, any prudent fund managers can change the asset allocation 
i.e. he can invest higher or lower percentage of the fund in equity or debt instruments 
compared to what is disclosed in the offer document. It can be done on a short term basis 
on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed 
certain flexibility in altering the asset allocation considering the interest of the investors. In 
case the mutual fund wants to change the asset allocation on a permanent basis, they are 
required to inform the unit holders and giving them option to exit the scheme at prevailing 
NAV without any load.    
   
4. Whom to Buy from? 
 
As such there are various alternatives available, such as the Mutual Fund Office, 
Intermediaries like Agents, Banks, Stockbrokers, Certified Financial Planners, Internet, 
Website, Portals, etc. However, today mostly mutual funds are sold through agents. Since 
today the entry load has been banned on all mutual funds, selling of mutual funds has not 
been so lucrative for the agents. The rapid mis‐selling of MF products has also led to a 
decline of this industry. Of late, SEBI has been trying to bring more educated intermediaries 
for selling of mutual funds. Consequently, SEBI is trying to bring in the concept of Mutual 
Fund Advisors who would be qualified and trained people in this sector. These would also 
charge a flat fees. One can use the benefit of Certified Financial Planners (CFP) who possess 
the qualification also. The Companies own websites and the Portals are also good options 
for investors who are well‐versed with them. 
   
5. What should an investor look into an offer document?  
 
An abridged offer document, which contains very useful information, is required to be given 
to the prospective investor by the mutual fund. The application form for subscription to a 
scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures 
in the offer document. An investor, before investing in a scheme, should carefully read the 
offer document. Due care must be given to portions relating to main features of the 
scheme, risk factors, initial issue expenses and recurring expenses to be charged to the 
scheme, entry or exit loads, sponsor’s track record, educational qualification and work 
experience of key personnel including fund managers, performance of other schemes 
launched by the mutual fund in the past, pending litigations and penalties imposed, etc.  
   
6. When  will  the  investor  get  certificate  or  statement  of  account  after 
investing in a mutual fund?  
 
Mutual funds are required to dispatch certificates or statements of accounts within six 
weeks from the date of closure of the initial subscription of the scheme. In case of close‐
ended schemes, the investors would get either a demat account statement or unit 
certificates as these are traded in the stock exchanges. In case of open‐ended schemes, a 
statement of account is issued by the mutual fund within 30 days from the date of closure of 
initial public offer of the scheme. The procedure of repurchase is mentioned in the offer 
document.  
   
7. How  long  will  it  take  for  transfer  of  units  after  purchase  from  stock 
markets in case of close‐ended schemes?  
 
According to SEBI Regulations, transfer of units is required to be done within thirty days 
from the date of lodgment of certificates with the mutual fund.  
   
8. How  much time  will it take to receive dividends/repurchase proceeds 
as a unit holder?  
 
A mutual fund is required to dispatch to the unit holders the dividend warrants within 30 
days of the declaration of the dividend and the redemption or repurchase proceeds within 
10 working days from the date of redemption or repurchase request made by the unit 
holder.  
In case of failures to dispatch the redemption/repurchase proceeds within the stipulated 
time period, Asset Management Company is liable to pay interest as specified by SEBI from 
time to time (15% at present).  
   
9. Can  a  mutual  fund  change  the  nature  of  the  scheme  from  the  one 
specified in the offer document?  
 
Yes. However, no change in the nature or terms of the scheme, known as fundamental 
attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a 
written communication is sent to each unit holder and an advertisement is given in one 
English daily having nationwide circulation and in a newspaper published in the language of 
the region where the head office of the mutual fund is situated. The unit holders have the 
right to exit the scheme at the prevailing NAV without any exit load if they do not want to 
continue with the scheme. The mutual funds are also required to follow similar procedure 
while converting the scheme form close‐ended to open‐ended scheme and in case of 
change in sponsor.  
   
10. How  will  an  investor  come  to know  about the  changes, if any, which 
may occur in the mutual fund?  
 
There may be changes from time to time in a mutual fund. The mutual funds are required to 
inform any material changes to their unit holders. Apart from it, many mutual funds send 
quarterly newsletters to their investors.  
At present, offer documents are required to be revised and updated at least once in two 
years. In the meantime, new investors are informed about the material changes by way of 
addendum to the offer document till the time offer document is revised and reprinted.  
   
11. How to know the performance of a mutual fund scheme?  
 
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on 
daily basis in case of open‐ended schemes and on weekly basis in case of close‐ended 
schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs 
are also available on the web sites of mutual funds. All mutual funds are also required to put 
their NAVs on the web site of Association of Mutual Funds in India (AMFI) 
http://www.amfiindia.com/ and thus the investors can access NAVs of all mutual funds at 
one place  
 
The mutual funds are also required to publish their performance in the form of half‐yearly 
results which also include their returns/yields over a period of time i.e. last six months, 1 
year, 3 years, 5 years and since inception of schemes. Investors can also look into other 
details like percentage of expenses of total assets as these have an affect on the yield and 
other useful information in the same half‐yearly format.  
The mutual funds are also required to send annual report or abridged annual report to the 
unit holders at the end of the year.  
Various studies on mutual fund schemes including yields of different schemes are being 
published by the financial newspapers on a weekly basis. Apart from these, many research 
agencies also publish research reports on performance of mutual funds including the 
ranking of various schemes in terms of their performance. Investors should study these 
reports and keep themselves informed about the performance of various schemes of 
different mutual funds.  
Investors can compare the performance of their schemes with those of other mutual funds 
under the same category. They can also compare the performance of equity oriented 
schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.  
On the basis of performance of the mutual funds, the investors should decide when to enter 
or exit from a mutual fund scheme.  
  
12. How  to  know  where  the  mutual  fund  scheme  has  invested  money 
mobilised from the investors?  
 
The mutual funds are required to disclose full portfolios of all of their schemes on half‐
yearly basis which are published in the newspapers. Some mutual funds send the portfolios 
to their unit holders.  
The scheme portfolio shows investment made in each security i.e. equity, debentures, 
money market instruments, government securities, etc. and their quantity, market value 
and % to NAV. These portfolio statements also required to disclose illiquid securities in the 
portfolio, investment made in rated and unrated debt securities, non‐performing assets 
(NPAs), etc.  
Some of the mutual funds send newsletters to the unit holders on quarterly basis which also 
contain portfolios of the schemes.  
  
13.  If  schemes  in  the  same  category  of  different  mutual  funds  are 
available, should one choose a scheme with lower NAV?  
 
Some of the investors have the tendency to prefer a scheme that is available at lower NAV 
compared to the one available at higher NAV. Sometimes, they prefer a new scheme which 
is issuing units at Rs. 10 whereas the existing schemes in the same category are available at 
much higher NAVs. Investors may please note that in case of mutual funds schemes, lower 
or higher NAVs of similar type schemes of different mutual funds have no relevance. On the 
other hand, investors should choose a scheme based on its merit considering performance 
track record of the mutual fund, service standards, professional management, etc. This is 
explained in an example given below.  
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both 
schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the 
two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in 
scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform 
equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and 
that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 
16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The 
investor would get the same return of 10% on his investment in each of the schemes. Thus, 
lower or higher NAV of the schemes and allotment of higher or lower number of units 
within the amount an investor is willing to invest, should not be the factors for making 
investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and 
an existing scheme is available for Rs. 90, should not be a factor for decision making by the 
investor. Similar is the case with income or debt‐oriented schemes.  
On the other hand, it is likely that the better managed scheme with higher NAV may give 
higher returns compared to a scheme which is available at lower NAV but is not managed 
efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may 
not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor 
should give more weightage to the professional  
management of a scheme instead of lower NAV of any scheme. He may get much higher 
number of units at lower NAV, but the scheme may not give higher returns if it is not 
managed efficiently.  
   
14. Are  the  companies  having  names  like  mutual  benefit  the  same  as 
mutual funds schemes?  
 
Investors should not assume some companies having the name "mutual benefit" as mutual 
funds. These companies do not come under the purview of SEBI. On the other hand, mutual 
funds can mobilize funds from the investors by launching schemes only after getting 
registered with SEBI as mutual funds.  
   
15.  Is the higher net worth of the sponsor a guarantee for better returns?  
 
In the offer document of any mutual fund scheme, financial performance including the net 
worth of the sponsor for a period of three years is required to be given. The only purpose is 
that the investors should know the track record of the company which has sponsored the 
mutual fund. However, higher net worth of the sponsor does not mean that the scheme 
would give better returns or the sponsor would compensate in case the NAV falls.  
   
16.  If  mutual  fund  scheme  is  wound  up,  what  happens  to  money 
invested?  
 
 In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV 
after adjustment of expenses. Unit holders are entitled to receive a report on winding up 
from the mutual funds which gives all necessary details.  
 
17.  How can the investors redress their complaints?  
 
Investors would find the name of contact person in the offer document of the mutual fund 
scheme who can be approached in case of any query, complaints or grievances. Trustees of 
a mutual fund monitor the activities of the mutual fund. The names of the directors of asset 
Management  Company  and  trustees  are  also  given  in  the  offer  documents.  Investors  can 
also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up 
the  matter  with  the  concerned  mutual  fund  and  follows  up  with  them  till  the  matter  is 
resolved. Investors may send their complaints to:  
Securities and Exchange Board of India 
Mutual Funds Department 
Mittal Court ‘B’ wing, First Floor, 
224, Nariman Point, 
Mumbai – 400 021. 
Phone: 2850451‐56, 2880962‐70  
 
   
   
 
 
 

INVESTING IN MUTUAL FUNDS THROUGH SIP ROUTE 

Systematic is the word that describes you. Organised, well‐managed and planned in all your 
activities. Whether it is earning, saving or spending, everything is done in a methodical 
manner. Well… err… except for investing. But then you are not to blame. You never had 
enough money. Or, sometimes it was shortage of time. If this is the case, then it's time you 
had a look at the systematic investment plan (SIP) of mutual funds. A SIP is nothing but a 
planned investment programme, which takes a small sum of money from you and invests it 
in a mutual fund at regular intervals. The minimum amount can be as small as Rs 500 and 
the frequency of investment is usually monthly or quarterly. This simple programme has a 
number of advantages. 
 
First, if saving is an arduous task for you, then SIP can do this for you. Money deducted from 
your account (through post‐dated cheques) and invested is money you cannot spend. And a 
rupee saved is a rupee earned. Even if each investment is small, over time this can add up to 
a neat kitty. And the power of compounding can do wonders. In due course of time, a small 
amount can grow into a significant amount. More importantly, an SIP does away with the 
need or effort to time the market. When the market is falling you may feel that it may 
decline further and that you should wait a while. Often stock markets make a recovery 
before you notice and the opportunity is lost. When markets are rising it is scary to invest 
money. Isn't it better that you wait for a correction and then make an investment? But if the 
correction doesn't come about, then even this opportunity is missed. And if markets are 
going nowhere, then what is the point in investing at all? 
 
So, trying to find out which is the best time to invest can be a tough task. And that's why it is 
said that timing the market is futile. If one could take advantage of the ups and downs that 
markets encounter, it would be great. And this is where SIP fits in. By the process of regular 
investing one gets to invest in the highs as well as the lows, and this helps in averaging out 
the volatility in the market. 
 
Some mutual funds suggest that contribution to an SIP programme should be increased in a 
full‐fledged bear market. While this may be emotionally difficult, it can be rewarding when 
markets recover. But then this appears very much like timing the market and the purpose of 
an SIP is to avoid this effort. 
 
Thus, an SIP imparts discipline to investing. Whether it is the regular act of saving or 
investing, an SIP does both automatically. While there are certain benefits of an SIP please 
remember it is no wonder drug that cures all investment‐related ailments. 
 
An SIP does not guarantee returns or positive returns. If you opt for an SIP in a falling 
market and the market continues to fall, then your investments will suffer a loss on the 
whole. An SIP does not guarantee a better return than a one‐time investment. If you made a 
one‐time investment when the Sensex was at 2,834 points in October 2002, then this would 
have performed better as compared to carrying out an SIP by spreading the investment over 
a period of time. 
 
The emphasis on averaging out in an SIP obviously makes it most useful in case of an equity 
fund, as the volatility is greater here. An SIP can be useful for a debt fund as well...to help 
build a pool of savings. It can be thought of something akin to a recurring deposit where a 
part of your savings is automatically deducted from your account. 
 
Overall, an SIP is a simple device that helps you to save and invest in a disciplined manner 
without having to time the market. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DISTRIBUTION OF MUTUAL FUNDS THROUGH POST OFFICES 
 
Distribution of Mutual Funds and Securities: 
      
The Post Office has traditionally been a distributor of financial services, from money orders 
to  banking  services.  The  Post  Office  Savings  Bank  is  the  largest  retail  bank  in  the  country, 
operating  from  over  1,50,000  branches.  With  an  objective  to  leverage  the  strength  of  the 
postal  network  and  skills  Department  of  Posts  had  started  retailing  mutual  funds  and 
bonds.    

On 22nd January 2001, India Post in partnership with IDBI‐Principal, launched a scheme for 
distribution of mutual funds through post offices. A pilot project was started from the four 
cities  of  Delhi,  Mumbai,  Kolkata  and  Patna.  Thereafter  from  15th  June  2001  onwards,  the 
scheme was extended to cover  post offices in all major capital and other cities all across the 
country. At present select  schemes of  Principal, SBI, UTI, Franklin Templeton and Reliance 
Mutual Fund are retailed through designated post offices in the country.  

Easy steps for investing through the Post Office: 

1.   At  each  designated  post  office  one  counter  (AMFI  qualified  personnel)  has  been 
earmarked (usually on a non‐exclusive basis) to receive the Mutual Fund applications; 

2.   An  investor  can  approach  the  designated  post  office  counters  or  the  concerned 
postmaster  for  application  forms  and  literature  on  the  types  of  fund  schemes  available 
through the post office; 

3.  Thereafter he can hand the application forms duly filled along with requisite amount in 
the form of a demand draft/cheque to the counter staff. No cash will be accepted; 

4.  The counters accept the application forms as per the cut off time prescribed by the AMCs 
for accepting the applications for their schemes in the particular post office. 

 
EXCHANGE TRADED FUNDS 
ETFs are basket of securities which are traded on an exchange just like individual stocks. So,
they work like investment funds which hold assets such as stocks, commodities or bonds and
trades at approximately the same price as the net asset value of its underlying assets over the
course of the trading day.

Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change
throughout the day. But unlike traditional mutual funds, ETFs do not sell or redeem their
individual shares at net asset value, or NAV.

They first came into existence in the USA in 1993. It took several years for them to attract
public interest. But once they did, the volumes took off with a vengeance. As of September
2010, there were 916 ETFs in the U.S., with $882 billion in assets, an increase of $189 billion
over the previous twelve months. About 60% of trading volumes on the American Stock
Exchange are from ETFs.
CREATION AND REDEMPTION 

As said earlier, ETF are different from mutual funds in the sense that ETF units are not sold
to the public for cash. Instead, financial institutions purchase and redeem ETF shares directly
from the ETF, but only in large blocks, varying in size by ETF from 25,000 to 200,000
shares, called "creation units". Purchases and redemptions of the creation units generally are
in kind, with the institutional investor contributing or receiving a basket of securities of the
same type and proportion held by the ETF, although some ETFs may require or permit a
purchasing or redeeming shareholder to substitute cash for some or all of the securities in the
basket of assets.
The number of outstanding ETF units is not limited, as with traditional mutual funds. It may
increase if investors deposit shares to create ETF units; or it may reduce on a day if some
ETF holders redeem their ETF units for the underlying shares. These transactions are
conducted by sending creation / redemption instructions to the Fund. The Portfolio Deposit
closely approximates the proportion of the stocks in the index together with a specified
amount of Cash Component. This “in-kind” creation / redemption facility ensures that ETFs
trade close to their fair value at any given time.

Some investors may prefer to hold the creation units in their portfolios. While others may
break-up the creation units and sell on the exchanges, where individual investors may
purchase them just like any other shares.

ETF units are continuously created and redeemed based on investor demand. Investors may
use ETFs for investment, trading or arbitrage. The price of the ETF tracks the value of the
underlying index. This provides an opportunity to investors to compare the value of
underlying index against the price of the ETF units prevailing on the Exchange. If the value
of the underlying index is higher than the price of the ETF, the investors may redeem the
units to the Sponsor in exchange for the higher priced securities. Conversely, if the price of
the underlying securities is lower than the ETF, the investors may create ETF units by
depositing the lower-priced securities. This arbitrage mechanism eliminates the problem
associated with closed-end mutual funds viz. the premium or discount to the NAV.

BENEFITS OF ETF 

ETFs provide exposure to an index or a basket of securities that trade on the exchange like a
single stock. They offer a number of advantages over traditional open-ended index funds as
follows:

• While redemptions of Index fund units takes place at a fixed NAV price (usually end
of day), ETFs offer the convenience of intra-day purchase and sale on the Exchange,
to take advantage of the prevailing price, which is close to the actual NAV of the
scheme at any point in time.
 • They provide investors a fund that closely tracks the performance of an index
throughout the day with the ability to buy/sell at any time, whereby trading
opportunities that arise during a day may be better utilized.
• They are low cost.
• Unlike listed closed-ended funds, which trade at substantial premium or more
frequently at discounts to NAV, ETFs are structured in a manner which allows
Authorized Participants and Large Institutions to create new units and redeem
outstanding units directly with the fund, thereby ensuring that ETFs trade close to
their actual NAVs.
• ETFs are like any other index fund, wherein, subscription / redemption of units work
on the concept of exchange with underlying securities instead of cash (for large
deals).
• Since an ETF is listed on an Exchange, costs of distribution are much lower and the
reach is wider. These savings in cost are passed on to the investors in the form of
lower costs. Further, the structure helps reduce collection, disbursement and other
processing charges.
• ETFs protect long-term investors from inflows and outflows of short-term investors.
This is because the fund does not incur extra transaction cost for buying/selling the
index shares due to frequent subscriptions and redemptions.
• Tracking error, which is divergence between the NAV of the ETF and the underlying
Index, is generally observed to be low as compared to a normal index fund due to
lower expenses and the unique in-kind creation / redemption process.
• ETFs are highly flexible and can be used as a tool for gaining instant exposure to the
equity markets, equitising cash or for arbitraging between the cash and futures market.

FREQUENTLY ASKED QUESTIONS 

What are the costs of investing in ETFs through the exchange?

While the Expense Ratio of ETFs is generally low, there are certain costs that are unique to
ETFs. Since ETFs, like stocks, are bought as shares through a broker, every time an investor
makes a purchase, he/she pays a brokerage commission. In addition, an investor can suffer
the usual costs of trading stocks, including differences in the ask-bid spread etc. Of course,
traditional Mutual Fund investors are also subjected to the same trading costs indirectly, as
the Fund in turn pays for these costs.

What are the advantages of ETFs over normal open-ended mutual fund?
1. Buying / Selling ETFs is as simple as buying / selling any other stock on the exchange.

2. ETFs allow investors to take benefit of intraday movements in the market, which is not
possible with open-ended Funds.

3. With ETFs one pays lower management fees. As ETFs are listed on the Exchange,
distribution and other operational expenses are significantly lower, making it cost effective.
These savings in cost are passed on to the investor.

4. ETFs have lower tracking error due to in-kind creation and redemption.

5. Due to its unique structure, the long-term investors are insulated from short term trading in
the fund.

What are the differences between ETFs and close-ended mutual funds?

Though Close-Ended Mutual Funds are listed on the exchange they have a limited number of
shares and trade at substantial premiums or more often at discounts to the actual NAV of the
scheme. Also, they lack the transparency, as one does not know the constitution and value of
the underlying portfolio on a daily basis.
In ETFs, the number of units issued is not limited and can be created / redeemed throughout
the day. ETFs rely on market makers and arbitrageurs to maintain liquidity so as to keep the
price in line with the actual NAV.

• ETFs Vs. Open Ended Funds Vs. Close Ended Funds

Parameter Open Ended Fund Closed Ended Fund Exchange Traded Fund
Fund Size Flexible Fixed Flexible
NAV Daily Daily Real Time
Liquidity
Fund itself Stock Market Stock Market / Fund itself
Provider
At NAV plus Significant Premium / Very close to actual NAV of
Sale Price
load, if any Discount to NAV Scheme
Through Exchange where Through Exchange where
Availability Fund itself
listed listed / Fund itself.
Portfolio
Monthly Monthly Daily/Real-time
Disclosure
Equitizing Cash, Hedging,
Uses Equitizing cash -
Arbitrage

For whom are ETFs suitable?

The major players in this market have historically been Large Institutional players seeking to
Index core holdings or pursue more aggressive market timing and sector rotation strategies.
However, since Smaller Institutions and Retail Investors can trade in small lots, they can
invest in essentially the same terms as Large Investors.

A broad class of investors can use ETFs:

1. For Retail or Wholesale Investors with a long-term horizon, it allows diversification of

portfolio with one single investment. It insulates them from short term trading activity of
other investors in the Fund as ETFs have a unique in-kind creation / redemption mechanism.
Lower costs of ETFs enhance net returns in the long term.

