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  • DERIVATIVES
  • EQUITIES
  • MUTUAL FUNDS
DERIVATIVES

A derivative is a financial security with a value that is reliant upon, or derived from, an underlying asset or group of assets (common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes). The derivative itself is a contract between two or more parties, and its price is determined by fluctuations in the underlying asset.

Generally belonging to the realm of advanced investing, derivatives are secondary securities whose value is solely based (derived) on the value of the primary security that they are linked to. In and of itself a derivative is worthless. Futures contracts, forward contracts, options, swaps, and warrants are commonly used derivatives. Futures and contracts are widely applied in the equity market all over the world and have already been introduced in the Indian equity market too.

Futures

Futures is a Contract between two entities, Buyer and Seller, to Buy or Sell the Underlying Asset, on a Future Date, for a specified Price and Quantity agreed today. It is an obligation on both Buyer and Seller to honor the Contract. It is entered, traded and settled in a Recognized and Regulated Exchange.

TRADING ON FUTURES


Some of the Common and Widely used Futures Trading practices are:

  • Long: Buy Futures at agreed upon price at a future date. You believe the market price of the underlying will go up (Bullish on the Market).
  • Short: Sell Futures at agreed upon price at a future date. You believe the market price of the underlying will go down (Bearish on the Market).

MARGINS


Two types of margins need to be paid to take up and hold positions in the Futures segment. They are known as Initial margin and Mark to Market Margin. While the initial margin has to be paid upfront as a percentage of the value of the underlying before the deal is struck, mark to market margin emerges daily when the contract is mark to marketed and the same has to be paid on next day basis. Failure to pay margins by clients will result into compulsory close out of one's position as insisted by SEBI.

INITIAL MARGIN

One can take exposure into a Futures Contract by paying the Initial Margin. The Margin will be stipulated by the Exchange and will change on a Daily Basis. On an average, the Margin percentage of the Futures Contracts works out to around 15-20 percentage of the Total Contract Value (this is subject to change, by the Exchange). For example, if you hold a positon for Rs. 5,00,000, you will have to pay a margin of only Rs. 75,000-1,00,000 (based on the 15-20 % assumption from above, which is not always the case as it may vary).

MARK TO MARKET MARGIN

The Mark To Market is done on a Daily Basis. It is the settlement of the Open Position of the Investor, with the Current, prevailing Market Price. So, Ideally, Mark To Market will be either Profit or Loss based on the Market Movement of the Futures Contract.

Therefore, all the Futures Contract which are Open, will be having the Daily MTM Debited or Credited based on the Market Movement. The Positions which have been Squared-Up Intra-Day will not have any Margin Obligation. Only the Price difference of Buy and Sell (Profit or Loss, as the case may be) will be Settled.

TYPES OF FUTURES

 
INDEX FUTURES

Index Futures are future contracts on which the underlying asset is an index like equity indices like the Sensex or Nifty. For trading convenience, these contracts have been standardized as far as market lot, minimum contract value etc. are concerned. In the Indian Equity market context, two equity index or stock index futures are being traded and they are the index futures on the Sensex (BSE 30) and index futures on S&P CNX Nifty of the National Stock Exchange. Stock Futures on the Nifty started trading on 12, June, 2000 is the first derivative instrument in the Indian equity market which was followed by stock index futures on the Sensex. The Exchange has also introduced trading in Futures and Options contracts based on Nifty IT, Nifty Bank, and Nifty Midcap 50, Nifty Infrastructure, Nifty PSE, Nifty CPSE indices.

STOCK FUTURES

Stock Futures or equity futures can be defined as future contracts in which the underlying asset is an individual share. As mentioned earlier, the holder of such a contract is eligible to purchase a certain quantity of the equity in question on a future date at the mutually agreed price.

Options

Option can be defined as a derivative contract which gives the buyer/holder a right, but no obligation, to buy (call option) or sell (put option) a specified quantity of the underlying asset on a future date at the predetermined price. Accordingly, an option contract consists of two parties, option buyer/holder and option seller/writer.

The agreement is drawn on a specified quantity of an asset or assets (that will be cash settled) and a specified price (Strike Price at which the settlement occurs) and the expiry date of the contract (time up to which the contract will be valid).

The seller of the contract receives an Option Premium (which will not be repaid even if the option buyer does not exercise the right to buy or sell the underlying) which is their attraction of taking the risk.

TRADING ON OPTIONS (CALL AND PUT OPTIONS)

Options trading practices are:

  • Call Option: This gives the buyer of the contract the Right to Buy the underlying at the future date and strike price according to the contract. But, the premium has to be paid to the seller of the contract up front.
  • Put Option: This gives the buyer of the contract the Right to Sell the underlying at the future date and strike price according to the contract. But, the premium has to be paid to the seller of the contract up front.

PARTICIPANTS IN OPTION MARKET

Option buyer, also known as the option holder enjoys the right to purchase or sell the underlying as per the terms of the contract. However, it is not obligatory from his side that this right has to be executed. In other words, the buyer has absolute freedom to walk away from the contract if he feels that the terms of the contract are not in his favour.

