Financial Market Know

how

1
 This session will help you
understand

• The component and Structure of financial

market.

• The working of the equity as an asset class.

• The working of the Fixed Income Securities.

• The working of mutual fund products.

• Economic Environment and indicators.

• How to recommend a investment portfolio.

2
 Financial Markets

Organizations that facilitate the trade in financial products. i.e. Stock

exchanges facilitate the trade in stocks, bonds and warrants

3
 Types of financial markets
The financial markets can be divided into different
categories:
– Capital Market
• Stock markets, which provide financing through the
issuance of shares and enable the subsequent trading.
• Bond markets, which provide financing through the
issuance of Bonds, and enable the subsequent trading.

– Money markets, which provide short term debt financing

and investment.

– Derivatives markets, which provide instruments for the

management of financial risk.

– Foreign exchange markets, which facilitate the trading of

foreign exchange.

– Commodity markets, which facilitate the trading of

commodities. 4
 Capital Market
• The capital market is the market for securities, where
companies and governments can raise long-term funds.

• The capital market includes the stock market and the bond
market.

• Financial regulators oversee the capital markets to ensure

that investors are protected against fraud.

• The capital markets consist of primary markets and

secondary markets.
– Primary markets: Newly formed (issued) securities are
bought or sold.
– Secondary markets allow investors to sell securities that
they hold or buy existing securities.
5
 Primary Market
• It deals with the issuance of new securities. Companies,
governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue.

• In the case of a new stock issue, this sale is an initial public

offering (IPO).

• Features Of Primary Market are:

– Market for new long term capital.
– Securities are sold for the first time.
– Issued by the company directly to investors

• Methods of issuing securities in the Primary Market

– Initial Public Offer;
– Rights Issue (For existing Companies); and
– Preferential Issue.
6
 Secondary Market
• It is the market for trading of
securities that have already been
issued in an initial offering
• Once a newly issued stock is listed on
a stock exchange, investors and
speculators can easily trade on the
exchange
• A stock exchange is an organization
which provides facilities for stock
brokers and traders, to trade
7
Equity

8
 Understanding Equity

Equity is the form of shares of common

stock. As a unit of ownership, common stock
typically carries voting rights that can be
exercised in company decisions

9
 Ordinary shares - Equities
• Part Owners of Company
– Voting
– receive annual report and accounts
– entitlement to residual assets in case of
winding up
• No Actual Ownership of Company
Assets

10
 Preference shares
• Fixed Dividend
• Priority for dividend
• Priority on liquidation of company

11
Terminology

12
 EPS: Earning per Share
•Earning per share: PAT/ No of equity share

•PAT: Profit after tax of the company

It denote the how much the company has

earned on per share.

13
 P/E Ratio
• Market price / number of shares
outstanding
• P/E could be either trailing or
forward, depending on the type of
earnings used in the denominator.

14
 Dividend Yield
• Dividend is declared on the face value of
the share.
• The market price and face value of the
share differs
• Divided yield: Dividend/ price
• In case of a dividend paying company, there
is a cut off day – till the cut off day the price

High D/Y paying Low D/Y paying

15
Company Company
 Market capitalization
• It gives the idea as how big the
company.
Price x No. of share
Where,
Price: Market price
No of share: No of fully diluted share

16
Large Cap Small
 Index
• A broad-base index represents the
performance of a whole stock market —
and by proxy, reflects investor
sentiment on the state of the economy.

– Meaning – represents the value of a set of

stocks; relative in value
– Importance
• Barometer for market behavior
• Benchmark portfolio performance
• Underlying in derivative instruments like index
futures
• Passive fund management (index funds)
17
 Index:
Sensex
• Short form of the BSE-Sensitive Index
• Is a "Market Capitalization-Weighted" index of
30 stocks representing a sample of large,
well-established and financially sound
companies.
• Base period of SENSEX is 1978-79. Actual
total market value of the stocks in the Index
during the base period is equal to an indexed
value of 100.
Calculation:
• Divide the total market capitalization of 30
companies in the Index by the Index Divisor.
18
 Types of equity research
• Fundamental analysis – Future
earnings and risk profile considered
( whether to buy or not)

• Technical analysis – Study of historic

data on the company’s share price
movements and volume (To find
timing)

19
 Valuations
• Valuation - process of determining the fair value of a
financial asset.
• Also referred to as ‘valuing’ or ‘pricing’.
• The fundamental principle of valuation - value is equal to
present value of expected cash flows.
• Valuations of financial assets involve the following three
steps:

Step 1: Estimate the expected cash flows

Step 2: Determine the appropriate interest rate that should be used to

discount the cash flows.