2. For FIIs, Institutions and Mutual Funds, it allows easy Asset Allocation, Hedging and
Equitising Cash at a low cost.

3. For Arbitrageurs, it provides ease with low Impact Cost to carry out arbitrage between the
Cash and the Futures market.

4. For investors with a shorter term horizon, ETFs provides access to liquidity due to the
ability to trade during the day and at values near to NAV.

What are the USES OF ETFs?

Asset Allocation: Asset allocation managing could be difficult for individual investors given
the costs and assets required to achieve proper levels of diversification. ETFs provide
investors with exposure to broad segments of the equity markets. They cover a range of style
and size spectrums, enabling investors to build customized investment portfolios consistent
with their financial needs, risk tolerance, and investment horizon. Both institutional and
individual investors use ETFs to conveniently, efficiently, and cost effectively allocate their
assets.

Cash Equitization: Investors typically seek exposure to equity markets, but often need time
to make investment decisions. ETFs provide “Parking Place" for cash that is designated for
equity investment. Because ETFs are liquid, investors can participate in the market while
deciding where to invest the funds for the longer-term, thus avoiding potential opportunity
costs. Historically, investors have relied heavily on derivatives to achieve temporary
exposure. However, derivatives are not always a practical solution. The large denomination
of most derivative contracts can preclude investors, both Institutional and Individual, from
using them to gain market exposure. In this case and in those where derivative use may be
restricted, ETFs are a practical alternative.

Hedging Risks: ETFs are an excellent hedging vehicle because they can be borrowed and
sold short. The smaller denominations in which ETFs trade relative to most derivative
contracts provides a more accurate risk exposure match, particularly for small investment
portfolios.
Arbitrage (Cash Vs Futures) and Covered Option Strategies: ETFs can be used to arbitrage
between Cash and Futures Market, as it is very easy to trade. ETFs can also be used for cover
Option strategies on the Index.

What happens to dividends?

Dividends received by the Scheme will be reinvested in the scheme. However, the Fund may
also decide to distribute dividends to the investors.

What are the rules governing taxation of ETFs?

Same rules apply as in the case of buying or selling stocks or mutual fund units. Kindly refer
the
respective Offer Document /Key Information Memorandum

What happens if constituents in the underlying index change?

Constituents of an Index are changed as and when Securities in the Index do not match
specific criteria laid down by the Index Service Provider or a better candidate is available to
replace a constituent. The Index Service Provider usually makes announcements of change
well in advance. Once Securities in the underlying index are changed, the Fund would change
the Securities in its underlying portfolio by selling the Securities that are being removed from
the Index and including those that are included in the Index. This will in no way affect the
units being held by an investor, as the units will continue to track the index. The only effect
may be on the tracking error of the scheme.
Index changes are usually not so frequent. In India, historically, around 10%of the Index
constituents have changed annually which means an index of 50 securities would experience
about 5 changes every year.

How do ETFs compare with Index Futures?

Index Futures have gained wide acceptance globally as a tradeable means of shifting
exposure to Indices. Index Futures are advantageous when the implied Cost of Carry is less
than the actual Cost of Carry. In addition, an investment in ETFs requires investment of the
entire notional value, while an investment in Futures requires posting of an initial collateral
deposit and then daily Market to Market Margins which represent a small fraction of the
notional value, allowing leverage.

ETFs are beneficial over Index Futures in many situations:

1. When investors cannot or prefer not to trade Index Futures

2. When cash flows are small and investors do not have enough capital to invest in index
futures, as the minimum investment amount required in index futures is very large as
compared to ETFs.

3. For longer-term horizons, Index Futures need to be rolled over every month /quarter which
has its own risk and costs

4. If regulations prevent investors from investing in Futures;

5. Taxation issues: With Index Futures investors can avail of only short-term capital gains
while with ETFs, investors can avail long-term capital gains.

6. If the discount in ETFs is greater than the discount in futures

ETF LAUNCHED ON NSE 

The first ETF in India, “Nifty BeEs (Nifty Benchmark Exchange Traded Scheme) based on
S&P CNX Nifty, was launched in January 2002 by Benchmark Mutual Fund. It may be
bought and sold like any other stock on NSE. Its symbol on NSE is “NIFTYBEES”.

EQUITY ETF
GOLD ETF
WORLD INDICES
DEBT

CURRENT GROWTH TREND OF ETF 
 ETF have shown consistent growth in volumes both in terms of number of trade and
turnover. Based on the underlying asset different types of ETFs have been identified. The
turnover and price of each class of ETF listed on NSE is given below:

Based on the current growth trend of Gold, there has been a

significant rise in investment in Gold through the ETF route. Gold ETFs contributed to
83.44% of the total turnover of the ETF market.

Among 11 Gold ETFs the top 3 gold ETF contributed 90.52% of the total trading volumes during
the month. The total trading volume for the month was ` 163743.57 lacs and the top 3 securities
were GOLDBEES, KOTAKGOLD & RELGOLD.
REAL ESTATE 
For many of us, buying real estate is towards the goal of providing for shelter for our family.
However, today real estate has also become a practical alternative to stocks and FDs as a
financial investment.

Property  Investments  in  India  have  normally  been  a  gold  mine  for  most  investors.  The 
growth and development of cities across the country have  added fuel to the rise in prices 
across  the  country.  According  to  a  survey  conducted  by  ASSOCHAM,  65%  of  working 
individuals  prefer  real  estate  as  a  mode  of  long  term  investment.  Property  prices  in  India 
have increased by 16.5% in the last year according to a study by Makaan.com.  
Characteristics of Real Estate as an Investment 

Real estate has a combination of characteristics that are not available through other asset 
classes, thus making it somewhat unique as an asset class. 

1. Protection against inflation:

An investment property can offer the buyer a good protection against inflation. In this
regard it is like Gold, in that usually real estate retains its intrinsic value. However,
unlike Gold, one can earn income through real estate through rental income.
Depending upon the existing price level in the economy, one can increase the rents in
times of high inflation thus retaining the purchasing power of one's rental income. In
addition, real estate offers the prospects of capital appreciation as well.

2. Tax incentives:

All around the world, different countries offer different incentives to buy real estate.
For instance, it’s very common for governments to offer some kind of tax subsidy for
a property purchased for residential use (whether by self or let out). In some countries
there are tax advantaged trusts through which investors can own real estate (REITs),
and these are expected to emerge in India as well.

3. Diversification:

There are many different categories of real estate investments. The most commonly
understood in India is residential, but other types that are also growing are
commercial (office buildings), retail (malls and shops), industrial (factories and
warehouses) and lodging (hotels). Each of these has different drivers and different
return characteristics.

4. Maintenance costs:

Finally, if you have invested in any of the above type of properties, it is likely that
you will have annual maintenance costs (cleaning, painting, ongoing repairs) and the
occasional capital expenditure to upgrade the property every few years. Investments
such as stocks and FDs don't have these associated expenses.

Investment Related Issues 

When it comes to the process of making a real estate investment and exiting from it, there 
are a few things that you must keep in mind. 

1. Transaction costs:

When you buy or sell property, there are many associated costs associated: brokerage
fees, stamp duty, registration fees, tax liability in case of gains. All these costs can
add a material amount to the purchase or sale price of your investment.

2. Liquidity:
 Some investments like stocks or FDs can be readily converted into cash in hand. Real
estate on the other hand is not "liquid", i.e., it takes time to convert it into cash. If you
need to have easy access to your money, please be aware that real estate deals take
weeks or months to complete.

3. Cash:

Property investments are not always the cleanest because of the cash versus cheque
component of real estate deals. Unlike mutual funds where KYC norms require that
the investment be made in cheque and the PAN card details be shared, real estate
investments can have a huge cash (undeclared money) component to them. This might
not suit everyone.

4. Long term Investment: 

 The preferable time horizon for real estate is four‐ seven years for it to deliver best 
returns.  The low liquidity results in poor prices in case of distress sales. E.g. during 
the  last  downturn  people  had  to sell  their  properties  at  throw  away  prices  as  they 
were unable to pay their EMIs. Hence only invest long term surpluses and where you 
do not require liquidity. 

5. Cyclical :

Real estate is also cyclical, though the cycles are significantly longer than equity
cycles. If timing is wrong, it can also lead to losses or poor returns.

FREQUENTLY ASKED QUESTIONS ON REAL ESTATE INVESTMENT 
What is Real estate investment?
Real estate investment includes investment in
• Agricultural land
• Farm houses
• Urban land and
• House property
• Commercial property

What are the guidelines used to evaluate real estate as an investment option?
To evaluate real estate as an investment option, use the following guidelines.

• Check out the various loan options to raise the finances.

• Ensure that there is scope for infrastructure development around the property under
consideration.

• Another factor is the location and the proximity to schools, hospitals, markets, public
transportation, etc.
 • Check out the rental returns and capital appreciation potential in the area where the
property is located.

• Actual property taxes to be paid.

• Finally, ensure that you are able to maximize the tax benefits to the limit.

What are the sources of Housing finance?

• Own money
• State Housing Boards
• Loans from Employers
• Loans from Co-operative Housing Societies
• HDFC
• Housing Schemes of Banks and financial institutions
• LIC Housing Finance

Who is liable to pay Stamp Duty‐the buyer or the seller?  

The liability of paying stamp duty is that of the buyer unless there is an agreement to the 
contrary.  

In whose name are the stamps required to be purchased?  

The stamps are required  to  be  purchased  in  the  name  of  any  one  of  the  executors  to  the 
Instrument. 

What  is  meant  by  the  market  value  of  the  property  and  is  Stamp  Duty  payable  on  the 
market value of the property or on consideration as stated in the agreement? 

Market value means the price at which a property could be bought in the open market on 
the  date  of  execution  of  such  instrument.  The  Stamp  Duty  is  payable  on  the  agreement 
value of the property or the market value whichever is higher. 

Which are the instruments that attract the payment of Stamp Duty? 

The instruments like Agreement to Sell, Conveyance Deed, Exchange of property, Gift Deed, 
Partition Deed, Power of Attorney, settlement and Deed and Transfer of lease attract Stamp 
Duty on market value of the property. 

Who is the appropriate authority for knowing the market value of the property?  

The  Sub‐Registrar  of  the  area,  in  whose  jurisdiction  the  property  is  located,  is  the 
appropriate authority for knowing the market value of the property.  

What are the risks associated in buying a flat on Power Of Attorney (POA) basis? 

Purchasing a flat on a POA basis is not permitted under the law of the land.  
What  exactly  do  we  mean  by  a  Freehold  flat?  What  are  the  advantages  and 
disadvantages, if any? 

A  freehold  property  (plot  or  a  flat)  is  one  where  there  is  a  whole  and  sole  owner(s), 
ownership is full and unconditional (within the provisions of the laws of the land) and there 
is no lessor / lessee involved. 

How  to  verify  the  authenticity  of  the  various  documents  submitted  by  the  seller  of  the 
house, particularly with regard to the possibility that the house has not been sold earlier 
to a third party (title deed is clean) ? 

Regarding  authenticity  of  documents,  again,  you  have  to  take  the  help  of  an  advocate  to 
verify.  

What are the legal formalities in gifting a property?

Gift of an immovable property is considered as a ‘transfer’ under the provisions of the
Transfer of Property Act and you have to have the transaction registered through a Gift Deed
and pay stamp duty as per provisions of the relevant stamp act depending in which state the
property is situated.

REAL ESTATE GLOSSORY  

Like in the medical or legal professions, real estate also has its own vocabulary, much of
which can be confusing to the lay person. Here is a glossary of most commonly used terms in
the industry so that you are not at a handicap when buying real estate in India.

Built-up area:

The built-up area refers to the entire area of the floor including carpet area, walls, lobbies and
corridors, atrium areas and basement. In Delhi, the lift areas and staircase areas are included
in the built-up area. In Mumbai, the basement, staircase, lift, and utility rooms like generator
and electricity rooms are also taken as built-up area. In Bangalore, the basement is not
included in the built up area and in Chennai, the basement and atrium areas are excluded. As
always, check with your builder/broker on what definition they are using.

Carpet area:

It is the actual usable area within the walls of the floor.

Super (build-up) area:

This generally refers to the entire area of the building including carpet area, walls, lobbies
and corridors, lifts, staircases basements, and other atrium and utility areas. In Delhi, the
basement is not included in super area unless it is being used for commercial purposes. In
Mumbai, the area under water tanks and other utility rooms are included in the super areas. In
Chennai, the basement and atrium areas are included in the super areas whereas in Bangalore,
the basement is not included in the super area.
Efficiency ratio:

Efficiency ratio is generally expressed as a percentage of carpet to super areas of the

property.

Floor Space Index (FSI):

Floor space index is the quotient of the ratio of the combined gross floor area of all floors
excepting areas specifically exempted under these regulations to the total area of the plot.

Maintenance charges:

These are charges taken by the maintenance society towards the maintenance of the property
which includes costs of generator sets, security, landscaping, and common areas.

Market value:

Valuation process evaluates the market value of the property. Demand and supply forces in
the market and factors like type of property, quality and construction, its location,
infrastructure and available maintenance are taken into consideration. Market value of the
property is the price that the property commands in the open market.

Stamp duty:

Real Estate Stamp duty is a type of tax collected by the Government of India. Stamp duty is
based on the market value or the agreement value whichever is greater.

Sale deed:

The sale deed gives the buyer the absolute and undisputed ownership of the property. By
executing this, the seller transfers his right of property to the buyer. It is executed subsequent
to the execution of the sale agreement and after compliance of various terms and conditions
detailed in the agreement.

Registration charges:

These are the fees associated with getting the legal title registered in your name. This legal
activity is conducted in the sub-registrar’s office in your local court.

In addition to the above, the following terms are commonly used in the commercial real
estate market and worth getting familiar with if you are considering buying commercial
property.

Common Area Maintenance (CAM):

Common areas include hallways, pathways and utilities. CAM fees are collected by the
landlords from the tenants to cover maintenance, property taxes and insurance in the case of
Triple Net Lease.

Cap rate:
This refers to the capitalization rate. The capitalization rate is the return on investment on the
property. Capitalisation rate is measured by the formula: Purchase Price / Net Operating
Income from the Property.

Cash on cash:

It is the annual percentage return of your down payment not including appreciation. It is the
first year’s cash flow divided by your initial down payment.

CPI:

The Consumer Price Index is used to calculate the annual rental increase so as to compensate
for inflation.

Full service lease:

This is a lease where the tenant pays rent to cover everything including utilities.

Gross lease:

This is a lease where the tenant only pays the rent and the landlord pays the taxes, insurance
and maintenance.

Gross Leasable Area (GLA):

This is the Gross Leasable Area or the total rentable area. This is the area that can be leased
out for rental income. This does not include spaces for elevators, utilities room etc.

Letter of Intent (LOI):

This is the Letter Of Intent which is a non-binding offer letter to buy a commercial property.

Mixed use:

These are commercial properties with retail on the first floor and apartments on upper floors.

Net Operating Income (NOI):

Net Operating Income is the annual income after deducting expenses like property tax,
insurance, and maintenance but except mortgage payments.

Percentage lease:

It is a lease where the tenant pays base rent plus a percentage of the tenant’s revenue.

If there is any real estate term that you are unsure of always check and verify. It is always
better to ensure that you and the other party are working on the same understanding.
REAL ESTATE OPTIONS IN INDIA 

The question now for investors is how best to benefit from investments in realty; whether 
to  look  at  investments  directly  in  property  or  route  the  investments  to  real  estate 
companies that are listed on the stock markets.  

Investment in Real Estate Stocks: 

Investing in equity shares of real estate companies can be rewarding if well timed and study 
of  the  fundamental  factors  is  done  properly,  however,  the  volatility  is  significantly  higher 
considering that real estate stocks are normally high beta stocks. 

The realty index has recently underperformed the Sensex by as much as 47%. This raises a 
question on why companies are not able to replicate the returns that investors make while 
investing  on  property.  Real  Estate  companies  have  been  facing  volume  pressures  and  are 
burdened  with  huge  debts  which  lead  to  outflow  of  cash  towards  interest  rate 
commitments. 

The Reserve Bank of India (RBI) increased the repo rate the 13th time to 8.5% stepping up its 
fight against persistently high inflation on the 25th October, 2011. Increasing interest rates 
are  a  double  whammy  for  real  estate  stocks  as  its  add  pressure  on  bottom  lines  for 
companies  plus  reduces  demand  as  customers  postpone  real  estate  purchases.  Increasing 
costs of raw materials add pressure on the margins of real estate companies.  

Fundamental  factors  to  consider  before  investing  could  be  the  land  base,  debt  levels  and 
the segmental diversification of the company. Also, other fundamental factors like Interest 
costs, land bank, demand for housing, interest rates to home loan borrowers, etc can impact 
real estate stocks. 

Investments in Property: 

With  rising  interest  rates  and  slowdown  of  the  economy,  the  demand  for  real  estate  has 
definitely  reduced  especially  in  Mumbai,  Bangalore,  Pune  and  Kolkata  in  March  2011. 
However,  on  the  price  front,  the  movement  has  been  in  a  narrow  range  in  the  past  few 
quarters as developers have held on and buyers have been playing a waiting game. The past 
few months have puzzled property buyers. On account of conflicting signals on realty prices, 
the buyers are confused as to wait for prices to fall or rush to buy before they appreciate.  

While  in  the  current  situation  of  tight  liquidity  conditions,  increasing  inventories,  rising 
interest rates and construction costs, buyers may stand to gain as the real estate developers 
may have to opt for distress sale to improve their cash flows. However, rising interest rates 
(expected to go up further as inflation continues to remain high) may make the home loans 
even more expensive for the buyers.  

It is widely suggested that instead of investing of Tier 1 cities, one could look at investment 
opportunities  in  select  tier  2  and  tier  3  cities.  Tier  2  and  Tier  3  cities  offer  prospects  for 
returns  as  they  stand  to  grow  faster  over  the  years  proportionate  to  the  growth  of  the 
economy.  

Mysore is one such example; the city today plays host to global organizations like Infosys. 
Other  cities  like  Lucknow,  Jaipur,  Chandigarh,  Ranchi,  Guwahati,  Bhubaneshwar, 
Thiruvananthapuram, Bhopal and Jammu and even smaller ones like, Kochi, Madurai, Vizag, 
Cuttack,  Ludhiana,  Nagpur  and  Aurangabad  are  catching  up  fast.  One  needs  to  focus  on 
cities where there is commercial and industrial development so as to benefit from an uptick. 

However, one must always remember that real estate investments are predominantly a long 
term  investment  providing  low  liquidity  to  an  investor.  Investors  can  look  at  renting  out 
their  property  (residential  or  commercial)  if  the  idea  is  to  have  a  continuous  revenue 
stream.  This  can  also  help  lower  the  burden  of  EMI’s  for  a  property  purchased  by  a  loan. 
One can also look at renting out apartments as service apartments.  

Companies  always  look  for  cheaper  accommodation  for  their  employees  and  service 
apartments  provide  an  alternate  to  hotels  across  countries.  This  help  to  get  higher  rental 
yields compared to residential use. One should always tread with caution while investing in 
any investment avenue.  

Whether  investment  in  real  estate  is  through  the  stock  market  or  outright  purchase  , 
investors should always ensure that the investment is in sync with the financial plan so that 
the investor is able to achieve his/her financial goals. 
 REVERSE MORTGAGE 

Getting into old age without proper financial support can be a very bad experience. The rising
cost of living, healthcare, other amenities compound the problem significantly. No regular
incomes, a dwindling capacity to work and earn livelihood at this age can make life
miserable. A constant inflow of income, without any work would be an ideal solution, which
can put an end to all such sufferings. But how is it possible?
In 2007, P. Chidambaram, the then finance minister, announced a rather novel scheme called
‘Reverse Mortgages’, which promised to give senior citizens an income stream based on the
value of property they owned. Most of the people in the senior age groups, either by
inheritance or by virtue of building assets have properties in names, but they were not able to
convert it into instant and regular income stream due to its illiquid nature.

The  concept  is  simple,  a  senior  citizen  who  holds  a  house  or  property,  but  lacks  a  regular 
source of income can put mortgage his property  with a  bank  or housing finance company 
(HFC) and the bank or HFC pays the person a regular payment. The good thing is that the 
person who ‘reverse mortgages' his property can stay in the house for his life and continue 
to receive the much needed regular payments. So, effectively the property now pays for the 
owner. So, effectively you continue to stay at the same place and also get paid for it. Where 
is the catch? The way reverse mortgage works is that the bank will have the right to sell off 
the property after the incumbent passes away or leaves the place, and to recover the loan. 
It passes on any extra amount to the legal heirs.   

The  whole  idea  is  entirely  opposite  to  the  regular  mortgage  process  where  a  person  pays 
the  bank  for  a  mortgaged  property.  Hence  it  is  called  reverse  mortgage.  This  concept  is 
particularly popular in the west.  
The whole idea is entirely opposite to the regular mortgage process where a person pays the
bank for a mortgaged property. Hence it is called reverse mortgage. This concept is
particularly popular in the west.

The draft guidelines of reverse mortgage in India prepared by RBI have the following salient
features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60% of the value of residential property.
• The maximum period of property mortgage is 15 years with a bank or HFC.
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any
point, as per his discretion.
• The revaluation of the property has to be undertaken by the Bank or HFC once every 5
years.
• The amount received through reverse mortgage is considered as loan and not income;
hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market
conditions depending on the interest rate regime chosen by the borrower.