Option Seller, also known as option writer, on the other hand is obligated to buy or sell as per the contract terms provided the buyer comes forward to exercise his rights.

Hence, there are four participants:

  • Buyer of a Call Option (Right but no obligation to sell underlying)
  • Seller of a Call Option (Obligation to buy underlying if Buyer exercises their Right)
  • Buyer of a Put Option (Right but no obligation to buy underlying)
  • Seller of a Put Option (Obligation to sell underlying if Buyer exercises their Right)

RISKS ASSOCIATED WITH OPTIONS

BUYER OF OPTIONS
LIMITED RISK AND UNLIMITED PROFITABILITY TO THE BUYER

A call option is bought when the contract buyer is bullish (expects that the price would rise) about the underlying asset and expects that a profit could be made by exercising his right (to buy) at the strike price and selling the asset at a higher price which is decided by the spot value of the asset. If things are going as expected, the call buyer can make a handsome profit and this could be termed as unlimited. On the other side, his loss is limited only up to the premium paid if the value of the asset remained stagnant or even lower. For example, person A purchases a right to buy 100 shares of Infosys Technologies at a price of Rs.3500(strike price) per share on the last day of December,2001(expiry day) and the right is bought at a premium of Rs.100 per share. Also assume that Infosys share price has increased to Rs.3900 on the expiry day. The call buyer will purchase Infosys at Rs. 3500/share (since this is the strike on the contract) from the call seller and the same will be sold at Rs. 3900/share because it is the settlement value. His gain after deducting the premium is Rs. 300 per share. Conversely, suppose that value of Infosys has come down to Rs. 3,000 on the expiry day. He can simply walk away from the contract and what he has to lose is the premium and nothing more.

SELLER OF OPTIONS
LIMITED PROFIT AND UNLIMITED LOSS TO THE SELLER

Unlike a call buyer, the writer of a call option is bearish on the underlying asset (expects that the price would fall) and the call is sold on expectation that a profit could be made to the extent of the premium received. So long as he is right, the seller makes a profit but this is limited to the premium. On the other side, the call writer may be a big loser if the value of the asset increases. In such an occasion, he has to buy it from the market at a higher price to fulfill his obligation to sell to the call buyer and this loss may be unlimited.

Trading and Settlement

Final settlement of derivative contracts is on the last Thursday of each month and all open positions on the settlement date will be closed out by the Exchange at the settlement price i.e., the spot value of the asset on the settlement date. (If the contracts for Option contracts are out of the money or at the money, it will be allowed to expire because they are worthless from the point of view of option buyers.)

Besides final settlement of the contracts by the Exchanges concerned, buying or selling positions of contract holders and writers could be traded on a daily basis and positions could be closed out at any time by entering into an opposite transaction. For example, a buying position in a type of contract could be closed out by effecting a sell and vice versa and profit can be booked without waiting for the final settlement day. Thus, options are giving profitable trading opportunities to the participants on a daily basis.

Standardization

All the derivative instruments are standardized. In the sense, the Contract

Specifications are pre – determined by the Exchange.

  • The Lot Size or the Quantity of Units to be traded.
  • The Contract Duration – called as the Expiry Date.
  • Settlement – In India, the Futures and Options Contracts are Cash Settled
  • Other Contract Information.
Minimum contract value and Market lot

Futures on the Sensex and Nifty are being traded in the standardised form, that is, the market lot, minimum contract value etc. are standardised. In the case of Sensex Futures, the market lot is decided as 50 units of the Sensex (one unit refers to the value of the index on the contract day) and it is 200 units as far as Nifty futures are concerned. Trading positions could be taken as multiple of these market lots.

The difference in the market lot as stated above occurred because of the stipulation by SEBI that a derivative contract should have a minimum value of Rs.5 lakhs for each.

https://www.nseindia.com/products/content/derivatives/equities/individual_securities.htm
Why are Derivatives traded?

HEDGING

Hedging is the act of taking a position in the futures market which is exactly the opposite of one's position in other segments of the market such as the equity segment, with a view of offsetting losses in one segment (say, in equities) with a gain in the other (say, futures)

The rationale behind these acts lies on the fact that both segments of the market (Futures and equities) are moving in tandem and hence the loss on buying positions in equities could be eliminated or reduced to the minimum by taking a reverse position in the futures market. To elaborate, let us assume that one has a good equity portfolio of Rs.10 lakhs and he wants to hedge his portfolio against market falls. Simply speaking, he can do so by taking a sales position of Rs.10 lakhs or a little more in the futures segment.

Suppose that the market is falling in due course. It is no doubt that the investor would have lost on his portfolio. On the other side, he would have made a reasonable profit from the futures segment where he is a seller on the simple reason that he can settle the deal by purchasing futures contracts at a price lower than the one on which the sales were effected. Thus, the loss in equities are made up by the gain in futures as the market falls.

The main drawback of hedging is that the profit generated from one side is eaten up by the loss on the other and hence, profitability would be the minimum. Therefore, hedging is widely used by large fund managers, high net worth individual investors etc. and the major objective is to eliminate risk rather than making big gains from trading.

SPECULATIVE TRADING

Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense. Also, as the margin necessary to trade in derivatives is 15-20% of the total margin required for equity trading, the return on investment will be 5 to 7 times that obtained from equity trading.

