1 CREDIT RATING

Credit rating is an evaluation that reflects the probability of timely repayment of principal and
interest by a borrowing company, governmental or quasi-governmental body. A credit rating
agency collects qualitative as well as quantitative data of a company that is to be rated. This
includes information on financial data, financial projections, market position, management
and business environment. The data collected from various sources is used to analyse and
assess the company’s strength and ability to honour obligations contained in the debt
instrument throughout its duration.

1.1 FUNCTIONS OF CREDIT RATING

Typically, credit rating agencies have the following functions:

1. To Provide Unbiased and Low Cost Information:

A credit rating conducted by an independent, professional firm offers superior and

unbiased information. This rating enables investors and lenders to analyse the amount of
risk involved in investing or lending capital to the company. The credit rating company’s
expertise and access to information not publicly available enhances its ability to assess
risks involved.

2. To Provide The Basis for a Proper Risk-Return Tradeoff:

Debt securities that are rated professionally enjoy widespread investor acceptance and
confidence. This provides investors a more rational risk-return trade-off in the capital
market.

3. To Enforce Discipline on Corporate Borrowers:

Companies, which desire to have a clear image and high credit rating, strive to maintain
healthy management and trade practices.

1.2 TYPES OF CREDIT RATING

There are various types of credit rating. These include

 Bond Rating

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  Equity Rating
 Commercial Paper Rating
 Rating the Borrowers
 Sovereign Rating

Bond Rating: Rating the bonds/debt securities floated by a company, governmental or quasi-
governmental body is known as bond rating. Bond rating is a major business for credit rating
agencies.

Equity Rating: Equity rating refers to the rating of equity issued in the capital market.

Commercial Paper Rating: As per the rules laid down by the Reserve Bank of India, any
corporate body planning to issue commercial paper has to compulsorily get itself credit rated.
Commercial paper rating is undertaken to ascertain the probability of timely repayment by
the company.

Rating the Borrowers: This type of rating is carried out before a loan/credit facility is
sanctioned to a company.

Sovereign Rating: Sovereign rating is carried out to analyse credit worthiness, probability
risk etc. of a country.

1.3 REGULATORY REQUIREMENTS

In India, the following regulatory requirements have to be complied with, for the issue of
fully convertible debentures, partly convertible debentures and non-convertible debentures.

 It is compulsory for companies issuing debentures to get credit rated if the conversion
is to be made for fully convertible debentures after 18 months.
 In cases where the maturity period of Non-Convertible Debentures and Partly
Convertible Debentures exceeds a period of 18 months, a credit rating is compulsory.
 Before the roll over of a non-convertible portion of partly convertible debentures, a
fresh credit rating has to be obtained within a period of six months before the date of
redemption and the same is communicated to the debenture holders.
 Commercial paper and fixed deposits also have to be credit rated.

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1.4 ADVANTAGES OF CREDIT RATING

Credit rated instruments provide different benefits to different sections of people:

Benefits to the Investors

 Facilitates improved understanding to lestors

 Provides investors with an insight of risk involved in an investment
 Rating symbol of the issuing company helps an investor to analyse the credibility of
the company.

Benefits to the Company

 A company with a high credit rating is able to mobilise large amounts of fund.
 A high credit rating helps a company lower its cost of borrowing
 A high rating encourages companies to increase transparency of their financial status
to create better image with customers, lenders and creditors.

Brokers and Financial Intermediaries

 Brokers can convince clients to put money in investments with high credit rating.
 Financial intermediaries such as banks and other financial institutions can be assured
of their investment, before investing in a company.

1.5 DISADVANTAGES OF CREDIT RATING

 Rating of a particular instrument of a company is often taken as a certificate for

matching quality of the company and its management.
 A biased rating can have disastrous consequences on investors.

