Professional Documents
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FINANCIAL MARKETS
A financial market is an organized trading platform for exchanging financial instruments under a regulated
framework[1]. The participants of the financial markets are borrowers (issuers of financial instruments or
securities), lenders (investors or buyers of financial instruments) and financial intermediaries that facilitate
investment in financial instruments or securities. The financial markets comprise two markets[2] – (A)
Money markets, which are regulated by the Reserve Bank of India (RBI) and (B) Capital markets, which
are regulated by the Securities Exchange Board of India (SEBI) and.
Financial Markets
Money markets is “… the collective name given to the various firms and institutions that deal in the
various grades in near money”[3]. The definition implies that the money market caters to short-term
demand and supply of funds. The major participants of the money market are as follows:
Lenders: Lenders include the regulator RBI, commercial banks and brokers. These participants facilitate
the expansion or contraction of money in the market
Borrowers: Borrowers include commercial banks, stock brokers, other financial institutions, businesses
houses and governments provide financial instruments to other investors depending upon the money
borrowed from lenders
Accordingly, the characteristics of money market include the following:
1. Short-term – The instruments in the money market have maturities mostly less than a year and
cater to short-term demand and supply of funds.
2. Highly liquid – The money market is considered highly liquid wherein securities (financial
instruments) are purchased and sold in large denominations to reduce transaction costs[4] (because
they are a close substitute to cash)[5]. The market distributes and redistributes cash balances in
accordance to the liquidity needs of the participants
3. Safe – The instruments are considered safe with RBI playing a pivotal role in monitoring regulating
and managing monetary requirements of all participants.
4. Lower returns – The transactions are on a same-day-basis and the returns on these investments
accordingly, are low.
5. Institutional investors – Retail or individuals investors cannot directly participate in money markets.
The money market mainly caters to institutional investors who require instant cash for running their
operations in the financial system. However, retail or individual investors indirectly participate in
money markets by lending money to institutions (large corporations and government) through bonds
to gain high returns.
6. Monetary policy – The money markets are governed and influenced by changes in the monetary
policy. For example, changes in interest rates announced by RBI play a critical role in determining
liquidity requirements in the overall financial system
7. Interrelated sub-markets – The money market consists of the following interrelated markets[6]:
1. Call money market
2. Commercial bill or ‘Bill’ market
3. Treasury bill market
4. Commercial Paper (CP) market
5. Certificates of Deposits (CD) market
Each and every abovementioned sub-market is characterised with different money market instruments
with different maturities offered in mostly different trading platforms and cater to different borrowers/
lenders with the objective of maintaining different liquidity requirements. For example, in the call
money market, banks borrow call money / notice money from other banks and non-banks to maintain
CRR[7]requirements[8]. The exchange occurs in Over-the-Counter (OTC) market (without brokers) and
the maturity period of call money instruments vary between one day and a fortnight.
(B) Capital Markets
Capital market is an organized mechanism for effective and smooth transfer of long-term capital money or
financial resources from borrowers (corporates / government) to lenders. This market enables
channelizing of savings from investors to raise productive capital for borrowers, which in turn provides
higher returns to investors for their investments through relevant profits.
The securities or issues or instruments in capital markets include equity and debt securities. Capital
markets (equity and corporate debt) in India are predominantly regulated by the SEBI[9]. However,
government securities (in the debt market) are regulated by the RBI. Based on the aforementioned
description, following are some characteristics identified for the capital markets:
1. Primary and secondary securities – To raise productive capital, lenders issue and/or trade financial
securities (instruments) through primary and secondary markets. Primary markets deal with issuance
of new capital (or financial securities), whereas the secondary market (or stock market) deals with
buying and selling of already existing securities that are listed on the stock exchanges[10]. Primary
and secondary markets are inter-dependent and important for creation of long-term funds in the
capital markets. For the new issues or securities introduced and sold by the lenders in the primary
markets, the proceeds of the same go directly to the lenders (to raise capital). These proceeds are
however, dependent upon favourable macroeconomic conditions of an economy. Subsequently,
these issues are traded in the secondary market (or stock exchanges) that also provide the basis for
determining possible prices of primary issues. Thus, depth and performance of the secondary
markets depends upon the new issues / securities in the primary markets because the larger number
of new securities issued in primary markets lead to availability of larger number of instruments for
trading in secondary markets. Thus, the primary markets facilitate liquidity in the secondary markets
further leading capital formation. The secondary market can also divert funds to the primary market
for new issues of large size and bunching of large issues also affecting the stock prices. Lenders can
raise its capital in primary markets either through any of the following – public issue, rights issue,
bonus issue and private placement (Private placement is securities to sold to few select investors like
large banks, insurance companies, mutual fund companies, etc). The interrelationship between
primary and secondary markets lead to provision of long-term securities to raise capital.
2. Risk-returns – Capital markets are characterised with equity and debt instruments that allow
diversification of risks between high-risk equity instruments and low-risk debt instruments.
Nevertheless, capital markets are considered as high-risk markets in comparison to money markets.
3. Low-information and transaction costs[11] – The capital markets are mostly transparent and
information about the trends in the market is available and accessible in comparison to money
markets. Also, due to ease in availability and accessibility of long-term securities, transaction costs
are comparatively lower than money markets. For example, retail investors can invest in stock
markets through a dematerialised account provided by banks.