Without the prospect of substantial gains, there would be little motivation to engage in speculation.

FAQ

CONTRACT VALUE

Contract value at any point of time is the value of the index at that time period multiplied by the market lot. Hence, the contract value may go up or down at different time intervals in accordance to the movement of the index on which the contract is based.

COVERED CALL

If a call is written on an asset on the backing of long position (buying) of the same asset in the cash market, it is known as a covered call. Since the call seller has bought the required quantity of the asset in the cash market, losses due to a price increase of the asset could be eliminated.

NAKED CALL

A naked call is one where the seller of the call option does not have position in the underlying asset.

INTRINSIC VALUE

The difference between strike price of a contract and the spot value of the underlying asset at any point of time is the intrinsic value. Based on this, option contracts are said to be in the money, at the money or out of the money.

IN THE MONEY

A contract is in the money when the contract is in favour of the buyer, that is, a profit could be made by trading or exercising his rights. In fact, it depends on the difference between the strike price and the exercise value and hence will differ in the case of call option and put option. A call option is in the money when the settlement value of the asset is higher than the strike price. A put option will be in the money when the settlement value is lower than the strike price.

AT THE MONEY

An option contract is said to be in the money when there is no cash flow from exercising the contract. Such a situation arises when the strike price is equal to the exercise price and the case is the same in both call options and put options.

OUT OF THE MONEY

An option contract is out of the money when the contract is not in favour of the buyer, that is, a profit could not be generated by exercising the right or by trading.

A call option is out of the money at times when the strike price is higher than the spot value of the asset. In such circumstances, a profit could not be made from the contract.

A put option is out of the money when the strike price is lower than the spot value or settlement price of the asset.

When a contract is out of the money, the premium fetched by it may be lower as compared to other times. A contract which may be out of the money at a point of time may turn to be in the money at another time and vice versa.

EQUITIES

An equity share, commonly referred to as ordinary share, represents the form of fractional or part ownership in a business venture. The holders of such shares are members of the company and have voting rights.

Boiled down, a stock is a stake of ownership in a company that is sold off in exchange for cash. A stock is a security in that company that can also be referred to as equity or a share.

When a company goes to sell a stock (companies issuing stock for the first-time issue Initial Public Offerings, or IPOs), they decide to sell a certain amount of shares of ownership in their company that they will give up in exchange for cash from investors. The investors will then have part ownership in the company and will be able to sell or trade their stock (on the stock market) to other investors to make profits (or take losses if the company is doing poorly).

Additionally, by buying a stock in a company, the investor buys a claim to that company's earnings and assets.

FAQ

Pros and Cons

The biggest pro of investing in stocks is that, history shows, stocks tend to earn more than bonds - especially long term. Additionally, stocks can offer better returns if the company growth is exponential, earning the investor potentially millions on an originally miniscule investment. For investors willing to take the risk, stocks can pay more than bonds in returns as the company's stock could continue rising.

As a con, stocks make no promises of future returns on initial investments. Because the stock market is unpredictable, it is very easy to lose money by investing in the wrong stocks. For this reason, stocks are often considered high risk investments.

Bonds

A bond is a debt that the company or entity enters into with the investor that pays the investor interest on that debt. Essentially, bonds are IOU's that companies enter into with investors on the pretense that they will repay the money lent in full with regular interest payments.

However, bonds can be issued by a company, a city, or a government (in the case of government bonds), and are generally considered a lower-risk option compared to stocks.

Bonds are created when a company, government, or other entity wishes to raise money to finance a project, growth, or development and wish to use investors instead of a bank to create loans.

Bonds are fixed-income investments, which operate off of a fixed interest rate and a fixed amount of time wherein the company, government, or other will repay the money plus the interest (the interest rate is called a coupon rate) to the creditor (at the point of maturity). For this reason, bonds are frequently called "fixed-income securities," which, as the name suggests, may be more dependable (in theory) than investing in stocks.

Bonds vs Stocks

Bonds are debts while stocks are stakes of ownership in a company. Because of the nature of the stock market, stocks are often riskier short term, given the amount of money the investor could lose virtually overnight. However, long term, stocks have historically proved to be very valuable.

On the other hand, bonds often operate off of fixed interest rates that the entity buys from the investor, which will frequently pay out annual interest rates to investors while repaying the amount in full at a given time. For this reason, bonds are generally considered a safer investment in the short term or for new investors.

Index

An index is a stock-market indicator created as a statistical measure of the performance of an entire market or segment of a market based on a sample of securities from the market. An index is thus a means to evaluate the overall performance of a market or of a segment of the market. An index measures aggregate market movements. 

We have 2 renowned indices viz.

  • a. BSE Sensitive (BSE Sensex) and
  • b. S&P Nifty 50 (Nifty)

BSE Sensex comprises of 30 large-cap companies. As the name suggests, it is a premier index on Bombay Stock Exchange (BSE). Nifty comprises of 50 large-cap companies on the National Stock Exchange (NSE).

