A Project On

HSBC AND THE WEALTH MANAGEMENT SYSTEM

Submitted towards the partial fulfillment of the Summer Internship May 2008

Submitted by: to:

Submitted

Punita Sharma
M.B.A. - M.B.L. IInd Semester Roll No. 153

Mr. Arijit Nandy

HSBC Jaipur

NATIONAL LAW UNIVERSITY, JODHPUR

MAY, 2008

PREFACE
The present project, undertaken as a part of the partial fulfilment of the Summer Internship, undertaken with HSBC, Jaipur Branch, as a requirement for the award of MBA- MBL, is an honest attempt to study and gain knowledge of the worlds most appreciated private bank, HSBC and the services it offers to its customers. The study undertaken in order to come up with the project has given me a good knowledge about the kind of banking HSBC deals in as well as its concept of Wealth Management Services.

HSBC is one of the largest banking and financial services organisations in the world. HSBC's international network comprises over 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. The HSBC Group has an international pedigree which is unique. Many of its principal companies opened for business over a century ago and they have a history which is rich in variety and achievement. The HSBC Group is named after its founding member, The Hongkong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between China and Europe.

Under the purview of Wealth Management Services, HSBC tries to understand the needs, requirements as well as the kind of financial planning its customers intend to make for themselves.

I hope the reader will have some good idea about the topic having gone through this study paper and that is the only criteria of the success or otherwise of this study paper.

ACKNOWLEDGEMENT

This project owes its accomplishments to the inputs, help, and assistance received from various websites (www.). A great sense of gratitude is also expressed towards Ms. Ritu Sharma, under whose able guidance I got an opportunity to learn immensely, the mantras of being a Successful and an efficient Relationship Manager. I also extend my Heartiest gratitude for Mr. Arijit Nandy, without whose cooperation and support my journey with HSBC would not have been possible. Along with him, I also thank my National Law Universitys Placement Cell, which chose me to work with as esteemed an institution as HSBC. I express my gratitude towards the staff and the fellow colleagues at HSBC who not only helped me learn during my internship but also made the association healthy and comfortable.

The world's local bank

Who is HSBC? Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world. HSBC's international network comprises over 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by around 200,000 shareholders in some 100 countries and territories. The shares are traded on the New York Stock Exchange in the form of American Depositary Receipts. Through an international network linked by advanced technology, including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of financial

services: personal financial services; commercial banking; corporate, investment banking and markets; private banking; and other activities. Group History The HSBC Group has an international pedigree which is unique. Many of its principal companies opened for business over a century ago and they have a history which is rich in variety and achievement. The HSBC Group is named after its founding member, The Hongkong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between China and Europe. Our principles and values The HSBC Group is committed to five core business principles:

outstanding customer service; effective and efficient operations; strong capital and liquidity; prudent lending policy; strict expense discipline;

Our business principles are supported by loyal and committed employees who make lasting customer relationships and international teamwork easier to achieve.

HSBC also operates according to certain key business values:

the highest personal standards of integrity at all levels; commitment to truth and fair dealing; hands-on management at all levels; commitment to quality and competence; a minimum of bureaucracy; fast decisions and implementation; putting the teams interests ahead of the individual's; the appropriate delegation of authority with accountability; fair and objective employer;

diverse

team

underpinned

by

meritocratic

approach

to

recruitment/selection/promotion;

a commitment to complying with the spirit and letter of all laws and regulations wherever we conduct our business; the exercise of sustainability through detailed assessments of lending proposals and investments, the promotion of good environmental practice and sustainable development, and commitment to the welfare and development of each local community.