4. Retail & institutional – The capital markets is an inclusive market that enables all kinds of investors to
invest and gain higher returns. The investors include – individual or retail investors, small-medium-
large businesses, financial or non-financial institutions and government
5. Capital allocation – Capital markets are a medium of efficiently allocating capital in the system
through a competitive pricing mechanism
Financial Markets
The description of capital and money markets leads to understanding the following characteristics of
financial markets:
1. Financial markets enable large volume of transactions and mobilize financial (short-term and long-
term) resources at real-time basis through investments in stocks, bonds and money
2. Financial markets generate a scope of arbitrage across different markets. This implies, that
investors can take advantage of price differences across different markets and diversify risks
3. Financial markets are characterised with volatility directed by trade of large volume of securities.
Mostly, these markets are influenced by macroeconomic and political changes in India and the world
4. Markets are dominated by financial intermediaries who take investment decisions as well as risks on
behalf of depositors (savers)
5. Financial markets are also characterised by externalities. An externality refers to cost or benefit that
are not transmitted by prices but influenced by a stakeholder’s actions in the financial markets
leading to market failures. For example, speculation in prices of stock markets could affect the
workings of the money market
6. Domestic financial markets are also becoming integrated with global financial markets that not only
enables capital mobility at a global level but spread of risks across the globe
Savers or entities that save can be further categorised into the following:
1. Household sector – The household sector include individuals, unincorporated businesses, farm
production units and non-profit businesses. Savings for the household sector is mostly in financial
such as includes deposits, life insurance, shares & debentures, provident and pension fund, loans for
durables and real estate.
Savings are mostly considered synonymous to deposit accounts (offered by banks) though savings
can be directed towards life insurance, provident and pension funds or loans on durables / real estate
that are regarded as productive investments. Thus, household sector demand for financial assets to
make productive use of their savings. The household sector contributes to a majority of the savings in
India in comparison to the private and government sector
2. Private sector – This sector includes non-government, non-financial companies, private financial
institutions and co-operative institutions that are involved in production and/or distribution of goods
and services. The sector mostly includes profit-making companies that are driven by various social,
political, economic, technological, legal and demographic factors. Savings in this sector are in the
form of net profit generated by businesses
3. State and Government sector – This sector includes government, administrative departments and
enterprises both departmental and non-departmental. Savings for this sector is the difference
between government receipts and government expenditure. Receipts of government are classified
into the following[13]:
1. Revenue receipts such as tax revenues (corporate tax, income tax, other taxes on incomes &
expenditure, taxes on wealth, customs, excise duties, service tax, other taxes / duties on
commodities and services and surcharge transferred to national calamity and contingency fund)
and non-tax revenues (consisting of interest receipts[14], dividends[15], profit from public
enterprises and fees/charges for providing various services)
2. Non-debt capital receipts such as recoveries of loans and disinvestment of government’s equity
holdings in Public Sector Undertakings (PSUs)
Expenditures of government are classified into the following:
1. Non-plan expenditures that include interest, subsidies, defence, pensions, police, grants-in-aid,
loans, etc
2. Plan expenditures include expenditures as per the Central plan and central assistance to state and
Union Territories’ (UT) plans
Borrowing structure
The borrowing structure in an economy comprises of “borrowers” or entities that finance their needs
through borrowing. The needs of borrowers could involve incurring expenditures on labour, plant and
equipment, constructing residential, industrial or commercial sites and building additions to inventories.
The borrowers include the government sector (central and state level), public sector and private sector
corporations. The borrowers provide or supply financial assets to savers by issuing primary securities in
financial markets, which in turn are reissued by financial intermediaries as secondary securities (in
financial markets) for the savers as investments. The flow of savings (from the savings structure) to the
flow of investments (to the borrowing structure) leads to capital formation or long-term investments
Capital Formation
Capital formation
The flow of money from savings to investments leads to formation of capital stock in the form of
equipment, buildings, intermediate goods and inventories. Capital formation reflects the country’s
capability of producing and distributing goods and services across different sectors and industries thus
leading to an increase in the country national incomes of economic growth. National income of a country
or economic growth can be measured by calculating the Gross Domestic Product (GDP) or Gross
National Product (GNP) that comprises economic activities in sectors like agriculture, industry and
services requiring financial resources to allocate labour, capital and other factors of production.
Economic Growth
AMFI is the Short form Association Of Mutual Funds in India.Everyone is having a Question about AMFI &
its Role Of Mutual Fund Industry. This piece of Information may helpful those who want to know AMFI
with clear understanding.The Association of Mutual Funds in India (AMFI) is dedicated to
developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to
enhance and maintain standards in all areas with a view to protecting and promoting the
interests of mutual funds and their unit holders. AMFI is established on the lines of the Investment
Company Institute (ICI), the national association of US investment companies.
AMFI was incorporated on August 22, 1995 as a non-profit organization with an objective to:
To Promote best business practices and code of conduct in all areas of operation of Mutual
Fund Industry.
AMFI should Maintain high professional and ethical standards in the Mutual Fund Industry.
AMFI Should Interact with the Securities and Exchange Board of India (SEBI) and to represent to
SEBI on all matters concerning the Mutual Fund Industry.
AMFI to Make a representation to the Government, RBI and other regulatory bodies in matters
relating to the Mutual Fund Industry.
It has to Develop a well-trained agent distributors network for the Mutual Fund Industry.
To Promote Nationwide investor awareness program to make the investors understand the
concept and working of Mutual Funds.
