investor education

A few weeks back, capital markets regulator, SEBI, decided to introduce options from July 2, 2001. While trading on index-based options has begun, that on scrip- based options would begin from July 2. The introduction of options came in the wake of a concomitant ban on the 135-year old carry forward system, popularly called badla. The introduction of options is yet another milestone in India's march toward globalisation and the adoption of international systems and best practices. Much like stocks, options can be used to take a position on the market in an effort to capitalize on an upward or downward market move. Unlike stocks, however, options can provide an investor the benefits of leverage over a position in an individual stock or basket of stocks reflecting the broad market. Enumerated below are some basics on options:-

A stock option is a contract which gives the buyer the right, but not the obligation, to buy or sell shares of the underlying security or index at a specific price for a specified time. Stock option contracts generally are for 100 shares of the underlying stock. There are two types of options, calls and puts.

call option gives the buyer the right, but not the obligation, to buy the underlying security at a specific price for a specified time. The seller of a call option has the obligation to sell the underlying security should the buyer exercise his option to buy.

A put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell.

The premium is the price at which the contract trades. The premium is the price of the option and is paid by the buyer to the writer, or seller, of the option. In return, the writer of the call option is obligated to deliver the underlying security to an option buyer if the call is exercised or buy the underlying security if the put is exercised. The writer keeps the premium whether or not the option is exercised.

The strike, or exercise, price of an option is the specified share price at which the shares of stock can be bought or sold by the buyer if he exercises the right to buy (in the case of a call) or sell (in the case of a put).

When the price of the underlying security is equal to the strike price, an option is at-the-money. A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security. A call option is out-of- the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the money if the strike price is less than the market price of the underlying security.

The amount of the underlying asset covered by the options contract. This is 100 shares for one option unless adjusted for a special event, such as a stock split or a stock dividend.

Open interest refers to the number of outstanding option contracts in the exchange market or in a particular class or series.

When you buy an option you have the right to either purchase or sell stock at a predetermined price. When and if you choose to purchase or sell stock at that predetermined price you are said to be " exercising your right".When you sell an option you now have the obligation to sell or purchase stock. You have or may not have to fulfill that obligation. You are considered to be "assigned" if you are being required to fulfill that obligation. Typically this occurs when the option is in-the-money

If you bought a call or put you would lose the premium you paid for the option plus whatever commissions and fees incurred on that transaction. If you sold a call or a put and your option is in-the-money you will most likely be assigned and you will have to sell or buy stock.

American-style is an option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. All stock options are American-style. European-style is an option contract that can only be exercised on the expiration date.

The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised.

A strike price is the actual numeric value of the option. For example, a May option may have strike prices of 45, 50 and 55. Strike prices are determined when the underlying reaches a certain numeric value and trades consistently at or above that value. If, for example, XYZ stock was trading at 49, hit a price of 50 and traded consistently at this level, the next highest strike may be added.

If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity. The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive (bullish) or negative (bearish). If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value. Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential. Buying an XYZ July 50 call option gives you the right to purchase 100 shares of XYZ common stock at a cost of Rs50 per share at any time before the option expires in July. The right to buy stock at a fixed price becomes more valuable as the price of the underlying stock increases. Assume that the price of the underlying shares was Rs50 at the time you bought your option and the premium you paid was 3 1/2 (or Rs350). If the price of XYZ stock climbs to Rs55 before your option expires and the premium rises to 5 1/2, you have two choices in disposing of your in-the-money option: You can exercise your option and buy the underlying XYZ stock for Rs50 a share for a total cost of Rs5,350 (including the Option premium) and simultaneously sell the shares on the stock market for Rs5,500 yielding a net profit of Rs150. You can close out your position by selling the option contract for Rs550, collecting the difference between the premium received and paid, Rs200.In this case, you make a profit of 57% (200/350), whereas your profit on an outright stock purchase, given the same price movement, would be only 10% (55-50/50).

The profitability of similar examples will depend on how the time remaining until expiration affects the premium. Remember, time value declines sharply as an option nears its expiration date. Also influencing your decision will be your desire to own the stock. If the price of XYZ instead fell to Rs45 and the option premium fell to 7/8, you could sell your option to partially offset the premium you paid. Otherwise, the option would expire worthless and your loss would be the total amount of the premium paid or Rs350. In most cases, the loss on the option would be less than what you would have lost had you bought the underlying shares outright, Rs262.50 versus Rs500 in this example. Put options may provide a more attractive method than shorting stock for profiting on stock price declines, in that, with purchased puts, you have a known and predetermined risk. The most you can lose is the cost of the option. If you short stock, the potential loss, in the event of a price upturn, is unlimited.