Step 3: Calculate the present value of expected cash flows found in

Step 1, using the interest rate or interest rate determined in Step 2.
20
 Equity Valuation
• The valuation of equity share is more
difficult.
• The difficulties arise because of two
factors first the rate of dividend on
equity share is not known also the
payment of equity dividend is
discretionary.

21
 Valuation Process
• There are two general approaches to the
valuation process
– Top- Down (three step) Approach
– Bottom Up/ Stock Picking Approach

• Three step approach believe that the

economy/ market and the industry effect
have a significant impact on the total
returns for the individual stock.

• The stock picking contend that it is possible

to find stocks that are undervalued relative
to their market price and these will provide
superior returns regardless of the market
and industry outlook. 22
 The Bulls
A bull market is when everything in the economy is great,
people are finding jobs, gross domestic product (GDP) is
growing, and stocks are rising.

Picking stocks during a bull market is easier because

everything is going up.

Bull markets cannot last forever though, and sometimes they

can lead to dangerous situations if stocks become overvalued.

If a person is optimistic and believes that stocks will go up, he

or she is called a "bull" and is said to have a "bullish outlook".

23
 The Bears
A bear market is when the economy is bad, recession is
looming and stock prices are falling.

Bear markets make it tough for investors to pick profitable

stocks.

One solution to this is to make money when stocks are falling

using a technique called short selling.

Another strategy is to wait on the sidelines until you feel that

the bear market is nearing its end, only starting to buy in
anticipation of a bull market.

If a person is pessimistic, believing that stocks are going to

drop, he or she is called a "bear" and said to have a "bearish
24
 Risk consideration
Investment Risk: It is the total risk of the
investment in stock which is measured
by Standard deviation. It can be
separated into systematic risk (non
diversifiable risk) Plus Unsystematic
Risk (Diversifiable Risk)
A) Systematic Risk: It includes risks that affect the entire
market e.g. market risk, interest rate risk. Systematic risk cannot be
eliminated through diversification because it affects the entire market.
Beta is a measure by which systematic risk is determined.
B) Unsystematic risk: It is unique to a single business or
industry, such as operations and methods of financing. Unlike
systematic risk, unsystematic risk can be eliminated through

25
 Beta
• Beta is a measure of the systematic risk
of a security that cannot be avoided
through diversification.
• Beta is a relative measure of risk-the
risk of an individual stock relative to the
market portfolio of all stocks.
• If the stock has a beta of 1, the
implication is that the stock moves
exactly with the market.
• A beta of 1.2 is 20 percent riskier than
the market and 0.8 is 20 percent less
26
 Return Computation
• Total return or Holding period
return: The period during which the investment is
held by the investor is known as holding period and the
return generated on that investment is called as holding
period return during that period.

• Compounded Annual Growth

Rate (CAGR): The year-over-year growth rate of
an investment over a specified period of time.

27
 CAGR Computation
• Suppose you invested Rs. 10,000 in a portfolio on Jan 1,
2005. Let's say by Jan 1, 2006, your portfolio had grown to
Rs. 13,000, then Rs. 14,000 by 2007, and finally ended up
at Rs. 19,500 by 2008.
Your CAGR would be the ratio of your ending value to
beginning value (Rs. 19,500 / Rs. 10,000 = 1.95) raised to
the power of 1/3 (since 1/# of years = 1/3), then
subtracting 1 from the resulting number:
1.95 raised to 1/3 power = 1.2493. (This could be written as
1.95^0.3333). 
1.2493 - 1 = 0.2493

• Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to
28
 Risk Adjusted Return
• A higher return by itself is not
necessarily indicative of superior
performance.
• Alternately, a lower return is not
indicative of inferior performance.
• There are composite equity portfolio
measures that combine risk and return
to give quantifiable risk-adjusted
numbers.
• The most important and widely used
measures of performance are:
– The Sharpe Measure
29
 The Treynor Measure
• Relative measure of the risk adjusted
performance of a portfolio based on
the market risk (i.e. the systematic
risk).