In spite of being such a good and innovative product, till now, only about 7,000 reverse
mortgages have been sold, though over 20 banks offer the product. The main reason is that
most elderly see residences as entitlements of bequeaths for their offspring as in many cases
they have also come to inherit them from their parents. Other reason is that The loan tenure,
maximum of 20 years, is a drawback. After 20 years, the borrower will either have to repay
or let the bank take possession (to be sold after the person’s death). The borrowers were
concerned about low valuations that banks gave to their houses. The bank, of course, was
taking a risk that the property price could have fallen below the loan amount. The result:
Bankers were not too keen to promote or sell the product, and the potential customers did not
give enough thought to reverse mortgage as a financing option.

However, the product is evolving. A new product (launched in early 2010) born out of a
bank-insurance company tie-up, combines annuity with reverse mortgage, which means the
income stream will continue throughout the lifetime of a customer. The amount the customers
get is also more by 50-75 percent, because insurance companies with actuarial skills
understand the risk better and price the products better. In the long run, demand for reverse
mortgages is likely to go up. There are broader social changes — growth of nuclear families,
elderly people living alone, children settling abroad or in bigger cities — that will drive the
growth of the product.

PERSONAL GUIDE FOR BUYING A HOME 
 • Planning and Budgeting 

Owning a home gives you a sense of pride and liberty, but also many responsibilities. For a 
first timer, it would be a rather complicated process, especially ‘saving’ for down payments. 
The savings for a home purchase can be started at any time, much before you seriously start 
shopping for a home. With the RBI increasing the down payment limit to 20% of the actual 
price of the property for loans above Rs.20L, an early start in saving for your down‐payment 
is the best option. 

Planning  is  the  most  important  step  for  buying  your  first  home  as  in  with  any  other 
purchase. And here, the key for planning is an honest financial self‐appraisal with a budget 
planner. Budgeting is a fabulous diagnostic instrument to analyze your income‐expenditure 
patterns  and  thereby  your  true  financial  position.  It  helps  you  to  identify  and  eliminate 
discretionary expenses.  

Few saving tips 

* Those that started planning early can slowly save and invest in good investment schemes. 
But  you  need  to  make  sure  that  your  savings  are  working  for  you.  Money  that  is  put  in  a 
savings  account  earns  less  and  will  not  help  you  much  to  reach  your  goal  faster.  Look 
forward  for  a  high‐yield  savings  or  low  risk  investment  in  debt  funds.  Investing  in  share 
markets is a good option, but not a guaranteed one. However if you stay invested for a long 
term and make your exit at the right moment, it will immensely help you in meeting your 
money requirements. 

*  Those  that  save  late  also  have  many  options  like  gathering  additional  sources  like  tax 
refunds,  bonuses,  dividends  etc.  Immediate  money  requirements  can  be  arranged  from 
sources like‐ gold loan, personal loan, borrowing from relatives, collateral security etc. 

* While planning, consider not only your current position but also the future changes that 
could impact your situation like changes to your income, expected costs etc. 

* If you are servicing multiple loans, if possible clear the costlier loans or try to pay off most 
of them. Personal loans, credit card debts and business loans are costlier, while home loan is 
the cheapest among them and the tax advantages on home loans is an additional benefit. 
You can also make part prepayments for all loans whenever you have excess money which 
will directly bring down your outstanding principal amount. 

• Research 
For  most  middle  and  upper‐middle  class  families,  a  house  is  the  most  expensive  asset 
owned by them. The asset also has emotional value and therefore families should perform 
meticulous  research  before  buying  the  same.  The  following  is  a  set  of  must‐dos  before 
buying a house.  

A. DUE DELIGENCE OF THE PROPERTY:  

Real estate developments must receive different approvals from various authorities before 
the property can be considered legal and authorized. If one or many of these are missing, 
then it can delay completion or even bring down the value of the property at a later date. In 
a worst case, lack of approvals can make it difficult to get a loan to finance the purchase or 
re‐sell the property.  

Make sure that the developer has the following approvals before you finalize your property 
purchase: 

1) Non‐agriculture order:  

Is  the  land  authorized  for  residential  accommodation?  The  government  grants  permission 
for certain lands to have certain types of usage. A lot of the new residential developments 
occurring are in  areas outside the city centre where the land might have been earmarked 
for agricultural purposes only. Please confirm with the developer that they have permission 
for non‐agricultural use on the land that they are using for the residential project.  

Without  due  permission  from  the  concerned  authority,  it  is  illegal  for  a  developer  to 
commence any construction activity in an area zoned for agricultural use. So, make sure that 
your developer obtains the conversion order or the non‐agriculture order.  

2) Building plan:  

Has  the  building  plan  been  approved  and  sanctioned  by  the  local  municipal  authorities? 
Before construction is started, a developer has to submit the building plan to the concerned 
authority  of  the  state  for  their  approval.  The  building  plan  assures  the  authority  that  the 
project  complies  with  the  building  by‐laws  of  that  state/city.  For  instance,  in  Delhi,  the 
building  plan  has  to  be  submitted  to  the  Municipal  Corporation  of  Delhi  (MCD),  and  in 
Gurgaon the plan needs to be submitted to Haryana Urban Development Authority (HUDA).  

While getting a plan approved might be a formality, it must be completed. Sometimes the 
developer  might  apply  for  approval  simultaneous  to  accepting  bookings  for  apartments  in 
the development. In such a case, understand how your booking amount will be refunded if 
the approval is not received.  

3) Floor plan approval:  

Do the floor plans meet safety requirements? A floor plan is also required to be submitted 
by a developer to the authority in order to seek permission from them regarding the layout 
of the apartment. This ensures that the building does not deviate from minimum acceptable 
levels  of  safety  such  as  fire  exits,  amount  of  space  devoted  to  common  areas  like  lift  and 
lobbies etc. 

4) No objection certificate (NOC):  

Does the developer have the necessary approvals from civic authorities that won’t affect the 
validity of the property later on? Developers need to get NOCs from several departments to 
ensure  that  the  property  is  following  all  the  applicable  rules.  An  NOC  from  the  pollution 
board is required to make sure that the project adheres to the environmental standards. An 
NOC from the water supply and sewage authorities is also needed.  

It  is  also  important  to  get  an  NOC  from  the  neighboring  properties  to  prove  that  the 
developer  is  not  encroaching  any  neighborhood  property.  NOCs  from  the  respective  state 
authority are also essential before carrying out the construction activities like digging a bore 
well.  

In case the buyer doesn’t hold the NOC and the builder defaults on his mortgage payments, 
the buyer may be evicted from the property.  

5) Commencement certificate:  

Once all the plans submitted by the developer are approved, the local authority gives a go‐
ahead to the construction process by giving a commencement certificate.  

6) Title deed:  

Is the legal ownership of the plot of land on which the development is occurring legally clear 
or is it under dispute? The developer needs to get a clear title for the land or plot where the 
property will be constructed. If the title is in dispute it means that the ownership is unclear. 
For you, as an end consumer, buying an apartment built on land where the ownership is in 
dispute means taking on a lot of risk that you are better off staying away from. For instance, 
there is a risk that no lender will offer home loans for this development, or the ownership 
dispute might be held up in court that can delay construction or possession and so on.  

Only buy a property where the title is clear. If there are lenders who have agreed to offer 
loans on this property, then that is a good signal that the title is clear. 

7) Occupation certificate: 

 Finally, after the construction is complete, your apartment will be ready for occupation by 
you.  However, before you are handed over possession  and  before you are able to occupy 
the apartment, the property has to be certified fit for occupation. The developer will get this 
permit  for  you  once  the  construction  is  complete,  but  before  you  get  possession  of  the 
property. 

Banks  and  housing  finance  companies  (HFCs)  are  pre‐approving  residential  projects  by 
carrying out property due diligence themselves. This provides credibility to the project from 
the  buyer’s  perspective.  Hence  before  opting  for  a  loan  one  can  check  if  the  particular 
project they are interested in is pre‐approved. 

Buying real estate can be tricky  if some of the above  permits are not there. Lack of  these 

approvals might mean that your property is not legal or not worth the money you paid for it.  

B. Evaluation of hidden costs:  

Buyers ought to be wary about per square feet price quoted by builders, as there are myriad 
hidden  costs  not  captured  in  the  quote.  Stamp  duty  and  registration  fees  are  mandatory 
fees and amount to approximately 5% of the value of the property.  

Majority of urban property purchases are financed by home loans and therefore there is the 
cost of an insurance policy to cover the loan. Customizing the property to the buyer’s tastes 
and  preferences  entails  a  substantial  expenditure  on  purchase  of,  interior  furnishing, 
furniture  and  white  goods.  Liabilities  like  unpaid  telephone  and  electricity  bills  may  be 
present in case of a second hand property. 

• Home Loan 
Knowing your capacity 

One  must  always  aim  for  a  home  which  you  can  really  afford  to  pay.  Loans  can  be  good 
friends in the hour of need but an inconvenient burden, if not properly managed. It is wise 
to  restrict  your  monthly  loan  repayments  to  40‐45%  of  your  monthly  income.  Banks  will 
finance up to 80% of the property value. So, the remaining 20% are expected to be shelled 
out of your pockets. If your savings allows, it is always better to make the maximum down 
payment possible, to reduce your monthly financial burden in the form of an EMI. 

Accessing your home loan 

It is advisable for buyers to approach a bank or housing finance company only after selecting 
the property to buy. Some banks are averse to financing purchases of more than 15 years 
old  property  which  has  been  resold  more  than  twice.  Financing  purchases  of  under 
construction properties, which are not listed with any of the banks for pre‐approved loans, 
is difficult. Large builders may have tie ups with banks or HFCs which offer lower rates and 
lend up to 85% of the property value. 
It is crucial to find the right lender and the right loan in the process of buying a home. It is 
always  good  to  know  the  basics  of  loan  terms  and  clauses  from  your  friends  or  through 
online sources, before you speak to the lender. 

Compare the EMI payable for different tenures with your monthly income. Higher the loan 
tenure, lesser the EMI, but at the same time you  will be shelling out more interest. There 
are also schemes like step up loans, where EMIs accelerate every year in proportion to the 
increase in your income; however it comes with a certain amount of risk. Banks even allow 
the customers to switch the current EMI options to longer loan tenures, if they are unable 
to take it forward. 

Banks sanction in‐principle loan based on the customer’s eligibility for those who have not 
yet  decided  on  the  property.  This  helps  home  buyers  gauge  the  loan  amount  that  a  bank 
would  be  able  to  give  them  and  the  money  they  will  have  to  manage.  This  will  help  set  a 
budget limit before looking out. 

Interest rate on home loan: 

As  per  the  prevailing  economic  situation,  floating  rate  loans  score  over  fixed  rate  loans. 
Transparent floating rate home loans are at least 2% cheaper than a loan of identical tenure. 
There is the risk of rate charged on a floating rate loan being revised upwards when market 
rates rise.  

90% of home loan consumers opt for floating rate loans making it difficult for policymakers 
to raise interest rates dramatically. The buyer should check whether a bank passes on the 
benefit  of  reduced  rates  to  the  consumer  by  going  through  its  past  record  of  benchmark 
rates. 

Other charges associated with a home loan:  

These should be looked into to understand the exact amount of expenses the buyer would 
incur  towards  the  home  loan.  Processing  fees,  amounting  to  0.5‐1%  of  loan  amount  is 
charged  by  most  lenders,  in  addition  to  administrative  fees  and  legal  charges  during  loan 
disbursement.  

The buyer has to pay stamp duty which depends on the amount of the loan and the state in 
which the property is purchased. Prepayment charges are levied on loan repayments made 
over  and  above  the  amount stipulated by  the repayment schedule. Making EMI payments 
after the due date attracts delayed payment charges. 

Hence, it makes sense for the buyer to take into consideration the total loan cost or money 
outgo  throughout  the  loan  tenure  when  comparing  loan  offers.  This  will  provide  a  clear 
picture of which loan is the most affordable for the buyer. 

BENEFIT OF TAKING A JOINT LOAN 
If you and your spouse earn similar incomes, then its best to opt for an equal co‐ownership 
of the property and split the tax benefits of the home loan equally as well. 

Who can opt for it? 

Banks insist that all co‐owners of the home must be co‐borrowers in a joint home loan. 

‐  One could  team  up  with  parents or  the spouse  to  be  able  to  maximize  the  benefits  of  a 
joint home loan. 

‐  Some  banks  allow  brothers  to  take  a  joint  home  loan  provided  they  opt  to  become  co‐
owners of the property. 

The  exceptions  are  sisters,  friends  or  unmarried  couples  living  together  as  most  banks 
generally don’t allow them to opt for a joint home loan. 

Key advantages of a joint home loan 

a. Better loan eligibility 

 Banks  do  not  allow  a  person  to  borrow  to  an  extent  where  their  EMI  exceeds  more  than 
around  40‐50%  of  their  monthly  income.  This  ensures  that  there  is  no  stress  on  an 
individual’s  monthly  budget.  Hence,  when  the  incomes  of  all  the  joint  applicants  are 
combined to decide the loan eligibility, the result is a better loan amount for a better home. 

b. Tax benefit under 80 C and Section 24 

All  co‐applicants  are eligible  for  simultaneous  tax  rebates  under  Section  80  C  for  principal 
repaid and under Section 24 for interest repaid. However, these tax deductions are capped 
at 1 L for the principal repaid and 1.5 L for the interest repaid. Do note that this is applied 
for  each  individual  loan  applicant  thus  maximizing  the  tax  benefits  on  the  home  loan. 
If you and your spouse earn similar incomes, then its best to opt for an equal co‐ownership 
of the property and split the tax benefits of the home loan equally as well. In case one of 
you fall under a smaller tax bracket, it is good to let the partner with the higher pay make a 
higher contribution towards the home loan resulting in a better tax benefit collectively. This 
would  help  you  optimize  the  benefits  from  the  tax  exemption  on  principal  and  interest 
repaid. 

E.g. let’s say the principal and interest repayment on your home loan for a given year is Rs 
2.4 lakh and Rs 3.5 lakh respectively. Now, under Section 80C, you can get a maximum tax 
deduction of Rs 1 lakh on principal repaid and under Section 24 you can get a tax break of 
up to Rs 1.5 lakh on interest repaid. However, if you and your spouse have opted for a joint 
home loan, you would collectively be able to claim a deduction of Rs 2 lakh and Rs 3 lakh on 
the principal and interest repaid. 

Do note that the tax benefits are according to the proportion of the loan. That is, if the ratio 
of the loan is 70:30, then a loan of say, Rs 50 lakh will be split as Rs 35 lakh and Rs 15 lakh 
respectively  and  this  ratio  will  be  applicable  while  calculating  tax  benefits  on  the  interest 
and principal repaid on this loan. 

Also keep in mind, that tax slabs might change according to new budget specifications each 
year and there could be changes in the gross income as well, not to mention changes in the 
total principal and interest repaid in every new year of the home loan. In this respect, the 
interest repaid will become considerably lesser and the principal repaid will become higher 
during the latter years of the loan. 

For  tax  purposes,  it  is  best  to  procure  a  home  loan  sharing  agreement,  detailing  the 
ownership  proportion  in  a  stamp  paper,  as  legal  proof  for  ownership. 
 

So taking a joint home loan has the significant twin benefit of increasing your loan eligibility 
and  maximizing  your  tax  rebate.   Do  remember  that  though  the  banks  insist  that  all  co‐
owners of the property should also be co‐applicants in a joint home loan, the reverse need 
not be true. 

• Safety Points in your Home Agreement 
It is very important to ensure that your agreement with your builder has no unforeseen loop
holes that can plunge you in a legal mess.

Here are five essential steps you need to take to avoid such situations.

1: COST OF YOUR DREAM HOME

There are various costs attached to the owning your home besides its cost. The cost covers
basic utilities like electricity, water, parking space, various taxes and in certain instances the
registration charges as well. These may come as part of the deal or may be charged under
separate heads. Make sure all these costs are factored into the final price you pay.

Safety points

Scan the agreement with great care for all these charges. Get the agreement ratified with a
real estate lawyer to see if there are any hidden or missed out charges. So, you can have an
upfront discussion with the builder and have the document corrected. If the extra charges are
for alterations made to the original plan, ask the builder for the sanction letter provided by
government authorities for such alterations.

2: SIZE OF THE HOUSE

Look for the specifications in the agreement that defines the size of the house. This should be
clear and specific. Also, look for a clause that says ‘…the plans, designs, and specifications
are tentative and the developer reserves the right to make variations and modifications….’
This might mean that you may agree for a certain size, but the builder can give a different
size.

Safety points

Do a thorough check on the builder to determine his track record in project delivery. The way
the builder has handled the past projects should serve as a measure to how your project is
going to turn out. Discuss with your lawyer and think about including another clause that
provides a definite range to the maximum and minimum size beyond or below which the
builder cannot venture.

3: CARPET AREA

Carpet area is the space where it’s possible to lay the carpet. It does not take into account the
area of the walls and balcony. When you include these areas as well to the carpet area you
obtain the total built up area of the house or apartment. Additionally, if you include common
spaces like lobby, lifts, stairs, garden, swimming pool etc., then its termed as the super built
up area. The actual carpet area is bound to be around 20 to 30 per cent lesser than the super
built up area.

Safety points

Always base your purchase decision on the carpet area of the flat. Double check if this area is
specified in the agreement. Discuss with your builder and the lawyer to make sure it’s
possible to include a termination clause if the final construction of the house has a carpet area
lesser than what is specified in the agreement.

4: COMPLETION OF CONSTRUCTION AND DATE OF POSSESSION

During the realty crash that occurred in the recent past, there have been several instances
where projects have not been completed on time. Though agreements have a tentative date of
possession it is important to for you to check this aspect of the deal.

Safety points

Monitor the progress of the construction and keep a regular tab on it. Follow up with the
builder if you find the progress painfully slow and request him to step it up. Keep in touch
with the builder as the work progresses. Establishing a society with other buyers in the case
of an apartment complex, will ensure that things happen at a decent pace from the builder's
side.

5: COMPLETION CERTIFICATE

When the project is completed and the house is delivered to you ensure that the builder
provides you with a completion certificate. This certificate provided by the municipal
authorities authenticates that the building complies with the approved plan and obeys all
government norms and specifications. This certificate is critical for the registration of the
house and to complete other legal formalities.

Safety points

Make sure the agreement has a clause that indicates the certificate will be handed over to you
on completion and hand over of the house/apartment. Again a society could help move things
faster if the builder is laid back about this aspect. Apart from the above mentioned aspects an
overall quality check on the construction, society management etc. are important. Ensure
these aspects are also covered in the agreement. Be aware and clued on about what you are
getting into before you sign the dotted line.

• Home Insurance 

For most of us, buying a house is the single most largest investment made and has a strong
emotional value attached to it. Also, none of us are capable to financially withstand if our
property is hit by any natural calamity including earthquake, fire, etc.
Considering  the  above,  it  becomes  very  essential  that  we  to  insure  the  home  under 
standard fire & special perils policy given by almost all general insurance companies. It could 
be  good  thing  to  do  so  when  you  apply  for  a  home  loan  as  there  maybe  some  benefits 
attached to it. 

Fire and Special Peril Policies provide protection against damages/fortuities triggered by the 
following perils: 

1. Fire 

a) Fire – Excluding destruction or damage caused to the property insured by 

‐ Its own fermentation, natural heating or spontaneous combustion. 

‐ Its undergoing any heating or drying process. 

b) Lightning 

c) Explosion/Implosion 

d) Excluding destruction or damage caused to the boilers (other than domestic boilers), by 
its own explosion/implosion 

e) Aircraft Damage 

f)  Destruction  or  damage  caused  by  Aircraft,  other  aerial  or  space  devices  and  articles 
dropped there from excluding those caused by pressure waves 

g) Riot, Strike, Malicious and Terrorism Damage 

h)  Loss  of  or  visible  physical  damage  or  destruction  by  external  violent  means  directly 
caused to the property insured 

i) Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation 

j) Impact Damage 

k) Impact by any Rail/Road vehicle or animal by direct contact 

l) Subsidence and Landslide including Rock slide 

m) Bursting and/or overflowing of Water tanks, Apparatus and Pipes 

n) Missile testing operations 

o) Leakage from Automatic Sprinkler Installations 

p) Bush Fires 
2. Earthquake 

The above mentioned covers are more than sufficient for any house building. This covers all
natural disasters and any kind of fire occurrences.

Surprisingly the premium for  this product is 0.06% + Service Tax.  This means  per lakh you 

may have to pay Rs. 67 per annum. What’s even more interesting is that one can avail a 50% 
discount  on  premium  if  one  wishes  to  insure  his/her  house  for  10  years  by  paying  the 
premium upfront. 