To Disseminate information on Mutual Fund Industry and to undertake studies and research
directly and/or in association with other bodies.
AMFI has also set up the Committee on Valuation of Mutual Funds, Committee on Best Practices,
Committee on RBI Related Matters, and Committee on Registration of AMFI Certified Distributors for
reviewing and evolving standards in the Mutual Fund Industry.
Though technically not an SRO(Self Regulatory Organisation), AMFI, right from its inception, has
performed self regulatory functions like giving clarification on payment of brokerage to
intermediaries, training the Mutual Fund distributors, and educating the investors
AMFI guidelines
AMFI has revised code of conduct for mutual fund distributors by adding some of the new regulatory
norms. Fund distributors were earlier governed by AMFI Guidelines and Norms for Intermediaries (AGNI)
which was drafted in 2002.
Some of the areas like perpetrating fraud, providing anti-money laundering details, observing high
standards of ethics and integrity have been added in the revised code of conduct.
Most of the guidelines which were a part of AGNI are still present in the new code of conduct. Distributors
are required to send a self-certification form to AMFI every year attesting that they have adhered to these
code of conduct.
Below are some of the new guidelines:
No splitting of applications to earn higher transaction charges/commissions
Intermediaries to keep themselves abreast with the developments relating to the mutual fund industry as
also changes in the scheme information and information on mutual fund / AMC like changes in
fundamental attributes, changes in controlling interest, loads, liquidity provisions, and other material
aspects and deal with the investors appropriately having regard to the up to date information.
To protect the investors from potential fraudulent activities, intermediary to take reasonable steps to
ensure that the investor’s address and contact details filled in the mutual fund application form are
investor’s own details, and not of any third party. Where the required information is not available in the
application form, intermediary should make reasonable efforts to obtain accurate and updated information
from the investor. Intermediaries to abstain from filling wrong / incorrect information or information of their
own or of their employees; officials or agents as the investor’s address and contact details in the
application form, even if requested by the investor to do so. Intermediary should abstain from tampering
in any way with the application form submitted by the investor, including inserting, deleting or modifying
any information in the application form provided by the investor.
Intermediaries including the sales personnel of intermediaries engaged in sales/marketing shall obtain
NISM certification and register themselves with AMFI and obtain an Employee Unique Identification
Number (EUIN) from AMFI apart from AMFI Registration Number (ARN). The Intermediaries shall ensure
that the employees quote the EUIN in the Application Form for investments. The NISM certification and
AMFI registration shall be renewed on timely basis. Employees in other functional areas should also be
encouraged to obtain the same certification.
Intermediaries shall comply with the Know Your Distributor (KYD) norms issued by AMFI.
Co-operate with and provide support to AMCs, AMFI, competent regulatory authorities, Due Diligence
Agencies (as applicable) in relation to the activities of the intermediary or any regulatory requirement and
matters connected thereto.
Provide all documents of its investors in terms of the Anti-Money Laundering/Combating Financing of
Terrorism requirements, including KYC documents / Power of Attorney/investor’s agreement(s), etc. with
Intermediaries as may be required by AMCs from time to time.
Be diligent in attesting/certifying investor documents and performing In Person Verification (IPV) of
investor’s for the KYC process in accordance with the guidelines prescribed by AMFI / KYC Registration
Agency (KRA) from time to time.
Intimate the AMC and AMFI any changes in the intermediary’s status, constitution, address, contact
details or any other information provided at the time of obtaining AMFI Registration.
Observe high standards of ethics, integrity and fairness in all its dealings with all parties – investors,
Mutual Funds/AMCs, Registrars & Transfer Agents and other intermediaries. Render at all times high
standards of service, exercise due diligence and ensure proper care.
Intermediaries satisfying the criteria specified by SEBI for due diligence exercise shall maintain the
requisite documentation in respect of the “Advisory” or “Execution Only” services provided by them to the
investors.
Intermediaries shall refund to AMCs, either by set off against future commissions or payment, all
incentives of any nature, including commissions received, that are subject to claw-back as per SEBI
regulations or the terms and conditions issued by respective AMC.
In respect of purchases (including switch-ins) into any fund w.e.f. January 1, 2013, in the event of any
switches from Regular Plan (Broker Plan) to Direct Plan, all upfront commissions paid to distributors shall
be liable to complete and / or proportionate claw-back.
Do not indulge in fraudulent or unfair trade practices of any kind while selling units of schemes of any
mutual fund. Selling of units of schemes of any mutual fund by any intermediary directly or indirectly by
making false or misleading statement, concealing or omitting material facts of the scheme, concealing the
associated risk factors of the schemes or not taking reasonable care to ensure suitability of the scheme to
the investor will be construed as fraudulent/unfair trade practice.
Mandates provided by AMFI to AMC’s for fund management
and portfolio management services
To make it easier for foreign fund managers keen to relocate to India, markets
regulator Sebi's board on Friday approved a proposal to allow them to act as
'Portfolio Managers' under a relaxed regulatory regime.
The move assumes significance in the wake of the government already having
announced taxation incentives for the offshore fund managers willing to relocate to
India.
At a meeting in Mumbai, Sebi's board approved issuance of a consultation paper for
'amendments to the Sebi (Portfolio Managers) Regulations, 1993', which would
make it easier for the overseas funds to relocate to Indian shores.
The proposed amendments include a separate section on 'Eligible Fund Managers'
that would specify conditions that will apply to their activities as portfolio managers.