Capital Market

A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

Capital Market enhances capital formation in the economy and comprises of -

  • a. Primary Market is a place where new offerings by Companies are made either as an Initial Public Offering (IPO) or Rights Issue.
  • b. Secondary Market is a market where securities are traded after being initially offered to the public in the Primary Market and/or listed on the Stock Exchange. Majority of trading is done in this market which comprises of equity market and debt market.

Dividend

Dividend is the part of profit distributed by the company among its investors. It is usually declared as a percentage of the paid-up value or face value of the share.

Initial Public Offering (IPO)

An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as "going public."

Bonus Share

A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout. For example, a company may give one bonus share for every five shares held.

Rights Issue

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called "rights," which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

TRANSACTION

To be able to trade in the Stock Market, an investor would need to be registered with a stock broker like Geojit Financial Services Ltd. who holds membership in stock exchanges and who is registered with SEBI. A “Member-Client agreement” has to be signed for the purpose of engaging a broker to execute trades on the investor’s behalf from time to time and furnish details relating to the investor to enable the member to maintain Client Registration Form.

Trading can be done via the phone or by coming in person to the office of Barjeel Geojit or through any other facility provided by Barjeel Geojit like Internet trading. The dealer (employee of Barjeel Geojit who is supposed to input the investors order into the stock exchange order system), after checking the authenticity of the person calling and after checking the margin available in the account, would put/enter the order into the stock exchange system.

Mininum Amount

For equity shares, common shares or common stocks, there is no stipulated minimum transaction amount. The investors can decide on the amount and the number of shares they wish to buy.

TAX

For equity share transactions, there are two types of taxes: one for short-term investments (investments less than one year) and another for long-term investments (investments more than one year). Short-term taxes are 15% of the capital gain while long-term tax is 10% of the total capital gain.

Mutual funds also follow the same tax procedure as equity shares, where short-term investments are eligible for 15% tax and long-term investments 10% tax.

Additional Changes

In addition to the brokerage, the trading member can charge:

  • Securities Transaction Tax.
  • Service tax as applicable.
  • Transaction charges levied by NSE, Stamp duty and other charges directly attributable to the transaction.
Common Position in trade

When you act upon a stock and buy into it, you are taking a position. A position is an amount of money committed to an investment in anticipation of favorable price movements. There are two kinds of positions:

  • Long positions are what most people do. When you buy long, that means you are anticipating an upward movement in the price, and that is how you profit. People usually buy stocks at market prices expecting to sell them later at higher prices and hence make profits.
  • Short positions are the tricky ones. When you buy short, you are anticipating a fall in the price and the fall is the source of your profits. The shares will be sold, usually without actually owning any of the said shares, and when the price falls they will be repurchased and given back in the amount sold earlier and the difference in price is where the investor profits. Of course, the investor who borrowed the shares carries the risk of not having the price move as anticipated, in which case he may lose money in repurchasing the stocks.
Methodology Of Trading

Indian residents are required to hold a Trading Account and a Demat Account to execute investment transactions. These accounts can be opened with the help of Barjeel Geojit Financial Services Ltd. or any other depository participant.

A non-resident has to hold another account in addition to the Trading and the Demat account which is registered with the RBI called the PIS (Portfolio Investment Scheme) Account through which all investments are routed so that the RBI can monitor the account.

Depository

A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. There are two main depositories in India, namely, a) National Securities Depository Ltd. (NSDL) and b) Central Depository Securities Ltd. (CDSL), both of which are regulated by SEBI. Geojit Financial Services Ltd is a Depository Participant of NSDL and will hold your securities in electronic form.

Basic services of a depository includes maintenance of accounts of investors, dematerialisation and rematerialisation of shares, settlement of market transaction through the release and receipt of securities in the investor's account ,off market transfers, inter-depository transfers, distribution of non- financial benefits from corporates to its shareholders, nomination facilities, transmission of shares, hypothecation of dematerialised securities for a bank loan, freezing of account to protect one's holdings when he is temporarily out of the scene etc.

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. It has its own merits. Bad deliveries could be eliminated since shares are registered in the electronic form that cannot be mutilated easily. Elimination of all risks associated with physical certificates Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements through and from the registrars etc. Such problems do not arise in the depository environment.

No stamp duty for transfer of any kind of securities in the depository. This waiver extends to equity shares, debt instruments and units of funds etc. in the depository. Thus, cost can be reduced.

Member Client Agreement

It is an agreement entered into between client and broker in the presence of witnesses wherein the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of the broker’s capabilities to deal in the same.

Trading Cycle

Trading is done under Rolling Settlement, where in each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. Settlement is on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

MUTUAL FUNDS

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors.

Open Ended VS Closed Ended

Open ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at prevailing NAV.

Close-ended mutual fund Schemes have a stipulated maturity period wherein an investor can invest only when subscription is allowed (generally during NFO). Exit is normally restricted and investors can liquidate their investment from the scheme only on its maturity. Few closed ended schemes get listed on Stock Exchanges, where option to sell is available, however market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders’ expectations and other market factors. Usually they are traded at a discount to NAV; but closer to maturity, the discount narrows.