Another advantage of buying puts results from your paying the full purchase price in cash at the time the put is bought. Shorting stock requires a margin account, and margin calls on a short sale might force you to cover your position prematurely, even though the position still may have profit potential. As a put buyer, you can hold your position through the option's expiration without incurring any additional risk. Buying an XYZ July 50 put gives you the right to sell 100 shares of XYZ stock at Rs50 per share at any time before the option expires in July. This right to sell stock at a fixed price becomes more valuable as the stock price declines. Assume that the price of the underlying shares was Rs50 at the time you bought your option and the premium you paid was 4 (or Rs400). If the price of XYZ falls to Rs45 before July and the premium rises to 6, you have two choices in disposing of your in-the-money put option: You can buy 100 shares of XYZ stock at Rs45 per share and simultaneously exercise your put option to sell XYZ at Rs50 per share, netting a profit of Rs100 (Rs500 profit on the stock less the Rs400 Option premium). You can sell your put option contract, collecting the difference between the premium paid and the premium received, Rs200 in this case. If, however, the holder has chosen not to act, his maximum loss using this strategy would be the total cost of the put option or Rs400. The profitability of similar examples depends on how the time remaining until expiration affects the premium. Remember, time value declines sharply as an option nears its expiration date. If XYZ prices instead had climbed to Rs55 prior to expiration and the premium fell to 1 1/2 , your put option would be out-of-the-money . You could still sell your option for Rs150, partially offsetting its original price. In most cases, the cost of this strategy will be less than what you would have lost had you shorted XYZ stock instead of purchasing the put option, Rs250 versus Rs500 in this case. This strategy allows you to benefit from downward price movements while limiting losses to the premium paid if prices increase.

Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions. With an objective to make the investors aware of functioning, of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

Mutual fund is a Mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section and sectors thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

Unit Trust of India was the mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are - to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual finds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended there after from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as-a mutual fund (as on January 15, 2002).

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor/s who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is also registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money collected from the investors, in securities markets. In simple words, Net Asset Value is the market value of the securities held under the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit, is the market value of securities of scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units at Rs. 10 each to the investors, then the NAV per unit of the fund is Rs. 20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

Schemes according to Maturity Period : A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The key feature of open-ended schemes is liquidity. Close-ended Fund/Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of buying back the units to the mutual fund at NAV related price. Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective : A scheme can also be classified as growth scheme, income scheme or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the Country. If interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors, as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they, are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

These schemes offer tax rebates to the investors under specific, provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest predominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs. 10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs. 10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sale price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.

An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI. has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor's track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.

Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

A mutual fund is required to dispatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder. In case of failures to dispatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme from close-ended to open-ended scheme and in case of change in sponsor.

There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors. At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report, or abridged annual report to the unitholders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking, of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.

Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below. Suppose scheme A is available at a NAV of Rs. 15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs. 10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes. On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look, for quality of portfolio. They may also seek advice of experts.

Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.

In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. Investors can log on to the web site of SEBI www.sebi.gov.in and go to “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

In case of winding up of a scheme, the mutual fund pays a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds, which gives all necessary details.

Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints to:

Mutual Funds Department
Mittal Court 'B' wing, First Floor,
224, Nariman Point,
Mumbai - 400 021.
Phone : 2850451-56, 2880962-70
Website : www.sebi.gov.in
AMFI Postal Address
Association of Mutual Fund in India
‘B’ Wing, Dalamal Tower,
Free Press Journal Marg,
Nariman Point,
Mumbai - 400 021.
Tel. : 232 4524/25
E-mail : amfi@bom5.vsnl.net.in
Website : http://www.amfiindia.com/

Alliance Capital Mutual Fund
Bench Mark Mutual Fund
Birla Sun Life Mutual Fund
BOB Mutual Fund
Bank of India Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
D S P Merrill Lynch Investments Managers
Dundee Mutual Fund
Escorts Mutual Fund
First India Mutual Fund
GIC Mutual Fund
HDFC Mutual Fund
IDBI Principal
IL & FS Mutual Fund
Indian Bank Mutual Fund
ING Savings Trust
J. M. Mutual Fund
J. F. Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Morgan Stanley Mutual Fund
Pioneer ITI Mutual Fund
PNB Mutual Fund
Prudential ICICI Mutual Fund
Reliance Capital Mutual Fund
SBI Mutual Fund
Shriram Mutual Fund
Standard Chartered Mutual Fund
Sun F&C Mutual Fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
Templeton Mutual Fund
Unit Trust of India
Zurich India Mutual Fund

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the price band for orders. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include - Price Aggression Investor quality Earliness of bids, etc. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing.

Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: 100% of the net offer to the public through the book building route. 75% of the net offer to the public through the book building process and 25% through the fixed price portion Under the 90% scheme, this percentage would be 90 and 10 respectively.

The Stock Exchange, Mumbai established in 1875 as the "Native Share and Stock Brokers' Association is one of the oldest stock exchanges in Asia. The Exchange not only provides an efficient market but also upholds the interests of the Investors' and ensures redressal of their grievances, whether against the companies or its Member-brokers. It strives to educate and enlighten the Investors' by making available to them the necessary information. The Exchange popularly known as the Bombay Stock Exchange (BSE) provides all the market related information by issuing press release and these are also available on the website (i.e. www.bseindia

Protecting the interest of Investors' dealing in securities is one of the main objectives of the Exchange. In pursuit of this objective, an Investors' Services Cell (ISC) was set up in 1986 by Bombay Stock Exchange (BSE). The grievances of Investors against listed companies and members of the Exchange are redressed by the Exchange. The Exchange also assists in arbitration process both between Members & Investors. The capital market can grow only when the Investors' find it safe for them to invest in the capital market and they are assured that the rules governing the market are fair and just to all the players in the market. With a view to ensure speedy and effective resolution of claims, differences and disputes between non-members, the Exchange has laid down a set of procedures for arbitration thereof. These procedures are duly embodied in the Rules, Bye-laws and Regulations of the Exchange, which have been duly approved by the Government of India / Securities and Exchange Board of India (SEBI).

These are some of the safe-guards that needs to be adhered to by the Investors' before trading in the securities market.

Deal with only SEBI registered Broker / Sub-broker after due diligence. Details of List of Brokers' can be procured from the Member's List published by the Exchange and from the website: www.bseindia.com

Fill in a Client registration form with Broker / Sub - broker Enter into Broker / Sub-broker - Client Agreement. This agreement is mandatory for all Investors for registering as a client of a BSE Trading Member. The Client should ensure the following before entering into an agreement: Carefully read and understand the terms and conditions of the agreement, before executing the same on a valid stamp paper of the requisite value. Agreement to be signed on all the pages by the Client and the Member or their representative who has the authority to sign the agreement. Agreement has also to be signed by the witnesses by giving their name and address.

Specify to the Broker / Sub- broker, Exchange through which your trade is to be executed and maintain separate account per Exchange. Obtain a valid Contract Note (from Broker) / Confirmation Memo (from Sub-broker) within 24 hours of the execution of the trade. Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client in a format prescribed by the Exchange. It establishes a legally enforceable relationship between the Member and Client in respect of settlement of trades executed on the Exchange as stated in the Contract note. Contract notes are made in duplicate, and the Member and Client both keeps one copy each. The Client is expected to sign on the duplicate copy of the contract note for having received the original. Contract Note - Form 'A' - Contract Note issued where Member is acting for constituents as brokers and agents. Contract Note - Form 'B' - Contract note issued by Members dealing with constituents as Principals. Confirmation Memo - Form 'C' - Confirmation Memo issued by registered Sub-brokers acting for Clients / Constituents as Sub-brokers.

SEBI registration number of the Member/ Sub-broker. Details of trade such as, Order no, trade no., trade time, quantity, price, brokerage, settlement number, and details of other levies. The trade price should be shown separately from the brokerage charged. As stipulated by SEBI, the maximum brokerage that can be charged is 2.5% of the trade value. This maximum brokerage is inclusive of the brokerage charged by the sub-broker (Sub-brokerage cannot exceed 1.5% of the trade value.) Any additional charges that the member can charge are Service tax @5% of the brokerage and any penalties arising on behalf of client (Investor). The brokerage and service tax is indicated separately in the contract note. Signature of authorized representative. Arbitration clause stating that the trade is subject to the jurisdiction of Mumbai must be present on the face of the Contract note.

Ensure delivery of securities /payment of money to the broker immediately upon getting the contract note for sale / purchase but in any case, before the prescribed pay-in-day. The Member should pay the money or securities to the Investor within 48 hours of the payout.