The new rules would also specify the procedure to be followed by a Sebi-registered
Portfolio Manager to function as an Eligible Fund Manager.
Besides, Sebi would lay out the procedure for registration of an existing foreign
based fund manager desirous of relocating to India or a fresh applicant to function
as an Eligible Fund Manager.
While listing out the obligations and responsibilities of Eligible Fund Managers, Sebi
would specify non-applicability of certain provisions of Portfolio Managers
Regulations on Eligible Fund Managers.
These provisions would include 'High Water Mark Principle' regarding calculation of
fees, disclosure of fees, obligation to act in a fiduciary capacity and audit of
overseas fund.
Besides, the rules regarding mandatory agreement between the portfolio manager
and overseas fund, reporting about overseas fund and minimum investment
requirements (Rs 25 lakh) would also not be applicable for such overseas funds.
After the board meeting, Semi said the consultation paper would soon be put in
public domain to seek comments from all stakeholders. The final rules would be
framed accordingly.
After the announcement in the Union Budget, a new section was added to the
Income Tax Act to provide that the fund management activity carried out through an
Eligible Fund Manager (EFM) located in India and acting on behalf of an Eligible
Investment Fund (EIF) would not constitute business connection in India of such a
fund.
Following the issuance of notification by the tax department in this regard, Semi held
meetings with various stakeholders to discuss the registration framework for EFMs,
during which several impediments were pointed out in the existing regulations for
Investment Advisers and Portfolio Managers.
Subsequently, Semi has now decided to initiate a consultation process for changes
to its norms for Portfolio Managers while putting in place a framework for allowing
EFMs to act as Portfolio Managers to their EIFs.
Managing, and more crucially growing, money is not easy. If it were we would all be
a lot richer than we are. Even professionally trained active fund managers at the top
of their profession notoriously often fail to beat the market. That can be attributed
in large part to fee structures draining profits, but still highlights the scale of the
challenge that faces portfolio managers. However, there are many successful
investment portfolio managers, private and professional, that do consistently
outperform markets. This is especially true when fund managers crippled by their
fund’s fee structure are taken out of the equation.
While even the most adept portfolio manager will make the occasional bad call, the
real secret to effective portfolio management is in the consistent avoidance of costly
errors. In an article for Forbes Magazine, Peter Andersen, Chief Investment Officer
at Congress Wealth Management, posits that cutting mistakes down to the bare
minimum is what separates consistently successful portfolio managers from the rest.
He argues that most mistakes can also be traced back to violations of several key
money management rules. So let’s take a look at some of those key rules for
successful portfolio management. Some are those mentioned by Andersen and some
are not. While this is by no means a comprehensive list, hopefully they will get you
thinking about the important things to keep in mind when it comes to minimizing
the mistakes that can be the difference between effective portfolio management
and disappointed clients, or even a disappointing performance for your own
personal investment portfolio.
Although it can be worded in different ways, from ‘trust the fundamentals’ to ‘long
term investing’ ‘patience’ is, with justification, the most commonly cited piece of
advice when it comes to a successful investment strategy.
Especially in the news-hungry modern world which continuously updates us on our
holdings, it is important to block out all but the most important information and
focus on the underlying, longer term fundamentals that original decisions were
based on. Markets have more and less volatile periods and while it is crucial to stay
alert for significant changes which could impact your holdings, it is just as crucial to
cancel out most of the noise and ignore short term volatility.
Groupthink may be harder to spot in investment trends than it is at the golf club or
between a group of friends but make no mistake, it permeates financial markets to
a frightening extent. As a portfolio manager one of the most fundamental pieces of
advice you should heed is to ignore what the markets and media are saying and
always think for yourself. If you are a day or short-term trader the trend may well
be your friend, but as a portfolio manager it is more like peer pressure to skip
school. You might gain short-term kudos but it isn’t going to do anything positive for
your long term prospects.
When you choose to invest in any holding, go through all of the potential scenarios,
positive and negative, that could significantly impact your initial suppositions. You
will then know if conditions have changed in a pre-empted way to mean your
commitment is no longer be tenable, know the terms of divorce and be able to
react. And of course, you need to have Plans B and C in place so you are not
scrabbling around trying to figure out what to do when negative scenarios do come
to pass.
There is a wealth of new technology out there that can help portfolio managers
hugely when it comes to screening different equities and other assets. They take a
lot of the manual process out of value assessment by different metrics and while
they are restricted to data-based filtering can be an invaluable tool to flag options
for further attention. Embracing these kind of screening tools, and other technology
out there, can help portfolio managers make picks from a much vaster range of
options than was previously possible.
Finally, with the best of intentions, impeccable approach, knowledge and skill,
professional portfolio management requires communication if the manager is to be
successful. When a fund underperforms the market investors are twice as
disappointed as they are happy when it outperforms. The same is true of a portfolio
manager’s clients. There will always be times when a portfolio loses value, it is
unavoidable. However, clear communication with clients on the decision making
process, correct expectation setting and regular updates will reduce the chances of
clients panicking when that does happen. Don’t try to make your skill set seem
mysterious and out-of-reach. Educate your clients as much as possible on
investment principles and your approach. The better they understand what you are
doing the less likely they are to be phased by setbacks and appreciate successes.