HSBCs reputation is founded on adherence to these principles and values. All actions taken by a member of the HSBC Group or staff member on behalf of a Group company should conform with the principles and values. Additionally, we have codes of conduct for staff in all operations. Many areas of sustainability provide opportunities to collaborate with other financial services organisations through international commitments to establish best practice. HSBC INDIA The antecedents of the HSBC Group in India can be traced back to October 1853 when the Mercantile Bank of India, London and China was founded in Bombay (now Mumbai). Starting with an authorised capital of Rs 5 million, the Mercantile Bank soon opened offices in London, Madras(Chennai), Colombo and Kandy, followed by Calcutta(Kolkata), Singapore, Hong Kong, Canton(Guangchow) and Shanghai by 1855. The following hundred years were in many ways propitious for the Mercantile Bank. In 1950 it moved into its new head office building in Mumbai.at Flora Fountain. The acquisition in 1959 by The Hongkong and Shanghai Banking Corporation Limited of the Mercantile Bank was a decisive factor in laying the foundation for today's HSBC Group. Founded in 1865 to serve the needs of the merchants of the China coast and finance the growing trade between China, Europe and the United States, HSBC has been an international bank from its earliest days.

After the Mercantile Bank was acquired by The Hongkong and Shanghai Banking

Corporation, the Flora Fountain building became and remains to this day, the Head Office of the HSBC Group in India.

Through the 1990s, HSBC has vigorously developed its role as one of the leading banking and financial services organisations in the world. Its strategy of 'managing for value' emphasises the Group's unique balance of business and earnings between older, mature economies and faster-growing emerging markets.

HSBC in India is proud to have retained the Group's pioneering streak by being an active partner in the development of the Indian banking industry - even giving India its first ATM way back in 1987. The organisation's adaptability, resilience and commitment to its customers have further enabled it to survive through turbulent times and prosper through good times over the past 150 years.

HSBC PowerVantage HSBC's PowerVantage Account is a proposition that offers, amongst other benefits, a feature called the Personalised Financial Review (PFR). A trained Financial Planner uses the PFR to help you evaluate your finances, identify your current and future financial needs and assist you in drawing up a plan to meet them. This sets it apart from other ordinary banking accounts

Features & Benefits

A PowerVantage Relationship Manager to assist you in your banking and financial planning needs Personal Financial Review helps you to evaluate your finances, identify your current and future financial needs and assist you in drawing up a plan to meet them

Unlimited free transactions (cash withdrawals and balance enquiries) at 23,500 HSBC and non - HSBC Visa ATMs in India using your PowerVantage debit card

Dedicated Service Desk and Teller Counters to assist you with your banking needs, enabling you to save time Higher cash withdrawal limit of up to Rs. 50,000 and funds transfer up to Rs. 100,000 with your PowerVantage debit card, across 23,500 HSBC and nonHSBC Visa ATMs in India and more than 1 million ATMs overseas

Use your PowerVantage debit card for purchases of upto Rs. 50,000 per day at over 350,000 merchant establishments in India and over 26 million such establishments overseas

Free Cheques Payable at Par (CPP) facility in all cities where HSBC has branches, helping you save on out-station clearing time and costs No-bounce Cheque Protection which means cheques presented through clearing irrespective of funds available, will be honoured (overdrawing of a maximum of Rs. 10,000)*

Monthly Composite Statement giving you a snapshot of all deposits and loans Joining fee waiver and 50% off on the annual fee for your credit card ** Free passbook facility w.e.f. Aug 1st 2007. Passbooks can be collected from the nearest branch and can be updated personally with transactions up to three preceding months.

Eligibility

To be eligible for PowerVantage, all you have to do is maintain an overall average quarterly balance of Rs. 100,000 as a combination of deposits and loans OR with a minimum of Rs. 50,000 in deposits

Take a home loan from HSBC

OR

Hold a minimum investment of Rs. 500,000 purchased through HSBC.

Financial Planning Services Inflation, falling interest rates and fluctuating market conditions require you to plan your finances carefully. Celebrate important occasions in the future by managing your wealth well now. HSBC's Financial Planning Services offer assistance to secure your future. Our Financial Planning Services are available for existing HSBC customers and are free of cost.

