Chapter 6: Investment Products &

Services
Contents
 Derivatives
 Mutual Funds
 Venture Capital / Private Equity Funds
 Hedge Funds
 Structured Products
 Portfolio Management Services (PMS)

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Derivatives
o Derivatives are contracts that
represent financial exposure to
an underlying security or index
or parameter.

o A benefit of derivative is the

leveraging. For the same
outgo, it is possible to have a
much higher exposure in the
derivative market, than in the
underlying cash market.

o Futures and options are two

commonly traded derivatives.

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Derivative Instruments
Derivative
Transactions

Cash / Spot Derivative

Forward Futures Options Swaps

Interest Rate
Call Option Swap

Put Option Currency

Swap

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Positions taken in a Contract
Positions taken in the market can be
long or short.

o In a long position, the investor buys

the investment, with the hope that it
will rise in value. When it rises, the
investor can sell and book a profit.

o In a short position, the investor sells

the investment, with the expectation
that it will fall in value. When it falls,
the investor will buy back the
investment and book a profit.

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Positions taken in a Contract

Short Long
Position Position

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Pay-off
The pay-off in any security is symmetric.

o When price of the security goes up, the party that is long on the
security will benefit; the counter party (which will be short on the
security) will lose.

o The position is reversed when the price of the security goes down.

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Margins
Margining systems applied by the
exchange / settlement house ensure
the solvency of the market.

o Even if a market participant

defaults on his obligations, the
margins collected from him help
the settlement house ensure that
the counter-party is not affected
by the default.

o This boosts the confidence of

participants in the market.

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Margins

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Futures
o A futures contract is a
contractual agreement,
generally made on the trading
floor of a futures exchange, to
buy or sell a particular
commodity or financial
instrument at a pre-determined
price in the future.

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Futures Pay-off
The payoff in a futures contract therefore is symmetric like that of the
underlying.

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 Options
o An options contract is an agreement between a buyer and seller that
gives the purchaser of the option the right to buy or sell a particular
asset at a later date at an agreed upon price.

o In case of options, only the seller of the option (the option writer) is
under an obligation; not the buyer of the option (the option purchaser).

o There are two types of options-

i. Call options
ii. Put options

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Options
In a call option, the buyer of the option has the right to buy the
underlying, while in a put option, the buyer of the option has the right to
sell the underlying.

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Mutual Funds
o A mutual fund is a professionally managed
investment fund that pools money from
Deb
many investors to purchase securities. Equit t
y
o Mutual Funds offer schemes that invest as Gol
per their investment objective. Investors d

invest in schemes that are in line with their

financial goals.
Mutual
o According to the time of closure schemes, Funds
Mutual Funds can be classified as follows:
i. Open ended schemes
One stop shop
ii. Closed ended schemes investment
for
product
s.
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Types of Mutual Fund

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Mutual Funds on the basis of Nature
Equity Funds: Equity Funds invest
money in equity i.e. Shares/ Mid-cap funds
Stocks, Rights, Warrants etc. Small-cap funds
Equity funds invest money in
companies across sectors & Diversified funds
market capitalization.
Sector specific funds
Suitability -: Equity Funds are Index funds
suitable for investors with an
appetite & tolerance for high risk & Type of Tax-saving funds
looking for better real rate of return. Equity Arbitrage funds
Funds

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Mutual Funds on the basis of Nature
Debt Funds: Debt funds invest Liquid Funds
money in Government Securities, Ultra Short Term Funds
Corporate bonds, Debentures & all
kind of different Fixed Income Dynamic Bond Funds
instruments. Short Term Bond Funds

Long Term Bond Funds

Suitability -: Debt Funds are
Income Funds (diversified
suitable for investors who are risk debt funds)
averse & do not mind Gilt Funds
Type
compromising on real returns &
of Fixed Maturity Plans (FMPs)
generally have near or short term
Debt
financial goals. Gold Funds / ETFs
Funds

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Mutual Funds on the basis of Nature
Hybrid Funds: Hybrid Funds invest
in multiple asset classes which Balanced
could invest in Equity, Debt or even Funds
Gold. They are mandated to invest
certain portion of their AUM in the MIPs
respective asset classes. (Monthly
Income
Suitability -: Hybrid funds can be Plans)
Capital
suitable for investors who want to Protection
tactically allocate their assets; but Type of Schemes
the selection therein should be Hybrid
done as per their risk appetite and Funds Savings
tolerance. Funds

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Mutual Funds Statistics
Indian Mutual Fund Industry - Key Statistics
Indian Population 132 Crs Approx
No of AMCs in MF industry 39 Exactly
No of schemes in MF industry More than 2000 Approx

No of ARN Holders (individual + corporates) 145000 Approx

AUM of the MF industry (all AMCs) 21.27 lakh crore As on 31 Dec 2017

Average AUM of the MF industry (all AMCs) 22.60 lakh crore As on 31 Dec 2017

No of folios in MF industry 6.65 Crores As on 31 Dec 2017

No of active SIPs in India 1.88 Crore Approx
Ticket size of SIPs in India 3300/- per month

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Venture Capital Funds
o Venture capital funds are
investment funds that manage money
from investors seeking private equity
stakes in startup and small and medium-
size enterprises with strong growth
potential.
o Venture capital funds invest at an earlier
stage in the investee companies life than
the private equity funds.
o These investments are generally
characterized as high-risk/high-return
opportunities. They take a higher level of
project risk and have a longer investment
horizon (3 – 5 years).

