Investment Products: Chapter 1: Equity Markets

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Chapter 1: Equity Markets

Capital markets are classified into two categories:
1. Primary Market: Primary market is the market where a financial instrument is first
issued/offered to the public. The interaction is between the issuer and the investor.
2. Secondary Market: Secondary market is the market where the instrument is
subsequently traded (bought and sold). The interaction is between one investor (seller)
and another investor (buyer).
Based on the nature of trading, secondary markets are classified into:
1. Listed Market: Trading where an auction method is used at a physical location, or
an automated mode of trading through an exchange.

For example, stock markets.
2. Over-The-Counter (OTC) or Unlisted Market: A negotiated market without a
physical location where transactions are done via telecommunications.

For example, currency markets.
Trade Life Cycle:

The trade life cycle of a financial instrument has five stages:
1. Issuance: The trade life cycle begins with the birth or creation of the instrument. This
takes place in the primary market.

2. Pre-Trade Analysis: At this point, investors gather market information and use various
analytical techniques to make their trading decision.

3. Trade: The investor executes the transaction in the market.
4. Post-Trade: After the trade, both the buyer and seller have to confirm the details. They
finally exchange securities for cash, on a specified date called the settlement date.
5. Asset Servicing: Finally, the buyer is now the recipient of any future benefits that
may accrue on the instrument. This may be in the form of returns in cash or kind; or
resulting from any other actions taken by the issuer.
Activities
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From an operational perspective, financial market activities can be classified into Front, Middle
& Back office.
Front office handles the trade decision, trade execution and the first stage of the post
trade process i.e. Deal capture
Middle office handles the trade decision support, and any risk management relating to
the deal.
Back office handles the actual processing and settlement of the transaction.
Market Participants
Trading participants in the equity markets are classified as follows:
Banks & Brokerage Firms: Banks and brokerage firms are members of stock exchanges. The
exchange interacts with the members, who in turn interact with their clients/investors. Banks
and brokerage firms are said to be on the sell side.
Fund or Portfolio Managers: Fund or portfolio managers manage accounts of institutions like
mutual funds or of highly wealthy individuals. They are also called asset managers.
Corporates and Individual Investors: These investors are the ones who invest their
surpluses into the capital markets.
Funds/Investment Managers/Corporates /Individuals are said to be on the buy side.
Other Market Participants

The other market players who facilitate the post trade process are:
Clearing Firms: A clearing firm is an organization that works with the exchanges to handle
confirmation, delivery and settlement of transactions.
Depository: Securities are held in electronic (also called dematerialized) form in the demat
(short for dematerialized) accounts at firms providing depository services.
There are two central depositories in India National Securities Depositories Ltd. (NSDL) and
Central Depository Services (India) Ltd. (CDSL).
Custodian Banks: These are banks where the clients hold their demat accounts. They
facilitate clearing and settlement for the client, by interacting with the broker members,
depositories and clearing corporations.
Exchange: The exchange facilitates trade execution and the clearing and settlement of
securities through their various agencies such as clearing firms.
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Regulators: SEBI regulates the stock market to ensure smooth functioning.

System Vendors: These are technology service providers who automate the various processes
and ensure processing with minimal manual intervention.
Key Terms
American Depository Receipt (ADR): ADR is a negotiable certificate issued by an American
bank. It represents a certain number of shares of a foreign company, which have been
deposited with them.
Bellwether Stock: It is a share/stock which assumes a position of market leadership.
Book Value: The value at which an asset is carried on a balance sheet is known as book value.
Book value is also the net asset value of a companys shares in case of liquidation.
Circuit Breakers or Price Bands: Stock markets are very volatile. To curb excessive volatility,
SEBI has prescribed a system of circuit breakers to bring a coordinated trading halt in all equity
markets nationwide.
Intrinsic Value: The intrinsic value of a share, as against its market driven prices, is its
fundamental strength and future potential. This is also called fair value.
Market Capitalization: Market capitalization is the total market value, at the current stock
exchange list price, of the total number of equity shares issued by a company.
Exchanges use a free float mechanism to calculate the market cap.
Free float of a company is an estimate of the proportion of shares that are freely traded in the
market.
Market Capitalization (using free float) = Market Price * Number of Outstanding
Shares of the Company * Free Float Factor
Participatory Notes (P-Notes/PNs): Participatory notes are instruments issued by
registered Foreign Institutional Investors (FIIs) to overseas investors. This is issued to those,
who wish to invest in the Indian stock markets without registering themselves with the market
regulator - SEBI (Securities and Exchange Board of India).
Trading Philosophy:
1. Top-Down Investing- In this approach, an investor considers important
parameters like trends in the economy, industries which these trends favor and
companies within these industries which are likely to benefit the most.
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2. Bottom-Up Investing- Bottom-Up investing involves looking for individual shares
with outstanding performance or potential, without considering economic trends.
Classification of Stocks
Stocks are classified into the following categories for trading purposes:
1. Growth Stocks: These are stocks that are expected to demonstrate price growth which
2.
3.
4.
5.
6.
7.
is better than the market.