• Treynor Index (Ti) = (Ri - Rf)/Bi.

• Where, Rp represents return on

portfolio, Rf is risk free rate of return
and Bi is beta of the portfolio.
30
 The Sharpe Measure
• Relative measure of risk adjusted performance
of a portfolio based on total risk (systematic risk
+ nonsystematic risk).

• Standard deviation is used as the measure for

the total risk. In comparing, bigger is better

Sharpe Index (SI) = (Rp - Rf)/SD

• Where, SD is standard deviation of the fund, Rp

is the portfolio rate of return and Rf is the risk
free rate of return.

31
 Long Term Investors Get
# YEAR END
Rewarded
SENSEX
PERFORMANCE OF BSE SENSITIVITY INDEX
Rolling 1 Rolling 3 Rolling 5 Rolling 7 Rolling 10 Rolling 15 Rolling 20
Yr Growth Yr Growth Yr Growth Yr Growth Yr Growth Yr Growth Yr Growth

High Risk Medium Risk Safe

0 Mar-79 100
1 Mar-80 128.57 28.57%
2 Mar-81 173.44 34.90%
3 Mar-82 217.71 25.52% 29.58%
4 Mar-83 211.51 -2.85% 18.05%
5 Mar-84 245.33 15.99% 12.24% 19.64%
6 Mar-85 353.86 44.24% 17.56% 22.43%
7 Mar-86 574.11 62.24% 39.45% 27.03% 28.33%
8 Mar-87 510.36 -11.10% 27.66% 18.57% 21.76%
9 Mar-88 398.37 -21.94% 4.02% 13.48% 12.60%
10 Mar-89 713.6 79.13% 7.51% 23.79% 18.47% 21.70%
11 Mar-90 781.05 9.45% 15.22% 17.15% 20.50% 19.76%
12 Mar-91 1167.97 49.54% 43.12% 15.25% 24.96% 21.00%
13 Mar-92 4285 266.88% 81.66% 52.97% 42.76% 34.68%
14 Mar-93 2280.52 -46.78% 42.88% 41.73% 21.76% 26.82%
15 Mar-94 3778.99 65.71% 47.85% 39.54% 33.08% 31.43% 27.37%
16 Mar-95 3260.96 -13.71% -8.70% 33.07% 35.02% 24.85% 24.04%
17 Mar-96 3366.61 3.24% 13.85% 23.55% 24.79% 19.33% 21.84%
18 Mar-97 3360.89 -0.17% -3.83% -4.74% 23.16% 20.72% 20.00%
19 Mar-98 3892.75 15.82% 6.08% 11.28% 18.75% 25.59% 21.41%
20 Mar-99 3739.96 -3.92% 3.57% -0.21% -1.92% 18.01% 19.90% 19.85%
21 Mar-00 5001.28 33.73% 14.15% 8.92% 11.86% 20.39% 19.30% 20.09%
22 1-Mar 3604.38 -27.93% -2.53% 1.37% -0.67% 11.92% 13.02% 16.38%
23 2-Mar 3469 -3.76% -2.48% 0.64% 0.89% -2.09% 13.63% 14.85%
24 3-Mar 3049 -12.11% -15.21% -4.77% -1.41% 2.95% 14.53% 14.27%
25 4-Mar 5528 81.31% 15.32% 8.13% 7.37% 3.88% 14.62% 16.85%
26 5-Mar 6492.82 85.14% 23.24% 5.36% 10.34% 2.64% 15.16% 15.66%
27 6-Mar 11279.96 57.17% 54.66% 25.63% 17.08% 12.09% 16.32% 16.06%
28 7-Mar 13072.1 15.89% 33.23% 30.39% 14.71% 14.19% 7.72% 17.60%
29 8-Mar 15644.44 19.68% 34.06% 38.69% 23.33% 17.77% 13.70% 20.14%
Probability of Loss 29-Oct 27-May 25-Mar 23-Mar 20-Jan 0/15 0/10
Investment Success 66% 81% 88% 87% 95% 100% 100%

32
Fixed Income Securities

33
 Introduction to Bonds

A financial obligation to pay a specified sum of money at specified future

date- Fixed Income Investment

34
 Basic Features
• Term to Maturity: The number of years the debt is
outstanding.

• Par Value: The agreed repayment amount to the bondholder

at or by maturity date.

