Professional Documents
Culture Documents
Project on :
Investment Banking
Guide:
Jayalaxmi Mam
Topics of Investment Banking:-
Introduction
Meaning
Overview
~Evolution of Investment Banking
~Its Mechanism (statement of investment banking)
Products/Services Offered
~Lists of explanation
~Special services
How these services server the purpose of clients?
Risks associated with investment banking?
~Types
~Explanation (example){problem impact}
How the risks are managed effectively?
~Why risks management?
~Ways (example){problem action}
Future Scenario
Conclusion
INTRODUCTION
The "buy side" constitutes the pension funds, mutual funds, hedge funds, and
the investing public who consume the products and services of the sell-side
in order to maximize their return on investment. Many firms have both buy
and sell side components.
Definition
Most small to medium sized companies do not have a large in-house staff,
and in a financial transaction may be at a disadvantage versus larger
competitors. A quality investment-banking firm can provide the services
An investment bank is split into the so-called Front Office, Middle Office
and Back Office. The individual activities are described below:
Front Office
Middle Office
• Risk Management involves analysing the market and credit risk that
traders are taking onto the balance sheet in conducting their daily
trades, and setting limits on the amount of capital that they are able to
trade in order to prevent 'bad' trades having a detrimental effect to a
desk overall. Another key Middle Office role is to ensure that the
above mentioned economic risks are captured accurately (as per
agreement of commercial terms with the counterparty) correctly (as
per standardised booking models in the most appropriate systems) and
on time (typically within 30 minutes of trade execution). In recent
years the risk of errors has become known as "operational risk" and
the assurance Middle Offices provide now include measures to
address this risk. When this assurance is not in place, market and
credit risk analysis can be unreliable and open to deliberate
manipulation.
Back Office
• Operations involve data-checking trades that have been conducted, ensuring that
they are not erroneous, and transacting the required transfers. While it provides
the greatest job security of the divisions within an investment bank, it is a critical
part of the bank that involves managing the financial information of the bank and
ensures efficient capital markets through the financial reporting function. The
staff in these areas are often highly qualified and need to understand in depth the
deals and transactions that occur across all the divisions of the bank.
Recent evolution of the business
New products
Investment banking is one of the most global industries and is hence
continuously challenged to respond to new developments and innovation in
the global financial markets. Throughout the history of investment banking,
many have theorized that all investment banking products and services
would be commoditized. New products with higher margins are constantly
invented and manufactured by bankers in hopes of winning over clients and
developing trading know-how in new markets. However, since these can
usually not be patented or copyrighted, they are very often copied quickly by
competing banks, pushing down trading margins.
For example, trading bonds and equities for customers is not a commodity
business but structuring and trading derivatives is highly profitable .Each
OTC contract has to be uniquely structured and could involve complex pay-
off and risk profiles. Listed option contracts are traded through major
exchanges, such as the CBOE, and are almost as commoditized as general
equity securities.
• Many investment banks also own retail brokerages. Also during the
1990s, some retail brokerages sold consumers securities which did not
meet their stated risk profile. This behavior may have led to
investment banking business or even sales of surplus shares during a
public offering to keep public perception of the stock favorable.
• Since investment banks engage heavily in trading for their own account, there is
always the temptation or possibility that they might engage in some form of front
running.
Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of
objectives, such as to acquire another company, reduce its debt load, expand
existing operations, or for specific project financing. Capital can include
some combination of debt, common equity, preferred equity, and hybrid
securities such as convertible debt or debt with warrants. Although many
people associate raising capital with public stock offerings, a great deal of
capital is actually raised through private placements with institutions,
specialized investment funds, and private individuals. The investment bank
will work with the client to structure the transaction to meet specific
objectives while being attractive to investors.
Deciding on the proper time to purchase a security that you would like to
add to your holdings can be a daunting task. If the price drops immediately
after you buy, it may seem as if you missed out on a better buying
opportunity. If the price jumps right before you make your move, you may
feel as if you paid too much. As it turns out, you should not let these small
fluctuations influence your decision too much. As long as the fundamentals
that led you to decide on the purchase have not changed, a few points in
either direction should not have a large impact on the long-term value of
your investment.