ALTERNATIVE INVESTMENTS 
An alternative investment is an investment product other than the traditional investments of
stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible
assets such as art, wine, antiques, coins, or stamps and some financial assets such as private
equity and film production. Globally, alternative investment avenues are quite in vogue
among rich investors, who are estimated to allocate 5-10% of their investment portfolio into
these products. Alternative investments are favoured mainly because their returns have a low
correlation with those of standard asset classes.
In order to safeguard investors from falling prey to dubious schemes of portfolio managers,
capital market regulator SEBI will soon come out with guidelines for alternative investments
as reported in July 2011. It aims to frame a stringent set of rules for funds investing in art
works, antiques, coins and stamps, with an aim to check black money flow into these
products and safeguard the interest of genuine investors.

Globally, art funds are very famous as alternative class of investments for rich investors and 
have started gaining ground in India over the past few years. However, there are no specific 
rule  in  India  for  art  and  other  such  funds,  which  collect  money  from  numerous  investors, 
mostly high‐net worth individuals, to invest in art works, antique pieces as also old and rare 
coins and stamps. 

As  part  of  the  proposed  regulatory  framework  for  alternative  investments,  SEBI  is  already 
planning  to  set  up  an  intermediary  regulatory  body  with  representation  from  wealth 
managers.  SEBI  considers  investment  funds  focused  on  art  works,  antiques,  coins  and 
stamps  as  "Collective  Investment  Schemes",  which  come  under  the  ambit  of  the  capital 
market  regulator.  The  SEBI  has  already  begun  a  consultation  process  with  stakeholders, 
including  the  centre  and  RBI,  with  an  aim  to  frame  the  specific  regulations  for  alternative 
investment vehicles this fiscal. 

 
 

RARE COINS AND PAPER CURRENCY (NUMISMATICS) 
Numismatics is the study or collection of currency, including coins, tokens, paper money, and
related objects. With a bit of interest and insight on the art of collecting coins and paper
money one can expect handsome returns comparable to traditional investments. The idea of
numismatic as an investment tool is still in its nascent stage but is fast catching up in India.
THE NUMISMATICS MARKET
Contrary to the popular perception, one need not be a high net-worth individual to enter the
numismatics market. Price of commemorative coin sets starts at around Rs 2,000-3,000,
which even a middleclass salaried person can easily afford. On the other hand, some rare
British-India 'gold-mohurs', can be as expensive as Rs 4 to 5 lakhs each. So, there is plenty of
opportunity for people looking at exotic investment options as well. If you have chosen to
invest in ancient coins which are mostly in either of silver, gold or copper, you are sure to get
a price for the precious metal at least in case you are in a hurry to liquidate.
Commemorative coins are available in two varieties - proof and uncirculated. Proof coins are
specially made coins of the highest quality, having first-rate mirror finish contrasting with
frosting on the relief (the raised portion in a coin), and are therefore of higher value. Also, the
commemorative coins which have been issued by the government so far have various
denominations ranging from 5 paisa to Rs 100. Error coins, coins with flaws that occurred in
the minting process, fall under the rare category and thus can fetch much higher prices. Since
there are many coins minted in each era, it is impossible to collect all of them.
A collector should concentrate on one particular era, theme or subject such as Republic India,
British India, princely states, Mughal sultanates, ancient coins, etc. to begin. Joining a
numismatic society and being in this circuit can help in gaining knowledge on the subject
Auction houses or coin dealers may not be the best place to start buying your collection. For
the beginners, the best place to buy commemorative coins would be directly from
Government owned mints. Mints at Mumbai and Kolkata sell commemorative coins.
Whenever a new commemorative coin is issued, the mints offer bookings to the public.
One can book online or send a demand draft to these mints. The coins are usually delivered
six to 12 months after booking. If someone misses this direct booking opportunity, they can
go online and buy through portals like eBay.
FITNESS CHECK
One must not just buy coins on impulse. Try to read about them as much as possible before
you take a plunge. Two coins may look exactly the same to you but a minor variation could
mean a huge difference in their value. Beware that there are many fakes floating in the
market. It will be wise to know all attributes of the coin such as weight, diameter, metal
composition, year of issue, mint etc., before you actually buy it. Also beware of sellers using
adjectives like 'rarest', 'super rare', 'extraordinary' etc. to sell these items.
Since the Indian numismatics market is not regulated, it is recommended that you buy coins
and paper currency only from reputed dealers and auction houses who give guarantee on the
authenticity.
INVESTMENT STRATEGY
Coins and bank notes can be ideal investments to diversify your portfolio. As more collectors
are getting interested and the supply is comparatively less, it can be a very good investment
channel for investors who are looking for long term gains. Since these are rare items and can't
be reproduced, the value will only increase with the rise in demand. But those looking for
high returns in the short-term, should avoid putting their money in coins.
An investment in a single rare item is better as chances of appreciation in its value are much
higher, but you will need to make a sizeable investment to buy one. One can consult
catalogues like the Standard Catalogue of World Coins for getting an idea of the price of a
coin. However, these are published annually, so the weekly or monthly price fluctuations
would not be available. The price of a coin typically would depend on its rarity, condition and
series and are chiefly governed by demand and supply. Coins with low mintage numbers will
always be costlier. Abroad, weightage is also given to the quality or grade of the coins.
Like one approaches portfolio managers to get best returns from stock and bonds, one should
consult an advisor with knowledge on the subject for returns from coins as well. Some
auction houses and coin dealers can also provide valuation of the coins for a small fee.
However with very few professionals in this field, this is yet to pick up in India.
PRESERVING YOUR INVESTMENT
Knowing how to preserve a coin is important. Some common guidelines:
1. Handle coins only from the edges;
2. Do not touch the obverse or reverse;
3. Try to keep them in their original form;
4. Never clean a coin to make them look new or add fake lustre;
5. Do not fold or laminate a paper currency.
6. Consult an expert for specific methods of preserving rare items.
Though the number of investors has been growing rapidly in the past few years, compared to
the numismatics trade in the western countries or other popular alternative investment
channels such as fine arts, wine, etc., the volume of trade in coins is still low. One of the
major reasons being lack of awareness.

STAMP COLLECTION (PHILATELY) 
Investing in stamps can help you earn handsome returns in the long term. The demand for
Indian stamps has been rising from the past two-three years. So, it might be the right time to
park some funds here before prices go beyond your reach.
INVESTMENT PERFORMANCE
It is difficult to predict how a stamp will perform in future. Stamps tend not to move in a
linear fashion, but in 'steps', driven by the market movements. Therefore, it is encouraged to
have a minimum five year holding before crystallising gains.
The best available indicator of the rare stamp market is the Stanley Gibbons GB30 Rarities
Index (listed on Bloomberg Professional), which tracks the prices of 30 classic British stamps
recommended for investment. It has shown a compounded annual growth of 10% over the
last 50 years and has never fallen during that time.
Compared with developed nation like Europe and US, where investment in stamps is a
recognised and well-organised channel of investment, the Indian market is still in its nascent
stages. Since the percentage of people who look at it as an alternative investment channel is
pretty less, the demand, and therefore value, of Indian stamps is also comparatively low.
INVESTMENT STRATEGY
Like any other investment, knowledge is the key to succeed in putting together a collection
that would give decent financial returns in future. Apart from theoretical awareness, it is also
important that you have a genuine interest in stamps.
In India, you would not find professionals to manage your portfolio. Get in touch with local
philatelists who can guide you in making a collection as per your interest. Finding stamp
enthusiasts outside India and making them your pen friends in another old but popular way to
start.
While definitive stamps are used for regular mailing purposes, it is commemorative stamps
which collectors generally put their money in. These stamps are printed in limited quantities
and one can buy them from the Philatelic Bureaux and its counters.
Stamps can be collected on the basis of time periods (year-wise), countries they belong to or
according to a particular theme such as flowers, birds, monuments, armed forces stamps, etc.
To make it easier and attractive, many philatelists, take it as an investment option, would
advice you a thematic collection.
To get the best deals, it is important that you build your collection over time. Spend time
hunting through stamp pages, albums, network with all kinds of stamp dealers and collectors,
attend philatelic society meetings and events and you will definitely find the best deals to
complete a collection at a lesser price.
Also, it is important that you build a balanced portfolio. Don't put all your funds in one stamp
or of a single type. If you have a portfolio of rare stamps, hold it on to it for a few years to
maximise the returns as trading volumes are low in case of rare items.
PRICING OF STAMPS
A rough estimate of the market value of a stamp can be had by using a price catalogue such
as the annual Indian publication from Kolkata, Phila India or you can go to
Allworldstamps.com, an online stamp catalogue to search details of stamps from various
countries all over the world. You can even find information about different dealers here.
These price catalogues come in a variety of formats from simplified to specialise.
Although a catalogue will give you an idea of the price, it is not adequate for assessing
whether a stamp is of investment grade or not. The rule of demand and supply applies to the
stamp market as well.
The condition of the stamp also plays a vital role in its valuation. Even though catalogues
specifically mention that the price quotes are for stamps in 'fine' condition, many make the
mistake of pricing them strictly on the basis of this document. If you find a stamp in better
than 'fine' condition, you might have to pay a higher price, while the price for a similar stamp
in poor condition will be substantially lower.
Every single feature of a stamp needs to be considered separately before a judgment on its
value can be passed. However, there are some consistent factors such as the condition of the
gum, colour of the stamp, margins, perforation and the quality of cancellation, which fall
under essential considerations before estimating its value. Ultimately, rarity and number of
examples available will have the biggest bearing on the price.
A subtle difference in colour could mean you have a rare 'error of colour' thus elevating an
ordinary stamp to something extraordinary or it could be just a poor quality faded stamp
which is actually of lower value. Also, many flaws are not visible to the naked eye and
certain characteristics such as the quality of the cancellation can only be judged by an expert
who has vast experience of handling stamps. You should take an expert's opinion before you
make any expensive purchase.
The costliest Indian stamp is the four anna inverted head litho stamp, where the queen's head
appeared inverted. It is this printing error which makes it a unique example and worth around
Rs 1 crore.
The famous Rs 10 Mahatma Gandhi stamps was issued in 1948. A set of hundred of these
stamps with the word 'service' on them were exclusively printed by the postal department for
the then Governor-General of India, C Rajagopalachari, for his official usage. A single stamp
of this lot went for approx. Rs 24,49,000 in the David Feldman's auction sale on October 5,
2007.
The first Indian stamp called 'Scinde Dawk', a small copper token valued at 2 annas , was
generally the medium of payment for postage. Today, the red stamp will cost you something
between Rs 15-20 lakh.

ART 
Investing in art is a good method for diversification. Since art prices do not depend on other
possible components of a portfolio, they act as a cushion when other markets are not doing
well. The aesthetic pleasure of viewing a great piece of art is a great advantage.

A few things an investor must look into:

• Art buyers should gain as much knowledge as possible of the artist’s work, the
quality, provenance, condition and period in which it was painted before investing.
• Have a clear idea about the time horizon and gestation period for a particular work to
appreciate in value.
• If an investor is looking for quick returns, he must buy works of well-known artists. If
you like a less famous artist’s work and are prepared to wait, your returns might grow
majorly over a period of time.
• Buy art only if you like the quality of work and not just the artist. Art requires careful
maintenance.

Risks of investing in Art

Like all other investments, investing in art also has its downsides. Not anyone can invest in
art. It requires a certain level of knowledge and expertise. The fact that they depend largely
on public tastes and other factors, make them a fairly speculative investment.

If  you  suddenly  need  to  sell  the  masterpiece  that  you  happen  to  own,  it  will  become 
apparent that the art market is not transparent because no two people agree on what the 
appropriate valuation is. Moreover, it is an illiquid asset. 

The  Indian  art  market  is  especially  shallow,  with  relatively  few  buyers.  Furthermore,  high 
transaction costs can swallow as much as 30% of the sale price (at auctions), compared to 
selling stocks for a few pennies. And, all of this is before accounting for the fact that unlike 
property, stocks and bonds, there is no underlying income stream such as rentals, dividends 
or interest received whilst owning the masterpiece. On top of that, the owner usually has to 
pay storage and insurance costs. 

TAKING CARE OF YOUR ART

When you buy art, you invest a significant sum of your money in these objects. This value
will however not sustain and definitely not appreciate unless you look after the works and
prevent damage caused by nature or carelessness.
It is very important to get advice from professionals on how to maintain your works well.
Some tips are:
• Always keep minimum light around your paintings and display your most valued artworks
in areas that receive less direct or prolonged light.
• Do not hang your paintings next to direct heat or moisture sources, outdoor vents, damp
walls, unventilated rooms, air conditioners, coolers or fireplaces.
• Use two pegs to hang the painting and secure it well. Make sure heavy paintings are
supported at the base.
• Store your un-stretched paintings flat but if it is too large for this, then have it stored rolled
on an 8-10-inches-wide pipe. If there is more than one painting to be rolled, use foam and
butter paper between them. Stack your framed works vertically.
• Check your works regularly and if you see any fungus growth (green, white or grey fluffy
spots), separate them from other paintings so that the fungus does not spread. Immediately
take it to a professional restorer.
• Regularly dust your paintings with a soft cloth or soft brush. However, if the painting is
flaking, do not dust it at all. If there is glass over the work, spray glass cleaner onto a cloth
and wipe it every now and then.
• If the polythene sheet over a painting or paper work gets stuck, do not remove it. Leave it to
an expert.

The Sound Portfolio

It is advisable to have a portfolio with both modern and contemporary works as each has its
strength and potential. The former illustrates our nation’s history and will continue to
appreciate due to this significance, while the latter represents the culture of our times.
It is advised that an art portfolio should consist mostly of moderns. Their works have
surpassed the market movements and sustained. Invest a smaller percentage on
contemporaries because a lot of them have shown erratic movements in terms of pricing and
many have not been able to sustain their quality. Focus on those whose prices have not been
unnaturally volatile.
It is imperative to buy from reputed galleries as they promote and nurture an artist’s career.
Explore the artist’s international presence because it represents the future promise.

Most importantly, if you invest in high quality art that you connect with, you are likely to
spot the best works.

ANTIQUITIES 
Antiquities are the story tellers of the history of the world. Their importance lies in their
dwindling numbers and their reflection of the culture of bygone societies. A historical object
of significance will only get rarer with time, and as the rule goes, the rarer the object, the
more valuable it is.

The antiquities market consists of small collectibles (like vessels, lamps, prints and puppets, 
etc), wooden carvings and textiles, stone sculptures, bronze works and miniature paintings 
in a more or less ascending order. Most of the pieces acquired range from the 10th to 19th 
century. 

Miniatures constitute the top end, requiring expert knowledge and understanding. Stones and
bronzes range from various dynasties. Wood carvings, textiles and pichwais usually range
from the 17th to 20th century. Although not a thumb rule, most antiquities sell in India for
barely 1/3rd the international price. Small exceptions to this rule are the Tanjore and Mysore
paintings, which sell at a higher price in India than overseas. It is this price differential,
coupled with a boom overseas, that is set to drive prices in India.

INVESTMENT STRATEGY
Antiquities have a very strong foundation because these are finite objects. Even when the
market is dull, their prices do not fall. However, one needs to do a lot of research because
only then will you acquire something investment worthy. This can be exhausting but there is
no other way.
Indian antiquities
With a rich history, India brims with antiquated objects. However, laws prohibit the export of
Indian antiquities, specifically sculptures and paintings.

Over the past few years, Indian antiquities within the country have appreciated at 40 percent
per year. There are only 10 to 15 registered dealers in the country so it is a task to find well
documented antiquities. You can buy from unregistered dealers but the perils with this are the
lack of information on the origin — which could devalue it — and the possibility of fakes.
When you do buy from official dealers, the antiquities are already registered with the
Archaeological Survey of India (ASI). You just need to submit a ‘Transfer of Ownership’
form to the ASI within 10 days of the transfer.
Even if you move the object to a different location, you need to inform the ASI officer in
your area. This is only a notification, but could be considered an additional hassle.
Selling: You should keep antiquities bought in India for at least five years for them to
appreciate enough. You can sell all kinds of antiquities through registered dealers or auction
houses.

Indian antiquities from Abroad

When you purchase Indian antiquities overseas to bring back, be aware of a couple of things.
You could also have problems while importing. Sometimes it is not as simple as just paying
the 15 percent duty. Customs officials might suspect that you have undervalued it and that
could lead to dispute. When the object does pass customs, you need to submit a registration
form to the ASI. An officer usually comes to inspect that the item matches the details.

Selling: If you import Indian antiquities, hold it for a minimum of 10 years to get a good
price within the country. If you keep it abroad (a better option), you could sell it sooner.

International Antiquities

You could purchase a variety of priceless antiquities from ancient civilisations like China,
Mesopotamia, the Middle East etc. at auctions or from dealers like Art Ancient in the UK.

The value of many of these is astonishing. On November 11, 2010, a Chinese vase from the
Qing Dynasty (1740) sold at Bainbridges in London for $83 million. If you purchase an
object like this and bring it to India, you would need to pay the duty and may have trouble at
customs, but you can always export the work again to sell. This is a great benefit in investing
in non-Indian antiquities.

Selling: These can be sold after a couple of years, depending on the appreciation of that
piece.

WINE 
At an annual traded value of $4 billion (year-on-year), wine is emerging as a very good
investment option. The London-based Liv-ex Fine Wine 100 Index, the wine investment
industry benchmark, has been giving a compounded annual return of 13.7 percent since 1988.
As of November 2010, the Liv-ex gave a return of 38.7 percent year-on-year.

For instance, the price of Château Lafite Rothschild, 2000 vintage, has risen more than five 
times  over  the  last  five  years.  Château  Mouton  Rothschild,  1982  vintage,  has  shot  up  173 
per cent in the same period. 
As  of  now,  there  are  no  Indian  wines,  wineries  or  wine  funds  one  can  invest  in.  Investors 
have  to  look  to  international  wine  funds.  However,  internationally  too,  not  every  wine  is 
worth  investing  in.  In  practice,  this  is  a  narrow  group  of  wines  considered  as  investment 
grade internationally and includes the very top wines of the Bordeaux region in France and a 
smattering  of  wines  from  Burgundy,  the  Rhone,  Italy,  Champagne  and  the  New  World 
[California]. 

Wine purchased as an investment is typically obtained from a reputable wine broker since 
wine houses do not generally sell directly to the public. Indian wine advisory firms, such as 
Antique Wine Company and Drayton Capital, offer services to hold and preserve the wine on 
behalf of their clients. 

Advantages
Firstly, being a physical commodity, it is not affected by the stock market, company
bankruptcies, fraudulent activities, major market shifts or even poor management. Wine
Investment provides legitimate ways of exemption from capital gains tax, VAT and import
and export duties. Like other tangible investments, wine provides a good means to diversify a
portfolio. Fine Wine increases in quality with time, hence its value continually increases.
Disadvantages

It is argued that Wine Investment Market is difficult to understand and analyse. Wines are 
not always priced based on their value, but on the basis of their demand, which in turn is 
dependent on several unstable factors. In order to store and preserve wines, investors tend 
to incur sizeable expenses. Also if you are importing wine, exchange rate risk also come to 
the picture. It is strictly for people who know and understand wine. 

Investment strategy

If you have met your targeted investments in debt, equity, and property, you can consider 
buying a couple of bottles or investing in a wine fund. The minimum investment should be 
around 2 lakh. But before that, one should brush up his wine knowledge. As with all other 
investments,  you  must  do  rigorous  research  about  terroir,  storage  conditions  and  the 
pedigree of wine producers to make an informed choice. 

Here are three popular ways to invest in wine: 

Buy bottles:  

It is the most traditional and seemingly simple way to invest in wine. But buying bottles is 
not easy as wine trading is still a new concept in India. A thorough examination of the brand, 
vintage,  longevity,  history  of  the  producer,  consistency,  score  and  storage  conditions  are 
essential to determine the quality of the wine. Online ratings by reputed societies and wine 
tasters  are  a  reliable  source  for  such  information.  To  buy  the  wine,  you  have  to  rely  on 
brokers  in other countries  who export  it to India. This increases  the cost of investment as 
you have to pay import duty. Then comes the headache of finding a suitable warehouse to 
store the bottles for several years.  
The solution is to keep them in bonded warehouses in the countries you buy them. You will 
have  to  pay  storage  charges  but  these  are  lower  than  the  import  duty.  The  brokers  will 
monitor the investments and also help you to sell them. Taxes will kick in where applicable. 

Wine Funds

As  with  gold  and  art,  you  can  invest  in  wine  through  speciality  funds  that  buy  wine.  The 
funds send a share certificate with details of your investment, including a net asset value of 
the share. They also give regular updates on the value of your wine. The minimum lock‐in 
period varies across funds. At the time of exit, you receive the net profit depending on the 
growth in the value of the wine. 

The  advantage  of  wine  funds  is  that  you  don't  have  to  worry  about  storage  or  broker 
commissions. However, a high entry fee could be a barrier for most investors. The minimum 
amount for investing through funds or advisory companies is more than Rs 1 lakh. 

Wine Futures 

If you want to invest in wine even before it is bottled, opt for wine futures, also called wine 
primeurs. Investing in wine that has not been tasted is considered riskier than buying bottles 
or buying wine funds. 

Only 1% of the world's wines (268.7 million hectolitres) are investible. These wines can last 
between  50  and  100  years.  The  value  of  all  wines  does  not  appreciate  with  maturity,  so 
wines  with  a  shorter  lifespan  may  not  make  for  good  investments.  wine  is  a  long‐term 
investment.  Profits  can  range  from  10‐50%  on  every  bottle,  but  the  key  is  to  remain 
invested for long. The investment horizon for wines to mature is 5‐15 years. 

