Mutual fund
Mutual fund which it manage professionally .
WHO MANAGES INVESTOR’S MONEY?The Asset Management Company (the Third tier) who manage (IM). The Asset management Company (AMC) which it is by appoint Trustees , to manage investor’s money. The AMC which it fee charged for the services provided and the investors fee is borne as it is deducted from the money collected from them. The AMC’s Board of Directors which they required 50% of Directors They are independent directors.
THE ROLE OF THE AMC?
The role of the AMC is to manage investor’s money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service providers.
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
d type of collective investment scheme that pools money from any investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
- Professional Management
- Diversification
- Convenient Administration
- Return Potential
- Low Costs
- Liquidity
- Transparency
- Flexibility
- Choice of schemes
- Tax benefits
- Well regulated
Types of Derivatives
There are various types of derivatives traded on exchanges across the world. They range from the very simple to the most complex products. The following are the three basic forms of derivatives, which are the building blocks for many complex derivatives instruments (the latter are beyond the scope of this book):
- Forwards
- Futures
- Options
Knowledge of these instruments is necessary in order to understand the basics of derivatives.
We shall now discuss each of them in detail.
Forwards
A forward contract or simply a forward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It may be noted that Forwards are private contracts and their terms are determined by the parties involved.
A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. This is different from a spot market contract, which involves immediate payment and immediate transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. The price agreed upon is called the delivery price or the Forward Price.
Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis.
A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. This is different from a spot market contract, which involves immediate payment and immediate transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. The price agreed upon is called the delivery price or the Forward Price.
Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis.
Futures
Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. However, unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. All the terms, other than the price, are set by the stock exchange (rather than by individual parties as in the case of a forward contract). Also, both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation. The Clearing Corporation provides this guarantee to ensure that the buyer or the seller of a futures contract does not suffer as a result of the counter party defaulting on its obligation. In case one of the parties defaults, the Clearing Corporation steps in to fulfill the obligation of this party, so that the other party does not suffer due to non-fulfillment of the contract. To be able to guarantee the fulfillment of the obligations under the contract, the Clearing Corporation holds an amount as a security from both the parties. This amount is called the Margin money and can be in the form of cash or other financial assets. Also, since the futures contracts are traded on the stock exchanges, the parties have the flexibility of closing out the contract prior to the maturity by squaring off the transactions in the market.
The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing Corporation is depicted in the diagram below:
The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing Corporation is depicted in the diagram below:
Options
Like forwards and futures, options are derivative instruments that provide the opportunity to buy or sell an underlying asset on a future date.
An option is a derivative contract between a buyer and a seller, where one party (say First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed-upon price. In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the “premium” or price of the option. The right to buy or sell is held by the “option buyer” (also called the option holder); the party granting the right is the “option seller” or “option writer”. Unlike forwards and futures contracts, options require a cash payment (called the premium) upfront from the option buyer to the option seller. This payment is called option premium or option price. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation.
There are two types of options—call options and put options.
An option is a derivative contract between a buyer and a seller, where one party (say First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed-upon price. In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the “premium” or price of the option. The right to buy or sell is held by the “option buyer” (also called the option holder); the party granting the right is the “option seller” or “option writer”. Unlike forwards and futures contracts, options require a cash payment (called the premium) upfront from the option buyer to the option seller. This payment is called option premium or option price. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation.
There are two types of options—call options and put options.
Derivative Market
The term “derivatives” is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective underlying asset. Thus if a derivative’s underlying asset is equity, it is called equity derivative and so on.
Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called “over-the-counter” (OTC) trading. (In India only exchange traded equity derivatives are permitted under the law.) The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset prices) from one party to another; they facilitate the allocation of risk to those who are willing to take it.
Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called “over-the-counter” (OTC) trading. (In India only exchange traded equity derivatives are permitted under the law.) The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset prices) from one party to another; they facilitate the allocation of risk to those who are willing to take it.
Two important terms
Before discussing derivatives, it would be useful to be familiar with two terminologies relating to the underlying markets. These are as follows:
Spot Market
In the context of securities, the spot market or cash market is a securities market in which securities are sold for cash and delivered immediately. The delivery happens after the settlement period. Let us describe this in the context of India. The NSE’s cash market segment is known as the Capital Market (CM) Segment. In this market, shares of SBI, Reliance, Infosys, ICICI Bank, and other public listed companies are traded. The settlement period in this market is on a T+2 basis i.e., the buyer of the shares receives the shares two working days after trade date and the seller of the shares receives the money two working days after the trade date.
Index
Stock prices fluctuate continuously during any given period. Prices of some stocks might move up while that of others may move down. In such a situation, what can we say about the stock market as a whole? Has the market moved up or has it moved down during a given period? Similarly, have stocks of a particular sector moved up or down? To identify the general trend in the market (or any given sector of the market such as banking), it is important to have a reference barometer which can be monitored. Market participants use various indices for this purpose. An index is a basket of identified stocks, and its value is computed by taking the weighted average of the prices of the constituent stocks of the index. A market index for example consists of a group of top stocks traded in the market and its value changes as the prices of its constituent stocks change. In India, Nifty Index is the most popular stock index and it is based on the top 50 stocks traded in the market. Just as derivatives on stocks are called stock derivatives, derivatives on indices such as Nifty are called index derivatives.
Spot Market
In the context of securities, the spot market or cash market is a securities market in which securities are sold for cash and delivered immediately. The delivery happens after the settlement period. Let us describe this in the context of India. The NSE’s cash market segment is known as the Capital Market (CM) Segment. In this market, shares of SBI, Reliance, Infosys, ICICI Bank, and other public listed companies are traded. The settlement period in this market is on a T+2 basis i.e., the buyer of the shares receives the shares two working days after trade date and the seller of the shares receives the money two working days after the trade date.
Index
Stock prices fluctuate continuously during any given period. Prices of some stocks might move up while that of others may move down. In such a situation, what can we say about the stock market as a whole? Has the market moved up or has it moved down during a given period? Similarly, have stocks of a particular sector moved up or down? To identify the general trend in the market (or any given sector of the market such as banking), it is important to have a reference barometer which can be monitored. Market participants use various indices for this purpose. An index is a basket of identified stocks, and its value is computed by taking the weighted average of the prices of the constituent stocks of the index. A market index for example consists of a group of top stocks traded in the market and its value changes as the prices of its constituent stocks change. In India, Nifty Index is the most popular stock index and it is based on the top 50 stocks traded in the market. Just as derivatives on stocks are called stock derivatives, derivatives on indices such as Nifty are called index derivatives.
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