Similarly, the fact that an investment has been increasing in value of late is
not a sufficient reason for you to purchase it. Momentum can be very fickle,
and recent movement is not necessarily an indicator of future movement.
Therefore, buying decisions should be based on sound and thorough research
geared toward discerning the future value of a security relative to its current
price. This analysis will probably not touch upon price movement in the
very recent past. As you learn more about investing you'll get better at
deciding when to buy, but most experts recommend that beginners avoid
trying to time the market, and just get in as soon as they can and stay in for
the long haul.
The proper time to buy a security is quite simply when it is available for less
than its actual value. These undervalued securities are actually not as rare as
they sound. However, the problem is simply that they are never sure bets.
The value of a security includes estimates of the future performance of
factors underlying the value of the security. For stocks, these factors include
things like earnings growth and market share. Changes can be predicted to a
degree, but they are subject to fluctuation due to forces both within and
beyond the control of the company.
The overall economic climate, changes in the industry or even bad decisions
by management can all cause a security poised to ascend in value to become
an under performer. Therefore, it is essential to practice your analysis before
putting your money into action. Make some mock purchases based on your
personal analysis technique and track the results. Not all of your decisions
will lead to the results you were expecting, but if most of your choices turn
out to be good and there are mitigating factors that you can learn from to
explain your missteps, then you may be ready to put your analysis technique
and investing strategy into action.
At this point, the need to continuously monitor your investments does not
disappear. Both under performers and overachievers should be studied
carefully to fine-tune your strategy. You should also regularly look at your
securities to make sure that the fundamentals for success that led you to buy
in the first place are intact. If not, you may need to prepare to cash in and
start looking for the next opportunity.
Selling:
Investors often seek to sell investments that have dropped in value in the
short-term. However, if conditions have not changed significantly, drops in
price may actually represent an opportunity to buy at a better price. If the
initial research, which led to the purchase, was sound, a temporary decline
does not preclude the success that was originally predicted. Of course, things
change, and if the security no longer meets the criteria that led to its
purchase, selling may in fact be the best option.
Selling may also become necessary if investment goals change over time.
You may need to reduce the amount of risk in your portfolio or you may
have the opportunity to seek out greater returns. Additionally, a security may
have increased in value to the point that it is overvalued. This creates an
excellent opportunity to cash in and seek out new undervalued investments.
Often you will need to make this type of sale in the course of rebalancing a
portfolio necessitated by gains and losses in different areas.
When considering any sale, you must factor in the costs of the sale itself.
Fees and taxes will eat into profits, so they must be subtracted from any
increases in value to understand the true impact of the transaction. Capital
gains taxes are higher for gains on investments held less than one year, so
it's often wise to invest for the long term rather than to buy and sell quickly.
On the other hand, it can be dangerous to hold an investment longer than
you want to, simply to reduce the tax burden.
Principles of Investing
We say this not just to discourage procrastination, but because an early start
can make all the difference. In general, every six years you wait doubles the
required monthly savings to reach the same level of retirement income.
Another motivational statistic: If you contributed some amount each month
for the next nine years, and then nothing afterwards, or if you contributed
nothing for the first nine years, then contributed the same amount each
month for the next 41 years, you would have about the same amount.
Compounding is a beautiful thing.
2. Know Yourself
The right course of action depends on your current situation, your future
goals, and your personality. If you don't take a close look at these, and make
them explicit, you might be headed in the wrong direction.
• Goals: What are your financial goals? How much will you need to
achieve them? Are you on the right track?
• Risk Tolerance: How much risk are you willing and able to accept in
pursuit of your objectives? The appropriate level of risk is determined by
your personality, age, job security, health, net worth, amount of cash you
have to cover emergencies, and the length of your investing horizon.