WEALTH MANAGEMENT SYSTEMS

HSBC provides its customers with the advantage of wealth management services. The service is offered to both type of its customers, i.e. the PowerVantage customers as well as the Premiere Customers. Under the WMS the bank tries to understand its customers needs and requirements and as per these requirements the Relationship manager designs the planner for its client. Before moving on lets understand the concept of Wealth Management System in a more comprehensive way. As the number of high net worth individuals has continued to rise in the major economies around the world, so has the demand for wealth management services. The private wealth market is a growing one for financial institutions and firms of advisors able to offer wealth management services that meet the demanding requirements of wealthy investors. Increasingly, high net worth individuals look for diversification in their investments to obtain the returns they need to protect and grow their wealth. To draw up the investment strategies their private wealth customers require, wealth management professionals need access to comprehensive coverage of the global financial markets and to the news which affects them. They look for services that enable them to find and filter information quickly and build personalised displays. They also seek purpose-built tools and models to help them analyse instruments, sectors, funds, indices or economic conditions and test the level of risk versus return of proposed

investments.

To perform, wealth management professionals need advanced portfolio management systems that allow them to analyse their private wealth customers' portfolios, value them in a range of currencies and measure performance. Wealth management professionals want portfolio management systems that automate administrative functions so that they can spend more time developing good relationships with private wealth customers. Effective portfolio management systems enable wealth management professionals to generate customised reports for customers and colleagues. They also give private wealth customers the means to access their own accounts directly so they can view their portfolio valuation, transaction history or cash position. Wealth management professionals need to be able to trade quickly to respond to market conditions. They therefore want portfolio management systems that provide access to order entry functionality and market information from a single interface. They look for functionality that allows them to route orders to multiple venues, so they can achieve best price and execution, and lets them track the progress of their orders. They also want portfolio management systems that enable them to feed order information into in-house systems to facilitate trade management.

Reuters offers a range of products tailored to the needs of wealth management professionals. They provide access, from a single platform, to everything they need to operate effectively and support their private wealth customers.

MUTUAL FUNDS
A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager, also known as portfolio manager, trades the fund's underlying securities, realizing capital gains or losses and passing any proceeds to the individual investors. Today, the worldwide value of all mutual funds totals more than $26 trillion in assets

The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. Legally known as an "open-end company" under the Investment Company Act of 1940 (the primary regulatory statute governing investment companies), a mutual fund is one of three basic types of investment companies available in the United States. Outside of the United States (with the exception of Canada, which follows the U.S. model), mutual fund is a generic term for various types of collective investment vehicle. In the United Kingdom and western Europe (including offshore jurisdictions), other forms of collective investment vehicle are prevalent, including unit trusts, open-ended investment companies (OEICs), SICAVs and unitized insurance funds. In Australia the term "mutual fund" is generally not used; the name "managed fund" is used instead. However, "managed fund" is somewhat generic as the definition of a managed fund in Australia is any vehicle in which investors' money is managed by a third party (NB: usually an investment professional or organization). Most managed funds are open-ended (i.e., there is no established maximum number of shares that can be issued); however, this need not be the case. Additionally the Australian government introduced a compulsory superannuation/pension scheme which, although strictly speaking a managed fund, is rarely identified by this term and is instead called a "superannuation fund" because of its special tax concessions and restrictions on when money invested in it can be accessed. The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore (As of Dec, 2006) of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut

of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments. Specialisation is the order of the day, be it with regard to a schemes investment objective or its targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, its not just about going with the fund that gives you the highest returns. Its also about managing risk finding funds that suit your risk appetite and investment needs. So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tackswhat exactly is a mutual fund? Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors, and collectively invests this amount in either the equity market or the debt market, or both, depending upon the funds objective. This means you can access either the equity or the debt market, or both, without investing directly in equity or debt.