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Private Equity funds
o Private equity is equity capital that is not
quoted on a public exchange i.e. it consists of
investors and funds that
make investments directly
into private companies or conduct buyouts of
public companies that result in a delisting of
public equity.
o Private equity funds typically have a shorter
investment horizon of 1 – 3 years
o While their focus is on unlisted companies,
they do invest in listed companies too. Such
deals, called Private Investment in Public
Equity (PIPE) are increasing in India.

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Private Equity & Venture funds -
Regulations
o Venture capital funds and private equity funds do not operate under
the kind of strict guidelines that are applicable to mutual funds.

o Therefore, these funds have greater freedom in their investments and

operations; investors (unit-holders) in these funds have greater
responsibility to protect their interests.

o This is quite unlike mutual funds, where SEBI has made the trustees
responsible for protecting investors’ interests.

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Private Equity vs Venture Capital
Parameters Private Equity (PE) Venture Capital (VC)
VCs invest mostly in early stage
Stage PE Firms buy mature Companies
Companies

PE Firms buy Companies across VCs are focussed on technology, bio-

Company Types
all industries tech and clean-tech Companies

PE Firms often almost buy 100% VC only acquire a minority stake

Percentage Acquired
of the Companies which is less than 50%
Investment Size $100 million to $10billion Below $10 million

Structure Combination of equity and debt Use only Equity

Depends on the inherent risk of Many failures, some solid returns, a

Return on Investment
particular firm and industry few spectacular successes

Time Horizon 1-3 years 3-5 years

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Hedge funds
A hedge fund is an investment fund that pools capital from
a limited number of accredited individual or institutional
investors and invests in a variety of assets, often with
complex portfolio construction and risk management
techniques.

It is mostly aimed at large investors.

They operate with high fee structures, and are less closely
monitored by the regulatory authorities.

Hedge Funds Portfolio Risk Reliable

Provide Diversification Management Returns

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Structured Products
o A structured product, also known as a
market-linked investment, is a pre-
packaged investment strategy based on
derivatives, such as a single security, a
basket of securities, options, indices,
commodities, debt issuance and/or
foreign currencies, and to a lesser extent,
swaps.
o The product is meant for those investors
who want equity returns but also safety of
debt .
o As per SEBI rules , minimum ticket size
for investing in any structured product is
Rs.25 lakhs.

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Structured Products - Characteristics

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Risk involved in Structured Products
Composition of Basic Structured Product

Basic Derivative Composition

Financial of Basic
Instrument e.g. – Call Structured
e.g. - Bond Option Product

The following risks are associated with structured products:

Marked to
Model risk market risk Issuer risk Liquidity risk Transparency
before risk
maturity

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Portfolio Management Services (PMS)
o Portfolio management services are
meant for high net worth individuals or
institutions who want a
personalized management of their
finances. As per SEBI rules , minimum
ticket size for investing in any PMS is
Rs.25 lakhs.
o A team of expert professionals conduct
extensive research on markets to
provide a customized solution to achieve
unique investment objectives. So, here
the portfolio is unique to a customer
unlike in a mutual fund which has a
common portfolio for all customers.

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Portfolio Management Services (PMS)
o The cost structure for PMS, can be quite high. Besides a percentage
on the assets under management (AUM), the investor may also have
to share a part of the gains on the PMS portfolio; the losses are
however borne entirely by the investor.
o Variants of PMS structure exist. In some cases the PMS provider has
the discretion to decide on investments. In other cases, approval of
the client has to be taken for each investment.
o PMS are regulated by SEBI, under the SEBI (Portfolio Managers)
Regulations, 1993. However, since this investment avenue is meant
only for the larger investors, the mutual fund type of rigorous
standards of disclosure and transparency are not applicable.
o Investors have to take up a major share of the responsibility to protect
their interests.

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Features of PMS

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Thank
You

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DISCLAIMER
The following presentation is for educational purpose only. All symbols and investment/ trading ideas
discussed by instructors are for demonstration purposes only and are not recommendations to buy or
sell into any asset class.

This information may demonstrate certain hypothetical trading strategies with the use of software(s).
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