Even though investing may be more fun than personal finance, it makes
more sense to get started on them in the reverse order. If you don't know
where the money goes each month, you shouldn't be thinking about
investing yet. Tracking your spending habits is the first step toward
improving them. If you're carrying debt at a high rate of interest (especially
credit card debt), you should unburden yourself before you begin investing.
If you don't know how much you save each month and how much you'll
need to save to reach your goals, there’s no way to know what investments
are right for you.
Now that you know your current situation, goals, and personality, you
should have a pretty good idea of what your long-term plan should be. It
should detail where the money will go: cars, houses, college, and retirement.
It should also detail where the money will come from. Hopefully the
numbers will be about the same.
Don't try to time the market. Get in and stay in. We don't know what
direction the next 10% move will be, but we do know what direction the
next100% move will be.
5. Buy Stocks
Now that you've got a long term view, you can more safely invest in 'riskier'
investments, which the market rewards (in general). This requires patience
and discipline, but it increases returns. This approach reduces the entire
universe of investment vehicles to two choices: stocks and stock mutual
funds. In the long run, they're the winners: In this century, stocks beat bonds
8 out of 9 decades, and they're well in the lead again. According to
Ibbotson's Stocks, Bonds, Bills and Inflation 1995 Yearbook, here are the
average annual returns from 1926 to 1994 (before inflation):
But is it really worth the additional risk just for a few percentage points? The
answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is
only 280%. Compounding is God's gift to long-term planners.
If you buy outstanding companies, and hold them through the market's
gyrations, you will be rewarded. If you aren't good at selecting stocks, select
some mutual funds. If you aren't good at selecting mutual funds, go with an
index fund (like the Vanguard S&P 500).
Always do your homework. The more you know, the better off you are. This
requires that you keep learning, and pay attention to events that might affect
you. Understand personal finance matters that could affect you (for example,
proposed tax changes). Understand how each of your investments fits in
with the rest of your portfolio and with your overall strategy. Understand the
risks associated with each investment. Gather unbiased, objective
information. Get a second opinion, a third opinion, etc. Be cautious when
evaluating the advice of anyone with a vested interest.
If you're going to invest in stocks, learn as much as you can about the
companies you’re considering. Understand before you invest. Research,
research, Read books. Consider joining an investment club or an
organization like the American Association of Individual Investors.
Experiment with various strategies before you put your own money on the
line. Examine historical data or participate in a stock market simulation. Try
a momentum portfolio, a technical analysis portfolio, a bottom fisher
portfolio, a dividend portfolio, a price/earnings growth portfolio, an intuition
portfolio, a mega trends portfolio, and any others you think of. In the process
you'll find out which ones work best for you. Learn from your own mistakes,
and learn from the mistakes of others.
If you don't have time for all this work consider mutual funds, especially
index funds.
The following personality traits will help you achieve financial success:
• Fear: If you are unwilling to take any risk, you will be stuck with
investments that barely beat inflation.
The do-it-yourself approach isn't for everyone. If you try it and it's not
working, or you're afraid to try it at all, or you just don't have the time or
desire, there's nothing wrong with seeking professional assistance.
If you want others to handle your financial affairs for you, you will
nevertheless want to remain involved to some degree, to make sure your
money is being spent wisely.
Initial Public Offerings (IPOs) are the first time a company sells its stock to
the public. Sometimes IPOs are associated with huge first-day gains; other
times, when the market is cold, they flop. It's often difficult for an individual
investor to realize the huge gains, since in most cases only institutional
investors have access to the stock at the offering price. By the time the
general public can trade the stock, most of its first-day gains have already
been made. However, a savvy and informed investor should still watch the
IPO market, because this is the first opportunity to buy these stocks.
In accordance with the Securities Act of 1933, the corporation will file a
registration statement with the Securities and Exchange Commission (SEC).
The registration statement must fully disclose all material information to the
SEC, including a description of the corporation, detailed financial
statements, biographical information on insiders, and the number of shares
owned by each insider. After filing, the corporation must wait for the SEC to
investigate the registration statement and approve of the full disclosure.