Mutual funds: The advantages

And that, naturally, begs the question: why cant I invest directly in, say, equity? Why go through a mutual fund at all? Here are some compelling arguments in favour of mutual funds: Professional management Take equities. Most of us have neither the skill to find good stocks that suit our risk and returns profile nor the time to track our investmentsbut still want the returns that can be had from equities. Thats where mutual funds come in. When you invest in mutual funds, it is your fund manager who will take care of your investments. A fund manager is an investment specialist, who brings to the table an in-depth understanding of the financial markets. By virtue of being in the market, the

fund manager is ideally placed to research various investment options, and invest accordingly for you. Small investments Today, if you wanted to buy government securities, you would have to invest a minimum amount of Rs 25,000. Much the same is the case if you want to build a decent-sized portfolio of shares of blue-chips. Now, that might be too large an amount for many small investors. A mutual fund, however, gives you an ownership of the same investment pie at an outlay of Rs 1,000-5,000. Thats because a mutual fund pools the monies of several investors, and invests the resultant large sum in a number of securities. So, on a small outlay, you get to participate in the investment prospects of a number of securities.

Diversified portfolio One of the oft-mentioned tenets of portfolio management is: diversify. In other words, dont put all your eggs in one basket. The rationale for this is that even if one pick in your portfolio turns bad, the others can check the erosion in the portfolio value. Take a simpleeven if extreme example. Say, you have Rs 10,000 invested in one stock, Reliance. Now, for some reason, the stock drops 50 per cent. The value of your investment will halve to Rs 5,000. Now, say you had invested the same amount in a mutual fund, which had parked 10 per cent of its corpus in the Reliance stock. Assuming prices of other stocks in its portfolio stay the same, the depreciation in the funds portfolio and hence, your investmentwill be 5 per cent. Thats one of the merits of diversification. Liquidity You are free to take your money out of open-ended mutual funds whenever you want, no questions asked. Most open-ended funds mail your redemption proceeds, which are

linked to the funds prevailing NAV (net asset value), within three to five working days of your putting in your request. Tax breaks Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. Whats more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year.

Disadvantages
Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund.

No assured returns and no protection of capital

If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India).

There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors.

Restrictive gains
Diversification helps, if risk minimisation is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. In our earlier example, say, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation.

Types of mutual funds

Many people tend to wrongly equate mutual fund investing with equity investing. Fact is, equity is just one of the various asset classes mutual funds invest in. They also invest in debt instruments such as bonds, debentures, commercial paper and government securities. Every scheme is bound by the investment objectives outlined by it in its prospectus, which determine the class(es) of securities it can invest in. Based on the asset classes, broadly speaking, the following types of mutual funds currently operate in the country.

Equity funds.
The highest rung on the mutual fund risk ladder, such funds invest only in stocks. Most equity funds are general in nature, and can invest in the entire basket of stocks available in the market. There are also specialised equity funds, such as index funds and sector funds, which invest only in specific categories of stocks.

Debt funds.

Such funds invest only in debt instruments, and are a good option for investors averse to taking on the risk associated with equities. Here too, there are specialised schemes, namely liquid funds and gilt funds. While the former invests predominantly in money market instruments, gilt funds do so in securities issued by the central and state governments.

Balanced funds.
Lastly, there are balanced funds, whose investment portfolio includes both debt and equity. As a result, on the risk ladder, they fall somewhere between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Lets now take a closer look at the working of each of these three categories of funds, the investment options they offer, and how best you can make money from them.

Equity funds
As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:

Index funds
These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to

near accuracy. Index funds dont need fund managers, as there is no stock selection involved. Investing through index funds is a passive investment strategy, as a funds performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, theres a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unitholders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, the lower the tracking error, the better the index fund.

Diversified funds
Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund managers picks languish, the returns will be far lower. The crux of the matter is that your returns from a diversified fund depend a lot on the fund managers capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practised by your fund

manager. Understand that a portfolio concentrated in a few sectors or companies is a high risk, high return proposition. If you dont want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance.