PRIVATE EQUITY 
Private equity has arrived as a major component of the alternative investment universe and 
is  now  broadly  accepted  as  an  established  asset  class  within  many  institutional  portfolios. 
Many investors still with little or no existing allocation to private equity are now considering 
establishing or significantly expanding their private equity programs. 

Private  equity  investing  may  broadly  be  defined  as  "investing  in  securities  through  a 
negotiated process". The majority of private equity investments are in unquoted companies. 
Private  equity  investment  is  typically  a  transformational,  value‐added,  active  investment 
strategy.  It  calls  for  a  specialized  skill  set  which  is  a  key  due  diligence  area  for  investors' 
assessment of a manager. The processes of buyout and venture investing call for different 
application of these skills as they focus on different stages of the life cycle of a company. 
Private  equity  investing  is  often  divided  into  the  categories  described  below.  Each  has  its 
own subcategories and dynamics and whilst this is simplistic, it provides a useful basis for 
portfolio  construction.  Private  equity  is  the  universe  of  all  venture  and  buyout  investing, 
whether  such  investments  are  made  through  funds,  funds  of  funds  or  secondary 
investments. 

Venture Capital 

Venture capital is investing in companies that have undeveloped or developing products or 
revenue. 

• Seed stage Financing provided to research, assess and develop an initial concept
before a business has reached the start-up phase.
• Start-up stage Financing for product development and initial marketing. Companies
may be in the process of being set up or may have been in business for a short time,
but have not sold their products commercially and are not yet generating a profit.
• Expansion stage Financing for growth and expansion of a company which is breaking
even or trading profitably. Capital may be used to finance increased production
capacity, market or product development, and/or to provide additional working
capital. This stage includes bridge financing and rescue or turnaround investments.

Replacement Capital

Purchase of shares from another investor or to reduce gearing via the refinancing of debt.

Buyout

A buyout fund typically targets the acquisition of a significant portion or majority control of
businesses which normally entails a change of ownership. Buyout funds usually invest in
more mature companies with established business plans to finance expansions,
consolidations, turnarounds and sales, or spinouts of divisions or subsidiaries. Financing
expansion through multiple acquisitions is often referred to as a "buy and build" strategy.
Investment styles can vary widely, ranging from growth to value and early to late stage.
Furthermore, buyout funds may take either an active or a passive management role.

Special Situation

Special situation investing ranges more broadly, including distressed debt, equity-linked debt,
project finance, one-time opportunities resulting from changing industry trends or
government regulations, and leasing. This category includes investment in subordinated debt,
sometimes referred to as mezzanine debt financing, where the debt-holder seeks equity
appreciation via such conversion features as rights, warrants or options.

Go for this option only if you have a large sum — say a crore of rupees — which you can
invest and wait at least eight years before you see any money back.
Through a PE fund, you can invest in upcoming companies in new sectors. Taking a
relatively early position in them can fetch very good returns. Very often such companies are
in the pre-IPO stage, and need both financial and managerial support, which is provided by
the PE fund, and can give higher return than other asset classes.
One can also choose funds that are specialists and invest in sectors where public stock
markets don’t offer many options.
About 10 percent of the total portfolio in PE would be ideal for diversification purpose.
Risk of investment through PE
This is a highly illiquid piece of investment. Since PE funds invest in unlisted companies, it is
hard to sell that investment in a jiffy, should the need arise. You may not see any returns for
the next decade. There is less flexibility to exit and hence needs patient investment.
Investing in a PE fund with managers that have a very strong track record is critical, since
investors really have no influence on the companies that are being invested in. The fund
managers should have seen at least two business cycles. This means the team should have
stuck around for at least 10 years. One of the key problems with not having experienced
managers is valuation goof-up. This is very important today because high levels in the public
stock markets are driving valuations steeply in unlisted markets.
If you make an entry at the wrong price in an unlisted company, you are doomed. It is
impossible to average it down and make any decent money off it later. But if you must take
this decision, choose a fund that does not invest in very small companies. Choose PE funds
that invest in a combination of pre-IPO and public companies. It increases the probability of
steady exits and hence returns to the investors.
Role of Stock Market
While the performance of private equity funds in markets is less correlated with public
equities, functioning stock markets still play an important role. Private equity benefits from a
liquid and well performing stock market, either as an exit route, a source of fund capital or,
increasingly, as a source for deals.
Current Trends

In calendar year 2010, private equity and venture capital firms invested 7.97 billion dollars 
in  325  deals  (excluding  real  estate)  as  against  4.07  billion  dollars  in  290  deals  during  the 
previous  year.  The  energy  sector  was  the  biggest  draw  with  34  investments  worth  2.14 
billion  dollars  while  IT  and  ITeS  with  79  investments  worth  696  million  dollars  topped  in 
terms  of  volume,  said  The  Associated  Chambers  of  Commerce  and  Industry  of  India 
(ASSOCHAM).Banking,  financial  services  and  insurance  with  44  investments  worth  1.04 
billion dollars stood second on both counts. 

While the industry has witnessed difficult times, five Indian funds managed to raise 1.5
billion dollars, highlighting the fact that limited and general partners look at diversification of
risk across industries and geographies – given a fund’s teamwork and potential – not only
individual track records.
INVESTMENT OPTIONS FOR NON – RESIDENT INDIANS  
India offers a tremendous opportunity for investment and wealth building for Non Resident 
Indians (NRI) as India is slated to grow at the rate of 8%‐10% for the next few decades. The 
Government  has  provided  a  wide  range  of  incentives  and  concessions  to  Non‐Resident‐
Indians, some of which are being listed here.  

What are the various definitions of NRI? 

The residential status of a person is decided under two different Acts, one under Income Tax 
Act, 1961, ( I.T. Act) and another under Foreign Exchange Regulation Act, 1973 (FERA). The 
concept of Non‐Resident under FERA is different as compared to that under Income Tax Act. 
Under  Income  Tax  Act,  the  residential  status  of  a  person  is  determined  on  the  basis  of 
number of days he stays in India whereas under FERA, it is the intention of a person to be in 
India or outside India would be an important factor determining his residential status. 

Provisions under the I.T. Act  

The Income Tax Act, 1961 defines a non‐resident Indian as an individual, being a citizen of 
India or a person of Indian origin, who is not a resident. A person is of Indian origin if he or 
either of his Indian parents or any of his grandparents was born in undivided India. 

Also, an individual (whether Indian citizens or not) who is outside India and who comes on a 
visit to India in any previous year will be treated as "non‐resident" in India if he stays in India 
in that previous year less than 182 days subject to the condition that during the preceding 
four previous years his stay in India does not amount to 365 days or more. 

A  Hindu  undivided  family,  firm  or  other  association  of  persons  will  be  treated  as  "non  –
resident"  in  India  in  any  previous  year  if  the  control  and  management  of  its  affairs  is 
situated wholly outside India during that year. 

A  company  will  be  treated  as  "non‐resident"  in  India  in  any  previous  year  if  it  is  not  an 
Indian company and also the control and management of its affairs is not situated wholly in 
India in that year. 

The Provisions under Foreign Exchange Regulation Act (FERA) 
 
NRI means a person resident outside India who is a citizen of India or is a person of Indian 
origin. 

What do you mean by Person on Indian Origin (PIO)?

'A Person of Indian Origin' means an individual (not being a citizen of Pakistan or
Bangladesh or Sir Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who
(i) at any time, held an Indian Passport or

(ii) who or either of whose father or mother or whose grandfather or grandmother was a
citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955
(57 of 1955).

Which are the different categories, which non‐residents fall into? 
    Non‐Resident Indians (NRIs) generally fall under the following categories:  

• A citizen of India staying abroad for employment or for carrying on business on

vocation or for any purpose in the circumstances indicating an indefinite period of
stay outside India.
• A citizen of India proceeding abroad for higher studies, touring, recreation, training,
or medical treatment or taking up employment on completion of studies, training etc,
and such a person is treated as a NRI from the time he/she takes up a job abroad.
• A Government servant posted abroad on duty with Indian Missions or similar
agencies set up abroad by the Government and those deputed abroad on an
assignment with a foreign Government or regional/international agencies like the
World Health Organisation, International Bank for Reconstruction and Development,
International Monetary Fund etc.
• An official of a public sector undertaking or an autonomous organisation deputed
abroad on a temporary assignment or posted to its branches or offices abroad are also
treated as a NRI.

What is an OCB?
Overseas Corporate Bodies (OCBs) are bodies predominantly owned by individuals of Indian
nationality or origin resident outside India and include overseas companies, partnership firms,
societies and other corporate bodies which are owned, directly or indirectly, to the extent of
at least 60% by individuals of Indian nationality or origin resident outside India as also
overseas trusts in which at least 60% of the beneficial interest is irrevocable held by such
persons. Such ownership interest should be actually held by them and not in the capacity as
nominees, The various facilities granted to NRIs are also available with certain exceptions to
OCBs so long as the ownership/beneficial interest held in them by NRIs continues to be at
least 60%.
Are OCBs required to produce any certificate regarding ownership/beneficial interest
in them by NRIs?
Yes. In order to establish that the ownership/beneficial interest in any OCB held by NRIs is
not less than 60%, the concerned body/trust is required to furnish a certificate from an
overseas auditor/chartered accountant/certified public accountant in form OAC where the
ownership/beneficial interest is directly held by NRIs, and in form OAC 1 where it is held
indirectly by NRIs and further that such ownership interest is actually held by them and not in
the capacity as nominees.
What are the various facilities available to NRIs/OCBs?
NRIs/OCBs are granted the following facilities:

1. Maintenance of bank accounts in India.

2. Investments in securities/shares of, and deposits with, Indian firms/companies.
3. Investments in immovable properties in India.
 Features of various Deposit Schemes available toNRI  

(updated as on April 21, 2011)

1
Features of various Deposit Schemes available for Non-Resident Indians (NRIs)

Particulars Foreign Currency (Non-Resident) Non-Resident (External) Rupee Non-Resident Ordinary Rupee Account
Account (Banks) Scheme [FCNR Account Scheme Scheme [NRO Account]
(B) Account] [NRE Account]
(1) (2) (3) (4)

Who can open an NRIs (individuals / entities of
account Bangladesh/ Pakistan nationality/
ownership require prior approval of
RBI)
Joint account In the names of two or more non-
resident individuals provided all the
account holders are persons of
Indian nationality or origin.
Nomination Permitted
NRIs (individuals / entities of
Bangladesh / Pakistan
nationality/ownership require prior
approval of RBI)
In the names of two or more non-
resident individuals provided all the
account holders are persons of
Indian nationality or origin.
Permitted
Any person resident outside India (other
than a person resident in Nepal and
Bhutan). Individuals / entities of
Bangladesh / Pakistan nationality /
ownership as well as erstwhile Overseas
2
Corporate Bodies require prior approval of
the Reserve Bank.
May be held jointly with residents
Permitted

Currency in which Pound Sterling, US Dollar, Japanese Indian Rupees
account is denominated Yen, Euro, Canadian Dollar and
Australian Dollar
Repatriablity Repatriable
Type of Account Term Deposit only
Period for fixed deposits For terms not less than 1 year and
not more than 5 years.
Rate of Interest Subject to cap as stipulated by the
Department of Banking Operations
and Development, Reserve Bank of
India :
At present, with effect from the close
of business on November 15, 2008,
interest shall be paid within the
ceiling rate of LIBOR / SWAP rates
plus 100 basis points for the
respective currency/ corresponding
maturities.
Indian Rupees
Repatriable Not repatriable except for the following:
i) current income ii) up to USD 1 (one)
million per financial year (April-March), for
any bonafide purpose, out of the balances
in the account, e.g., sale proceeds of
assets in India acquired by way of
purchase/ inheritance / legacy inclusive of
assets acquired out of settlement subject
to certain conditions.
Savings, Current, Recurring, Fixed Savings, Current, Recurring, Fixed Deposit
Deposit
At the discretion of the bank. As applicable to resident accounts.
Subject to cap as stipulated by the Fixed/ Recurring Deposits
Department of Banking Operations Banks are free to determine interest rates
and Development, Reserve Bank of for term deposits.
India :
Savings Bank Account
Fixed/ Recurring Deposits Interest rate shall be at the rate applicable
At present, with effect from the to domestic savings account. Currently, the
close of business on November 15, rate is 3.5 per cent.
2008, interest rates on NRE
deposits for one to three years
should not exceed the
LIBOR/SWAP rates plus 175 basis
points for corresponding maturities,
 On floating rate deposits, interest as on the last working day of the
shall be paid within the ceiling of previous month, for US dollar of
SWAP rates for the respective corresponding maturities.
currency / maturity plus 100 basis The interest rates as determined
points. above for three year deposits will
also be applicable in case the
For floating rate deposits, the interest maturity period exceeds three
reset period shall be six months. years.

Savings Bank Account

Operations by Power of Operations in the account in terms of
Attorney in favour of a Power of Attorney is restricted to
resident by the non- withdrawals for permissible local
resident account holder payments or remittance to the
account holder himself through
normal banking channels.
Loans
Interest rate shall be at the rate
applicable to domestic savings
account. Currently, the rate is 3.5
per cent.
Operations in the account in terms
of Power of Attorney is restricted to
withdrawals for permissible local
payments or remittance to the
account holder himself through
normal banking channels.
Operations in the account in terms of
Power of Attorney is restricted to
withdrawals for permissible local payments
in rupees, remittance of current income to
the account holder outside India or
remittance to the account holder himself
through normal banking channels.
Remittance is subject to the ceiling of USD
1(one) million per financial year.

a. In India

3
i) to the Account holder Permitted only up to Rs.100 lakhs Permitted up to Rs.100 lakhs Permitted subject to the extant rules

4
i) to Third Parties Permitted only up to Rs.100 lakhs Permitted, subject to conditions
Permitted up to Rs.100 lakhs
b. Abroad
i) to the Account Permitted Permitted Not Permitted
holder (Provided no funds are remitted back (Provided no funds are remitted
to India and are used abroad only) back to India and are used abroad
only)
Permitted
Not Permitted
(Provided no funds are remitted back Permitted
ii) to Third Parties
to India and are used abroad only) (Provided no funds are remitted
back to India and are used abroad
only)
c. Foreign Currency
Loans in India

i) to the Account holder

Permitted up to Rs.100 lakhs Not Permitted Not Permitted

ii) to Third
Not Permitted Not Permitted
Parties
Not Permitted
Purpose of Loan
a. In India
i) to the Account holder
i) Personal purposes or for carrying i) Personal purposes or for carrying Personal requirement and / or business
on business activities * on business activities.* purpose.*

ii) Direct investment in India on non-
repatriation basis by way of
contribution to the capital of Indian
firms / companies
iii) Acquisition of flat / house in India
for his own residential use. (Please
refer to para 9 of Schedule 2 to
FEMA 5).
ii) to Third Parties Fund based and / or non-fund based
facilities for personal purposes or for
carrying on business activities *.
(Please refer to para 9 of Schedule 2
to FEMA 5).
ii) Direct investment in India on non-
repatriation basis by way of
contribution to the capital of Indian
firms / companies.
iii) Acquisition of flat / house in India
for his own residential use. (Please
refer to para 6(a) of Schedule1 to
FEMA 5).
Fund based and / or non-fund Personal requirement and / or business
based facilities for personal purpose *
purposes or for carrying on
business activities *. (Please refer
to para 6(b) of Sch. 1 to FEMA 5)
 b. Abroad
To the account holder
and Third Parties
Fund based and / or non-fund based Fund based and / or non-fund
facilities for bonafide purposes. based facilities for bonafide
Not permitted.
purposes.

* The loans cannot be utilised for the purpose of on-lending or for carrying on agriculture or plantation activities or for investment in real estate
business.

Note :

a. When a person resident in India leaves India for Nepal and Bhutan for taking up employment or for carrying on business or vocation or for any other
purpose indicating his intention to stay in Nepal and Bhutan for an uncertain period, his existing account will continue as a resident account. Such account
should not be designated as Non-resident (Ordinary) Rupee Account.

b. Authorised Dealers (ADs) may open and maintain NRE / FCNR (B) Accounts of persons resident in Nepal and Bhutan who are citizens of India or of Indian
origin, provided the funds for opening these accounts are remitted in free foreign exchange. Interest earned in NRE / FCNR (B) accounts can be remitted only
in Indian rupees to NRIs and PIO resident in Nepal and Bhutan.

c. ADs may open and maintain Rupee accounts for a person resident in Nepal and Bhutan.

d. The regulations relating to the various deposit schemes available to Non-Resident Indians have been notified vide Notification No.FEMA.5 dated 3rd May
2000, as amended from time to time. The relevant Notifications and A.P. (DIR Series) Circulars are available on our website [www.rbi.org.in → Sitemap →
FEMA → Notifications / A.P.(DIR Series) Circulars]. The Master Circular on Non-Resident Ordinary Rupee (NRO) Account [www.rbi.org.in → Sitemap →
Master Circulars] may also be referred to. The details of rate of interest on the various accounts, are available in the “Master Circular on Interest Rates on
Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts” and “Master Circular of
instructions relating to deposits held in FCNR (B) Accounts” issued by our Department of Banking Operations and Development, available on our
website [www.rbi.org.in → Sitemap → Master Circulars].

e. AD Category – I banks and authorized banks may credit the proceeds of account payee cheques/ demand drafts / bankers' cheques, issued against
encashment of foreign currency to the NRE account of the NRI account holder where the instruments issued to the NRE account holder are supported by
encashment certificate issued by AD Category-I / Category-II.

f. AD Category – I banks and authorised banks may permit remittance of the maturity proceeds of FCNR (B) deposits to third parties outside India, provided
the transaction is specifically authorised by the account holder and the Authorised Dealer is satisfied about the bonafides of the transaction.

1
NRI means a person resident outside India who is a citizen of India or is a person of Indian origin [Regulation 2 (vi) of Notification FEMA 5/2000-RB dated
May 3, 2000 viz. Foreign Exchange Management (Deposit) Regulations, 2000].

2
Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least
sixty per cent by Non-Resident Indians and includes overseas trust in which not less than sixty percent beneficial interest is held by Non-resident Indians
directly or indirectly but irrevocably, which was in existence as on September 16, 2003 and was eligible to undertake transactions pursuant to the general
permission granted under Foreign Exchange Management Regulations.

3
Subject to usual norms as are applicable to resident accounts, for personal purposes or for carrying on business activities except for the purpose of
relending or carrying on agricultural / plantation activity or for investment in real estate business.

4
Subject to conditions such as (i) the loans shall be utilised only for meeting borrower's personal requirements and/ or business purpose and not for carrying
on agricultural/ plantation activities or real estate business, or for relending, (ii) Regulations relating to margin and rate of interest as stipulated by the Reserve
Bank from time to time shall be complied with and (iii) The usual norms and considerations as applicable in the case of advances to trade/industry shall be
applicable for such loans/ facilities.

RATE CEILING ON NRI DEPOSITS RAISED

The India central bank raised the interest rate on deposits for non-resident Indians, or NRIs
on the 23rd Nov, 2011. The objective is to attract dollar flow and stem the fall of the local
currency, which has lost 15.6% against the dollar since August 2011.

RBI hiked interest rates on non-resident rupee deposits between one year and three years to
275 bps above Libor, up from 175 bps—a rate that has remained unchanged since 15
November 2008. Interest on foreign currency deposits in Indian banks has also been
increased to Libor plus 125 bps from Libor plus 100 bps. Also, floating rate deposits will
have interest rate reset period of 6 months

Facilities to returning NRIs/PIO

Returning NRIs/PIO may continue to hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India, if such currency, security
or property was acquired, held or owned when resident outside India

Foreign Currency Account

• A person resident in India who has gone abroad for studies or who is on a visit to a
foreign country may open, hold and maintain a Foreign Currency Account with a
bank outside India during his stay outside India, provided that on his return to India,
the balance in the account is repatriated to India. However, short visits to India by the
student who has gone abroad for studies, before completion of his studies, shall not be
treated as his return to India.
• A person resident in India who has gone out of India to participate in an
exhibition/trade fair outside India may open, hold and maintain a Foreign Currency
Account with a bank outside India for crediting the sale proceeds of goods on display
in the exhibition/trade fair. However, the balance in the account is repatriated to India
through normal banking channels within a period of one month from the date of
closure of the exhibition/trade fair.

Resident Foreign Currency Account

• Returning NRIs /PIOs may open, hold and maintain with an authorised dealer in India
a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/
FCNR(B) accounts.

• Proceeds of assets held outside India at the time of return, can be credited to RFC
account.

• The funds in RFC accounts are free from all restrictions regarding utilisation of
foreign currency balances including any restriction on investment in any form outside
India.

• RFC accounts can be maintained in the form of current or savings or term deposit
accounts, where the account holder is an individual and in the form of current or term
deposits in all other cases.
INVESTMENT IN SECURITIES AND DEBT 
Indian market has been a darling for foreign investors for quite a few years. The market will 
keep its momentum as India is expected to grow with a respectable rate for a few decades. 
NRIs can invest in securities and debt instruments to exploit the opportunities presented by 
Indian stock market. NRIs can invest in stocks and debt funds directly or in mutual fund. 