Systematic Investment Plan(SIP)

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

Working of SIP(SYSTEMATIC INVESTMENT PLAN)

A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme.You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Rupee-Cost Averaging

With rupee-cost averaging, you invest a specific amount at regular intervals regardless of the investment's share (unit) price. By investing on a regular schedule, you can take advantage of market dips without worrying about when they'll occur. Your money buys more shares when the price is low and fewer when the price is high, which can mean a lower average cost per share over time.

The most important element of rupee-cost averaging is commitment. How frequently you invest (monthly, quarterly or even annually) is less important than sticking to your investment schedule.

Power of Compounding
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.
Example

If you started investing Rs. 10000 a month on your 40th birthday, in 20 years’ time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.

However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60th birthday - more than double the amount you would have received if you had started ten years later!

Other Benefits of Systematic Investment Plans

Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.

Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.

Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.

FAQ

COMMON MISTAKES WHILE CHOOSING MUTUAL FUNDS?

These are some of the common mistakes made when choosing a mutual fund:

  • buying only on past performance. In any market environment, some funds produce phenomenal returns. However, last year's best performers can be this year's laggards. One must take other considerations into account before buying into a fund.
  • Acting on tips and hunches. Since no one can consistently forecast market trends one needs to develop a consistent, disciplined approach and stick to it.
  • Over diversifying. Two or three mutual funds would offer instant cost-effective diversification. Investing in more schemes will mean losing the benefits of diversification.
  • Short-term horizon. for some time-periods, the market will favour diversified funds, or sector funds. When a style goes out of favour, fund performance in that group will suffer, but those funds will rebound when the style returns to favour.

ADVANTAGES

The advantages of investing in a Mutual Fund are:

  • Professional Management
  • Diversification
  • Return Potential
  • Low Costs
  • Liquidity
  • Transparency
  • Flexibility
  • Tax benefits
  • Well regulated

RISKS

This depends on the underlying instrument that a mutual fund invests in, based on its investment objectives. Mutual funds that invest in stock market-related instruments cannot be termed risk-free or safe as investment in shares are inherently risky by nature, whereas funds that invest in fixed-income instruments are relatively safe and those that invest only in short term government securities are the safest.


NET ASSET VALUE

Net asset value, or NAV, is just the net worth or book value of the mutual fund based upon the closing prices of the underlying investments of the fund owners. It is the price at which investors can buy or sell their shares at the end of each trading day.


EXPECTATION

Investors' can select mutual fund schemes from following broad categories which could align with their income/investment needs:

High Risk - High Return: Equity Oriented Mutual Fund schemes.

Moderate Risk - Moderate Return:  Balanced Mutual Fund Schemes.

Low Risk - Monthly Income Schemes: Monthly Income Plans.

Low Risk - Low Returns:Debt Oriented Mutual Fund Schemes.


PRICE OF A 'UNIT'

The advantages of investing in a Mutual Fund are:

  • Sale Price:
  • Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

  • Repurchase Price
  • Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

  • Redemption Price
  • Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

KNOW YOUR CLIENTS
Basics about PMLA
What is Money Laundering?
Money laundering broadly means the conversion or "Laundering" of money that is illegally obtained, so as to make it appear to have originated from a legitimate source. It was originally used in the context of terrorist, criminal, smuggling and drug-dealing activities. In a wider context, tax-evaded money is also covered.
What is the Prevention of Money Laundering Act (PMLA)?
As part of a global initiative, a Financial Action Task Force ("FATF") was created to help member countries draw up Anti-Money Laundering ("AML") legislation which would help implement the policies, techniques and counter-measures to combat money laundering. In India, The Prevention of Money Laundering Act, 2002 ("PMLA") was created under the aegis of FATF. The PMLA forms the core of the legal framework put in place by India to combat money laundering to be followed by banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc
What is FIU?
The Government of India set up Financial Intelligence Unit – India (FIU-IND) on18th November 2004 as an independent body to report directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND has been established as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence and enforcement agencies in pursuing the global efforts against money laundering and related crimes.
Are Mutual Fund Investors also covered by PMLA?
Yes, the PMLA covers all Financial Intermediaries, and this includes Mutual Funds. As such, all investors are required to submit necessary documentation that will help the Mutual funds complete the KYC procedure.
KYC formalities
What is KYC?
KYC is an acronym for “Know your Customer”, a term commonly used for Customer Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to ‘know’ their customers. This could be in the form of verification of PAN Number, identity and address, financial status, occupation and such other personal information.
What are the KYC requirements for a Mutual Fund Investor?
An Individual investor will have to produce copy of his PAN card as proof-of-identity and a separate document as proof-of-address. Non-Individual Investors will have to produce certain documents pertaining to their constitution / registration to fulfill the KYC process. A list of documents to be submitted can be found on the reverse of the KYC application form.
Why am I asked to prove my identity, if I have done no wrong?
As has been discovered in some terrorist acts such as the 9/11 bombings in New York or the attack on our Parliament in Delhi, white collared crime has arrived. Seemingly innocent people have been involved. It is also observed that had the checks, as now proposed by the PMLA, been in place, the detection or even pre-emption of the crime could have been possible. In this context, you will appreciate that providing your identity / address proof and information about your occupation and financial status will only help the Government in isolating the few who are involved in money laundering.
All this seems quite scary. Do I need to take any precautions?
Yes. You should be prudent in your money matters, just as you are in following some rules such as – say – not carrying unknown articles from unknown persons when you are traveling across cities. You should not receive or pay money on behalf of others, unless it is for a genuine transaction in which you have participated. You should also take care that you only deal with known individuals or companies which are registered with or regulated by SEBI, RBI, etc for all financial transactions. Please also ensure that you fill in forms completely and strike out any portions which you do not use or need.
Is KYC compliance required for a minor attaining majority?
Upon a minor attaining the age of majority (on completion of 18 years of age), he/she must complete the KYC process in his/her own name. The acknowledgement received should be registered with the mutual funds where he/she holds investments, along with other Bank Details, Signature, etc as per the requirements of the Mutual Fund.
What is CKYC?
CKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. The aim of this initiative is to have a structure in place which allows investors to complete their KYC only once before interacting with various entities across the financial sector. CKYC will be managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR). The objective of CKYCR is to reduce the burden of producing KYC documents and getting those verified every time when the investor deals with a financial entity for the first time. Thus, CKYCR will act as centralized repository of KYC records of investors in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.
What is CERSAI?
Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) is a central online security interest registry of India authorized by the Government of India to act as and to perform the functions of the Central KYC Records Registry under the PMLA (Prevention of Money-Laundering) rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in the digital form for a client.
What is the difference between KYC, eKYC and CKYC?