DEFINITION of 'Investor'
An investor is any person who commits capital with the expectation of financial
returns. Investors utilize investments in order to grow their money and/or provide an
income during retirement, such as with an annuity. A wide variety of investment
vehicles exist including (but not limited to) stocks, bonds, commodities, mutual
funds, exchange-traded funds (ETFs), options, futures, foreign exchange, gold,
silver, retirement plans and real estate. Investors typically perform technical and/or
fundamental analysis to determine favorable investment opportunities, and generally
prefer to minimize risk while maximizing returns.
Other investors, however, are more inclined to take on additional risk in an attempt
to make a larger profit. These investors might invest in currencies, emerging
markets or stocks. A distinction can be made between the terms "investor" and
"trader" in that investors typically hold positions for years to decades (also called a
"position trader" or "buy and hold investor") while traders generally hold positions for
shorter periods. Scalp traders, for example, hold positions for as little as a few
seconds. Swing traders, on the other hand, seek positions that are held from several
days to several weeks.
Meaning of investments
What is an 'Investment'
An investment is an asset or item that is purchased with the hope that it will
generate income or will appreciate in the future. In an economic sense, an
investment is the purchase of goods that are not consumed today but are used in
the future to create wealth. In finance, an investment is a monetary asset purchased
with the idea that the asset will provide income in the future or will be sold at a
higher price for a profit.
Taking an action in the hopes of raising future revenue can also be an investment.
Choosing to pursue additional education can be considered an investment, as the
goal is to increase knowledge and improve skills in the hopes of producing more
income.
Investment Banking
An investment bank provides a variety of services designed to assist an individual or
business in increasing associated wealth. This does not include traditional consumer
banking. Instead, the institution focuses on investment vehicles such as trading and
asset management. Financing options may also be provided for the purpose of
assisting with the these services.
Investments and Speculation
Speculation is a separate activity from making an investment. Investing involves the
purchase of assets with the intent of holding them for the long-term, while
speculation involves attempting to capitalize on market inefficiencies for short-term
profit. Ownership is generally not a goal of speculators, while investors often look to
build the number of assets in their portfolios over time.
The options for investing savings are continually increasing, yet every investment
vehicle can generally be categorized according to three fundamental
characteristics: safety, income and growth.
Safety
There is truth to the axiom that there is no such thing as a completely safe and
secure investment. Yet, we can get close to ultimate safety for our investment
funds through the purchase of government-issued securities in stable economic
systems, or through the purchase of the corporate bonds issued by large, stable
companies. Such securities are arguably the best means of
preserving principal while receiving a specified rate of return.
The safest investments are usually found in the money market. In order of
increasing risk, these securities include: Treasury bills (T-bills), certificates of
deposit (CD), commercial paper or bankers' acceptance slips, or in the fixed-
income (bond) market, in the form of municipal and other government bonds and
corporate bonds. As they increase in risk, these securities also increase in
potential yield.
There's an enormous range of relative risk within the bond market. At one end
are government and high-grade corporate bonds, which are considered some of
the safest investments around. At the other end are junk bonds, which have a
lower investment grade and may have more risk than some of the
more speculative stocks. In other words, corporate bonds are not always safe,
although most instruments from the money market can be considered very safe.
Income
The safest investments are also the ones that are likely to have the lowest rate of
income return or yield. Investors must inevitably sacrifice a degree of safety if
they want to increase their yields. As yield increases, safety generally goes
down, and vice versa.
In order to increase their rate of investment return and take on risk above that of
money market instruments or government bonds, investors may choose to
purchase corporate bonds or preferred shares with lower investment ratings.
Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but
generally also offer a higher income return than AAA bonds. Similarly, BBB-rated
bonds can be thought to carry medium risk, but they offer less potential income
than junk bonds, which offer the highest potential bond yields available but at the
highest possible risk. Junk bonds are the most likely to default.
Most investors, even the most conservative-minded ones, want some level of
income generation in their portfolios, even if it's just to keep up with the
economy's rate of inflation. But maximizing income return can be an overarching
principle for a portfolio, especially for individuals who require a fixed sum from
their portfolio every month. A retired person who requires a certain amount of
money every month is well served by holding reasonably safe assets that provide
funds over and above other income-generating assets, such as pension plans.
Growth of Capital
This discussion has thus far been concerned only with safety and yield as
investing objectives, and has not considered the potential of other assets to
provide a rate of return from an increase in value, often referred to as a capital
gain.
Capital gains are entirely different from yield in that they are only realized when
the security is sold for a price that is higher than the price at which it was
originally purchased. Selling at a lower price is referred to as a capital loss.
Therefore, investors seeking capital gains are likely not those who need a fixed,
ongoing source of investment returns from their portfolio, but rather those who
seek the possibility of longer-term growth.
Growth of capital is most closely associated with the purchase of common stock,
particularly growth securities, which offer low yields but considerable opportunity
for increase in value. For this reason, common stock generally ranks among the
most speculative of investments as their return depends on what will happen in
an unpredictable future. Blue-chip stocks can potentially offer the best of all
worlds by possessing reasonable safety, modest income and potential for growth
in capital generated by long-term increases in corporate revenues and earnings
as the company matures. Common stock is rarely able to provide the safety and
income-generation of government bonds.
It is also important to note that capital gains offer potential tax advantages by
virtue of their lower tax rate in most jurisdictions. Funds that are garnered
through common stock offerings, for example, are often geared toward the
growth plans of small companies, a process that is extremely important for the
growth of the overall economy. In order to encourage investments in these areas,
governments choose to tax capital gains at a lower rate than income. Such
systems serve to encourage entrepreneurship and the founding of new
businesses that help the economy grow.