Government  of  India  has  allowed  NRIs  to  invest  in  Indian  market  directly  or  through 
portfolio investment scheme. It has allowed the following types of investment. 

Investment in stocks (especially secondary market) through portfolio 
investment scheme (PIS) 

This allows NRIs to invest in Indian security market without obtaining any permission from 
the  RBI  or  the  Government.  In  some  cases,  however,  they  need  permission  from  FIPB 
(Foreign  Investment  Promotion  Board)  in  case  of  investment  in  agriculture  or  plantation 
activities.  Investing  in  securities is  done  through  portfolio  investment  scheme.  As  per  this 
scheme, NRIs can select one branch designated by RBI for transaction related to investment. 
The  transaction  then  can  happen  through  the  specified  branch  for  stocks  and  convertible 
debentures. This can be repatriable or non‐repatriable depending upon the situation. 

Investment with Repatriation clause: 

NRI may, without limit, purchase on repatriation basis:  

• Government dated securities / Treasury bills  
• Units of domestic mutual funds;  
• Bonds issued by a public sector undertaking (PSU) in India.  
• Non‐convertible debentures of a company incorporated in India.  
• Perpetual debt instruments and debt capital instruments issued by banks in India.  
• Shares  in  Public  Sector  Enterprises  being  disinvested  by  the  Government  of  India, 
provided the purchase is in accordance with the terms and conditions stipulated in 
the notice inviting bids. 
• Shares  and  convertible  debentures  of  Indian  companies  under  the  FDI  scheme 
(including automatic route & FIPB), subject to the terms and conditions specified in 
Schedule  1  to  the  FEMA  Notification  No.  20/2000‐  RB  dated  May  3,  2000,  as 
amended from time to time.  
• Shares  and  convertible  debentures  of  Indian  companies  through  stock  exchange 
under Portfolio Investment Scheme, subject to the terms and conditions specified in 
Schedule  3  to  the  FEMA  Notification  No.  20/2000‐  RB  dated  May  3,  2000,  as 
amended from time to time.  

 
Investment without repatriation benefit: 

NRI may, without limit, purchase on non‐repatriation basis:  

• Government dated securities / Treasury bills  
• Units of domestic mutual funds  
• Units of Money Market Mutual Funds  
• National Plan/Savings Certificates  
• Non‐convertible debentures of a company incorporated in India  
• Shares  and  convertible  debentures  of  Indian  companies  through  stock  exchange 
under Portfolio Investment Scheme, subject to the terms and conditions specified in 
Schedules 3 and 4 to the FEMA Notification No. 20/2000‐ RB dated May 3, 2000, as 
amended from time to time.  
• Exchange traded derivative contracts approved by the SEBI, from time to time, out of 
INR funds held in India on non‐repatriable basis, subject to the limits prescribed by 
the SEBI.  

Investment in mutual funds 

Investments by NRIs in Mutual Funds can be made on a repatriable or on a non-repatriable

basis, as preferred by the investor.

Repatriable Basis

To invest on a repatriable basis, you must have an NRE or FCNR Bank Account in India. The
Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer
mutual fund schemes on repatriation basis, subject to the following conditions:

1. The mutual fund should comply with the terms and conditions stipulated by SEBI.
2. The amount representing investment should be received by inward remittance through
normal banking channels, or by debit to an NRE/FCNR
account of the non-resident investor.
3. The net amount representing the dividend / interest and maturity proceeds of units
may be remitted through normal banking channels or credited to NRE / FCNR
account of the investor, as desired by him subject to payment of applicable tax.

Non-Repatriable Basis

The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer
mutual fund schemes on non-repatriation basis, subject to the following conditions:

1. Funds for investment should be provided by debit to NRO account of the NRI
investor. Alternatively, funds may be invested by inward remittance or by debit to
NRE / FCNR Account.
 2. The current income in the form of dividends is allowed to be repatriated.

Does an NRI need any approvals from the Reserve Bank of India to invest in mutual fund 
schemes? 

No.  As  an  NRI  one  does  not  need  any  specific  approval  from  the  RBI for  investing  or 
redeeming from Mutual Funds. Only OCBs and FIIs require prior approvals before investing 
in Mutual Funds.    

What are the investment restrictions on NRIs for investments in Mutual funds? 

There are no investment restrictions on NRIs for investing in mutual funds. RBI does not 
restrict investment in mutual funds either on repatriable or  
non‐repatriable basis. 

Can I gift Mutual Fund units to my relatives in India?

Yes. Certain funds do permit gifting of units. One should refer to the offer document of the
specific fund to know the details.

What is the procedure for redeeming mutual fund units?

NRI can redeem their units by signing on the tear-off portion of the account statement &
sending it to any of the AMC or your personal MF investment advisor through post or by
sending a letter requesting redemption with the signatures and the amount to be redeemed.
The redemption request would be processed at the applicable NAV based price. The
redemption proceeds will be sent directly to the bank branch where NRE/NRO account
depending upon whether repatriable or non-repatriable account within three business days.
The redemption proceeds will be net of tax deduction at source on the profits.

Can I repatriate my earnings on redemption?

If the investment is made on a repatriation basis, the net income or capital gains (after tax)
arising out of investment are eligible for repatriation subject to regulatory guidelines in force
at the time of repatriation. If the investment is made on a non-repatriation basis, only the net
income, that is, dividend, arising out of investment is eligible for repatriation.

What is the tax liability on Redemptions? What is the rate of Tax Deduction at Source
for NRIs / PIOs? What is the tax - rate on capital gains for NRIs / PIOs?

Under Section 2(42A) of the Income Tax Act, units of the Scheme held as a capital asset, for
a period of More than twelve months immediately preceding the date of transfer, will be
treated as a long term capital asset for the computation of capital gains thus attracting long
term capital gains tax rate. In all other cases it would be treated as a short-term capital asset
and would attract short-term capital gains tax rate. Hence depending on the period of
investments, long term or short capital gains and tax thereon is applicable on redemption.
Though there is currently no long-term capital gain tax liability for redemptions from equity
schemes, there is a liability at the time of redeeming from the debt schemes.
Investment in immovable assets 

The  factors  that  drive  the  sentiment  amongst  the  Non‐Resident  Indians  to  invest  in  a 
property back home are many. The idea to have a base in the home country where one can 
return to is a prime reason that motivates the NRI buyer. It also continues to be of interest 
to NRIs and foreign investors affected by the recession in the West, who see India's strong 
economic fundamentals and the continued strength of the real estate market as a desirable 
investment alternative. 

NRIs  can  invest  in  real  estate.  They  do  not  need  any  permission  to  invest  in  real  estate 
except in cases where they want to acquire farm land, plantation, and agriculture land. The 
repatriation clause needs to be looked at in individual cases. The Government allows up to 
100%  investment  in  real  estate  development  (including  housing  societies  and  commercial 
space) as well as financing of housing and commercial development. 

RBI Regulations

• NRI  /  PIO  /  Foreign  National  who  is  a  person  resident  in  India  (citizen  of  Pakistan, 
Bangladesh,  Sri  Lanka,  Afghanistan,  China,  Iran,  Nepal  and  Bhutan  would  require 
prior approval of the Reserve Bank) may acquire immovable property in India other 
than agricultural land/ plantation property or a farm house out of repatriable and / 
or non‐repatriable funds.  
• The payment of purchase price, if any, should be made out of:
(i) funds received in India through normal banking channels by way of inward
remittance from any place outside India or
(ii) funds held in any non-resident account maintained in accordance with the
provisions of the Act and the regulations made by the Reserve Bank.

Note: No payment of purchase price for acquisition of immovable property shall be 
made  either  by  traveller’s  cheque  or  by  foreign  currency  notes  or  by  other  mode 
other than those specifically permitted as above. 

• NRI may acquire any immovable property in India other than agricultural land / farm 
house plantation property, by way of gift from a person resident in India or from a 
person  resident  outside  India  who  is  a  citizen  of  India  or  from  a  person  of  Indian 
origin resident outside India 
• NRI  may  acquire  any  immovable  property  in  India  by  way  of  inheritance  from  a 
person  resident  outside  India  who  had  acquired  such  property  in  accordance  with 
the provisions of the foreign exchange law in force at the time of acquisition by him 
or the provisions of these Regulations or from a person resident in India 
• An NRI may transfer any immovable property in India to a person resident in India. 
• NRI  may  transfer  any  immovable  property  other  than  agricultural  or  plantation 
property or farm house to a person resident outside India who is a citizen of India or 
to a person of Indian origin resident outside India. 

In respect of such investments, NRIs are eligible to repatriate: 
 • The sale proceeds of immovable property in India if the property was acquired out of 
foreign exchange sources i.e. remitted through normal banking channels / by debit 
to NRE / FCNR (B) account.  
• The amount to be repatriated should not exceed the amount paid for the property in 
foreign  exchange  received  through  normal  banking  channel  or by  debit  to  NRE 
account (foreign currency equivalent, as on the date of payment) or  debit to FCNR 
(B) account.  
• In the event of sale of immovable property, other than agricultural land / farm house 
/  plantation  property  in  India,  by  NRI  /  PIO,  the  repatriation  of  sale  proceeds  is 
restricted to not more than two residential properties subject to certain conditions.  
• If the property was acquired out of Rupee sources, NRI or PIO may remit an amount 
up to USD one million per financial year out of the balances held in the NRO account 
(inclusive of sale proceeds of assets acquired by way of inheritance or settlement), 
for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and 
subject to tax compliance.  
• Refund of (a) application / earnest money / purchase consideration made by house‐
building  agencies/seller  on  account  of  non‐allotment  of  flats  /  plots  and  (b) 
cancellation  of  booking/deals  for  purchase  of  residential/commercial  properties, 
together  with  interest,  net  of  taxes,  provided  original  payment  is  made  out  of 
NRE/FCNR (B) account/inward remittances.  

Repayment of Housing Loan of NRI / PIOs by close relatives of the borrower in India  

Housing Loan in rupees availed of by NRIs/ PIOs from ADs / Housing Financial Institutions in 
India can be repaid by the close relatives in India of the borrower.  

Current Scenario
Most of the investments in real estate by NRI have either been in under-construction projects
where the objective is to attain capital appreciation or ready apartments where the objective is
to attain rental income. Most NRI buyers prefer buying luxury apartments at popular and
strategic locations in Metros, preferably Mumbai. These projects are generally located in the
key areas with close proximity to airports, five-star hotels and business districts. Mid-end
users also prefer alternate cities such as Navi Mumbai and Pune for such investments. These
cities gain out of proximity to Mumbai and sustained growth drivers such as Industrial and IT
/ ITeS markets provide sustained demand for the long term.

TAX SAVING OPTIONS FOR NRI 
Even if you are a Non‐Resident Indian, you are liable to pay tax for any income that is earned 
or  accrued  in  India.  This  is  irrespective  of  whether  the  income  is  directly  or  indirectly 
received by the Non‐Resident Indian in India or is accrued or deemed to have been accrued 
in India as far as the laws are concerned. A Non‐Resident Indian will have to pay tax for any 
income from business transactions and also income generated from assets and investments 
in India. 
 The  major  difference  between  tax  paid  by  a  resident  Indian  and  a  Non‐Resident  Indian  is 
that  the  latter  only  has  to  pay  tax  for  his  ‘Indian  Income’  and  his  foreign  income,  that  is 
income earned and accrued abroad, is completely exempted from tax in India. 

It is important to  note that Indian Income is income that accrues /arises (or is deemed to 
accrue/  arise  in  India)  or  which  is  received  (or  deemed  to  have  been  received)  in  India, 
though  it  might  have  accrued/risen  elsewhere.  Foreign  Income  is  that  which  accrues  or 
arises (or deemed to accrue or arise) outside India AND received (or deemed to be received) 
outside India. 

Following  table  summarizes  taxability  of  various  kinds  of  Income  earned  in  India  and 

Abroad: 

Sr. No Particulars of Income Ordinary Not Non-

resident Ordinary resident
resident
1 Income received or deemed to be Yes Yes Yes
received in India, whether accrued in or
outside India
2 Income accrues or arises or deemed Yes Yes Yes
To accrue or arise in India, wherever
received
3 Income accrues or arises outside India if Yes Yes No
derived from business controlled or
profession set up in India
4 Income accrues or arises outside India if Yes No No
derived from any source other than
mentioned in Point (iii)

Tax Free Income for Non‐residents Indians 
 

Non‐residents Indians are granted certain tax exemptions if they are defined as or fulfil the 
criteria  of  Non‐Resident  Indian  under  the  Income  Tax  Act,  1961.  These  tax  free  incomes 
available to Non‐Resident Indians are:  

1. Interest earned on Savings Certificate,  
2. Interest earned on Non Resident (Non Repatriable) [NRNR] Deposit,  
3. Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit, 
4. Overseas income of NRIs,  
5. Dividend income from Indian Public/Private Company, Indian Mutual Fund and from 
Unit Trust of India,  
6. Long‐term  capital  gains  arising  on  transfer  of  equity  shares  traded  on  recognized 
Stock  Exchange  and  units  of  equity  schemes  of  Mutual  Fund  is  exempt  from  tax at 
par with residents,  
 7. Remuneration  or  fee  received  by  non‐resident  /  non‐citizen  /  citizen  but  not 
ordinarily  resident  ‘consultants’,  for  rending  technical  consultancy  in  India  under 
approved  programme  including  remuneration  of  their  employees,  and  income  of 
their family members which accrue or arise outside India,  
8. Interest on notified bonds. 

Various Deductions for Non‐residents Indians 
 

 Non‐Resident Indians are allowed the following deductions under Income Tax Act, 1961: 

a. Home Loan Interest Deduction:  

Non‐residents Indians are eligible to avail deductions on home loan interest for the interest 
portion of the EMI paid towards the repayment of home loans. 
 

b. Savings Deduction:  

From the various tax saving avenues available to the general public – Equity instruments like 
ELSS, Debt instruments like PPF, National Savings Certificate, Bank FDs etc and Life 
Insurance and Pension Plans, Non‐residents Indians are not allowed the following 
investments: 

i.) Non‐residents Indians are not allowed to open a PPF account. An existing PPF account can 
be continued till maturity. 

ii.) Non‐residents Indians are also barred from investing in National Saving Certificates 
(NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing 
investments (i.e., those that were purchased before becoming an NRI) can be continued till 
maturity. 

c. Health Insurance Premium Deduction 

Non‐residents  Indians  can  also  claim  deduction  for  premium  paid  on  mediclaim  /  health 
insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 
15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health 
of parents. 

d. Other Deductions  
 

There are many other deductions available to resident Indians – Health Insurance Premium, 
Medical treatment of disabled dependent, Medical treatment of certain specified ailments, 
 Deduction  for  Handicapped  person,  Educational  loan,  Deduction  for  Donations  and  Rent 
paid.  

NRIs qualify for these deductions: 
i) Deduction for interest paid on educational loan 
ii) Deduction for certain specified donations 
Deduction for Medical treatment of disabled dependent, Deduction for Medical treatment 
of certain specified ailments, and Deduction for Handicapped person are not available for 
Non‐residents Indians. 

CHECKLIST OF FINANCIAL TASKS WHEN BECOMING AN NRI 
1. BANKING

Changing your bank account is crucial. Once you are an NRI, you cannot hold a
regular savings bank account in India. An NRI will require a non-resident external
(NRE) account. Credits to this account can be through remittances from overseas or
foreign currency deposits.

The NRI's existing accounts will be converted to non-resident ordinary (NRO)

accounts, wherein he can deposit his earnings in India, such as rental income, pension,
etc. You can request the bank to retain the same account number, which will save you
the hassle of notifying various agencies about the change. You will need to close
other bank accounts as these will become inactive if you don't use them for a year,
and dormant after 6-12 months of being inactive.

2. HOME LOAN

As an NRI, you can continue to service a home loan. However, you may need to give
fresh post-dated cheques or if the EMI goes through ECS, you will have to route it
through your NRO account. Also, register for receiving e-alerts and loan account
statements through Net banking. This will allow you to know the principal and the
interest portion paid when you file your tax returns abroad.

3. TRADING AND INVESTMENT

If you want to continue to trade in India, you will need to open a PINS account with
the depository participant (DP). However, you will not be eligible to invest in all
 instruments, such as the Public Provident Fund, small savings or certain shares (which
are listed by the RBI).

When you change the status to NRI with the DP (share broker), you need to
distinguish between shares that can be repatriated and those that cannot. For this, you
will need permission from the depository (NDSL/CDSL) and separate accounts. The
non-repatriable securities will be linked to the NRO bank account and you'll be able
to withdraw up to $1 million from it.

If you are not going to use your demat account while abroad, you can freeze it. While
it will continue to receive credits, such as bonus shares and dividends, the transactions
will be blocked till you give written permission. If you do not want to freeze the entire
account, you can do so for a select number of stocks.
In the case of mutual fund investments, you will have to fill up a know your customer
(KYC) form, mentioning the change in your residency status as well as the bank
account number, so that the SIP debits take place from your NRO account. If you do
not inform the mutual fund house about this, you may suffer a loss as SIPs for NRIs
cannot be debited from resident savings bank accounts.
TAX PLANNING 
Tax planning is an essential part of your financial planning. Efficient tax planning enables
you to reduce your tax liability to the minimum. This is done by legitimately taking
advantage of all tax exemptions, deductions rebates and allowances while ensuring that your
investments are in line with your long term goals.

What tax planning is not...

• Tax Planning is NOT tax evasion. It involves sensible planning of your income
sources and investments. It is not tax evasion which is illegal under Indian laws.
• Tax Planning is NOT just putting your money blindly into any 80C investments.
• Tax Planning is NOT difficult. Tax Planning is easy. It can be practiced by everyone
and with a very little time commitment as long as one is organized with their finances.

Planning taxes this year

a. You will have certain needs and goals to meet. Understand what those are and then figure
out how to maximize tax efficiency in your effort to meet them. Tax planning should be a
part of the overall financial planning that you must do.

For instance, you might be getting married and need to buy a house. In this situation you need
to get insurance to protect your spouse if they are financially dependent upon you, as well as
you need to get a home loan. What should you prioritize and what do you have the capacity
to afford? If you blindly put money into an insurance policy, it might not even be sufficient to
give you adequate insurance cover. However, if you choose to pay off the principal on your
home loan, that could be a better option in this situation.

b. Do not blindly invest money with the first agent that you might come across. You might
end up making mistakes. A lot of people end up buying insurance policies with minimal
insurance coverage or putting money in instruments where they cannot access the money
when they need it.

c. Do not make last minute decisions just because your payroll department has reminded you
that the internal deadline for submitting proofs is approaching. Tax planning involves
planning in advance to avoid the last minute scramble.

Selecting tax saving investments

You should think about the following criteria, before selecting your tax saving investments
for the year:

• Liquidity:

How quickly will you need the money? Will you need to access the money within the
next year or two years or over what duration?

• Risk and Return:

How much risk do you want to take? There is a trade off between the two, some
instruments are very low risk, but as a result they give low returns which are capped.

• Inflation protection:

The instruments that give you a low return typically are the worst type of investments
regarding inflation. This is important because many of the instruments give you a
fixed rate of interest, and lock in your money for a long period. This is not a good
protection against inflation.

• Tax Exemption:

All tax saving investments under Section 80C are alike in one respect that they are tax
exempt when they are invested. But they differ with respect to the tax on the income
you earn from such an investment as well as the tax on the maturity of the investment.
TAX SAVING OPTIONS FOR YOU 
Some of the Sections of Income Tax Act, 1961 are detailed below which detail few
exemptions and categories of exempt income that you can take advantage of:

SECTION 80 C: Investment in specified instruments and expenses

Section 80C gives every income tax payer up to a maximum of Rs. 1, 00,000 tax free income
in a year if they invest in or buy the following instruments. Please not that this is a combined
total of Rs. 1, 00,000 and not an individual figure for every instrument.

1. Premium for Life Insurance or ULIP

2. Provident Fund (PF) contribution

3. Public Provident Fund (PPF) - only up to Rs. 70,000 in a year

4. Repayment of home loan principal

5. Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies

6. Infrastructure Bonds (Covered under Section 80 CCD and gives an additional exemption of
Rs. 20000 over and above Rs.100000 given earlier)

7. National Savings Certificates (NSC)

8. Tax Saving Fixed Deposits with Banks

9. Tuition Fees of children

Comparison of 80C Investment Avenues

Type of 80C Lock In Returns Risk Taxation of

Instrument Period Returns
Equity Linked Savings 3 years Market Linked High No tax
Scheme (Mutual Fund) (58% Category
Average for yr
ending Dec 28,2007)
Life Insurance 2 years 6% Low No tax
Premium

ULIP Premium 1 3 years Market Linked High No tax

PPF (fixed returns) 15 years 8% Low No tax
2

Home Loan 5 years NA NA NA

Repayment
Infrastructure Bonds 3 years 6% Risk Interest is
(fixed returns) (min) Free taxed
NSC (fixed returns) 6 years 8.16% Risk Interest is
Free taxed
Tax Saving Fixed 5 years 8%-8.75% Risk Interest is
Deposits Free taxed
(fixed returns)

Notes:
1: ULIP premium needs to be at least 1/5th of the sum assured to qualify under Section 80C
2: PPF returns are set by the Government of India and can be revised either upwards or
downwards in any year.