During this period while the SEC investigates the corporation's filings, the
underwriter will try to increase demand for the corporation's stock. Many
investment banks will print "tombstone" advertisements that offer "bare-
bones" information to prospective investors. The underwriter will also issue
a preliminary prospectus, or "red herring", to potential investors. These red
herrings include much of the information contained in the registration
statement, but are incomplete and subject to change. An official summary of
the corporation, or prospectus, must be issued either before or along with the
actual stock offering.
After the SEC approves of the corporation's full disclosure, the corporation
and the underwriter decide on the price and date of the IPO; the IPO is then
conducted on the determined date. IPO’s are sometimes postponed or even
withdrawn in poor market conditions.
Performance
The aftermarket performance of an IPO is how the stock price behaves after
the day of its offering on the secondary market (such as the NYSE or the
NASDAQ). Investors can use this information to judge the likelihood that an
IPO in a specific industry or from a specific lead underwriter will perform
well in the days (or months) following its offering. The first-day gains of
some IPO’s have made investors all too aware of the money to be had in IPO
investing. Unfortunately, for the small individual investor, realizing those
much-publicized gains is nearly impossible. The crux of the problem is that
individual investors are just too small to get in on the IPO market before the
jump. Those large first-day returns are made over the offering price of the
stock, at which only large, institutional investors can buy in. The system is
one of reciprocal back scratching, in which the underwriters offer the shares
first to the clients who have brought them the most business recently. By the
time the average investor gets his hands on a hot IPO, it's on the secondary
market, and the stock's price has already shot up.
SEBI Guidelines
Objectives:
The SEBI has been entrusted with both the regulatory and
development function. The objectives of SEBI are as follows:
a) Investor protection, so that there is a steady flow of savings into
the Capital Markets.
b) Ensuring the fair practices by the issuers of securities, namely,
companies so that they can raise resources at least cost.
c) Promotion of efficient services by brokers, merchant bankers
and others intermediaries so that they become competitive and
professional.
SEBI POWERS
The SEBI powers on stock exchanges and their member brokers and sub
brokers were exercised under SEBI (stock brokers and sub brokers)
Regulations of October 23 1992. These relate to registration, licensing, code
of conduct, and inspection of books accounts, etc. These powers were
exercised under Section 12 of SEBI Act.
SEBI was delegated more powers of administration of SC (R)
Act in respect of many provisions including recognition of stocks exchanges
(Sec.3, 4&5) and control and regulation of stocks exchanges under Sections
7, 13, 18, 22 and 28 etc., These were concurrent powers wielded by both
Government and SEBI, effective from September1993.
Venture capital funds like mutual funds were brought under the
control of SEBI. Earlier to that, the SEBI has started licensing and
regulations the underwriters, debenture trustees, collecting bankers, and all
intermediaries in the capital market.
SEBI has got all the needed powers to regulate the Capital
Market including all affairs of listed Companies, Venture Funds,
MMMFs, etc. Already it has been regulating the foreign agencies or a
body operating in the capital market and it has announced guidelines
for all players in markets, including a code of conduct.
Institutional Agencies:
All the FIIs together can invest upto 24-30% of the company’s
paid up capital, of which a limit of 50% is allowed to foreign
individuals and corporates investing in India through FIIs; this limit of
30% was raised to 40% by the Central Budget for 2000-01.
The SEBI has also allowed the domestic Mutual Funds to invest in foreign
listed securities and to manage foreign portfolios. According to some
amendments to Mutual Fund regulations of SEBI, the Mutual Funds
are required to send a complete statement of their portfolios to all unit
holders within one month from the close of each half-year. In order to
deter mutual funds from delay in despatch of redemption warrants,
SEBI has directed mutual funds to provide for payment of interest to
the unit holders on this delayed payment, wherever applicable.