Secondary Objectives
Tax Minimization: An investor may pursue certain investments in order to adopt
tax minimization as part of his or her investment strategy. A highly paid
executive, for example, may want to seek investments with favorable tax
treatment in order to lessen his or her overall income tax burden. Making
contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k),
can be an effective tax minimization strategy.
Common stock is often considered the most liquid of investments, since it can
usually be sold within a day or two of making the decision to sell. Bonds can also
be fairly marketable, but some bonds are highly illiquid, or non-tradable,
possessing a fixed term. Similarly, money market instruments may only be
redeemable at the precise date at which the fixed term ends. If an investor seeks
liquidity, money market assets and non-tradable bonds aren't likely to be held in
his or her portfolio.
Effective Diversification/Strategic
Asset Allocation Strategy
Traditional views of diversification tend to focus on asset classes (e.g.,
equity, fixed income). Asset classes are essentially just legal definitions,
and while they help steer you towards diversification, they’re not the only
thing to focus on. Effective diversification requires you look at the
underlying source of risk. Diversifying across the underlying source of risk,
whether it’s related to the yield curve, the performance of a company or the
inflation environment, is the core of a solid investment strategy.
For instance, if you had held Lehman Brothers stock in your equity portfolio
and Lehman Brothers bonds in your fixed-income portfolio, you would have
held assets that belong to two different asset classes, but the risk you held
was not linked to the asset class—it was linked to Lehman Brothers. By
implementing effective diversification as a strategy, you may be able to
stabilize your portfolio by minimizing company overlap between your stocks
and bonds.
While most portfolios are heavily exposed to the performance of companies
(think equities and high-yield bonds), inflation may actually be the greatest
risk that you face in retirement. During periods of unexpected inflation,
equities and fixed-income investments may lose money; having assets in
your portfolio that generally rise along with inflation is a central element of
effective diversification/strategic asset allocation strategy .
Cost Efficiency
Whether you’re on your own or working with an advisor, paying fees is a
fact of life when it comes to investing. If you’re going to pay fees, make
sure you’re getting good value. When you consider advisory and custodian
fees, investment expense ratios and transaction costs, you could be paying
almost 3% in fees annually. That’s too much!
Research from Vanguard (the powerhouse of indexing firms) shows that
the value of a good financial advisor may cover their fees over time.
Advisors add value by managing their clients’ feelings of fear and greed,
building effectively diversified portfolios, monitoring markets for bubbles
and opportunities, minimizing the opaque costs embedded in investment
products, reducing clients’ tax burdens, and the list goes on.
I do think it’s possible to do better than passive indexing by using
a quantitatively enhanced indexing strategy. Research shows that by
having exposures like value and momentum in your portfolio, you have a
chance of outperforming a purely indexed approach over time. As a result,
it may be worthwhile to pay a little more for a research enhanced index
than a passive fund.
Finally, if you can find a strategy that offers a positive expected return with
a low, stable correlation to equity markets, it might be worth paying a higher
fee for the diversification benefits.
Tax Efficiency
The real measure of an investment strategy is how much of your money
you actually get to keep. That’s where incorporating tax efficiencies into the
investment philosophy come in. Research has shown that comprehensive
tax planning can save investors 75 basis points annually. It might not sound
like much, but with compounding, it’s a big deal.
One way to achieve greater tax efficiency is by increasing your use of tax-
advantaged vehicles. Another approach is to use asset location strategies
to minimize taxes by determining where assets should be held to take
advantage of the best tax treatments. Proactively harvesting losses also
helps offset future gains and can further bolster your bottom line.
While there are many ways to invest, there is no magic portfolio to be
found. Even though building an investment approach based on the above
concepts doesn’t guarantee the outcome you want, you can know that a
portfolio built on the above concepts is rooted in a research-driven
approach that, over time, has tended to provide the outcomes investors
need.
There is no guarantee that asset allocation or diversification will enhance
overall returns, outperform a non-diversified portfolio, nor ensure a profit or
protect against a loss.
No strategy assures success or protects against loss. Past performance is
no guarantee of future results.
Stock investing involves risk including loss of principal.
Portfolio Management Services objective of AMC
Portfolio Management Services (PMS), service offered by the Portfolio Manager, is an investment portfolio in
stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional
money manager that can potentially be tailored to meet specific investment objectives. When you invest in
PMS, you own individual securities unlike a mutual fund investor, who owns units of the fund. You have the
freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although
portfolio managers may oversee hundreds of portfolios, your account may be unique.
Discretionary:
Under these services, the choice as well as the timings of the investment decisions rest solely with the Portfolio
Manager.
Non Discretionary
Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the
timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the
portfolio manager.
Advisory
Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the
execution of the investment decisions rest solely with the Investor. Note: In India majority of Portfolio
Managers offer Discretionary Services.
Professional Management:
The service provides professional management of portfolios with the objective of delivering consistent long-
term performance while controlling risk.
Continuous Monitoring
It is important to recognise that portfolios need to be constantly monitored and periodic changes made to
optimise the results.
Risk Control
A research team responsible for establishing the client's investment strategy and providing the PMS provider
real time information to support it, backs any firm's portfolio managers.