Section 80D: Health Insurance Premium

You can take advantage of an annual deduction of Rs. 15,000 from taxable income for
payment of Health Insurance premium for self and dependants. For senior citizens, this
deduction is Rs. 20,000.

Section 80E: Interest paid on educational loans

You can claim a deduction on the interest paid on loans taken for higher education for
yourself, your spouse and children. There is no limit on the amount of deduction you can
claim.
The only thing to keep in mind is that the program for which the loan is taken should be a
graduate or post-graduate program in engineering, medicine or management or a post-
graduate course in the pure or applied sciences.

Section 80G: Donations to Charitable institutions

You can claim a deduction for any donation that you might have made to a charitable fund or
institution. However, please note that these donations should be made only to specified
institutions. And a proper proof of payment must be provided for the same. Based on the
classification of the charity, you can claim either 100% or 50% of the donated amount as
deduction. The deduction might also be subject to a certain limit again based on the type of
charity that you are donating money

Section 24: Interest paid on housing loan

Under Section 24, a maximum of Rs 1, 50,000 can be deducted from your taxable income as
interest repayment for a self occupied house. Please note that this deduction is not available if
you the house is still under construction and you do not have occupation of the house.

Provisions that you should take advantage of if you are a salaried

employee:

Section 10(13A): House Rent Allowance

You can take advantage of the provisions under this section if you are renting an
accommodation. These provisions will not be available to you if you stay in a rent-free
accommodation or live with your family or in your own house.

Under Section 10(13A), HRA is exempt to the least of the following:

i) 50/40 per cent of basic salary= Dearness Allowance (if, applicable),

ii) excess of rent paid over 10 per cent of basic salary; and
iii) actual HRA received.

Let’s illustrate this calculation with an example:

Assumptions

HRA per month = Rs 15,000

Basic monthly salary = Rs 30,000
Monthly rent = Rs 14,000
Rental accommodation is in Delhi.

Exemption

The HRA exemption would be the least of the following:

1. Actual amount of HRA: Rs 15,000

2. 50% of salary (basic component + dearness allowance) = 50% x (30,000 + 0) = Rs 15,000
3. Actual rent paid - 10% of salary (basic component + dearness allowance)= Rs 14,000 -
[10% of (30,000 + 0)] = 14,000 – 3,000 = Rs 11,000
Rs 11,000 being the least of the three amounts will be the exemption from HRA.
The balance HRA of Rs 4,000 (15,000-11,000) would be taxable.
Please note that HRA exemptions are only available on submission of rent receipts or the rent
agreement.

Paying Rent to parents or relatives

If you want to pay rent to your parents or any relatives (like uncle/cousin) whom you are
staying with. You will need to treat them as landlords. And request the owner of the house
(which will be one of your parents) to declare it in his/ her personal income tax return. This
will prevent any litigation in the future.

Section 10 (14) Rule 2BB(10) : Transport Allowance

Transport allowance granted for commuting between your residence and place of work is
exempt up to Rs. 800 a month. You can take advantage of this provision to get a tax
exemption of Rs 9600 annually by providing your employer with bills or a self declaration.

Section 17(2) : Medical Reimbursement

You can claim exemption up to Rs 15,000 annually on actual expenditure incurred on your
medical treatment or for treatment of any of your dependants. Moreover, there is no
restriction of approved hospitals or clinic for the same. This is exempt only on provision of
actual bills.

However, if the amount is paid out as an allowance not a reimbursement then it would be
fully taxable.
DIRECT TAX CODE (DTC) 
The Finance Minister has reassured that the DTC will be hopefully cleared in the winter
session of Parliament and will be implemented from Apr 2012. Let’s look at what is in store
based on the decisions that stand as of today.

The Good News

Enhancement of Tax Slab

Smile as the tax exemption limit now stands at Rs 2 lakhs which was earlier 1.6 lakhs. The
tax burden is lessened by 41,000 in the highest tax slab.

Individuals Income Individuals Tax rate

Up to Rs 2,00,000
Between 2,00,000 to 5,00,000
Between 5,00,000 to 10,00,000
More than 10,00,000
Zero
10% of (Total Income – Rs 2,00,000)
30,000 + 20% of (Total Income – Rs 5,00,000)
1,30,000 + 30% of (Total Income – Rs
10,00,000)

Investor friendly Capital Gain Tax

Only half of the short term capital gains on equity will be taxed. Long term capital gains from
equity have been left untouched. Capital gains from property will be considered as income
and for tax purposes the gain will be added to your income. Hence your tax liability will be
calculated as per the slab you fall under after the addition of gains.

Enhancement of Exemption limit from 1.2 Lakhs to 1.5 lakhs

With DTC now it will be easier to claim exemptions as it will reduce the confusing number
of investment options available. An individual can still claim deduction of Rs 1 Lakh as per
old tax regime but the investment options will reduce to NPS, Superannuation funds and
pension funds like EPF and PPF. Also, the exemption for tuition fee for children is now part
of this 1.5L where you can claim a deduction for a tuition fee of Rs 50,000 if you pay tuition
fees (max 2 children) or if you have taken health insurance/mediclaim policy or if you have
invested in pure life insurance product where the sum assured is 20 times annual premium.

Tax benefits of home loan

It is unclear if the principal due repaid for your home loan will continue to enjoy tax benefits
but the new DTC bill has most definitely retained the tax benefits on the interest due repaid
on your home loan.

EEE treatment of GPF, PPF and pure life insurance products

In earlier tax code, investments in the above schemes were governed as per EET where
investment and accumulation was tax free but withdrawal was not. In the New DTC it’s
proposed that the withdrawal from these schemes will also be tax exempt.

Enhancement of medical reimbursement limit

Now you can be happy even if you fall sick as DTC proposes to enhance the medical
reimbursement limit from Rs 15,000 to Rs 50,000.

The Not So Good News

No Leave Travel allowance

If you like to go on holidays, DTC will tax you from now onwards.

No special treatment for being a woman

No gender bias as per DTC as the extra tax benefit for women seems to be non-existent.

Reduction in tax exemption period of NRIs

NRIs will be taxed if they are earning in India and their stay exceeds from 60 days. Earlier
tax exempt period was of 180 days. This sounds like a bad news but the finance minister has
assured that this is under discussion and just staying in India for 60 days doesn’t make NRI’s
liable for taxation as there are other clauses attached to it.

DTC in its current form sounds to be tax payers friendly and let’s hope Indian Government
carry’s on with tax reforms so that we start loving the Tax Daemon. For the time being
“Thumbs Up” for the DTC.

RETIREMENT PLANNING 
Retirement planning, in a financial context, refers to the allocation of finances for retirement.
This normally means the setting aside of money or other assets to obtain a steady income at
retirement. The goal of retirement planning is to achieve financial independence, so that the
need to be gainfully employed is optional rather than a necessity.
Retirement is one of the most important life events many of us will ever experience. From
both a personal and financial perspective, realizing a comfortable retirement is an incredibly
extensive process that takes sensible planning and years of persistence. Even once it is
reached; managing your retirement is an ongoing responsibility that carries well into one's
golden years.
While all of us would like to retire comfortably, the complexity and time required in building
a successful retirement plan can make the whole process seem nothing short of daunting.
However, it can often be done with fewer headaches (and financial pain) than you might
think - all it takes is a little homework, an attainable savings and investment plan, and a long-
term commitment.
Why Plan For Retirement?
Before we begin discussing how to plan a successful retirement, we need to understand why
we need to take our retirement into our own hands in the first place. This may seem like a
trivial question, but you might be surprised to learn that the key components of retirement
planning run contrary to popular belief about the best way to save for the future. Further,
proper implementation of those key components is essential in guaranteeing a financially
secure retirement. This involves looking at each possible source of retirement income.
No government sponsored pension plan
Unlike the US and UK where they have IRA and state pension respectively as social security
benefit during retirement, the government of India does not provide such benefits. So again
you are on your own.
Nuclear families
Gone are the days when people use to have an entire cricket team would make a family.
Today's youth prefer not more than two children. With westernisation coming in, the culture
of joint family is changing. They prefer independence and stay away from their family.
Hence people have to develop a corpus to last them through their retirement without any help
from family.
Unforeseen Medical Expenses
Without your own savings to add to the mix, you'll find it difficult, if not impossible, to enjoy
much beyond the minimum standard of living social security provides. This situation can
quickly become alarming if your health takes a turn for the worse.
Old age typically brings medical problems and increased healthcare expenses. Without your
own nest egg, living out your golden years in comfort while also covering your medical
expenses may turn out to be a burden too large to bear - especially if your health (or that of
your loved ones) starts to deteriorate. As such, to prevent any unforeseen illness from wiping
out your retirement savings, you may want to consider obtaining insurance, such as medical.
Estate Planning
Switching to a more positive angle, let's consider your family and loved ones for a moment.
Part of your retirement savings may help contribute to your children or grandchildren's lives,
be it through financing their education, passing on a portion of your nest egg or simply
keeping sentimental assets, such as land or real estate, within the family.

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in
order to cover your expenses during your retirement years. This could prevent you from
leaving a financial legacy for your loved ones, or worse, cause you to become a financial
burden on your family in your old age.
The Flexibility to Deal with Changes
As we know, life tends to throw us a curve ball every now and then. Unforeseen illnesses, the
financial needs of your dependents and the uncertainty of social security and pension systems
are but a few of the factors at play.
Regardless of the challenges faced throughout your life, a secure nest egg will do wonders for
helping you cope. Financial hiccups can be smoothed out over the long term, provided that
they don't derail your financial plan in the short term, and there is much to be said for the
peace of mind that a sizable nest egg can provide.
How Much Will I Need?
It's entirely possible to determine a reasonable number for your own retirement needs. All it
involves is answering a few questions and doing some number crunching. Providing you plan
ahead and estimate on the conservative side, it's entirely possible for you to accumulate a nest
egg sufficient to last you through your golden years.
There are several key tasks you need to complete before you can determine what size of nest
egg you'll need in order to fund your retirement. These include the following:
1. Decide the age at which you want to retire.

2. Decide the annual income you'll need for your retirement years. It may be wise to
estimate on the high end for this number. Generally speaking, it's reasonable to
assume you'll need about 80% of your current annual salary in order to maintain your
standard of living.

3. Add up the current market value of all your savings and investments.

4. Determine a realistic annualized real rate of return (net of inflation) on your

investments. Conservatively assume inflation will be 4% annually. A realistic rate of
return would be 6-10%. Again, estimate on the low end to be on the safe side.

5. If you have a company pension plan, obtain an estimate of its value from your plan
provider.

6. Compute value required at retirement.

When drawing up your retirement plan, it's simplest to express all your numbers in today's
rupees. Then, after you've determined your retirement needs (in today's rupees), you can
worry about converting the numbers into "tomorrow's rupees," i.e. factoring in inflation.
It is also necessary to factor in taxation. Since, a part of your corpus would be gifted to the
Government. Hence, all return on investments should be calculated post tax. Normally, it’s
not possible to forecast what would be the taxation rate in future. Hence, it is advised to
compute your corpus based on current tax rate and review your retirement planning
periodically for changes in taxation, inflation, rate of return and other circumstances.

RETIREMENT INVESTMENT OPTIONS 

1. Public Provident Fund (PPF) 

A PPF account is opened for an initial period of 15 years. That is, you make a commitment of 
15  years  upfront  –  and  as  I  always  say,  this  means  that  you  can  reap  the  benefits  of 
compounding.  This  also  means  that  you  would  not  touch  these  funds  for  ad‐hoc  needs  – 
which make PPF all the more suitable for goals like retirement planning. 

If you do not need the funds at the time of maturity (after 15 years), or cannot find a better 
investment  avenue  for  these  funds,  you  can  opt  to  continue  the  PPF  account.  You  can 
extend the PPF account for 5 years at a time, and you can have as many extensions as you 
want.  

Please refer the section on Post Office Schemes for more details on PPF. 

2. National Savings Certificate

National Savings Certificate is a time-tested Tax saving instrument that combines sufficient
returns with high safety. NSCs are an instrument for facilitating long-term savings. A large
portion of middle class families use NSCs for saving on their tax, getting double benefits.
They not only save tax on their hard-earned income but also make an investment which is
sure to give good and safe returns for their retirement.

Please refer the section on Post Office Schemes for more details on NSC. 

3. Employees Provident Fund (EPF) 

What is Employee Provident Fund or EPF? 

Employee Provident fund or EPF is a fund made up of contributions by the employee during 
the  time  he  has  worked,  along  with  an  equal  contribution  from  the  employer.  It  is  a 
calculated as a percentage of employee’s salary (Basic Salary + DA + Retaining allowance), 
normally 12%, and returned upon retirement. In the absence of any social security cover for 
the elderly in India, employee provident fund not only provides monetary security and helps 
them  meet  daily  living  expenses;  it  also  helps  them  live  a  life  of  dignity  and  respect  after 
retirement. 

Is contribution towards Employee Provident Fund optional in India? 

All industries and establishments employing more than 20 people are required to contribute 
towards Employee Provident Fund (EPF).  

EPF Interest Rate 

The  rate  of  interest  for  EPF  is  fixed  by  the  Central  Government  every  year  during 
March/April. The interest is credited to the members account on monthly running balance 
with  effect  from  the  last  day  in  each  year.  The  rate  of  interest  is  normally  around  8.5%. 
However, the rate of interest for 2010‐2011 has been kept at 9.5%.  

Benefits of Provident Fund 
Apart from being a tool for our retirement savings, Provident Fund offers numerous more 
benefits: 

• PF entitles you to get Pension

As  you  must  have  seen  in  provident  fund  calculator  above,  8.33%  of  employer 
contribution goes towards pension.  

• Employee Provident Fund in India provides you insurance too – 0.5% of your
monthly basic pay goes towards providing you insurance. The insurance cover is
maximum of –
1) 20 times the average monthly wage (maximum of Rs 6500) – which comes to Rs
1,30,000
2) Full amount in your PF account up to Rs 50,000 and 40% of balance amount.

Checking Provident Fund Balance Online 

Thanks to initiatives by PF Department, provident fund balance can now be checked online 
(although currently data is available for a few locations only). 

Withdrawal from Provident Fund 

Premature  withdrawal  of  the  full  amount  of  provident  fund  is  allowed  under  following 
conditions: 

• In case the of massive retrenchment in the organization, and employee being unable to
find a job even after 60 days of leaving previous job, he can withdraw his provident
fund.
• On migration from India to abroad for permanent settlement or for taking employment
abroad.
• In case the employees of current establishment are transferred to another which is not
covered under the Act.

In any other case such as changing of jobs, etc, if the employee withdraws his complete
provident fund, then he is liable to pay tax on it.

Partial withdrawal of Employee Provident Fund in India 

A person who is a member of Employee Provident Fund can withdraw money upon reaching 
the age limit prescribed by the government, as of now, it is 55 years in India, or upon actual 
retirement. Additionally provident fund may be withdrawn partially to meet expenses such 
as –  

• Marriage of self, siblings or children

• Medical treatment of self or family
• Construction or Purchase of house or flat/site or plot
• Repaying of housing loan
 • Repairs to an existing home

Please Note: 

With  effect  from  1st  April  2011,  in  case  no  contribution  has  been  made  in  employee 
provident  fund  for  36  months,  it  will  be  identified  as  inoperative  and  no  interest  will  be 
credited in such accounts. 

4.  Mutual Fund Products 

Direct equity or mutual fund investments can also be used to create long‐term capital, but 
prudence  will  have  to  be  used,  as  such  products  do  not  have  any  fixed  time  horizon  and 
maturity value. You will have to time the market correctly to maximise benefits. 

Mutual funds (MFs) offer two kinds of retirement products—ones that offer tax deduction 
and other than don’t. Let’s call schemes that offer tax deduction type I and those which do 
not type II schemes.  

Besides  the  difference  in  tax  treatment,  type  I  and  type  II  schemes’  investment  pattern 
differs significantly. While type I schemes primarily invest in debt, irrespective of the age of 
investor, type II schemes mainly invest in equities until the time the investor nears the age 
of retirement. Typically, after the investor crosses 60 years of age, the fund begins to invest 
primarily  in  debt  in  order  to  secure  your  capital.  You  can  make  systematic  or  lump  sum 
withdrawal during this stage.  

There are two types I schemes in the market: Templeton India Pension Plan and UTI
Retirement Benefit Fund. Both the schemes invest 40% of the corpus into equity and the
balance into debt. These funds are relatively safe as a major part of the corpus is invested in
debt, but they do not guarantee your capital.
On the other hand, type II schemes are being offered by several MF companies, including
Birla Sun Life Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd.
The newly launched Tata Retirement Savings Fund by Tata Asset Management Ltd also falls
in the same category. Since type II schemes mainly invest in equities, the long-term returns
may be higher as compared with type I scheme.
Assuming the same rate of return, type 1 schemes are better because of the tax deduction
factor. Type 1 schemes tend to lose their edge only if the returns from equity are very high.
5.  Insurance Products 
Retirement plans offered by life insurance companies are bundled products, offering the
benefits of both insurance and investment. A typical retirement plan has two phases.
The first is the accumulation phase, during which you pay premiums and the money
accumulates through the tenure of the plan. The accumulated money is then invested in
securities approved by the Insurance Regulatory and Development Authority (IRDA ), the
insurance regulator.
These products are designed to protect the value of your principal while at the same time
provide you with steady returns.
The accumulation stage is followed by the vesting age, which is the age when you start
getting payouts from the kitty. This can be selected by you. The vesting age in most plans is
40 to 70 years. The period when a person gets pension is also called the annuity phase.
During this phase, you can withdraw up to 33% of the accumulated amount in one go. The
rest is paid as pension.
In the immediate annuity option, a person can pay in lump-sum, instead of over the years, and
start getting income immediately. The frequency of payments received can be monthly,
quarterly, half-yearly or annually.
ULlPS Geared for Old-age Cover
At present all ULIP products for retirement are single premium plans, that is, you have to pay
premium just once, at the beginning of the plan.

Most ULIP retirement plans invest only a small

amount in equity-based funds to avoid risk and
secure capital. If you are young and can invest for
a long time, you can opt for higher equity
contribution to ensure better potential earnings.
Since all available retirement Ulips are single-premium ones, equity can give you huge
returns due to the compounding effect.
Traditional Retirement Plans
Out of 19 traditional retirement plans, 15 are participating ones. Participating plans give a
share of profit to policyholders. This share is not fixed and depends on the performance of the
company. When a company makes higher profits, the payout rates to its policyhoders are
normally revised upwards.
Working out Maturity Benefits
Maturity benefits in traditional plans are based on the sum assured. At maturity, a buyer of a
participating plan gets sum assured along with guaranteed additions, if any, and bonuses.
In case you have a conservative approach and don't want to risk your money, it is advisable to
go for plans that return the sum assured. However, it will be a good idea to choose a plan that
offers the higher of sum assured or accumulated amount, if such an option is available.
Retirement plans are designed to provide returns only at the age you require them the most,
that is, the vesting age.
Usually, no withdrawals are allowed during the accumulation phase.
Varied Death Benefits on Offer
The good part about traditional retirement plans is that they provide life cover during the
accumulation phase.
6. NEW PENSION SCHEME (NPS) 
NPS is similar to Mutual funds. You keep aside some money for your retirement and this
money is put into the capital market. Hence, the sum which you will get post retirement will
be dependent on the performance of capital market. These are managed by fund managers.

Currently 6 fund houses appointed by the government are available under NPS. These are
SBI Pension Funds Private Limited, UTI Retirement Solutions Limited, ICICI Prudential
Pension Funds Management Company Limited, Religare Pension Fund Limited, IDFC
Pension Funds Management Company Limited, and Kotak Mahindra Pension Fund Limited.
There are 3 schemes available under NPS which is:

Fund E: If you invest in this fund, then a portion of not more than 50% of your invested
money will be put into equity. You should consider investing in this retirement plan only if
your risk appetite is high as up to 50% of your money will be linked to the performance of
equity.

Fund C: if you invest in this fund, then all of the money will be put into fixed income
instruments like corporate bonds and government securities. You should consider investing in
this fund if your risk appetite is medium as corporate bonds are not that risky.

Fund G: In this fund, all of your money will be invested in government securities. Hence,
this is suited for you if you want it to be an almost risk free investment.

You can choose to invest in any of these funds or you can invest in a mix of these funds. If
you are not able to choose between these funds then your contributions will be invested in a
fund with 15% in equity, 45% in corporate bonds and 40% in government bonds. However
with increase in age after 35 years, the government bond exposure will increase with a
maximum limit of 80% and 10% each in equity and corporate bonds. To ensure you avail the
scheme you should compulsorily contribute at least Rs 500 per month.

Amendments Proposed for workers in unorganized sector

The government has proposed to roll out a ‘fixed income pension’ plan to the workers in the
unorganized sector. This will be done in three steps. Firstly, the monthly contributions you
make will be invested as per NPS guidelines. Secondly, state funds for old age savings
scheme will be added to this. Thirdly, if any gap exists between the sums guaranteed and sum
generated from the above two steps then the central government will provide the requisite
fund. The new plan will be started off initially in states like Haryana, Karnataka and Andhra
Pradesh which are known to be quick in implementing government schemes. However this
amendment is only meant for workers in the unorganized sector. Central and State
government employees will continue to get pension through NPS.

