The document provides an overview of financial markets and various asset classes within them, including equities and fixed income securities. It discusses the structure and components of financial markets, how equity and fixed income products work, economic indicators, and how to build an investment portfolio. Key topics covered include the types and functioning of capital markets, primary and secondary markets, equity valuation methods, risk analysis, and bond characteristics.

1. Financial Market
1

2. You will 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

3. Financial Markets
Organizations that facilitate the trade in financial products. i.e.
Stock exchanges facilitate the trade in stocks, bonds and warrants
3

4. 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

5. 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

6. 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

7. 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 company
stocks and other securities.
7

8. Equity
8

9. 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

10. 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

11. Preference shares
• Fixed Dividend
• Priority for dividend
• Priority on liquidation of company
11

12. Terminology
12

13. 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.
Particulars ABC Co Ltd XYZ Co Ltd
No of shares 540 300
PAT( Last 4 quarters) 60 25
EPS 9 12
13

14. P/E Ratio
• Market price / number of shares outstanding
• It tells how much investment one has to make to earn
one rupee of income.
• P/E could be either trailing or forward, depending on
the type of earnings used in the denominator.
Particulars ABC Co Ltd XYZ Co Ltd
Price 100 200
EPS (Earning per share) 5 20
P/E Computation (100/5) (200/20)
P/E Ratio 20 10
14

15. 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 is CUM-dividend and
after that EX-dividend.
ABC Co Ltd XYZ Co Ltd
Current Market price (Rs) 500 350
Dividend per share 20 5
Dividend yield 4 1.43
High D/Y paying
High D/Y paying Low D/Y paying
Low D/Y paying
Company
Company 15 Company
Company

16. 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
Example XYZ Co Ltd ABC Co Ltd
Current Price 200 230
No of share (Cr) 10000 2000
Market Capitalization 200 x 10000 230 x 2000
Market cap 2000000 460000
Large Cap 16
Large Cap Small Cap

17. 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

18. 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. The Divisor is the only link to the
original base period value of the SENSEX.
18

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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 outlook".
24

25. 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 diversification.
25

26. 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 risky than the market.
26

27. 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

28. 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
24.93%, representing the smoothed annualized gain you earned
over your investment time horizon.
28

29. 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
– The Treynor Measure
29

30. 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

31. 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

32. Long Term Investors Get Rewarded
32

33. Fixed Income Securities
33

34. Introduction to Bonds
A financial obligation to pay a specified sum of money at
specified future date- Fixed Income Investment
34

35. 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

36. 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

37. Classification of Bonds
Market Issuer Instruments
Segment
Government Central Government Zero Coupon Bonds, Coupon Bearing Bonds, Treasury
Securities Bills, STRIPS
State Governments Coupon Bearing Bonds.
Public Sector Government Agencies / Govt. Guaranteed Bonds, Debentures
Bonds Statutory Bodies
Public Sector Units PSU Bonds, Debentures, Commercial Paper
Private Sector Corporate Debentures, Bonds, Commercial Paper, Floating Rate
Bonds Bonds, Zero Coupon Bonds, Inter-Corporate Deposits
Banks Certificates of Deposits, Debentures, Bonds
Financial Institutions Certificates of Deposits, Bonds
37

38. 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

39. 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

40. 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

41. Credit Rating
• An important tool used to gauge the default risk of an issue -
credit ratings by rating companies.
Agency Moody’s/ ICRA S & Ps/ CRISIL Description
Gilt edge, prime, Maximum
Highest Quality Aaa AAA safety
High Grade, High Credit
High Quality Aa AA quality
Upper Medium A A Upper Medium Grade
Medium Baa BBB Lower Medium Grade
Somewhat Speculative Ba BB Low grade, Speculative
Speculative B B Highly Speculative
Substantial risk, in poor
Highly Speculative Caa CCC standing
May be in default, very
Most Speculative Ca CC speculative
Imminent Default C C Extremely speculative
Default D D Default
41

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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),
Certificates of Deposit (CDs) and Treasury Bills (T-Bills).
49

50. 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

51. 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

52. 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. Mutual Fund
53

54. 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 Instruments
54

55. 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.
• The investment portfolio is created according to the
stated investment objectives of the fund.
55

56. 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

57. 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

58. 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, which are fundamentally
linked to the NAV.
58

59. 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

60. 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

61. 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

62. 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/ corporate deposits.
62

63. 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

64. How does a Mutual Fund work?
AMC
Savings
Trust Investments
Units
Unit holders Returns
Registrar
Trust
SEB
I Custodian AMC
64

65. 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

66. 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

67. 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

68. Fund Management
68

69. 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

70. 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

71. 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 portfolios should be
comparable. 71

72. 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

73. Wealth cycle for investors
Stage Financial needs Investment preferences
Accumulation stage Investing for long term identifed Growth options and long term
financial goals products.High risk appetite
Transition Stage Near term needs for funds as Liquid and medium term investments.
pre-specified needs draw closer Lower risk appetite
Reaping Stage Higher liquidity requirements Liquid and medium term investments.
Preference for income and debt
products
Long term investment of
Inter Generational Low liquidity needs.
inheritance
Ability to take risk and invest for the
transfer
long term
Sudden wealth surge Medium to long term Wealth preservation.
Preference for low risk products
73

74. 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

75. Economic Environment and Indicators
75

76. 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

77. 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

78. ECONOMIC FACTORS: GNP & GDP
Gross National
Gross National This is the value of output of goods and services
This is the value of output of goods and services
Product (GNP)
Product (GNP) produced by Indian companies, regardless of whether
produced by Indian companies, regardless of whether
the production is inside or outside the India
the production is inside or outside the India
The value of output of goods and services produced
The value of output of goods and services produced
Gross Domestic
Gross Domestic in the country, regardless of whether businesses are
Product (GDP) in the country, regardless of whether businesses are
Product (GDP) owned and operated by Indians or foreigners.
owned and operated by Indians or foreigners.
-
profits on
= +
profits on
Gross National
Gross National Gross Domestic
Gross Domestic Indian owned
foreign owned
Product (GNP)
Product (GNP) Product (GDP)
Product (GDP) businesses
businesses
outside India
78

79. 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=
GDP= C + II + G +
C+ +G+ (X- M)
(X- M)
C = personal consumption spending on goods and services
C = personal consumption spending on goods and services
I I= Private sector fixed capital expenditure
= Private sector fixed capital expenditure
G = Government expenditure
G = Government expenditure
(X-M)= Net of export receipts (X) and import payments (M)
(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

80. 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)
= 5500 – 500
= 5000
80

81. 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. There is a considerable co-
movement between these two indices with the CPI tending to follow the WPI
with a lag.
• The converse of inflation, that is, deflation, is the persistent falling of
prices. RBI can reduce the supply of money or increase interest rates to
reduce inflation.
81

82. 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

83. 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

84. 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

85. Thank You!
85