Portfolio Management Service provider gives the client a customised service. The company takes care of all
the administrative aspects of the client's portfolio with a periodic reporting (usually daily) on the overall status
of the portfolio and performance.
Flexibility
The Portfolio Manager has fair amount of flexibility in terms of holding cash (can go up to 100% also
depending on the market conditions). He can create a reasonable concentration in the investor portfolios by
investing disproportionate amounts in favour of compelling opportunities.
Transparency
PMS provide comprehensive communications and performance reporting. Investors will get regular statements
and updates from the firm. Web-enabled access will ensure that client is just a click away from all information
relating to his investment. Your account statements will give you a complete picture of which individual
securities you hold, as well as the number of shares you own. It will also usually provide:
Customised Advice
PMS give select clients the benefit of tailor made investment advice designed to achieve his financial
objectives. It can be structured to automatically exclude investments you may own in another account or
investments you would prefer not to own. For example, if you are a long-term employee in a company and you
have acquired concentrated stock positions over the years and have become over exposed to few company's
stock, a separately managed account provides you with the ability to exclude that stock from your portfolio.
BNP Paribas Asset management India Private Limited
BNP Paribas is a French international banking group with a presence in 75 countries.[4] It is listed on
the First Market of Euronext Parisand is included in the CAC 40 index. At 31 December 2016, net
income attributable to equity holders was EUR7,702 million.[5]
BNP Paribas is one of the largest banks in the world. The bank serves more than 30 million
customers between its retail banking networks in its four domestic
markets, France, Belgium, Italy and Luxembourg, through several brands such as BNL, BGL BNP
Paribasor BNP Paribas Fortis.
The retail bank also operates in the Mediterranean region and in the west of the United States.
It was formed through the merger of Banque Nationale de Paris (BNP) and Paribas (see below for
name origin) in 2000. The company is a component of the Euro Stoxx 50 stock market index.[6]
Its Corporate & Institutional Banking and International Financial Services businesses for corporate
and institutional clients are leaders in Europe,[citation needed] significant players in the Americas and
growing strongly in the Asia-Pacific region.
BNP Paribas has the highest brand value in France.[citation needed] Its brand value increased EUR590
million to reach EUR14.7 billion in 2015.
BNP Paribas was the leading bank in the Euro zone in 2017 (2nd in Europe) and ranked 8th
internationally.
The Banque Nationale de Paris S.A. (BNP) resulted from a merger of two French banks – Banque
nationale pour le commerce et l'industrie (BNCI) and Comptoir national d'escompte de Paris (CNEP)
– in 1966.
The Banque de Paris et des Pays-Bas S.A. (Bank of Paris and the Netherlands), or Paribas, was
formed from two investment banks based respectively in Paris and Amsterdam, in 1872. Les Pays-
Bas ("The Low Countries") is French for the Netherlands.
In May 2000, BNP and Paribas merged to form BNP Paribas, which is thus descended from four
founding banking institutions.
On 7 March 1848, the French Provisional Government founded the Comptoir national d'escompte de
Paris (CNEP) in response to the financial shock caused by the revolution of February 1848. The
upheaval destroyed the old credit system, which was already struggling to provide sufficient capital
to meet the demands of the railway boom and the resulting growth of industry. The CEP grew
steadily in France and overseas, although in 1889 there was a crisis in which it was temporarily
placed in receivership.
Separately, on 18 April 1932, the French government replaced Banque nationale de crédit (BNC),
which failed as a result of the 1930s recession, with the new bank Banque nationale pour le
commerce et l'industrie (BNCI). The former banks headquarter and staff were used to create BNCI
with fresh capital of 100 million francs. The bank initially grew rapidly through absorbing a number of
regional banks that got into financial trouble. After the Second World War, it continued to grow
steadily. It grew its retail business in France and its commercial business overseas in the French
colonial empire.
After the end of the Second World War, the French state decided to "put banks and credit to work for
national reconstruction". René Pleven, then Minister of Finance, launched a massive reorganization
of the banking industry. A law passed on 2 December 1945 and which went into effect on 1 January
1946 nationalized the four leading French retail banks: Banque nationale pour le commerce et
l'industrie (BNCI), Comptoir national d'escompte de Paris (CNEP), Crédit Lyonnais, and Société
Générale.
In 1966, the French government decided to merge Comptoir national d'escompte de
Paris with Banque nationale pour le commerce et l'industrie to create one new bank called Banque
Nationale de Paris (BNP).
The bank was re-privatised in 1993 under the leadership of Michel Pébereau as part of a second
Chirac government's privatization policy.[7][8]
Paribas (Banque de Paris et des Pays-Bas)[edit]
See also: Paribas and Bischoffsheim family
Banque de Paris et des Pays-Bas (Paribas) was established on 27 January 1872, through the
merger of Banque de Crédit et de Dépôt des Pays-Bas, which had been established in 1820
by Louis-Raphaël Bischoffsheim in Amsterdam, and Banque de Paris, which had been founded in
1869 by a group of Parisian bankers. It went on to develop a strong investment banking business
both domestically in France and overseas.
During the period 1872 to 1913, it was involved in raising funds for the French and other
governments as well as big businesses through a number of bond issues. It helped the French
government raise funds during the First World War and raised further capital and expanded into
investments into industrial companies during the Great Depression. It stagnated and lost assets
during the Second World War.