Tips for Employees

• If you are planning to save for your retirement then you should avail NPS as the fund
management charges are very low which is 0.0009% compared to 1.5% – 2.5% for
mutual fund or insurance products.

• Currently, NPS does not offer any tax exemptions unlike other retirement plans. It
falls under the category EET (exempt-exempt-tax) system which means that maturity
benefits you receive post retirement will be taxable. However, with DTC replacing the
 current tax code, NPS will be tax exempted upon withdrawal too. Therefore, you
should avail this scheme when DTC comes into place.

• You can also make weekly contributions in NPS. But for every contribution, your
transaction cost will increase. Hence, it is better to keep some money from your
monthly compensation and contribute it to NPS once in a month.

• As compared to other retirement plans like (Employee provident fund) EPF, the
returns are better. Currently, EPF gives 8 per cent interest rate. However, investing in
NPS will earn you much better returns because of the equity portfolio of the scheme.

To conclude, NPS should be given serious consideration as a possible scheme for

accumulating your retirement funds as it is comparatively a much better scheme in the market
currently. It has earned an impressive average return of 19.5% which makes sense of
ploughing back some money in the capital market. For the unorganized sector, amendment
proposed by the government will ensure you get an assured sum post retirement.

RECENT CHANGES IN NPS

The revised DTC which will introduce several changes if implemented has brought NPS
under the tax exempt net. This new change will make NPS an attractive investment
opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation
for NPS – exemption at all the three stages of deposit, appreciation and withdrawal. Earlier,
the withdrawals from the NPS were taxed. This brings it at par with the other long term
investment avenues.
The Fund Regulatory and Development Authority Bill, 2011, (PFRDA Bill, 2011) has
recommended some changes in the structure of NPS. These are as follows:

Minimum guarantee 

The standing committee has proposed a minimum guaranteed return on the contributions
made by the members of the NPS. This is to ensure that the returns are not subject to the
vagaries of the market and are on par with other pension products that provide a defined
benefit; for instance, Employees’ Provident Fund Scheme (EPF).

For this purpose, the committee has proposed to peg the minimum rate of return on EPF’s 
rate  of  return.  EPF  gave  9.5%  for  FY11  due  to  a  windfall  gain;  it  had  been  giving  8.5%  for 
about  four  previous  years.  EPF  invests  only  in  debt  products  and  the  rate  of  return  once 
declared is guaranteed for the year. However, the structure of NPS is different from that of 
EPF.  

Under  NPS,  investors  from  the  unorganized  sector  can  choose  among  three  fund  options: 
equity (E), fixed‐income instruments other than government securities (C) and government 
securities (G). However, you can invest only up to 50% of the funds in the equity option.  

You  can  either  allocate  the  percentage  of  investment  in  the  three  investments  yourself 
(active choice) or let the fund allocate it for you in accordance to your age (auto choice). It 
automatically begins with a maximum exposure to equity at 50% till the age of 35 years and 
reduces  it  to  10%  by  age  55  in  order  to  lend  stability  to  your  investment  as  you  near 
maturity.  However,  for  government  employees,  who  have  switched  to  NPS,  the  cap  on 
equity exposure is 15%, on government securities 55% and on other fixed instruments 40%. 

The present structure of NPS is such that it allows an investor to enjoy market‐linked returns 
while limiting equity exposure. Having a minimum guarantee on returns will affect the fabric 
of NPS and will increase the burden on the government that promises to meet any shortfall 
if the fund managers are not able to meet the minimum return criteria.  

Withdrawal facility 

The other key recommendation, which takes NPS’ structure closer to that of EPF, is to allow 
partial withdrawals. But the committee has suggested that these withdrawals be repayable. 
The report says: “The committee desires that the facility of repayable advance should also 
be  provided  to  subscribers  to  enable  them  to  meet  important  commitments.  For  this 
purpose, the subscribers may be allowed to take a repayable advance from their accounts, 
say after 10‐15 years of service.”  

The withdrawal facility defeats the purpose of having a strict lock-in to help investors save
for their sunset years.

Other recommendations 

The committee is also concerned about returns from NPS, particularly with respect to the
unorganized sector and has pointed out to the uneven performance of fund managers. The
returns published by PFRDA as on 31 March indicate that in the equity scheme of the Tier-I
structure, only two fund managers had outperformed its benchmark index, S&P CNX Nifty,
in the last one year. Even in the debt schemes—C and G—the returns varied between fund
managers. The committee has recommended that the pension regulator exercise stringent
monitoring and review the guidelines/instruction issued to the fund managers periodically
and strictly evaluate the performance with a view to ensure stability of returns to the
subscribers. The fund managers’ defence: volatility is a short-term phenomenon, while saving
for retirement is a long-term goal.

While  the  PFRDA  Bill  may  go  in  for  further  deliberations,  NPS  remains  a  good  investment 
vehicle for retirement savings if you are a conservative or a medium risk investor.  

ESTATE PLANNING 
An estate is the total of all personal and real property owned by an individual. Real property
is real estate and personal property is everything else such as cars, household items, shares,
units, and bank accounts.
Estate planning is a process of accumulating and disposing of an estate to maximise the goals
of the estate owner. Its core objective is also to distribute wealth in a pre-determined manner
to a certain beneficiary or beneficiaries to whomever the owner wishes. Most estate plans are
set up with the help of an attorney experienced in estate law.

Objectives of estate planning:  
 1. Asset transfer to beneficiaries: Every individual wishes that his/her accumulated
wealth should reach the hands of the beneficiary of his/her choice. Beneficiary can be
his/her children, parents, friends or any other person.
2. Tax-effective transfer: To ensure least tax deduction on such transfer of wealth
3. Planning in case of disabilities: It ensures smooth functioning of asset management
within the family in case an individual gets disabled.
4. Time of distribution can be pre-decided: Individuals having minor children may wish
to transfer the assets only after the children attain a certain age, to avoid misuse that
may happen due to lack of maturity and discretion.
5. Business succession: Organized succession or winding up can be defined in case of an
individual handling business
6. Selection of trustee or guardian or the executor: An individual needs to be appointed
to carry out the functions like:
o Distribution of assets to the beneficiaries as per the individual's wish
o To pay testamentary and funeral expenses
o Applying for a probate
o Paying all the expenses and outstanding debts
o Ensuring all the benefits due to the deceased, such as life insurance, pension,
and other benefits are received
o Arranging for filing of tax returns

Estate planning is an ongoing process and should be started as soon as one has any
measurable asset base. As life progresses and goals shift, the estate plan should move to be in
line with new goals. Lack of adequate estate planning can cause undue financial burdens to
loved ones, so at the very least a will should be set up even if the taxable estate is not large.

How to Start on Your Estate Planning

Here's a list of steps that gives an overview of the estate planning process:

• Make a list of all your assets and liabilities.

• Open a family discussion of who should be the guardian for your children.
• Check and update your current beneficiaries like life insurance
• Determine the distribution of your assets upon your death (family, charity, etc).
• Discuss your funeral arrangements with your spouse or family.
• Seek the assistance of an estate-planning attorney.

Tools of estate planning:

There are various tools that a financial planner can adopt for getting an estate plan in place.
Some tools are effective during the lifetime of an individual while some after his/her death.

The following figure shows the tools used for estate planning by transferring the assets to the
beneficiary, with or without restrictions, during the lifetime of an individual
The following figure shows the tools used for estate planning where the transfer of assets to
the beneficiary becomes effective after the death of an individual

LIFE INSURANCE AS ESTATE PLANNING TOOL 
Insurance  policies,  such  as  whole‐life  covers,  can  be  vital  assets  that  you  leave  behind  for 
legal heirs and/ or nominees. They represent a large corpus of funds that can be of immense 
use to your next  of kin/ nominee/ legal heir after you have passed on. Plus,  you have the 
feeling of contentment that comes from doing what is right for them.  

Whole‐life insurance plans provide insurance throughout your life or up to a specified pre‐
determined  age.  The  maximum  age  of  coverage  differs  from  insurer  to  insurer.  The 
maximum age of expiry for a whole‐life policy could be as late as your 99th birthday.  

The sum assured is paid out to the nominee on your expiry, Or to you, if you survive till the 
predetermined age. Whole‐life policy payouts include the sum assured (i.e. death benefit) as 
well as bonus accrued in the course of the policy tenure. The whole‐life policy works on the 
principle  that  you  are  not  entitled  to  any  payout  during  your  lifetime.  That  is,  there  is  no 
survival  benefit  to  the  policyholder.  It  represents  value  accrued  throughout  your  life, 
bequeathed to your legal heir/ nominee.  

But here’s a surprise! If you were to survive till the almost‐impossibly high predetermined 
age, congratulations, you have earned the right to keep the payout. In this event, consider 
the payout as a gift for the long life you have managed to lead. A very nice birthday present 
indeed. As an estate planning tool, the whole‐life policy is the best in the insurance stable.  

But, (and it is a big but) a whole‐life policy will work as an estate planning tool only if you 
keep  to  certain  conditions:  the  policy  you  choose  should  have  the  least  investment 
component  in  its  premium  break‐up.  This  should  be  easy  to  find  out.  Compare  whole‐life 
premiums across insurers. The insurer giving you the smallest premium quote for the same 
sum assured and tenure will have the least investment component.  

Remember, an insurance product is not an ideal investment vehicle. Returns from insurance 
plans rarely beat inflation, never mind positive year‐on‐year rates of return. Therefore, why 
would  you  want  to  pay  extra  premium  towards  something  that  is  going  to  be  a  bad 
investment  when  even  basic  investment  or  savings  avenues  such  as  the  public  provident 
fund (8 per cent annualised return, guaranteed by the Government of India) pay more.  

Buy the whole‐life policy that also has the longest term. Remember, you haven’t bought a 
whole‐life plan for your benefit ‐ it is primarily an estate for your heirs. The longer the term 
of the policy, the lower will be the premium, i.e. maximum benefit at the least cost. Also, 
buy the whole‐life policy that allows you limited premium payment facility.  

Insurers offer whole‐life plans that allow you to pay premiums for just the first 20 years of a 
50‐year  plan.  This  means,  you  have  sewn  up  payment  on  your  plan  during  your  working 
years,  but  remain  covered  long  after  you  have  retired.  Think  twice  before  purchasing  any 
asset  or  policy.  When  it  comes  to  the  insurance  component  of  your  estate,  your  focus 
should be on lending a helping hand to your legal heirs. At the end of a productive life, you 
can pass on in peace, secure in the thought that you have left your dear ones in financial 
comfort.  

WILL AS ESTATE PLANNING TOOL 
1. What is a ““Will””?
 
“WILL” signifies the wish, desire; choice etc of a person intended to take effect after his 
death. It is a legal declaration and the direction of and by a person of his intention with 
respect  to  matters  which  are  within  his  domain  and  which  are  within  his  disposing 
capacity to be carried out after his death. Once a person writes his wishes regarding his 
property  on  the  paper  and  puts  his  signature  and  is  witnessed  by  two  witnesses,  the 
document becomes his ““WILL””. 
2. Legal terms in a “Will”: 
       
Testator  A person making the “Will”
Legatee or Beneficiary  A  person  to  whom  assets  are  bequeathed 
under a “Will” 
Executor  A  person  appointed  by  the  Testator  to 
execute  the  “Will”  as  per  the  provisions  of 
the “Will” 
Legacy  A benefit under a “Will”
Codicil  A  document  which  modifies  or  alters  the 
contents  or  provisions  of  the  original 
“Will” 
Attestation  An  act  of  witnessing  the  execution  of  the 
“Will” 
Probate  A  copy  of  the  “Will”  certified  under  the 
seal  of  a  Court  of  competent  jurisdiction 
with  a  grant  of  administration  to  the 
estate. 
 
3. What are the advantages of making a ““Will””? 
 
a) There will be clarity amongst the successors as to who will receive what. 
b) Life is uncertain and a “Will” can make your last wishes come true. 
c) A “Will” reduces unpleasant succession disputes if the head of the family dies 
intestate. 
d) One can maintain secrecy till his lifetime. 
e) If  one doesn’t make a ”Will”, the Personal Law  will follow and the property 
will  be  distributed as  per  the  Personal Law. Thus  there  will be no scope for 
tax planning, charity, etc. 
 
 
4. Who can make a “Will”? 
Any person who attends the age of Majority and who is of sound mind can make a
“Will”.
Age: as per Indian Majority Act 1875, where a guardian of the minor’s property has
been appointed by a court of law, he will be deemed to be a minor till he is 21 years of
age and in all other cases up to 18 years of age a person is considered as a minor.
Soundness of mind: As far as soundness of the mind is concerned, no definition of
soundness is given .The test of soundness of mind is a workable test, neither
hypothetical nor impractical. Soundness of mind denotes the mental capacity of the
testator as to what he is doing, his capability of understanding his wealth and what he
is giving. However soundness of mind does not depend on the age.
If these two conditions are satisfied he /she can make the “Will”. 
 
5. What are the salient features of a ““Will””? 
  
The following are the salient features of a ““Will””: ‐ 
¾ It can be on a plain paper. No stamp paper is required for making a “Will”.
¾ Modifications and alterations (including revocation of “Will”) can be done for ‘N’
number of times. The last ““WILL”” made will prevail on all the earlier “Will’s.
¾ No other person is legally competent to interfere with it or to modify it in any mode or
manner.
¾ A “Will” must be signed by the person who is making it
¾ There must be at least two witnesses to the “Will”. The witness should not be the
beneficiary under that “Will” and he must be of sound mind and majority age.
¾ There isn’t any standard format for the “Will”, but since decades the format used in
England has been in vogue in India .The Language of the “Will” should be simple &
free from any ambiguity. It must contain all the details of the property and recipient of
the property.
¾ “Will” is such a unique document that comes into operation when the writer is no
more. Hence some precautions are necessary. For e.g. to prove that the testator is of
sound mind, it is advisable if the family doctor himself signs as witness to the “Will”.
¾ The “Will” should not be prepared under duress or under influence.
¾ Personal law also needs a consideration. For e.g., a Hindu must provide for
maintenance of his wife and children and a Muslim cannot go beyond his religious
law and can distribute only 1/3rd of his property as per his wish.
¾ This is a function that cannot be assigned or delegated to some body. Every person
has to sign his “Will”. He cannot make his legal representative sign or make a “Will”
on his behalf.
¾ In case of soldiers/ mariner/ person on death bed there can be oral “Will” but it is in
very special circumstances.

5. CHECK LIST /SUGGESTIONS: 

Following are some points one must check in the “Will”, otherwise it will create
chaos and problems afterwards or it may defeat the very purpose of the “Will”.
a) It must be signed by two (2) witnesses who are of the age of majority and
should not be the beneficiaries under that “Will”.
b) When you appoint a person as an Executor to the “Will”, before appointment
take his consent. Appoint more than one Executor and handover to each
Executor one sealed copy of the “Will”. In case you wish to have a Registered
“Will”, then inform it to the Executor where you have registered your “Will”.
c) Prepare the list of all Assets and Liabilities and mention them in the “Will”. In
addition to this, always have a residual clause in the “Will”.
d) Even though it is not compulsory, it is advisable to have the “Will” neatly
typed and drafted beyond ambiguity.
e) It must be revised every three (3) years, because in that span of the period,
many changes might take place like assets may increase/decrease, beneficiaries
may increase or decrease.
f) Whenever you want to change your “Will”, you can do so by making a codicil,
but it is better if you make a fresh “Will”. Don’t give the “Will” to the
beneficiaries to read because their attitude towards you may change. Let it be
suspense for the beneficiaries.
 g) It is advisable to make “will” for self and spouse separately. 
h)    A “Will” may be registered with the Sub‐Registrar of Assurances     office. 
Although  it  is  not  necessary  to  register  a  “Will”,  it  adds  protection,  validity 
and secrecy to the “Will”. 
Instead of registering a “Will” any of the following precautions may be taken 
• Give the “Will” to the Executor in a sealed envelope.
• You may have joint locker in the bank, and keep it there.
• Give it to your consultant or Chartered Accountant.
• Keep with any other trustworthy person.
• Give it to the main beneficiary. In that case the main feature of “Will”
i.e. “SECRECY” will be lost
 
6. The tax Impact 
™  Transfer of assets under a “Will” isn’t considered a transfer and hence 
is a tax‐neutral transaction 
™ However when the beneficiaries sell the inherited assets, it will attract 
tax based on his taxable income and the classification of the assts as a 
business/capital asset. 
™ Until  such  time  the  assets  are  transferred  to  the  beneficiaries,  the 
income from such assets will be assessed in the hands of the executor 
as representative taxpayer. 
™ Through ““Will”” trust of new HUF can be created which are separate 
taxable entities. 
TRUSTS AS AN ESTATE PLANNING TOOL 
In a Trust, a person transfers his property to another person i.e. the Trustee to hold it for the
benefit of certain beneficiaries or it can be for the benefit of beneficiaries and himself .By
adopting a Trust Route a person can avoid the issues which arise in a Will and make a ring
fenced structure to ensure that the person’s future generations are well protected through a
vehicle created by him and according to his directions.

Characteristics of Trust Structures are as follows:

a) Title to the Trust property gets transferred to the name of the Trustee.
b) The Trust property constitutes a separate fund and is not a part of Trustee’s
own estate.
a) The Trustee has the power and the duty, in respect of which he is accountable,
to manage, employ or dispose of the Trust property in accordance with the
terms of the trust and the special duties imposed upon him by law. There
exist a fiduciary relationship between Trustee and the beneficiaries and thus
the Trustee exercises a higher duty of care then a mere agent. The Trustee
shall hold the ownership of Trust properties for the benefit of another or for
another & the owner but never for the benefit of the owner alone. The owner
who settles the Trust can be one of the beneficiaries.
e) A Trustee’s ownership is not an absolute ownership as known to law (i.e.
trustee’s ownership is the legal ownership not the beneficial ownership)
Estate Planning by a Trust Structure

Creating a private trust can be an efficient mode of planning one’s Estate. Estate Planning by
a Trust structure can be explained by the diagram.

Benefits of Estate Planning by Creation of Trust Structures

By adopting the Trust Structure for planning one’s estate the following objectives can be
achieved:

• Estate Protection because a Trust is a bankruptcy remote structure.

• Self Beneficiary -The person who creates the Trust can himself be one of the beneficiaries
and enjoy the benefit of his own estate during his lifetime.
• Efficient Succession Planning by providing for children, grand children and great grand
children.
• Management of all types of assets through expert advisors.
• Accumulation of the Estate during the lifetime and post death through the hands of
Trustees.
• Avoidance of family disputes leading to disintegration of family businesses.
• Retaining confidentiality, as obtaining a Probate is not necessary.
• Causing efficient management of the Estate as a trust can be made operational during the
lifetime and post death of the Client.
• Providing for future administration of assets to protect against future incapacity and for
incapable beneficiaries.
• Making provisions for religious or charitable purposes.
• Lower Contestability as compared to a Will.

Conclusion for setting up the Trust

1. You execute a Trust Deed where you appoint a Trustee, name your beneficiaries and
specify how and when the properties of the Trust would be distributed to the
beneficiaries.

2. In a Trust, you transfer ownership of some or all of your assets (which can include
investments, real estate, bank accounts etc.) and even personal property (jewellery,
antiques or furniture) from your name to that of the Trust.

3. Transfer of ownership of assets to the Trust can be done at any-time after the creation
of the Trust either by the Settlor or any other person.

4. After you transfer the assets, you maintain the same access and control as you did
before you put them in the trust in case of a revocable Trust.

5. In case you create an irrevocable Trust then you can retain some control over the
assets in the Trust by either having the Trustee consult you or by appointing an
Administrator/ Protector who will be consulted by the Trustee.

You lose nothing, but gain the assurance that your wishes will be carried out if something
happens to you, without
the time or hassles of probate through the hands of competent and professional Trustees.
JOINT OWNERSHIP AND NOMINATION AS ESTATE PLANNING 
TOOL 

An  estate  can  have  joint  ownership,  ie,  there  can  be  more  than  one  owner,  allowing  one 
owner  to  have  access  to  the  estate  in  the  absence  of  the  other(s).  The  limitation  in  this 
approach is that all asset classes cannot be covered and that it should also take into account 
different  treatment  for  different  asset  types.  For  example,  the  bond/equity  share 
nomination has an overriding effect over the Will. 

Hence, nominees of a share have a clear title to the share irrespective of the intentions of 
the deceased recorded in a Will. On the other hand, nominee of a bank account is supposed 
to hold the money in a trust for the legal heirs and such legal heirs can claim the money. 

Similarly, in  the  case  of property, in the event of  the  death of a  member of a society, the 

shares of the deceased will be transferred to the nominee, who is merely a trustee for the 
deceased's estate. 

GIFTING AS AN ESTATE PLANNING TOOL 
Gifting is another way to affect a transfer of property if the control and possession of such a
property can be given away during one's lifetime. Gifting to certain relatives is tax-free.
Gifting to persons other than relatives is tax-free if gifted during marriage. However, if it
involves immoveable property, stamp duty implications need to be taken into account.

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