1.6 INDIAN CREDIT RATING AGENCIES

 CRISIL - Credit Rating and Information Service of India Limited

 CRA - Investment Information and Credit Rating Agency of India Limited

 CARE - Credit Analysis and Research Limited

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1.7 INTERNATIONAL CREDIT RATING AGENCIES

 Moody’s Investor Services

 Standard and Poors

2 MUTUAL FUNDS:

A mutual fund pools the savings of a number of investors, with the objective of investing
that money in capital market securities such as equity stocks, bonds, and debentures. The
returns on these investments are shared by the investors whose money has been pooled. A
mutual fund is considered to be the ideal investment option for the common person, allowing
him to invest in a diversified, professionally managed assortment of securities at a relatively
lower cost.
Mutual funds are supposed to be the best mode of investment in the capital market since they
are very cost beneficial and simple, and do not require an investor to figure out which
securities to invest into. A mutual fund could simply be described as a financial medium used
by a group of investors to increase their money with a predetermined investment.The
responsibility for investing the pooled money into specific investment channels lies with the
fund manager of said mutual fund. Therefore investment in a mutual fund means that the
investor has bought the shares of the mutual fund and has become a shareholder of that fund.

2.1 TYPES OF MUTUAL FUNDS:

There are different ways to categorize mutual funds. Perhaps one of the more useful is via the
investment type. The following are the types of mutual funds:

1. Stock Funds:

Stock funds offer high profit potential, but this potential comes at the price of high risk. As
you would imagine, a stock fund is made up of a diverse range of stocks and shares. These
are particularly popular with new investors who want to find a sensible way to invest in stock
market. Buying stock funds allows investors the opportunity to utilize a professional stock

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investor to invest their money for them. There are thousands of different options when it
comes to stock funds and this means more choice and decisions for the stock fund investor.

2. Index Funds And Actively Managed Funds:

Index funds consist of a good cross section of stock from one particular index. This means
there is little management involved and the performance of the fund is directly correlated
with the performance of the index. Actively Managed Funds are fairly self explanatory. The
investment manager is given the job of sourcing the most ideal stocks and shares to create a
versatile diversified portfolio that performs well.

3. Dynamic Funds:

There is another type of mutual funds we have yet to cover. Dynamic mutual funds are
passively managed funds that compete with the benchmark they set themselves. This
benchmark could, for example, stipulates that the fund needs to provide results equivalent to
200% of the daily performance of NASDAQ. The term passive can be slightly misleading
because the investment or portfolio manager still follows the performance of the portfolio and
acts according to the relative performance when compared to benchmark. However, he or she
does not study and select individual stocks based on individual merit.

4. Growth Versus Value:

Some funds have certain stipulations. For example, growth funds invest in companies that are
still in the start up stage. Profits are used to expand the interests of the business. While
dividends are rare with growth funds, the actual share price of the fund will increase rapidly.
On the other hand, value funds look for value in companies which are often overlooked.
Dividends are paid regularly by these companies.

5. Bond Funds:

Bond funds on the other hand are made of various government and organization bonds. These
are very low in risks but offer a steady stream of income over a long period of time. Bond
mutual funds offer excellent liquidity, professional money management and much more.

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There is hardly any danger of the fund becoming worthless. Similarly the chances for losing
money are also very less.

6. Money Market Funds:

Money market funds are overlooked when compared with the stock and bond funds,
however, they offer a lot to the investor for various reasons. Money market funds invest in
debt instruments and not only provide a very good return but are incredibly flexible.
Unusually, many money market funds provide investors with a checkbook, enabling them to
write out a check. The money comes directly from their investment. With returns equivalent
to double the interest rate offered by most banks, this is an excellent alternative to a savings
account.

7. Load Or No Load Fund:

There is some debate over whether loaded funds still have a place in the modern mutual funds
market. It is difficult to see a reason for investors to opt for loaded funds at all. When we talk
about the load in loaded funds we actually refer to the sales load or sales commission. This
commission is paid to the third party that sold the fund. The load can appear as a percentage
of the initial investment. An annual percentage or a percentage of the final total. Percentages
tend to be in the vicinity of 5% and bearing in mind that there are no load mutual funds with
identical results and strategies available a 5% commission are different, increased profit is
needed for a loaded fund to outperform a no load fund.