After World War II, it missed the nationalisation of the other French banks due to its status as
an investment bank and managed to take advantage of that by expanding its operations overseas. It
also directs its activity towards businesses and participates in the development and restructuring of
French industry, including names such as Groupe Bull and Thomson-CSF.
The bank was nationalized in 1982 by the government of Pierre Mauroy under François
Mitterrand as part of a law that nationalized five major industrial companies, thirty-nine registered
banks, and two financial companies, Suez and Paribas. It was re-privatized in January 1987 by
the Chirac government.
In the 1990s, Paribas had an active policy of acquisitions and divestiture. This included selling
the Ottoman Bank to Doğuş Holding, and setting up the joint venture lending company Cetelem in
Germany. It sold Crédit du Nord to Société Générale and in 1998 it merged with Compagnie
Bancaire, renaming the bank with the official name Compagnie Financière de Paribas.
Corporate Identity[edit]
The BNP Paribas logo since 2000 (designed by Laurent Vincent under the leadership of the
Communications Director, Antoine Sire) is called the "courbe d'envol" (curve of taking flight). The
stars allude to Europe and universality. The transformation of the stars into birds conveys openness,
freedom, growth, and the ability to change and adapt. The shape and movement of the curve places
the logo in the universe of life. The green square symbolises nature and optimism.
Business units[edit]
In 2015, the BNP Paribas Group was organized around two business areas:
Retail Banking & Services, a global network of nearly 7,000 branches, comprising Domestic Markets
and International Financial Services, and Corporate & Institutional Banking (CIB).
At the end of 2015, outstanding deposits stood at EUR700.3 billion and outstanding loans at
EUR682.5 billion. The geographic breakdown of revenues was as follows: Europe (73.3%),
Americas (11.8%), Asia Pacific (7.5%) and others (7.4%).
Retail banking[edit]
Retail banking is BNP Paribas' largest business unit representing 72% of its 2015 revenues. Its
operations are concentrated in Europe, especially in the group's three domestic markets of France,
Italy (where it operates as Banca Nazionale del Lavoro (BNL)), and Belgium (as BNP Paribas
Fortis). The group also owns an American subsidiary BancWestwhich operates as Bank of the
West in the western United States and First Hawaiian Bank in Hawaii. BNP Paribas's Europe
Mediterranean group also runs large retail banks in Poland, Turkey, Ukraine, and northern Africa.
BNP Paribas is the largest bank in the Eurozone by total assets and second largest by market
capitalization according to The Banker magazine, just behind Banco Santander. It employs over
189,000 people, according to the bank as of 31 December 2015, of which 147,000 work in Europe,
and maintains a presence in 75 countries.
Domestic markets[edit]
France: BNP Paribas runs one of France's largest retail banking networks with 2,200 branches
and over 3,200 ATMs. In Paris alone the bank has 187 agencies. BNP Paribas serves over 6
million French households and 60,000 corporate customers. In 2009 The French Retail Banking
unit (FRB) had revenues of €6.1 billion (15.2% of total group's), income of €1.5 billion (15% of
total group's), and employs 31,000 people (15.4% of total group's workforce)[23]
Italy: In 2006 BNP Paribas purchased Banca Nazionale del Lavoro (BNL), Italy's sixth largest
bank at the time. In 2009 BNL had 810 branches in Italy, 2.5 million individual clients, and over
150,000 corporate clients. It grossed €2.9 billion in revenue (7.2% of the total group's) and
€540 million of net income (9.3% of the total group's), and employs around 13,000 employees
(6.5% of the total group's).[23]
Belgium: BNP Paribas acquired BNP Paribas Fortis when it acquired the retail banking assets of
the Belgian lender Fortis in 2009. This deal also included Fortis's subsidiaries in Poland and
Turkey, now grouped in the "Europe Mediterranean" division.
United States[edit]
In the United States, BNP Paribas owns BancWest, which in turn operates retail banking
subsidiaries Bank of the West and First Hawaiian Bank. Bank of the West operates in 19 Western
US states (where it ranks as the 7th largest bank by assets), while First Hawaiian is Hawaii's leading
bank with a 40% market share in deposits. Together the two banks operate 710 branches, and
service 5 million clients.
The two banks were merged into BancWest 1998, and BNP Paribas took full control of the combined
entity in 2001.
The group has a strong presence on niche markets such as lending for marine and recreational
vehicles, church lending, and agribusiness. In 2009 BancWest had €2.1 billion in revenues (5.2% of
the total group's), and 11,200 employees (5.5% of the total group's headcount).[23] BancWest lost
€223 million in 2009 largely due to its exposure in the subprime mortgage crisis in
California, Arizona, and Nevada.
Emerging markets[edit]
In 2009, BNP Paribas reorganized its retail banking divisions renaming its "Emerging Markets" group
the "Europe Mediterranean" group. This change was made because after the integration of Fortis
Bank's Polish and Turkish subsidiaries, BNP Paribas's emerging market activities are now heavily
concentrated in Eastern Europe and the southern half of the Mediterranean basin.
BNP Paribas is a member of the Global ATM Alliance, a joint venture of several major international
banks that allows customers of the banks to use their ATM card or check card at another bank within
the Global ATM Alliance with no ATM surcharges when traveling internationally. Other participating
banks are Barclays (United Kingdom), Bank of America(United States), China Construction
Bank (China), Deutsche Bank (Germany), Santander
Serfin (Mexico), UkrSibbank (Ukraine), Scotiabank (Canada) and Westpac (Australia and New
Zealand).[24]