KYC – is the known and regular process in the Mutual Fund industry whereby the identity of an investor is verified based on written details submitted by him / her on a form, supplemented by an In Person Verification (IPV) process. Once the verification is done successfully, the relevant investor data is entered into the KRA Registration Agency (KRA) system and subsequently uploaded to their database.

eKYC – is KYC done with the help of a investor’s Aadhaar number. While completing the eKYC, the authentication of the investor’s identity can be done:

  1. Via One Time Password (Limits investments to Rs 50,000 per year per mutual funds and mandates investments via the online electronic mode) 3
  2. Via Biometrics (No limits on the investment amount here unless those specifically imposed by the scheme / Fund House)

This data is uploaded into the records of the KRA.

CKYC – is an initiative of the Government of India where the aim is to have a structure in place which allows investors to do their KYC only once. CKYC compliance will allow an investor to transact / deal with all entities governed / regulated by Government of India / Regulator (RBI, SEBI, IRDA and PFRDA) without the need to complete multiple KYC formalities which is an inconvenience / hindrance as of now. It will allow for larger market participation by investors, easing their journey on the financial highway. The CKYC processing is handled by CERSAI.

Is the information that is currently sought on the current KYC form and the new CKYC form, the same?
No. CKYC requires additional information (for e.g. – investor’s maiden name, mother’s name, FATCA information etc) to be collected and submitted to CERSAI for completion of the CKYC formalities of an investor.
Why are there so many ways of doing KYC? What are the intent / purpose behind this?

Money laundering has become a big problem worldwide threatening the stability of various regions by actively supporting and strengthening terrorist networks and criminal organizations. The links between money laundering, organized crime, drug trafficking and terrorism pose a risk to all financial institutions. This means that we need to know and understand our investors in a much better manner that ever before.

With this in mind, the Government / Regulatory Bodies are introducing new and novel ways, enabling people to complete their KYC formalities in a quick and convenient manner. The targeted aim is to ensure that an investor does his / her KYC formalities only once, post which the focus for the investor can subsequently shift towards the actual dealing with the financial institutions.

What is ‘KYC Identification Number’?
KYC Identification Number (KIN) is a 14 digit number allotted by CERSAI to an investor who has completed his / her CKYC formalities. This number should be mentioned each time the CKYC details are required to be accessed by any intermediary.
From when is the CKYC applicable and what procedure do I need to follow?
CKYC compliance is applicable for investments received from February 1, 2017 onwards. You need to note the following:
  1. New investors (investors who are not KRA compliant or CVL KYC compliant) will have to mandatorily submit the CKYC form along with the investment application. If the investor has filled the KRA application form in lieu of CKYC form, he will have to additionally submit the Supplementary CKYC form along with the KYC application form.
  2. Existing investors (investors who are KRA compliant) can continue making investments without any additional requirements.
Is CKYC compliance mandated for all categories of investors?
No. Currently, CKYC is applicable only to Individuals (both Resident Individuals and Non-Resident Individuals (NRIs)).
What are the documents to be submitted for completion of CKYC formalities?
You need to submit the following documents:
  1. Duly filled and signed CKYC application form OR KRA application form + Supplementary CKYC form
  2. One proof of Identity (self-attested copy)
  3. One proof of Address (self-attested copy)
  4. One photograph
Please elaborate on the documents to be submitted as proof for the information provided on the CKYC form.

You need to submit both proofs of identity as well as address.

For identity proof, you may submit any one document - PAN/ passport / voter ID/ driving license / Aadhaar card / NREGA job card / any other document notified by central government.

For address proof, you may use the same proofs as submitted as identity proof (except the PAN, since that does not specify the address). If your permanent address is different from the correspondence address, then you need to submit proof for both the addresses.