Tax-saving funds
Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you wont get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.

Sector funds
The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector funds NAV will zoom if the sector performs well; however, if the sector languishes, the schemes NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cyclesget in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds.

How to pick an equity fund ?

Now, that you have an idea of the investment profile and objective behind each type of equity fund, lets get down to specifics: what you should look for while evaluating an equity fund. First, narrow down your investment universe by deciding which category of equity fund you would like to invest in. That decided, seek the following four attributes from a prospective fund.

Track record
Its always safer to opt for a fund thats been around for a while, as you can study its track record. You can see how the fund has performed over the years, which will facilitate historical comparison across its peer set. Although past trends are no guarantee of future performance, it does give an indication of how well a fund has capitalised on upturns and weathered downturns in the past. The funds track record also gives an indication of the volatility in its returns. Avoid funds that show a volatile returns patterns.

Diversified portfolio
Unless you are willing to take on high risk, avoid funds that have a high exposure to a few sectors or a handful of stocks. Such funds will give superior returns when the selected sectors are doing well, but if the market crashes or the sector performs badly, the fall in NAV will be equally sharp. Ideally, a diversified equity fund should have an exposure to at least four sectors and seven to 10 scrips.

Diversified investor base

Just as the fund needs diversified investments, it also needs to have a diversified investor base. This ensures that a few investors do not own a significant part of the fund, as it would belie the very principle of a mutual fund. Sebi (Securities and Exchange Board of India) regulations stipulate that a fund must publish, in its half-yearly disclosures, details of the number of investors who hold more than 25 per cent of the schemes corpus. Avoid such funds, as they could well be catering to the interests of the large investorsat your expense.

Transparency in operations
Before investing in a fund, always go through its offer document and fact sheet. If the fund house doesnt give out such information regularly, avoid that fund. Funds that do not disclose details on a regular basis to their unitholders are better left alone, as you may not be told what will happen to your money once you invest.

Debt funds
Such funds attempt to generate a steady income while preserving investors capital. Therefore, they invest exclusively in fixed-income instruments securities like bonds, debentures, Government of India securities, and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. There are basically three types of debt funds.

Income funds
By definition, such funds can invest in the entire gamut of debt instruments. Most income funds park a major part of their corpus in corporate bonds and debentures, as the returns there are the higher than those available on government-backed paper. But there is also the risk of defaulta company could fail to service its debt obligations.

Gilt funds
They invest only in government securities and T-billsinstruments on which repayment of principal and periodic payment of interest is assured by the government. So, unlike income funds, they dont face the spectre of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds.

Liquid funds
They invest in money market instruments (duration of up to one year) such as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile. They are ideal for investors seeking low-risk investment avenues to park their shortterm surpluses.

The risk in debt funds

Although debt funds invest in fixed-income instruments, it doesnt follow that they are risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so dont show the same degree of volatility in their performance as equity funds. Still, they face some inherent risk, namely credit risk, interest rate risk and liquidity risk.

Interest rate risk

This is common to all three types of debt funds, and is the prime reason why the NAVs of debt funds dont show a steady, consistent rise. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevelant demand and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign themselves with the new market yield. This, in turn, brings down the NAV of a debt fund. On the other hand, if interest rates fall, existing debt securities become more precious, and rise in value, in line with the new market yield. This pushes up the NAVs of debt funds.

Credit risk
This throws light on the quality of debt instruments a fund holds. In the case of debt instruments, safety of principal and timely payment of interest is paramount. There is no credit risk attached with government paper, but that is not the case with debt securities issued by companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more liquid than lower-rated paper.

Credit risk is not an issue with gilt funds and liquid funds. Gilt funds invest only in government paper, which are safe. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. For income funds, however, credit risk is real, as they invest primarily in corporate paper.