Preferably opt for buying and selling demat shares. For delivery of shares from Demat a/c, give the Depository Participant (D P) 'Delivery out' instructions to transfer the same from the beneficiary account to the pool account of broker through whom shares and securities have been sold. The following details to be given to the DP: details of the pool a/c of broker to which the shares are to be transferred, details of scrip, quantity etc. As per the requirements of depositories the Delivery out Instruction should be given atleast 48 hours prior to the cut-off time for the prescribed securities pay-in. For receiving shares in your Demat a/c, give the Depository Participant (D P) 'Delivery in' instructions to accept shares in beneficiary account from the pool account of broker through whom shares have been purchased. If physical deliveries are received - check the deliveries received as per Good/Bad delivery guidelines issued by SEBI. Bad delivery cases should be sorted out through Exchange machinery immediately. All registration of shares for ownership of physical shares should be executed by a valid, duly completed and stamped transfer deed.

Access to the Exchange arbitration facilities in case of dispute with brokers. Contact : The Investors' Service Cell, The Stock Exchange, 1st Floor , Rotunda Bldg, Mumbai - 400 001 For complaint against listed Companies/brokers contact: The Investors' Service Cell, The Stock Exchange,1st Floor, Rotunda Bldg, Mumbai -400 001. BSE has established a full-fledged Investors' Services Cell (ISC) to redress Investor's grievances. Since its establishment in 1986, the Cell has played a pivotal role in enhancing and maintaining Investors' faith and confidence by resolving their grievances either against listed companies or against Members of the Exchange. The services offered by the ISC are as under :

Investor's grievances against Listed Companies

ISC forwards the Complaints to the respective company and directs them to solve the matter within 15 days. In spite of the above efforts, if the company fails to resolve the Investor's Complaints and the total no. of pending complaints against the company exceed 25 and if these complaints are pending for more than 45 days , after issue of show cause notice for 7 days the Scrip of the company is suspended from trading till grievances are resolved. ISC also transfer's such Scrip's to 'Z' category for non-resolution of Investors' Complaints. ISC takes many other pro-active measures to resolve the Investor's grievance such as: Calling the Company representative to the Exchange to interact with Investor's / Members to resolve the complaints. Calling major Registrar & Transfer agent to the Exchange to interact and resolve the grievances of the Investor's and Members of the Exchange. Issuing monthly press release listing top 25 companies against whom maximum complaints are pending for resolution. The same is also released on the website of the Exchange. Pursuing Mumbai based companies to depute their representative to the Exchange to take the pending list of complaints & resolve the same immediately. Investor's grievances against Member's The nature of complaints received by the Exchange can be broadly classified into the following categories: Non-receipt of delivery of shares/ Non removal of objection/Non-receipt of sale proceeds of shares/ Non-receipt of dividend/ Non-receipt of Rights, Bonus shares Disputes regarding Rate Difference Disputes relating to non-settlement of Accounts

Miscellaneous Items

The complaints are forwarded to the concerned members to reply /settle the complaints within 7days from the receipt of the letter. If no reply is received or reply received is not satisfactory, the matter is placed before the IGRC (Investor's Grievance Redressal Committee) headed by Retd. High court Judge. IGRC is constituted by the Governing Board to resolve the Complaints of non-members against Members through the process of reconciliation. The parties are heard and the matter is tried to be solved amicably or it is referred for Arbitration under the Rules, Bye-laws & Regulations of the Exchange.

Arbitration

The Investors complaints referred by IGRC can be against the (i) active members of the Exchange as well as the (ii) defaulter-members of the Exchange. The process of solving the Investors complaints through the arbitration procedure are as mentioned below:

Arbitration Procedure

For the purpose of resolution of grievances between Investors and Member-brokers, the Exchange has constituted an Arbitration Committee with the approval of SEBI. The non-member arbitration panel consists of retired High Court and City Civil Court judges, Chartered Accountants, Company Secretaries, Solicitors and other professionals having in-depth knowledge of the capital market. On receiving the direction for arbitration from the IGRC, the complainant (applicant) files relevant supporting documents for arbitration. A set of the arbitration documents is sent to the other party (respondent) for giving his counter reply. After completion of the formalities, the matter is fixed for hearing before arbitrators. For claims less than Rs.10 lakhs, the applicant has/have to propose the name of three arbitrators and the respondent(s) has/have to consent on the name of one of the arbitrators. In case the respondent(s) does/do not consent on the arbitrator, the exchange appoints the arbitrator to adjudicate the matter. For claims above Rs.10 lakhs, a panel of three arbitrators, one each to be appointed by the applicant(s) and respondent(s) and the presiding arbitrator has to be appointed by the exchange to adjudicate the matter. The date for hearing is fixed and the concerned parties are informed about the date through notices. After hearing both the parties and taking the submissions and the documents on record, the arbitrator(s) close the reference and the award (decision) is given. Appeal If the applicant is not satisfied with the award he can appeal against the same in the Exchange within 15 days of the receipt of the award. The appeal bench of five arbitrators hears the matter and gives the award. However, the aggrieved party has to deposit the awarded amount given by the Arbitral Tribunal with the Exchange unless and until the appeal bench exempts it partly or wholly. If the award is in favour of the applicant, the active member has to abide by the decision. If he fails to abide by the award, the Disciplinary Action Committee (DAC) takes necessary action against him. The award becomes a decree after three months from the date on which it is given and can be executed as a court decree through a competent court of jurisdiction. The same can be challenged only in the High Court of Judicature, Mumbai.

Arbitration Procedure against Defaulter Member of the Exchange

Any complaint against defaulter Members of the Exchange can directly be filed in arbitration. However the same has to be filed within 6 months from the date of declaring the Member as defaulter by the Exchange. The rest of the process is the same as above. An award obtained against a defaulter member are scrutinized by the Defaulters committee (DC), a standing committee constituted by the Exchange, to ascertain their genuineness, etc. The awarded amount or Rs.10 lakhs whichever is lower is paid from the Customer's Protection Fund (CPF). After the approval of the DC & Trustee of CPF, the amount is distributed to the clients who have obtained the award against defaulter member.

Investor's or Customer's Protection Fund

BSE is the first Exchange to have set up the 'Stock Exchange Customer's Protection Fund in the interest of the customer's of the defaulter members of the Exchange. This fund was set up on 10th July, 1986 and has been registered with the Charity Commissioner, Government of Maharashtra as a Charitable Fund. BSE is the only Exchange in India, which offers the highest compensation of Rs.10 lakhs in respect of the approved claims of any Investor against the defaulter members of the Exchange. The members at present contribute Rs.1.50 per Rs.10 lakhs of turnover. The Stock Exchange contributes 2.5% of the listing fees collected by it. Also the entire interest earned by the Exchange on 1% security deposit kept by with it by the companies making public / rights issues is credited to the Fund.

Trade Guarantee Fund

In order to introduce a system of guaranteeing settlement of trades and ensure that market equilibrium is maintained in case of payment default by the Members the Trade Guarantee Fund was constituted and it came into force with effect from May 12, 1997. The main objectives of the fund are as given below: To guarantee settlement of bonafide transactions of members of the Exchange inter se which form part of the Stock Exchange settlement system, so as to ensure timely completion of settlements of contracts and thereby protect the interest of Investors and the Members of the Exchange. To inculcate confidence in the minds of secondary market participants generally and global Investors', particularly to attract larger number of domestic and international players in the capital market. To protect the interest of Investors' and to promote the development of and regulation of the secondary market. The Fund is managed by the Defaulters' Committee, which is a standing Committee constituted by the Exchange, the constitution of which is approved by SEBI.

Investor Awareness Program Investor Awareness programs are being regularly conducted by BSE to educate the investors and to create awareness among the Investors regarding the working of the capital market and in particular the working of the Stock Exchanges. These programs have been conducted in Gujarat, Kerala, Tamilnadu, Uttar Pradesh, Rajasthan, Punjab, and Haryana and within Maharashtra. The Investor Awareness program covers extensive topics like Instruments of Investment, Portfolio approach, Mutual funds, Tax provisions, Trading, Clearing and Settlement, Rolling Settlement, Investors' Protection Fund, Trade Guarantee Fund, Dematerialisation of shares, information on Debt Market, Investors' Grievance Redressal system available with SEBI, BSE & Company Law Board, information on Sensex and other Indices, workshops and Information on Derivatives, Futures and Options etc. The Bombay Stock Exchange has also earmarked an amount of Rs.1 crore for assistance to Investor Associations for conducting Investor Awareness and education seminars etc. During the year 2000 - 2001 an amount of Rs.20 lakhs has been disbursed to the SEBI recognized Investors Association. Further, for the benefit of the Investors' the Bombay Stock Exchange has : BSE Training Institute which organises Investor Education programs periodically on various subjects like comprehensive program on Capital Markets, Fundamental Analysis, Technical Analysis, Derivatives, Index Futures and Options, Debt Market etc. Further, for the Derivatives market BSE also conducts the compulsory BCDE certification for members and their dealers to impart basic minimum knowledge of the derivatives markets. For any enquiries Contact : The Training Institute, 21st Floor, P.J.Tower, Dalal Street, Mumbai- 400 001. BSE's official Website www.bseindia.com which is the focal point for information dissemination and updates Investors with the latest information on Stock Markets on a daily basis through real time updation of statistical data on Market activity, corporate information and results. Educative articles on various products and processes are also available on the site. Publications: BSE regularly comes out with publications for Investor education on various products and processes like Quick reference guide for Investors .