Legal Framework:
In the legal field, the securities Laws, 1999 was passed by the
Parliament in December 1999. This has incorporated the derivative
instruments in the definition of securities under Securities Contract
Regulation Act, 1956, as also the units of Collective Investments
Schemes, with a view to facilitating their transaction and regulation.
The new Act provided for transfer of Appellate functions under the
securities Laws Securities Appellate Tribunal (SAT). The stamp duty
payable on derivative transactions those in demat Form was
withdrawn by necessary legal changes. Banks now accept the
ownership pf securities in Demat Form.
Negotiated Deals:
The SEBI has also directed the companies listed, to reduce the No-
delivery period to one week in the case of Demat shares. A committee
was set up to streamline the existing risk containment measures
namely the margin system and simplify it.
SEBI’s Record:
The SEBI has set a creditable record of regulation for the
growth of a healthy Capital Market during the period of 1995-2000. In
the year 2000, it has set for itself the tasks of speeding up the
following measures.
Venture Projects:
Indian Position:
Private Agencies:
One Venture Capital fund set up the private sector in India is
Credit Capital Venture Capital (India) or CVF for the short, the principal
shareholders of which are Credit Capital Finance Corporation, Bank of
India, Asian Development Bank, and CommonWealth Development
Corporation. Another set up in the private sector jointly by the ICICI 20th
Century Finance Corporation, bank of Baroda, Asian development Bank and
Asian Finance and investment Corporation is the 20th Century Venture
Capital Corporation Ltd. One reason why private capitalists are generally
shy may be the high rate of capital gains tax applicable to the profit of
Venture Capital Funds. Though the guidelines provide for a concessional
rate of capital gains tax, the move can hardly be deemed as a ‘concession’ in
view of the enormous risks involved in the activity.
Policy Initiatives:
Difficulties in India:
Tax Treatment:
The tax treatment of the venture capital funds in India is
ungenerous and falls well short of what is required. Whereas the Mutual
Funds established by the government controlled financial institutions and
nationalised commercial bank suffer no tax on either income or capital
gains, a venture capital fund would suffer at 20 per cent on dividend income
and a similar rate on long-term capital gains. Given an adequate investment
spread and tax incentives, mutual funds step into the early stage financing
arena, professionally assess and the monitor investments assist the launch of
new medium size businesses. SBI Mutual Fund is really undertaking
investment work with its ‘brought deals’. The creation of more funds to
participate in this area of the market is now clearly seen. Early stage
financings could then be syndicated between number of professionally
managed funds and sound, competitive situation between them might also be
created.
In the matters of tax, venture capital funds and mutual fund are
kept on par. Foreign Venture funds are given a free hand tom flow in for the
investments permitted for foreign investment. During the first quarter of
2000, about $17 billon have flowed in as Venture Funds mostly invested in
the technology based small companies, according to a Survey Conducted by
price waterhouse coopers (PWC) Company.
Merchant banking
Issue Management
(a) To finalize the terms of the issue which will make the debenture issue
attractive; and
(b) To assist in the finalisation of the relative security or mortgage
documents and obtaining approval there to from the Company's solicitors
and trustees
Other Functions
Offer of Sale
Usually, when the closely-held companies, whose shares are not listed
on the stock exchange, approach the financial institutions for assistance for
the expansion of their existing operations or diversification, the financial
institutions stipulate a condition that the company should get its shares
listed. Where the capital base of the company is already large and issuing
further equity capital is not justified from the servicing angle, the promoters
can offer such part of their exist holding for sale through a letter of offer to
the members of the public as Is necessary to get the equity shares of the
company listed on the stock exchange. Although the letter of offer is not
governed by the provisions of the Companies Act, 1956, in practice, the
letter of offer contains all the similar provisions which are to be found in the
prospectus.
The offer for sale must give all material particulars relating to the
company as if it were a prospectus issued under the Companies Act. In
particular, it should include information regarding the shares on offer and
the terms of sale, its capital structure, and capitalisation of reserves, any
revaluation of assets or schemes of arrangements or reorganizations, last five
years' profit and loss account summarised accordance with the prescribed
listing requirements.