Liquidity risk
This refers to the ease with which a security can be sold in the market. While there is brisk trading in government securities and money market instruments, corporate securities arent actively traded. More so, when you go down the rating scalethere is little demand for low-rated debt paper. As with credit risk, gilt funds and liquid risk dont face any liquidity risk. Thats not the case with income funds, though. An income fund that has a big exposure to lowrated debt instruments could find it difficult to raise money when faced with large redemptions.

How to pick a debt fund

Its evident there is an element of risk associated with debt funds. Hence, some care and thought has to go into picking a debt fund. Here are some factors you ought to look at while scouting for a debt fund.

Investment horizon
The first thing you need to get a fix on is your investment horizon. If you wish to invest in a debt fund for anything up to one year, opt for a liquid fund. Anything above that, you should be looking at a gilt fund or an income fund.

Track record
As with equity funds, a debt fund with a good track record is always preferable. The longer the track record, the betterto be on the safe side, choose funds that have been in the market for at least a year.

Credit quality

One of the most important factors you need to look for in an income fund is the credit rating of the debt instruments in its portfolio. A credit rating of AAA denotes the highest safety, while a rating of below BBB is classified as non-investment grade. Although rating agencies classify BBB paper as investment grade, you should budget for downgrades, and set the minimum acceptable rating benchmark at AA. In order to ensure the safety of your investment, opt for a fund that has at least 75 per cent of its corpus in AAA-rated paper, and 90 per cent in AA and AAA paper.

Diversification
In order to limit the loss from a possible default, an income fund should be reasonably diversified across companies. Say, a fund manager invests his entire corpus in debt instruments of just one company. If the company goes under, the fund loses everything. Now, had the fund manager diversified and invested 10 per cent of his corpus in 10 companies, with one-tenth in the troubled company, his loss would be lower. Assuming the other companies meet their debt obligations, the funds loss would be restricted to 10 per cent.

Diversified investor base

Similar to the pre-condition for equity funds, avoid debt funds where a few large investors account for an abnormally high portion of the corpus.

Balanced funds
As the name suggests, balanced funds have an exposure to both equity and debt instruments. They invest in a pre-determined proportion in equity and debtnormally 60:40 in favour of equity. On the risk ladder, they fall somewhere between equity and debt funds, depending on the funds debt-equity spiltthe higher the equity holding, the higher the risk. Therefore, they are a good option for investors who would like greater returns than from pure debt, and are willing to take on a little more risk in the process.

How to pick a balanced fund?

The same criterion that applies to selecting an equity fund holds good when choosing a balanced fund. The one additional factor you should check for a balanced fund is the equity and debt split. The offer document will state the ratio of equity and debt investments the fund plans to have. Mostly, this takes on a range, and varies from time to time depending on the fund managers perception of the financial markets. Before investing in an existing balanced fund, go through a few of its past fund fact sheets, and look up the equity-debt split. If you are a conservative investor, opt for a fund where equity investments are capped at 60 per cent of corpus. However, if you are the aggressive sort, you could even go along with a higher equity holding.

The intelligent investor's seven rules

Its one thing to understand mutual funds and their working; its another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. Here are seven must-dos that go a long way in helping you meet your investment objectives.

Know your risk profile

Can you live with volatility? Or are you a low-risk investor? Would you be satisfied if your fund invests in fixed-income securities, and yields low but sure-shot returns? These are some of the questions you need to ask yourself before investing in a fund. Your investments should reflect your risk-taking capacity. Equity funds might lure when the market is rising and your neighbour is making money, but if you are not cut out for the risk that accompanies it, dont bite the bait. So, check if the funds objective matches yours. Invest only after you have found your match. If you are racked by uncertainty, seek expert advice from a qualified financial advisor.