Income Stocks: These are stocks that provide a good dividend yield on the amount
invested.
Cyclical Stocks: These are stocks that move in tandem with the economy.
Defensive Stocks: These are stocks that are relatively protected from economic cycles.
Value Stocks: These are stocks whose current valuation does not reflect some valuable
aspects of the company.
Contrarian Stocks: These are stocks that move against market perception.
Momentum Stocks: These are stocks that move in tandem with the relevant
benchmark index, that is they have a strong correlation with the index.
Chapter 2: Equity Derivatives

Options are similar to insurance contracts. That is why the price of an option is also called
premium, just like in insurance.
Derivatives are used to hedge or minimize risk and not to assume risk.
A derivative is a financial instrument that derives its value from the value of some more basic
underlying instrument or variable.
The underlying instrument or variable is commonly referred to as simply the underlying. A
derivative that has another derivative as an underlying is called a compound derivative.
A derivative is also sometimes referred to as a contingent security. That is another way of
saying that, the value of the derivative security is contingent on the value of some other
underlying security or variable.
Features
Derivative contracts transfer risk from the buyer to the seller. This could be in whole or in part.
Derivatives reduce transaction costs
Derivatives reduce cost of financial distress and increase the debt capacity of the firm.
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Chapter 3: Bond Markets

Introduction
A bond is a debt instrument that:
Typically carries a specific rate of interest
And a promise to repay the principal on maturity
Coupon the rate of interest on the bond when it was first issued
Annualized Coupon = [1+r/m]^m -1
Where r is the stated interest rate and m is the compounding frequency.
Yield also an interest rate expressed as a return of investment.

Current Yield = (Annual Coupon Amount (in INR)/ Market Price)*100
Yield to Maturity (YTM) is the true yield in the bond markets and factors in the coupon
payment, the capital gain/loss, and the reinvestment return of the coupon.
Yield curve
A yield curve gives the relationship between interest rate and term to maturity, at a specified
time. This could be positive, negative or flat.
The shape of the yield curve will change depending upon what happens to the long end of the
curve as compared to the short end on the bond in the secondary market. This will vary based
on market conditions Higher the price, lower the yield.
Trading involves taking a view on the level and the shape of the yield curve.
Floating interest rates

If the rate on the bond is varied or repriced at regular intervals, it is a floating rate bond. The
floating rate is linked to a benchmark such as LIBOR or MIBOR.
The floating rate is reset two business days prior to the start of the interest period.
Credit rating
Evaluates the risk of default on a bond. The rating is expressed in the form of alphabets such as
AAA, AA etc.
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Chapter 4: The Indian Bond Market

Bonds in India can be classified based on:
The type of issuer.
The bond characteristics.
Central Govt. securities

Issued by the central government. They are all very safe investments as they are backed by the
central government.
Day Count Convention is: 30/360
Coupon: semi-annual
T-Bills
The Government of India also issues securities called Treasury Bills or just T-Bills that have a
maturity < 1 year. They are also called Money Market securities as they are of short duration.
Day Count Convention: Actual/365.
No coupon.
State Government Securities

Although the majority of state funding comes through borrowings from the Central
Government, a significant amount of borrowing is also done by the state through capital
markets. These are called State Govt. securities.
Day Count Convention is: 30/360
Coupon: Semi-annual
Corporate Bonds
Bonds issued by corporations are called corporate bonds.
Day Count Convention is: Act/365,
Coupon payment: Annual
Types of Bonds
Callable Bonds: These are bonds where the issuer has the right to buy back the bonds. The
issuer will exercise if market rates are lower than coupon.
Puttable bonds: gives the investor the right to sell the bonds back to the issuer. The investor
will exercise if market rates are higher than coupon.
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Convertible bonds: These are bonds that can be exchanged for specified amounts of common
stock, after a certain period of time.
Money Market Instruments

CDs: issued by banks to raise money.
CPs: issued by corporates to raise money. CPs are issued at a discount to face value.
Call Money market: The most liquid tenor for borrowing and lending transactions remains the
overnight market, which is called the call money market in India.
Repos: A repo is therefore, a secured borrowing. RBI uses the repo as an instrument of
monetary policy i.e., to signal interest rate changes.
CBLO: The call money market is limited only to inter-bank participants. Other participants like
mutual funds and corporates, with surplus liquidity, can participate in this market through the
Collateralised Borrowing and Lending Operation (CBLO) of the Clearing Corporation of India Ltd.
(CCIL).
India has one of the deepest bond markets with instruments ranging from a few days to 30
years.
Regulations
Primary market regulation is the responsibility of the RBI. In the secondary market, regulation is
divided between the RBI and the Securities and Exchange Board of India (SEBI).
Chapter 5: Currency Markets- Introduction

Any individual or a company, who needs to sell or buy foreign currency, does so through an
authorized dealer. Currency trading is primarily conducted in the Over-The-Counter (OTC)
market.
Foreign exchange market is a 24 hour market. In terms of time zones, the first market to open
is Sydney, then Tokyo, Singapore, Frankfurt, London and then New York. As New York shuts,
Sydney opens.
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Market Participants
Authorised dealers access the foreign exchange markets
Corporates buy or sell, based on their requirements, through the authorised dealers
Brokers intermediaries between the ADs and
The Central Bank intervene to stabilize the market.
Foreign Exchange Fundamentals

Foreign exchange rates express the value of one currency in terms of another.
They involve a fixed currency (base currency), which is the currency being priced, and a
variable currency (quoted currency), the currency used to express the price of the fixed
currency.
The market always talks in terms of the base currency.
Direct quotations use USD as the base currency (BC). Indirect quotations use USD as the
quoting currency (QC).
Bid: It is the rate at which the quoting party is willing to buy the base currency, or sell the
quoted currency.
Offer (also called Ask): It is the rate at which the quoting party is willing to sell the base
currency, or buy the quoted currency.
Valuation or MTM
Cost of Purchases Sales, after squaring your position. Expressed in the quoted currency.
Stop Loss & Take profit are prices at which a trader books his losses or profits respectively. As a
matter of discipline, a trader must always place a stop loss, when he/she initiates a position.
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Chapter 6: Factors affecting Currency markets:

The fundamental factors that affect currency markets can be classified into:
Macro-economic factors:
GDP
Balance of Payments
Inflation
Structural Factors
Foreign Exchange reserves composition
Import elasticity
Exchange rate competitiveness
GDP
This is the primary indicator of economic growth. This gives a birds eye view of the economy
and its performance. A good positive growth in GDP is an indicator of the health of the
economy, and thereby the stability and strength of the currency.
BOP
This has three components:
Trade gap (imports less exports)
Current account balance (trade gap including invisibles)
Capital flows
A consistent BoP deficit implies, the country needs to buy foreign currency on a net basis. This
will result in a weaker local currency.
Inflation
This gives signals for future interest rate actions. Higher inflation signals monetary tightening
i.e. higher interest rates. Typically, you would like to buy a currency with a higher interest rate
as it gives a higher yield. However, if inflation and interest rates become high enough to stunt
economic growth, then the exchange rate may actually weaken eventually.
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Foreign Exchange Reserves

Reserves refer to the amount of foreign currency that a country holds. The composition of the
reserves is important (a higher percentage of short term obligations tends to make the
economy more vulnerable to exchange rate volatility).
Import elasticity
A lot of economies including Indias are dependent on oil imports which are pretty inelastic.
Volatility in oil prices brings a greater degree of uncertainty to economies dependent to a large
extent on oil imports.
Exchange rate competitiveness

RBI looks at INR, not only against the USD but against a basket of currencies. This is measured
in the form of REER the Real Effective Exchange Rate.
REER of INR is measured against a basket of currencies. This is adjusted for inflation and is
expressed in the form of an index.
Short Term Factors

Capital Flows
Carry Trades
Political Factors
Comments by Key Personnel
Central Bank Intervention
Safe Haven status
Technical Market Factors
Carry Trades
These are typically done on dollar-yen, to exploit the interest rate differential.
Let us understand how this works.
The traders borrow in yen (at zero interest rates), convert the yen into (universally accepted)
dollars in the spot market and then invest the dollars in global equity markets to generate a
return. Even though the borrowing cost is zero, traders run the exchange rate risk on dollar-
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yen, as they will have to sell dollars and buy back the yen at a later date, to repay the
borrowing.
Safe Haven
The term safe haven currencies comes from the flight of global money to quality/stable
currencies in unstable times.
In the currency markets, dollar (USD) and Swiss francs (CHF) are considered safe havens.
Technical Analysis
This technique is essentially based on the fact that history tends to repeat itself. By looking
at past data, one can forecast future exchange rates.
Economic Data
Economic data must be analysed in 3 ways:
As compared with the prior period.
As compared to the same period in the previous year. This will account for seasonality if
any.
Finally, and most importantly, you need to look at the data as compared to market
expectations.
Unemployment data
This gives the percentage of workers unemployed. Another indicator of unemployment is the
data on weekly jobless claims. This indicates the number of people claiming to be jobless, and
is another key indicator of the health of the US economy.
Durable Goods
This indicates the growth of consumer durable goods sector. A strong growth is an indicator of
the health of the economy.
ISM-PMI
This is the Purchasing Managers' Index (PMI). It is one of the leading indicators of
manufacturing growth, and is published as an index. The data is compiled by the Institute for
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Supply Management (ISM). A reading above 50 is a sign of economic expansion and below 50
indicates contraction.
PPI: The published number gives the inflation at the factory level.
CPI: This gives the inflation at the individual level.
Traders also look at core inflation, that is, excluding food and energy. This is because energy
and food are demand inelastic.
Retail Sales
This denotes local demand growth. It actually shows what customers are doing on the ground.
IFO Germany
This survey throws light on the business sentiment in Germany.
Quarterly Tankan
It is a quarterly index of the growth of big, medium and small manufacturers and nonmanufacturers. It is a gauge of business sentiment in Japan.
Indian Rupee Market

The daily volumes in the market are estimated to be over USD 5 bio.
The bid-offer spread normally ranges between 0.5 ps. 1.5 ps.
Standard market lots in the interbank market vary from USD 0.5 mio to USD 5 mio.
Flows: Supply side

Growing FDI & FII inflows
Corporates accessing External Currency Borrowings (ECB) and bringing them into India
NRI inflows
Exports
Flows: Demand side

Oil demand (hence imports)
Foreign debt repayments
Non-oil imports
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The rupee still remains a flow based business, and the player with the larger flows tends to
have the bigger clout. Hence large players like SBI (State Bank of India) continue to singly
move the market and have been nicknamed 'Daddy'.
Factors affecting the Rupee spot market

Month-end demand
DTC (Diamond Trading Corporation) remittances
FII flows
Chapter 7: Currency Futures

They are absolutely similar to forward contracts except that Currency Futures are traded on
exchanges like NSE, and not OTC.
They are available for standard amounts and standard maturity dates. Participants have to put
up an upfront margin (like a security deposit) for dealing in futures. Futures contracts have no
delivery.
The profit or loss on the contract is cash settled.
These are more for retail players who want to speculate, or for really small businesses that deal
in very small quantities, and are looking for transparency in their pricing.
Remember, like stocks, you need to transact through a member of the exchange a broker,
and pay the commission.
Margins:
The exchange imposes an initial margin. This is a percentage of the transacted amount.
The exchange also charges an extreme loss margin. This is calculated as 1% of the MTM
value of your open positions. This has to be deposited at the end of every trading day.
The daily MTM profit/loss is paid through the broker to the clearing house (CH). This is called
daily settlement.
On maturity, there will also be a final settlement.
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Chapter 8: Commodity derivatives

Commodity derivatives are an important tool used by hedgers worldwide to hedge their
commodity transactions.
Commodities traded in financial markets fall into two broad categories.
Investment commodities: Gold, Silver, Platinum etc.
Consumption commodities: Oil, Food Grains etc.
Commodities are traded on commodity exchanges like NCDEX, MCX etc.
Do you take delivery?

Most transactions are net settled, however the buyer and seller can agree to a physical delivery
as well.
Pricing Commodity Derivatives

Storage costs and Convenience yields are important in pricing the commodity derivatives.
Storage cost is the cost involved for storing the commodity.
Convenience yield - the additional yield obtained due to physical ownership of the scarce
commodity.
Specifications of a Futures Contract are:
The underlying asset
The contract size
Price quotation
Delivery date
Place of delivery
Details of assets and delivery arrangements
Margins are used by exchanges to reduce credit risks associated with these futures contracts.
In India, the mark to market amount is collected separately, leaving the margin amount
deposited unchanged.
Different types of margins include:
Initial Margin
Mark to Market Margin
Additional Margin
Delivery Margin
Trading strategies vary with reference to various participants operating in the market.
Hedgers- Producers/Consumers of commodities are faced with price and production risk over
time.
Trading strategy for hedgers:
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For Producers: They would prefer to sell (go short) a futures contract (to protect themselves
against a fall in price) on their finished product.
For Consumers: They would also prefer to buy (go long) a futures contract (to protect
themselves against a rise in price) on their raw material inputs.
Speculators: They have no business interest, but just trade as they are volatile.
Trading strategy for hedgers:
Sell if you expect prices to go down.
Buy if you expect prices to go up
Arbitrageurs: They look at mis-pricing between the cash and futures market in commodities,
and exploit this arbitrage opportunity.
Trading strategy for Arbitrageurs:
If the commodity Cash price plus the Cost of Carry is above or below the Futures price,
according to their view, an arbitrage opportunity arises.
At present there is a 3 tier structure for regulations:
The Government
The Forward Market Commission
Commodity exchanges.
Chapter 9: Mutual Funds

A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. They take these savings and in turn invest them in stocks, bonds or money
market instruments.
Structure
AMC - An AMC raises money from investors & invests in a group of assets.
Sponsor - The sponsor initiates the idea to set up a mutual fund.
Trustee an independent body whose role is to protect investors interests.
Custodian Looks after investments of the fund
Transfer agent Maintains records of unit holders
Regulators frame rules that regulate the industry
NAV
NAV on any day reflects the value of the funds investments divided by the number of units
issued by the fund.
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NAV = Market Value of the Fund Investment (including cash) + Income Accrued Expenses Accrued)}/Number of units outstanding to date
A fund has to incur certain expenses. These relate to Distribution & Marketing expenses & Fund
Management expenses.
Distribution expenses are recovered through entry/exit loads, and Fund Management expenses
through the NAV.
Entry load is commission paid by the investor while buying into a fund. They are now banned,
and the distributors now charge a commission directly from the client.
Exit load is commission paid while leaving or redeeming units from the fund.
Types of Mutual Funds

By structure:
Open ended Funds They have no fixed maturity and remain open all the time
Close ended funds -They are open for subscription once, and the corpus is fixed once the
issue closes.
By scheme:
Growth schemes invest primarily in equity. They can be further classified into large, mid
and small cap stocks based on market capitalization. There are also sectoral funds that invest in
a particular sector only.
Income schemes invest primarily in bonds. These could be Short/Medium/Long Term or
dynamic bond funds which are flexible on the tenor of investment.
Balanced schemes hold equity and debt typically in a 65-35 proportion.
Money Market/Liquid schemes They invest in very short term instruments, of less than 1
year duration.
Special schemes:
ELSS These are tax savings schemes for the individual. An investment of INR 1,00,000 is
exempt under ELSS.
Index funds These invest in the index stocks.
Capital Guaranteed These guarantee the principal. They do this by investing an amount in
fixed income instruments that will repay the principal amount on maturity.
Fixed Maturity Plans They invest in high yield bonds that exactly match the tenor of the
fund. They then hold the bonds to maturity, thereby capturing a high return.
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These funds also get double indexation benefits, as the tenor straddles two financial years.
Double indexation implies that the cost of purchase is adjusted for the inflation index, hence
bringing down the quantum of capital gains.
Fund of Funds A fund investing in other funds.
Classification by plan:
Growth Plan - These are plans which automatically reinvest the returns made by you
back in the fund.
Dividend Plan - These are plans where the returns are distributed in the form of
dividend back to the investor at regular intervals.
Bonus Plan - This is similar to bonus shares. Instead of giving dividend in the form of
cash, additional units are provided to the investors.
SIP - Under an SIP, the money is invested by the customer in committed installments
over a certain period.
Chapter 10: Insurance - Introduction

Human Life Value index is the capitalized value of your net earnings for the rest of your working
span. HLV index is the multiplier to annual income which will give us the HLV.
This is the amount of savings needed to protect your lifestyle. The calculation of HLV has
inflation built into it.
The main principles around which insurance is structured:
Pooling of Risk: An insurer pools or clubs the risk faced, by getting together a large number
of people of similar profile.
Adverse Selection: A person with higher than average risk is more likely to take insurance.
This is an adverse selection for the insurance company, and affects the pricing of the insurance
premium.
Insurable interest: For a person to obtain insurance, the risk event must be quantifiable in
financial terms. The probability of the risk event also needs to be ascertainable.
For example: you cannot purchase insurance for depression.
Key Terms
Underwriting: It is the process of selecting and classifying risk exposure.
Indemnity: Protection against loss.
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Speculative Risk: This is associated with situations which result in either a profit or a loss.
Speculative risk cannot be quantified.
Pure Risk: This is the opportunity of loss as a result of accidental circumstances. It is based on
probability and hence is mathematically predictable i.e., can be quantified and the probability
of occurrence measured.
Chapter 11: Insurance Products General Insurance

Health care and Disability Insurance products
Total & Permanent Disability (TPD) - It pays a lump sum amount. The payment is made in
case the individual is unable to work, loss of limbs or sight or he/she is unable to perform basic
living activities.
Income Continuation - It ensures a regular monthly payout. Payment is initiated on total and
not necessarily permanent disablement.
Trauma Insurance - This covers the occurrence of life threatening diseases and pays a lump
sum.
Health Insurance - This covers medical treatment costs for illnesses.
The Employees State Insurance Act 1948 provides for an integrated need-based social
insurance scheme. It protects the interests of workers in the event of contingencies such as
sickness, maternity, temporary or permanent physical disablement, or death owing to
employment injury resulting in loss of wages or earning capacity.
Property & Liability Insurance

This covers insurance for material items and any losses arising from/due to them.
Coinsurance is a penalty imposed on the insured by the insurance carrier. Penalty is imposed for
under reporting/declaring/insuring the value of tangible property or business income.
In case of over insurance, the insurer will not pay more than 100% of the claim value. This is
because someone might deliberately damage the property in order to make a profit through the
claim.
Types of Property insurance
Indemnity - the insured receives the market value of the asset - that is, typically, the
depreciated value of the asset.
Replacement - the insured receives the amount needed to rebuild the asset to the same level
as the old one with the incentive of getting a new asset for an old one.
Property Insurance can be taken for the property and the contents within the property.
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Personal Property Insurance - Specialized personal contents such as paintings and

sophisticated tools are beyond the scope of contents insurance and needs to be covered
individually.
Personal liability insurance provides cover against any liability arising out of injury caused to
a person or damage to a property resulting from an accident (other than a car accident).
Motor Insurance This covers third party claims, and property damage during accident.
Commercial Insurance - These are insurance covers required for a commercial enterprise.
These include: Key person Insurance, Business overhead insurance, Workers compensation etc.
For example:
The Workmens Compensation Act 1923 defines the amount payable to the worker under
different scenarios. Compensation is received in case of Industrial accidents and/or certain
occupational diseases
Key Person insurance is a policy to mitigate the loss to business owners arising from the loss of
a key person owing to incapacity, disability or death.
Chapter 12: Insurance Products Life Insurance

Life Insurance products:
Single Life: taken out on the life of one person
Joint Life: covers more than one person. Pays out on the death of the first.
Survivorship joint life: pays out on the death of the last person.
Family: for the entire family.
Beneficiaries: He/she is the person or entity who receives the insurance proceeds. In case of
more than 1 person, they are called co-beneficiaries.
Contingent beneficiary: Also called secondary beneficiary, she/he will receive the proceeds if
the primary beneficiary dies before the insured.
There are two types of values associated with a life insurance policy.
Cash Value: Equal to the savings accumulated during the existence of the policy.
Surrender Value: Amount returned to the policy holder at termination.
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Term Insurance
A term insurance provides only death protection there is no investment / savings portion, and
hence no return, in case the person survives the policy term.
Types of Term Insurance

Annual Renewable policy in effect, a year at a time.
Renewable automatically renewable at a pre-defined price
Level premium decreasing - The premium remains constant throughout but the cover
keeps falling as the cost of coverage for the insurer increases.
Level premium constant - Level premium term insurance means that, the premium will
stay the same each year for the term of the policy.
Increasing premium level - Here the premium keeps increasing every year as your risk
of death keeps increasing - while the cover remains fixed.
Single premium - The premium is paid upfront for a fixed cover for a fixed term.
Convertible term insurance This enables you to convert your term insurance into any of
the other types of insurance policies offered by the insurance company.
Traditional/Permanent Life Insurance

In this type of an insurance policy, the policy has a savings / investment component along with
the life cover. The policy protects against premature death and helps build a corpus through
compulsory savings.
So, unlike a term policy which is for a specific term and is a pure risk cover - permanent
policies are for ones entire life, and provide both a risk cover and an investment return.
Whole of Life Policy

This policy provides life insurance for the whole of ones life, not just for a specific duration.
Endowment Policy
These policies are payable on a specified date or on the death of the insured.
The payment shall depend on the investment performance, level of premiums paid and
the age of the policy.
The maturity value includes the guaranteed sum and accrued bonuses - the bonus once
announced is guaranteed.
Endowment policies have a fixed maturity date while whole-of-life policies dont.
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ULIPs
This is also a type of permanent policy where the premium paid covers risk of death, plus an
amount for savings. The difference here is, the customer makes the choice as to where he
wants the savings amount to be invested.
The allocated (invested) portions of the premiums after deducting all the charges, and premium
for risk cover are pooled together to form a unitfund.
In an endowment policy the insurance company pools funds across all policies and investments
are not disclosed. All that the customer gets to know is, if and when any bonus is issued.
A ULIP has 5 sets of charges:
Premium allocation charge - is deducted before allocating funds for investment.

Fund management charge - charge for managing the fund at a certain fixed
percentage
Surrender charge - levied on the unit fund at the time of surrender of the contract.
Mortality charge - fee that insurance companies charge to give life cover.
Policy administration charge Any other operational charges not covered above
Annuities
An annuity is a regular monthly payment for life or another defined period. It transfers an
accumulated sum of money into a series of payments over a number of years or a lifetime.
You can have immediate annuities that make payment immediately or deferred annuities that
delay payment to a defined future period.
Annuity Formula:
A = [RC * i * (1+i)^t / (1 + i)^t 1]
Where, A - periodic annuity, RC - retirement corpus, I - periodic rate of return on the
investment, t - time period of annuity in months/quarters/years, etc.
Retirement Corpus
To arrive at the retirement corpus the wealth manager has to a step by step analysis
1. Expenses post retirement is calculated factoring the inflation.
2. Calculate the retirement corpus needed.
3. Amount to be saved by the client every month.
Investment Products
Chapter 13: Alternate Investment Products & Services

Classification of Alternate Investments
Alternate investments can be classified into 3 categories: Real Estate, Private Equity &
Structured products.
All these investments have the following features:
Initial investment is large
Longer time horizon
Illiquid
Real estate like any asset class provides a steady income (lease or rentals) over a period of
time, with a potential for capital appreciation.
A Private Equity (PE) investment involves an equity participation in an unlisted company.
Investment is done through a PE firm in these companies.
PE firms are of 3 types:
Seed capital firms invest in pre-start up stage.
VC firms invest in startup stage, where the idea is still untested.
PE firms invest in more established ideas.
Structured products: These are pre-packaged strategies that use a traditional asset class as the
underlying.
Example: INR Denominated 16 Month Nifty Linked Non Convertible Debenture (NCD) Payout
Linked to Reference Index.
Portfolio Management Services (PMS)