Copies of all documents that are submitted need to be compulsorily self-attested by the applicant and accompanied by originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorized for attesting the documents. For more details, please refer to the “instructions / guidelines” over-leaf on CKYC / Supplementary CKYC form.

Is date of birth mandatory to be provided for CKYC compliance?
Yes, the date of birth is mandatory information required for processing of your CKYC application.
How would I know that my CKYC application is successful?
KIN is being allotted by CERSAI to investors whose CKYC application is found to be valid. An SMS / email will be Sent by CERSAI to the registered mobile number of the investor as soon as the KIN is generated at their end. Since CERSAI will not be sending any physical intimation, applicants should ideally provide their mobile number and/or email ID in the CKYC application form. 5
I do not have an email ID / mobile number. How will the KIN be informed to me?
Upon generation of a KIN, CERSAI as a process will communicate the same vide SMS / email provided on the CKYC form. In the absence of both the details, no communication will be sent by CERSAI. Such an investor needs to contact the entity to which the CKYC application form was submitted. You need to provide the details of the supporting documents (for e.g. if PAN copy was submitted as identity proof, then you would need to provide the PAN) that were submitted to the said entity. It is advisable that you provide an email ID / mobile number on the CKYC form so that you do not miss out on any important communication sent by CERSAI.
If my CKYC application is rejected / fails, will I be informed about the same?
If the CKYC application is not processed / rejected for some reason, no intimation will be sent to the applicant from CERSAI. The entity processing your CKYC application will be aware of such rejections and can approach in case of any queries.
Is CERSAI responsible for validation of investor data?
CERSAI will verify the details as against the supporting documents submitted by investor. However, the onus of completing the CKYC of a customer properly and correctly lies with the entity processing the CKYC.
How do I check the CKYC status online?
Currently, such an option is not available. If the investor is allotted the KIN, it is confirmation that the investor is CKYC compliant.
I have already obtained a KIN. Do I need to submit any more documents for CKYC compliance?
Investors who are already allotted a KIN are considered as CKYC compliant. Such investors do not need to submit any more documents for CKYC compliance. However, please ensure to keep the KIN details readily available as it needs to be mentioned on the application form at the time of investing.
Within how many days will I receive the KIN?
The KIN will be allotted by CERSAI within 4 – 5 working days.
Exceptions on documents required
I work in the Indian Army what are the acceptable documents as proof of address?
For Individuals with an Army Address (’56 APO’), Letter from Commanding Officer / Photo copy of Army Id card duly attested can be accepted as proof of address.
What are the valid documents as Proof of Identity?
Only a PAN card is a valid document for Proof of Identity.
I have printed my Bank Statement online which contains my address. Can I use it as a valid Proof of Address?
Bank/DP statements provided as proof of address must be on the letterhead of the Bank/DP. If not, they should carry the stamp of the bank and signature of an authorised person. Statements printed on plain stationery without the Bank/DP stamp and signature are not acceptable as a valid proof of address.
My Passport is expiring this month. Will it cause any problem in getting a KYC acknowledgement?
When documents such as Passports, Driving Licenses, etc carrying an expiry date are submitted as proof of address, the document must be current on the date of submission.
I haven’t received my latest Bank Statement. Can I use my last statement which was sent out 3 months before?
Electricity /Telephone bill, Bank passbook, Bank statement, Demat account statement submitted as proof of address should not be more than 3 months old as on the date of submission.
I cannot sign, will you accept a KYC application carrying Thumb impression?
KYC applications carrying thumb impression in lieu of signature can be accepted, provided the thumb impression is attested by a Notary or a Gazetted officer.
If the documents are in vernacular language, do I need to get a translated version in English?
If your proof of address document is in vernacular language, you will need to have the same translated into English and attested prior to submission.
Who are the attesting authorities?
Wherever attested copies are provided, attestation should be in original done by a Notary / Judicial Authority or a Bank manager of a Scheduled commercial bank / Multi national Bank (Excluding Grameen and Co-operative banks) can be accepted. Attestations by SEO, Police Inspector are not acceptable. Please ensure the attested copy carries the name, address, designation and seal / stamp of the attesting authority.
My name is spelt as John King on the PAN card, whereas I have given my name as John K with Mutual Fund. Will my application be rejected?
While the Mutual Fund will make every effort to ensure they accept applications with minor name variations (such as expanded initials, etc) this can only be determined on a case to case basis.
How will I know that the KYC compliance is registered in a Mutual fund?
KYC compliance for an investor in the folio will reflect in the account statement as “KYC Registered”.
NRI / PIO FAQs
Are there any special requirements for an NRI?

In addition to the certified true copy of the passport, certified true copy of the proof of overseas address and permanent address will also be required. The documents can be attested by a Consular Officer or an authorized official of overseas branches of scheduled commercials banks registered in India.

Apart from this, if any of the documents (including attestations / certifications) towards proof of identity or address are in a foreign language, please have them translated into English before submission.

I am an NRI living abroad. What documents are valid as Proof of Identity?
In case of an NRI, identity documents are a Passport and PAN card. This is mandatory and other documents such as driver’s license, electricity bill, bank statement etc. cannot be accepted.
I am a Person of Indian Origin (PIO). What documents are acceptable as Proof of Identity?
In case of PIOs, Identity document is a copy of the PIO card and PAN Card. The alternatives in lieu of a PIO card are
  • Copy of OCI card OR
  • Copy of foreign passport with place of birth as India OR
  • Indian passport copy of Self / Parents/ Grandparents (with proof of relationship) OR
  • Documents issued by a Government authority specifying place of birth as India
What is a valid Proof of address for NRI/PIO?

Documents for Address proof for NRIs/PIOs can be any document issued by local authority for Eg: Bank statements or Utility bills or driving license issued in your country of residence. Notarization/Attestation of such documents can be performed by any local authority in the country or the Consulate of the Republic of India or bank branches of scheduled commercial banks registered in India and Multinational banks in the country where the NRI / PIO resides.

NRI’s / PIO must provide their overseas address along with proof of such overseas address in the KYC application form. An address in India is not mandatory for NRIs / PIOs.

I am an existing NRI investor in a Mutual Fund. I have given my local address for correspondence. Can I continue to transact the same way?
Existing NRI / PIO investors who have provided only their local address must provide their overseas address as part of the KYC process.
My husband/Father/Partner is an NRI / PIO. I do not have a valid Proof of address in my name, but I hold investments with a Mutual Fund. How do I proceed with KYC?

Spouses / Children / Dependents of an NRI/PIO who do not have a proof of address can produce the proof of address of the sponsoring husband / parent with documents supporting the relationship such as marriage certificate/Visa, etc.

In case you desire to register an address in India for communication you must provide proof of address in your own name or that of an immediate relative with an additional document evidencing the direct relationship with such person i.e. Parent/Spouse/Child.

I live in UAE where post is delivered to a PO Box. Do you consider this a valid address for KYC?
A PO Box Address is adequate provided you can also provide us Proof for such PO Box such as bank statements, Telephone bills etc. carrying this PO Box address
I am an NRI who works for Merchant Navy. I do not hold an overseas address proof. What is the valid Proof of Address?
In case of Merchant Navy NRI’s, where overseas address proof is not available, please provide your local address in India with proof, along with a notarized copy of your Mariners’ declaration or CDC (Continuous Discharge Certificate)
I am an NRI as I frequently stay abroad, but I do not have any valid address proof overseas. What will be acceptable as Proof of Address?
Investor’s who travel frequently by nature of their profession and stay away in foreign countries in company’s accommodation or hotels (who become NRI and do not have a permanent address) but have a residential address in India, may provide such Indian address with proof. In addition, please also provide a letter of confirmation from your employer / business on company letterhead as an additional proof of address.
I invest in my minor child’s name? Do I need to get a KYC acknowledgement for my minor child as well?
KYC compliance is not mandatory for minors. The guardian must be KYC compliant.
Should I give the company proof of address on a letterhead?

All documents for non-individuals need to be on the company letterhead or in a letter format with the stamp of the firm/company.

Documents of Non-individual investors can be self attested by Director / Company Secretary / Partners / Trustees, only in case of registered entities. For All other (non registered) entities, documents must be attested by a Notary / Judicial Authority or a Bank manager of a Scheduled commercial bank / Multi national Bank (Excluding Grameen and Co-operative banks). Attestations by SEO, Police Inspector are not acceptable.

What are the documents that need to be submitted by Non- Individuals?
Sl No. Status Documents required (apart from copy of PAN card in the name of the non-individual
1 Hindu Undivided Family (HUF) Deed of Declaration
Latest Bank Passbook
Latest Bank statement
2 Company/Body Corporate Certificate of Incorporation
Memorandum and Articles of Association
Resolution of the Board of Directors
Authorised signatory list with specimen signatures
3 Partnerships firms Certificate of Registration
Partnership deed
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
4 Trusts, foundations, NGOs, Charitable Bodies, Clubs / Mutual Fund Schemes Certificate of registration
Trust deed
Authorised
Signatory List with specimen signatures
5 Unincorporated association or a body of individuals Proof of Existence / Constitution Document
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
6 Foreign Institutional Investors (FIIs) Letter and Certificate of Registration issued by SEBI
Authorised Signatory list with specimen signature
7 Scheduled Commercial Banks and Institutions not incorporated under the Registered Financial Copy of Constitution / registration documents evidencing authority to invest Copy of Constitution / registration documents
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
Note: On a need to need basis, additional documents may be requested apart from above stated documents.
Are there any additional requirements for investments managed by a Power of Attorney (POA) holder?
The POA holder is also required to be KYC compliant in his/her own name and produce a copy of the KYC acknowledgement for investments where he / she is a POA holder. This is apart from that of the investor on whose behalf the POA holder is investing.
My income status has now changed from what I have provided earlier in the KYC application form. Do I need to request for the change to reflect in my details submitted? How do I request for the change?
A change in income status must be intimated if such change results in a change in the income bracket you declared in the application form. Please apply to any POS in the specified form. No proof is needed for such change.
For determining financial status, will any supporting documents for annual income of an investor need to be submitted?
No documents are required to prove the financial status of an investor
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