• Coupon Rate (Nominal Rate): The interest rate that the

issuer agrees to pay each year.

• Zero Coupon Bond: Bonds that are not contracted to make

periodic coupon payment.

35
 Floating Rate Securities
• Coupon rate need not be fixed over the bond’s life.
• Floating rate securities - coupon payments reset
periodically according to some reference rate.
• Calculated as
– Coupon rate = reference rate x Quoted margin
• Quoted margin: additional amount that the issuer agrees to
pay above the reference rate.

Coupon rate = 1 month MIBOR +Quoted Basis point

36
Classification of Bonds

37
 Risk associated with Fixed Income
Securities
• Interest rate risk: Inverse Relationship between Interest or
Yield and bond price.
• Following relationship will hold:
– Price of a bond = par if coupon rate = yield.
– Price of a bond can be < par (sell at discount) or > par
(sell at a premium) if the coupon rate is different from
yield.
• Maturity Effect: All other factors constant, the longer
maturity, greater the price sensitivity to interest rates
changes.

38
 Risk associated with Fixed Income
Securities
• Reinvestment risk: Risk of reinvestment of interest income
or principal repayments at lower rates in a declining rate
environment.

• Credit risk: An investor who lends funds by purchasing a

bond issue is exposed to credit risk.

• There are two types of credit risk:

– Default Risk: Risk that the issuer will not meet the
obligation of timely payment of interest & principle.

– Downgrade Risk: Risk that one or more of the rating

agencies will reduce the credit rating of an issue or
issuer.
39
 What is a credit rating ?
• Rating organizations evaluate credit worthiness of an issuer
.
• Evaluation on ability to pay back debt.
• The rating is an alphanumeric code representing
creditworthiness.
• The highest credit rating - AAA & lowest - D (for default).
• Short-term instruments* rating symbol - "P" (varies
depending on the rating agency).
• In India, we have 4 rating agencies:
CRISIL ICRA

CARE Fitch

*of less than one year 40

 Credit Rating
An important tool used to gauge the default risk of an issue -
•

credit ratings by rating companies.

41
 Risk associated with Fixed Income
Securities
• Inflation Risk/Purchasing power risk: Risk of decline in the
real value of the security due to inflation.

• Liquidity Risk: Liquidity risk is the risk that the investor will
have to sell a bond below its expected value.

42
 Relationship between
parameters
• The relationship between coupon rate, yield, price and par
value are as follows:

– Coupon rate = Yield required by market, therefore price

= par value

– Coupon rate < Yield required by market, therefore price

< par value (discount)

– Coupon rate > Yield required by market, therefore price

> par value (premium)

43
 Yield Measures
• Investor should value bonds in terms of Yields and in not
rupee terms.
• For fixed income instruments, returns can be from :
• Coupon interest payment
• Capital gain on sale or maturity
• Reinvestment of interim cash flow.
• Current Yield: relates coupon interest to bond’s market
price.
• Same as dividend yield to stocks.
• Computed as follows
• Current yield= Annual coupon / market price

44
 Yield to Maturity
• The Yield to maturity is interest rate that will make the
present value of the cash flow equal to price plus accrued
interest. It is also known as IRR of bond.

• It takes in to account all three sources of return.

• The most widely used bond yield figure as it indicates the

fully compounded rate of return promised to an investor
who buys the bond at prevailing prices, if two assumptions
hold true.

• The first assumption is that the investor holds the

bond to maturity.
• Investors reinvest all the interim cash flows at the
computed YTM rate.
45
 Debt Markets
• Capital Markets comprise of :
– Equities Market &
– Debt Markets.

• The Debt Market - where fixed income securities of various

types and features are issued and traded.

• Fixed income securities can be issued by:

– Central and State Governments,
– Public Bodies,
– Statutory corporations and corporate bodies.

46
 Indian Debt Markets
• Indian Debt Markets - one of the largest in Asia today.

• Government Securities (G-Secs) market - the oldest &

largest component of Indian Debt Market in terms of
capitalization, outstanding securities & trading volumes.

• G-Secs- Benchmark for determining level of interest rates in

the country are the yields on government securities ,
referred to as the risk-free rate of return.

• The Indian Debt Market structure was a wholesale market

with participation largely restricted to the Banks,
Institutions and the Primary Dealers.