2.2 ADVANTAGES OF INVESTING IN MUTUAL FUNDS:

1. Professional Management:

Mutual funds give a small investor a chance to invest a low amount in a professional manner.
It is not feasible for small investments to be managed professionally, on an individual level,
because of low capital and low returns for the managing company. Once you decide on a
mutual fund to take care of your investment, all these charges can be avoided. You needn't be
an expert in trading or market analysis for making an investment. A professional fund

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manager make decisions on behalf of every small investor who put in money through the
firm, thus saving valuable time and effort.

2. Diversification:

A good investment practice involves diversifying the amount in different stocks or bonds. It
provides the option to hold a number of securities and reduce the risk of losing money, which
is not subject to the volatility of a single stock.

3. Lower transaction costs:

If you want to make an individual investment, it would involve a large transaction cost. On
the other hand, a mutual fund involves a large amount of capital to be traded. Therefore, it
bears a small transaction cost which eventually translates into a small transaction fee to be
paid by an investor.

4. Liquidity:

Units or shares in a mutual fund can be bought and sold any business day (that the market is
open), thus, providing investors with easy access to their money.

5. Convenience:

With most mutual funds, buying and selling shares, changing distribution options, and
obtaining information can be accomplished conveniently by telephone, by mail, or online.

6. Periodic Withdrawals:

If you want steady monthly income, many funds allow you to arrange for monthly fixed
checks to be sent to you, first by distributing some or all of the income and then, if necessary,
by dipping into your principal.

7. Dividend Options:

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You can receive all dividend payments in cash. Or you can have them reinvested in the fund
free of charge, in which case the dividends are automatically compounded. This can make a
significant contribution to your long-term investment results. With some funds you can elect
to have your dividends from income paid in cash and your capital gains distributions
reinvested.

8. Automatic Direct Deposit:

You can usually arrange to have regular, third-party payments -- such as Social Security or
pension checks -- deposited directly into your fund account. This puts your money to work
immediately, without waiting to clear your checking account, and it saves you from worrying
about checks being lost in the mail.

9. Recordkeeping Service:

With your own portfolio of stocks and bonds, you would have to do your own recordkeeping
of purchases, sales, dividends, interest, short-term and long-term gains and losses. Mutual
funds provide confirmation of your transactions and necessary tax forms to help you keep
track of your investments and tax reporting.

2.3 DISADVANTAGES:

1. Professional Management. Did you notice how we qualified the advantage of professional
management with the word "theoretically"? Many investors debate whether or not the so-
called professionals are any better than you or I at picking stocks. Management is by no
means infallible, and, even if the fund loses money, the manager still takes his/her cut

2. Costs. Fees for fund management services and various administrative and sales costs can
reduce the return on your investment. These are charged, in almost all cases, whether the fund
performs well or not.

3. Dilution. It's possible to have too much diversification. Because funds have small holdings
in so many different companies, high returns from a few investments often don't make much
difference on the overall return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager often has trouble
finding a good investment for all the new money.

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4. Taxes. When making decisions about your money, fund managers don't consider your
personal tax situation. For example, when a fund manager sells a security, a capital-gains tax
is triggered, which affects how profitable the individual is from the sale. It might have been
more advantageous for the individual to defer the capital gains liability.

2.4 LIST OF MUTUAL FUND COMPANIES IN INDIA:

Some of the popular firms that deal in mutual funds in India are:

 Reliance Mutual Funds

 HDFC
 ABN Amro
 AIG
 Bank of Baroda
 Canara Bank
 Birla Sun Life
 DSP Merrill Lynch
 DBS Chola Mandalam AMC
 Escorts Mutual
 Deutsche Bank
 ING
 HSBC
 ICICI Prudential
 LIC
 JP Morgan
 Kotak Mahindra
 Lotus India
 JM Financial
 Morgan Stanley
 State Bank of India (SBI)
 Sahara Mutual Funds
 Sundaram BNP Paribas
 Taurus Mutual Funds
 Tata

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  UTI

3 REFERENCES:

4. www.fundsupermart.co.in

5. www.amfiindia.com

6. en.wikipedia.org/wiki/Mutual_fund

7. en.wikipedia.org/wiki/Credit_rating

8. www.crisil.com

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