Identify your investment horizon

How long you want to stay invested in a fund is as important as deciding upon your risk profile. A mutual fund is essentially a savings vehicle, not a speculation vehicle dont get in with the intention of making overnight gains. Invest in an equity fund only if you are willing to stay on for at least two years. For income and gilt funds, have a one-year perspective at least. Anything less than one year, the only option among mutual funds is liquid funds.

Read the offer document carefully

This is a must before you commit your money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, name of the asset management company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors.

Go through the fund fact sheet

Fund fact sheets give you valuable information of how the fund has performed in the past. You can check the funds portfolio, its diversification levels and its performance in the past. The more fact sheets you examine, the better.

Diversify across fund houses

If you are routing a substantial sum through mutual funds, you should diversify across fund houses. That way, you spread your risk.

Do not chase incentives

Dont get lured by investment incentives. Some financial intermediaries give upfront incentives, in the form of a percentage of your initial investment, to invest in a particular fund. Dont buy it. Your focus should be to find a fund that matches your investment needs and risk profile, and is a performer.

Track your investments

Your job doesnt end at the point of making the investment. Its important you track your investment on a regular basis, be it in an equity, debt or balanced fund. One easy way to keep track of your fund is to keep track of the Intelligent Investor rankings of mutual funds, which are complied on a quarterly basis (log on to iinvestor.com to see the rankings for the quarter ended June 2001). These rankings allow you to take note of your funds performance and risk profile, and compare it across various time periods as well as across its peer set. In addition, you should run some basic checks in the fund fact sheets and the quarterly reports you get from your fund. Equity funds are subject to market volatility, and the pace of change can be quite brisk. Check your funds quarterly reports for changes that could have severe implications on your investment. If you find a high degree of concentration in a few stocks or sectors, it means the fund manager is banking on the performance of these sectors. If they keep up to his expectations, you could end up making hefty returns, but if they dont, chances are that the NAV will depreciate heavily. In the case of debt funds, check the portfolio distribution and the funds holding in AAA and equivalent papers. If you find your fund is holding a significant quantity (above 10 per cent) in below AA-rated paper, your investment is not safe. Remember, even a single default can drag the NAV of your debt down.

Tata AIGs bancassurance product with HSBC

Tata AIG Life Insurance Company has launched its first bancassurance product with HSBC Bank. The products will be sold by HSBC Insurance Services India an associate of HSBC Bank set up exclusively for the purpose of insurance distribution. This is for the first time that a life insurance product is being directly marketed to prospects. Unlike other life insurance policies which are sold by agents, HSBC Insurance services will be mass marketing the terms insurance cover to the one million customers of HSBC Bank. The customers include account holders and creditcard holders of the bank. What makes it possible for the product to be sold directly is the fact that policy is a fixed pre-packaged one with fixed benefits there is not much explaining to do. The

cover which has a term of 15 years is available for customers within the age group of 18 to 50 years without any medical examination. The product that Tata AIG is offering to HSBC Bank customers is a term insurance cover with return of premium. Term insurance policies typically are pure protection plans without any savings element. However, Tata AIGs term product offered to HSBC Bank customers has been structured in such a manner that the insured will receive 125 per cent of the premium paid towards life insurance if he survives until the maturity of the policy. For instance, a 30 year old will have to pay a premium of Rs.307 per month for a Rs.2 lakh insurance cover for a 15-year period. In addition to life cover the premium includes payment for accident disability. If he survives the 15 year period he will receive Rs.61,200 on maturity of the policy. "With an aim of providing complete financial services to its customers, including insurance services, HSBC Bank has set up a subsidiary called HSBC Insurance Services (India).

BIBLIOGRAPHY
o www.tata.com/tata_aig_life/media/20020222.htm - 14k o www.outlookmoney.com/scripts/IIH021C1.asp? sectionid=2&categoryid=22&articleid=2937 - 125k

o http://about.reuters.com/productinfo/s/wealth_management/ o www.hsbc.co.in/1/2/personal/wealth-management/powervantage - 29k -