• The Retail Debt Market in India has been created recently.

47
 Segments in the secondary
debt market
• The segments in the secondary debt market based on the
characteristics of the investors and the structure of the
market are:

– Wholesale Debt Market - investors are mostly Banks,

Financial Institutions, the RBI, Primary Dealers,
Insurance companies, MFs, Corporates and FIIs.

– Retail Debt Market involving participation by individual

investors, provident funds, pension funds, private trusts,
NBFCs and other legal entities in addition to the
wholesale investor classes

48
 Money Market Instruments
• Money markets - markets for debt instruments with
maturity up to one year.

• Money markets allow banks to manage their liquidity as

well as provide central bank a means to implement
monetary policy.

• The most active part of the money market - call money

market (i.e. market for overnight and term money between
banks and institutions) and the market for repo
transactions.

• The former is in the form of loans and the latter are sale
and buyback agreements - both are obviously not traded.

• The main traded instruments are Commercial Papers (CPs),

49
 Commercial Paper
• A Commercial Paper is a short term unsecured promissory
note issued by the raiser of debt to the investor.
• In India; corporate & Financial Institutions (FIs) can issue
these notes.
• Generally companies with very good ratings are active in
the CP market, though RBI permits a minimum credit rating
of Crisil-P2.
• Tenure of CPs - anything between 15 days to one year, the
most popular duration being 90 days.
• Companies use CPs to save interest costs.

50
 Certificates of Deposit
• Issued by banks in denominations of Rs.5 lakhs & have
maturity ranging from 30 days to 3 years.
• Banks are allowed to issue CDs with a maturity of less than
one year
• Financial institutions are allowed to issue CDs with a
maturity of at least one year.

51
 Treasury Bills (T-Bills)
• T- Bills: instruments issued by RBI at a discount to face
value

• Form an integral part of the money market.

• In India treasury bills are issued in four different maturities

—14 days, 90 days, 182 days and 364 days.

• Apart from these, certain other short-term instruments are

also popular with investors.

• These include short-term corporate debentures, bills of

exchange and promissory notes.

52
53
 Introduction
• It is a pool of money, collected from investors,
and is invested according to certain investment
objectives

• The ownership of the fund is thus joint or

mutual, the fund belongs to all investors.

• A mutual funds business is to invest the funds

thus collected, according to the wishes of the
investors who created the pool

• e.g. money market mutual fund seeks investors

to invest predominantly in Money Market
54
 Important characteristics
• The ownership is in the hands of the
investors who have pooled in their
funds.
• It is managed by a team of investment
professionals and other service
providers.
• The pool of funds is invested in a
portfolio of marketable investments.
• The investors share is denominated by
‘units’ whose value is called as Net
Asset Value (NAV) which changes
everyday.
55
 Advantages &
Disadvantages
Advantage:
• Portfolio diversification
• Professional Management
• Reduction in Risk
• Reduction in Transaction costs
• Liquidity
• Convenience and Flexibility
• Safety – Well regulated by SEBI

Disadvantage:
• No control over the costs. Regulators limit the expenses of
Mutual Funds. Fees are paid as percentage of the value of
investment.
• No tailor made portfolios.
• Managing a portfolio of funds. (Investor has to hold a portfolio
for funds for different objectives) 56
 Type of mutual Fund: By Structure

Open Ended Fund:

Investors can buy and sell units of the fund, at NAV related
prices, at any time, directly from the fund.

Open ended scheme are offered for sale at a pre- specified

price, say Rs. 10, in the initial offer period. After a pre-specified
period say 30 days, the fund is declared open for further sales
and repurchases

Investors receive account statements of their holdings,

The number of outstanding units goes up and down

The unit capital is not fixed but variable.

57
 Type of mutual Fund: By Structure

Closed Ended fund:

• A closed -end fund is open for sale to
investors for a specified period, after which
further sales are closed.

• Any further transactions happen in the

secondary market where closed-end funds
are listed.

• The price at which the units are sold or

redeemed depends on the market prices,
58
 Types of Funds - By Investment
Objective

Equity Debt Money Market

Equity Funds Fixed Income Money Market

Index Funds Funds Mutual Funds
Sector Funds GILT Funds

Balanced Funds

59
 Gilt Funds
• Invests only in securities that are issued by the Government
and therefore do not carry any credit risk.