Any document by which the offer for sale to the public is made shall, for
all purposes, be deemed to be a prospectus issued by the company and all
enactments and rules of law as to the contents of prospectuses and as to the
liabilities in respect of statement’s or omissions from prospectuses otherwise
relating to the prospectus, shall apply as if the shares or debentures had
been offered to the public for subscription and as if the persons accepting the
offer in respects of any shares or debentures were subscribers for those
shares or debentures.
The said letter of offer will have to be signed by the persons offering the
shares or debentures for sale in the same manner as the directors of the
company sign the prospectus in terms of Section 60 of the Companies Act.
The offers collectively and individually accept full responsibility for the
accuracy of the information given in this offer of sale and confirm that to the
best of their knowledge and belief there are no other facts, the commission
of which makes any statement in the offer for sale misleading, and they
further confirm that they have made all reasonable inquiries to ascertain such
facts.
The offers have to certify that neither the stock exchange to which an
application for official quotation is made nor the Central Government or
SEBI has any responsibility for the financial soundness of this offer, or for
the price at which the offer of sale is made, or for the statements made or
opinions expressed in the offer of sale.
The initial issues should normally be at par and if further issues are made
at a premium, this has to be justified by acceptable norms by the merchant
bankers.
Private Placement
When the financial institutions directly subscribes to the
equity/preference shares and/or debentures issued by the company, the
company is said to have privately placed these securities with the financial
institutions. This does not require either a prospectus or letter of offer. The
terms and conditions subject to which the financial institutions agree to
subscribe to the privately placed shares or debentures are usually
incorporated in the debenture subscription agreement or the investment
agreement entered into between the financial institutions and the company.
The company has to agree upon the list of persons to whom the offer is to
be sent much in advance and its is thereafter necessary that the company
should send offers to the same persons as per the list approved by the
Company with a clear-cut instructions to the officers that the securities
offered are strictly to be subscribed for by them and them alone and the
officers are not supposed to pass on the offer of the company to someone
else. He would also ensure that the company would receive subscription
only from those persons to whom the original offers had been sent by the
company and finally, the company would allot securities to the same
persons.
Functions
Underwriting
The type of staff required for a merchant bank will depend upon its
functions which are themselves flexible. The merchant bank should
have an organisation large enough to deal with a number of
applications at a time. The issue house which acts as the merchant
banker normally pays visits to the company's plant, warehouses, and
other physical assets and if a company is making its first issue, it
might secure independent reports from Chartered Accountants,
industrial consultants, technical experts etc. The issue house, which is
a merchant bank also, requires, plant, management, labour,
competitors, profit margins, taxations, etc. They have to keep ready all
the information needed in the form of dossiers with respect to the
affairs of the company generally enquired into by the investing public,
lending financial institutions and the government.
(a) Authorisation
(i) All Merchant bankers shall have a minimum net worth of Rs.5
crore.
(ii) The Authorisation will be for an initial period of 3 years.
(iii) All issues should be managed by at least one authorised to
Merchant banker functioning as the Lead Manager or sole
Manager.
(xi) SEBI shall be informed well before the opening of the issue the
Inter allocation of activities/sub-activities, among lead managers to
the issue.
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Category Requirement
Authorised to Act as
(1) (2) (3)
-----------------------------------------------------------------------------
------------------------------------------
Category 1 Minimum Net worth Rs.50 crore Lead
Manager/co.manager
Adviser/cons
ultant to an issue,
Portfolio
manager and
underwriter
to an issue is
Mandatory
required.
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(f) Grading of Prospectus
Points
Category
Less than 4
C
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I General Defaults 1
II Minor Defaults 2
IV Serious Defaults 4
INVESTOR PROTECTION
Introduction
Grievances Cell
Investors Beware
Investors in stock and capital market need a word of caution.