Under this, a unique portfolio is customized for the client, and is separately managed by the
wealth management firm.
In case the investments involve alternate investments such as PE, then portfolio manager will
collect the money from you in tranches, but at his discretion. This is called a drawdown.
Fee structure
The fees would tend to be a combination of a smaller fixed component and a larger
performance based component.
The performance fee gets charged only when the portfolio generates a return beyond a
specified hurdle rate.
Investment Products
The PMS Service can be discretionary or non-discretionary.

The discretionary portfolio manager independently manages the funds in accordance with the
needs of the client. The client cannot make decisions for the management of his/her portfolio.
On the other hand, in non-discretionary portfolio management, the client is actively involved in
decision making for the management of the portfolio.
Tax Planning
Taxes are of two types: Direct taxes & Indirect taxes.
Direct taxes cover Income tax, Capital Gains tax, Wealth Tax
Income tax
According to Income-tax Act, 1961, every person, who is an assessee and whose total income
exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or
rates prescribed in the finance act.
Residents are taxed on worldwide income. Non-residents are taxed on income arising in India,
such as rental income etc.
Income is calculated under various heads such as Salary, Interest income, Rent from property,
business income etc.
Tax payers also get deductions under various sections such as
80C maximum of INR 1,00,000
80D medical insurance premium
80G charitable donations
24 Interest on Housing Loans
Capital Gains Tax

A capital gain is income derived from the sale of an investment. Capital gain tax is applicable on
sale of shares, mutual funds, securities, property etc., as per income tax, at special rates
depending on the period of holding, and the type of security.
Wealth Tax
Wealth tax is tax on the benefits derived from property ownership. The tax is to be paid year
after year on the same property, on its market value, whether or not such property yields any
income.

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Investment Products

A QUALITY E-LEARNING PROGRAM BY WWW.LEARNWITHFLIP.COM

Chapter 1: Equity Markets

an automated mode of trading through an exchange.

physical location where transactions are done via telecommunications.

Trade Life Cycle:

takes place in the primary market.

analytical techniques to make their trading decision.

Other Market Participants

Regulators: SEBI regulates the stock market to ensure smooth functioning.

with outstanding performance or potential, without considering economic trends.

is better than the market.

Chapter 2: Equity Derivatives

Chapter 3: Bond Markets

Yield also an interest rate expressed as a return of investment.

Floating interest rates

Chapter 4: The Indian Bond Market

Central Govt. securities

State Government Securities

Money Market Instruments

Chapter 5: Currency Markets- Introduction

Authorised dealers access the foreign exchange markets

Brokers intermediaries between the ADs and

The Central Bank intervene to stabilize the market.

Foreign Exchange Fundamentals

Chapter 6: Factors affecting Currency markets:

Foreign Exchange Reserves

Exchange rate competitiveness

Short Term Factors

As compared with the prior period.

Indian Rupee Market

Flows: Supply side

Flows: Demand side

Factors affecting the Rupee spot market

Chapter 7: Currency Futures

Chapter 8: Commodity derivatives

Do you take delivery?

Pricing Commodity Derivatives

Chapter 9: Mutual Funds

Sponsor - The sponsor initiates the idea to set up a mutual fund.

Trustee an independent body whose role is to protect investors interests.

Custodian Looks after investments of the fund

Transfer agent Maintains records of unit holders

Regulators frame rules that regulate the industry

Types of Mutual Funds

Chapter 10: Insurance - Introduction

Chapter 11: Insurance Products General Insurance

Property & Liability Insurance

Personal Property Insurance - Specialized personal contents such as paintings and

Chapter 12: Insurance Products Life Insurance

Types of Term Insurance

Traditional/Permanent Life Insurance

Whole of Life Policy

Premium allocation charge - is deducted before allocating funds for investment.

Chapter 13: Alternate Investment Products & Services

Portfolio Management Services (PMS)

The PMS Service can be discretionary or non-discretionary.

Capital Gains Tax