• Government papers are called as dated securities also.

• It invests in both long-term and short-term paper.

• Ideal for institutional investors who have to invest in Govt.

Securities.

• Enables retail Participation

60
 ELSS (Equity Linked Saving Scheme)

• 3 year lock in period

• Minimum investment of 90% in equity markets at all times
• So ELSS investment automatically leads to investment in
equity shares.
• Open or closed ended.
• Eligible under Section 80 C
• Dividends are tax free.
• Benefit of Long term Capital gain taxation.

61
 Fixed Term Plan Series
• FTPs are closed ended in nature.
• AMC issues a fixed number of units for
each series only once and closes the
issue after an initial offering period.
• Fixed Term plan are usually for shorter
term – less than a year.
• They are not listed on a stock
exchange.
• FTP series are likely to be an Income
scheme.
• Good alternate of Bank deposits/
62
 Money Market Mutual Fund
• Money funds provide investors with current income and are
managed to maintain a stable share price.

• Because of their stability, money funds are often used for

cash reserves or money that might be needed right away.

• Money funds typically invest in short-term, high-quality,

fixed-income securities, such as T-Bills, CDs and CPs

• Income from money funds is generally determined by short-

term interest rates.

63
 How does a Mutual Fund work?

AMC
Saving
s
Trus Investmen
t ts
Unit
Unit s Return
holders s

Registrar

Trust
SEBI
Custodian AMC

64
 Loads
• Load is charged to investor when the investor buys or
redeems units. It is primarily used to meet the expenses
related to sale and distribution of units

• Load charged on sale of units is entry load. It increases the

price above the NAV for new investor.

• Load charged on redemption is exit load. It reduces price.

• Maximum Entry load or Exit load is 7%.( For Open ended

Funds)

• Max. Entry or Exit load for closed ended funds is 5%

• CDSC is an exit load that varies with holding period.

• Load is an amount which is recovered from the investor.

65
 Net Assets Value
• The net assets represent the market value
of assets which belong to the investors, on a
given date.

• Net assets are calculated as:

Market value of investments

Plus(+) current assets and other assets
Plus(+) accrued income
Less(-) current liabilities and other liabilities
Less(-) accrued expenses
66
 NAV Computation
• Unit capital of a MF scheme is Rs.20
million. The market value of
investments is Rs. 55 million. The
number of units is 1 million. The NAV
is
– Rs. 20
– Rs. 75
– Rs.55
– Not possible to say
67
Fund Management

68
 Active fund management

Fund manager tends to look at specific attributes in selecting stocks.

Active fund manager believes, that his ability to buy right stock at the right
time, can translate into superior performance for his portfolio.

What are the basic active equity fund management style?

Growth Investment style – Objective is capital appreciation, look for companies

that are expected to give above average earnings growth, The shares are more
risky and thus expected to offer higher returns over a long investment horizons.
Relatively higher P/E ratio and have lower dividend yield

Value Investment Style – Look for companies that are currently undervalued but
whose worth will be recognized eventually.

69
 Passive fund
management
• Fund manager believes, that holding a well
diversified portfolio is the cost efficient way
,to better returns, he would tend to mimic
the market index.
• It requires limited research and monitoring
costs and is therefore cheaper.
• Fund manager may choose to mimic a
index, or a subset of the index or choose a
basket of shares from multiple indices.
• A passive fund manager has to rebalance
his portfolio every time changes are made
in the index.
70
 Performance Measurement
• Returns comes form dividend or capital gains.
• Rate of Return =(Income Earned/Amount
invested)x100
• Simple total return=
{NAV(end) – NAV ( begin)}+ Dividend paid
x100
NAV at beginning
• Rule of 72 is a thumb rule used in finding
doubling period. If Rate = 12%, then money will
double in 72/12 = 6 years.
• CAGR
• While comparing funds performance with peer
group funds, size and composition of the
71
 Investment Plans
• Broadly 2 options- Growth option and
Dividend Option
• Automatic Reinvestment Plans–
Benefit of Power of Compounding.
• Systematic Investment Plans – For
regular investment
• Systematic Withdrawal Plan – For
regular income ( it is not similar to
MIP)
• Systematic Transfer Plan
72
Wealth cycle for investors

73
 Financial Planning
Strategies
• Power of Compounding

• Buy and hold

• Rupee cost averaging:

– A fixed amount is invested at regular intervals

– More units are bought when prices are low and fewer units

are bought when prices are high. Over a period of time, the

average purchase price of investor is lower than average

NAV.

– Its disadvantage : Does not indicate when to sell or switch.74

Economic Environment and Indicators

75
Importance of Economic and Business
Environment
• Significant implications on the investment
recommendation.

• Recommendations depend on a number of

assumptions about the future performance
of the economy.

• Financial advisors should always keep a

track of economic environment to make
reasonable assumptions.

• A thorough understanding of economic

environment helps in reviewing the existing
financial situation.
76
 Gross Domestic Product
• There are three ways to derive GDP:
– The sum of all expenditures,
– The sum of all incomes, and
– The sum of all value added by business

77
 ECONOMIC FACTORS: GNP & GDP

Gross National This is the value of output of goods and services

Product (GNP) produced by Indian companies, regardless of whether
the production is inside or outside the India

The value of output of goods and services produced

Gross Domestic in the country, regardless of whether businesses are
Product (GDP) owned and operated by Indians or foreigners.

-
profits on
Gross National
Product (GNP) = Gross Domestic
Product (GDP)
profits on
foreign owned
businesses
+ Indian owned
businesses
outside India

78
 GDP

GDP is the measure of total value of final goods and services

produced in the domestic economy each year. The following is
often used
GDP= C+I+G+ (X- M)

C = personal consumption spending on goods and services

I = Private sector fixed capital expenditure

G = Government expenditure

(X-M)= Net of export receipts (X) and import payments (M)

The relationship highlights actual rupee expenditure for goods and services produced
in the economy for measuring GDP.
This equation includes all key players involved in the economy – consumers /
households, business (private sector) and government.
For living standards to rise in India, GDP must grow at a faster rate than the
population. This way, there is greater quantity of goods and services per person. 79
 Example
The following information is available for an
economy.
Consumption (C) = Rs 3000
Private Investment (I) = Rs 500
Government Expenditure (G) = Rs
2000
Exports (E) = Rs 1000
Imports = Rs 1500
Calculate the GDP for the economy?

Answer:
GDP = 3000 + 500 + 2000 + (1000-
1500)
80
 Inflation
• A situation of rising prices. Inflation refers to a persistent rise in
prices. Simply put, it is a situation of too much money and too few
goods.

• The most popular measure of inflation in India is change in the

Whole Price Index (WPI) over a period of time.

• The WPI is an index measure of the wholesale prices of a selected

basket of goods and services in the economy. The WPI is expressed
as a percentage with reference to some base year, according to a
formula

• WPI= (aggregate price for current year/aggregate price for the base
year)* 100

• An alternative measure is consumer price Index, which is concerned

with the consumer market for goods and services.

81
 Monetary Policy
• Monetary policy is the process by
which the central bank of a country
controls the supply of money, cost of
money or rate of interest.

• The Reserve Bank of India (RBI)

controls and influences the economy
by means of monetary and credit
policy.
82
 Some Monetary Policy terms
• Bank Rate
– Bank rate is the minimum rate at which the central bank
provides loans to the commercial banks. It is also called the
discount rate.
– Usually, an increase in bank rate results in commercial banks
increasing their lending rates. Changes in bank rate affect credit
creation by banks through altering the cost of credit.
– Bank Rate is at 6.0 per cent.

• Cash Reserve Ratio

– All commercial banks are required to keep a certain amount of
its deposits in cash with RBI. This percentage is called the cash
reserve ratio.
– It is cash as a percentage of demand and time liabilities that
bank maimtain with RBI
– Cash reserve ratio (CRR) of scheduled banks increased to 8.25
per cent with effect from the fortnight beginning May 24, 2008.

83
 Some Monetary Policy terms
• Open Market Operations
– An important instrument of credit control, the Reserve
Bank of India purchases and sells securities in open
market operations.

– In times of inflation, RBI sells securities to mop up the

excess money in the market. Similarly, to increase the
supply of money, RBI purchases securities.

• Statutory Liquidity Ratio

– Banks in India are required to maintain 25 per cent of
their deposits in government securities and certain
approved securities.

– These are collectively known as SLR securities.

84
 RakeshChandrayan

THANK YOU
By
Rakesh
Chandrayan
PGDF
Batch-(2008-09)