Firstly, these investments are more risky, returns are uncertain and
share values are subjected to wide fluctuations. Secondly, such
investments require an art and expertise to pick up the right stocks,
failing which the investors would burn their fingers. Thirdly, the
players in the market namely, Brokers and issuers of securities,
companies’ etc are not rated high for their honesty with the result that
the investor’s complaints against stock brokers and companies have
been increasing over the years.
Specific Goals
The investor should be clear in the objectives of the income, capital appreciation,
short term gains or long term gains etc. He should have made already enough investments in
housing and for a regular income to meet his minimum needs and comforts of life. Even if
all the stock market investments are wiped out due to a market crash, the investor should not
be pauper on the streets. Besides, if the investor spends sleepless nights on the fall of share
prices, he cannot be a good stock market investor.
Pre-requisites of Investor
The investor should have abundant common sense and a strong heart to withstand
the vicissitudes of fortune. He need not be a holder of high academic degrees like an MBA
from Harvard or a finance graduation from the Wharton School. Nor does he need to have
hereditary characteristics or family tradition of investment. The only requirement he should
have is abundant logic and common sense and strong nerves and develops the art of
investment on a scientific basis.
Preparing to Invest
Investors desiring to invest in stocks require a lot of preparation. The weak hearted and
risk -averter should first make an entry by buying only debentures, particularly convertible
debentures of good companies, or subscribe to new issues of promising and well-established
companies. After sufficient study and preparation, the investor should act like stag-pickers
in the market, picking up scripts on a selective basis. That means selected companies from
promising and growing industries should be picked up after collection of all relevant
information and data on the companies and scientific analysis of their fundamentals. The
undervalued scripts should be purchased at the right time with the help of technical analysis.
Rumors and advices: of so-called consultants have to be carefully scrutinized. As the market
investment is both a science and an art, it requires both expertise and intuition. There is
need for prior preparation and a lot of home works before investments are undertaken. A
high degree of caution and planning is necessary but the scientific basis and knowledge are
to be acquired by a proper study.
Choice of a Broker
All NBFCs been registered and licensed by the RBI since July
1997 and guidelines for them have been issued by the RBI early in 1998.
The raising of deposits by them is subject to credit rating and a host of other
requirements.
Guidelines to Investors
Portfolio Manager:
According to SEBI, ‘Portfolio Manager’ means any person who
pursuant to contract or arrangements with a clients, advices or directs or
undertakes on behalf of the clients the management or administration of a
portfolio of securities or the funds of client, as the case may be
Discretionary Portfolio Manager:
According to SEBI, ‘discretionary portfolio manager’ means a
portfolio manager who exercises or may, under a contract relating to
portfolio management, exercises any degree of discretion as to the
investments or management of the portfolio of securities or the funds of
the clients, as the case may be.
FUNCTIONS
The objective of portfolio management is to develop a portfolio
that has maximum return at whatever level of risk the investor deems
appropriate.
Risk Diversification
Efficient Portfolio:
Asset allocation
Beta Estimation
Rebalancing Portfolios:
STRATEGIES
A Portfolio manager may adopt any of the following strategies as
part of an efficient management:
Under the ‘buy and hold’ strategy, the portfolio manager builds a
portfolio of stock, which is not disturbed at all for a long period of time.
This practice is common in case of perpetual securities such as common
stock.
Indexing
Laddered Portfolio
Under the laddered portfolio, bonds are selected in such a way that their
maturities are spread uniformly over a long period of time. This way a
portfolio manager aims at distributing the funds throughout the yield
curve.
Barbell Portfolio
Conformance to Requirements
Any application, which is not complete in all respects and does not
conform to the instructions specified in the form, shall be rejected by the
Board. Before rejecting any such application, the applicant shall be given
an opportunity to remove within the time specified such objectives as
may be indicated by the Board.
Consideration of Application
For the consideration the grant of certificate of registration to the
applicant, the Board takes into account all matters, which it deems
relevant to activities relating to the activities to portfolio management.
The Board considers the following in this regard: