Content

1. About WealthTech 2. Key concepts: 2a. Capital Market 2b. Mutual Funds

Module 8: WealthTech Contents

1. Introduction

2. Categories

3. Business models

4. Emerging Trends

1 About WealthTech 1.1 Introduction What is WealthTech?

WealthTech is a combination of wealth and technology with the goal of

G providing digital solutions to enhance wealth management and investing.

WealthTech describes a new class of financial G technology companies which are creating digital solutions to transform the investment management industry.

WealthTech players employ advanced G analytics to offer digital solutions to transform traditional wealth management and investment management services. 1.2 Categories Key categories

In India, the technological trends in WealthTech include digital onboarding; robo- advisory; personal finance management apps; reduced paperwork, tools for wealth managers, etc.

PERSONAL FINANCE MANAGEMENT ROBO ADVISORS: These applications provide a more They provide financial advice structured way of managing money with minimal human intervention

Categories INVESTING TOOLS: INVESTMENT PLATFORMS: These help traders make informed A platform through which one decisions while trading. Financial can buy, sell, and hold funds calculators help in quick thereby simplifying the computations and help create process of investing diversified portfolios

DIGITAL BROKERS: They are online platforms and software tools that aim to facilitate access to stock market information and investment 1.3 Business Models Business model trends

Business model trends in India include:

Discount broking Here buying and selling happens at a minimal rate as the brokers don’t give advice or perform models any analysis on clients’ behalf

An investment method where performance is measured by success of investments which help Goals-based investing a person meet his personal and lifetime goals. Eg: clients goal of saving for children's education.

This model helps to invest in long-term trends or Thematic investing themes by identifying macro level trends in investments

Comprises of both traditional models and robo- Hybrid models advisors, thereby using all emerging technologies to make investment decisions 1.4 Emerging trends Key Trends

Micro-Investments 2 Voice controlled investing 1 • Allow their users to invest small • Adoption of Google home, Alexa is amounts of money on a regular basis encouraging advisors to adopt voice without having to pay a commission interfaces to access client data and reports quickly and verbally

Account Aggregators 4 Expected regulatory SOPs and scrutiny 3 • Allows for advisors to accumulate all • Government strengthening avenues of a client’s account details in a single to invest and save beyond traditional portal so as to provide more assets meaningful, holistic advice

Open Banking and APIs Increasing participation by non- 6 5 traditional players • Easy, seamless and secure access, collection and sharing of data which • New, direct competition from e-tailors, tech-fins, financial infrastructure firms would lead to reduced TATs and hyper-personalized services 2. Key concepts in WealthTech Next two sections capture key basic concepts relevant to the WealthTech space 2a Capital Market Contents

1. Starting with basics – Why invest?

1. Assumptions

2. Numbers Stack

3. The big question

2. Where to invest?

3. Things to know before investing 2a. 1 Introduction to Stock Markets 1 Starting with basics – Why invest? 1.1 Why invest?

Assume you are 30 years as of today, plan to work for another 20 years and retire at 50 You earn 50K a month and spend 30K, save 20K in cash Assume you don’t want to invest the 20K in cash, save it in the form of cash What would happen if you were to retain the cash (20K a month for 20 yrs) and never make any investment?

To answer the question above, we need to do some math.

Before we stack up the numbers, lets make a few assumptions –

• The employer is kind enough to give you • You don’t intend to work after you retire a 10% salary hike every year • Your expenses are fixed and don’t foresee • The cost of living is likely to go up by 8% any other expense year on year • The balance cash of Rs.20,000/- per month is • You are 30 years old and plan to retire retained in the form of hard cash at 50. This leaves you with 20 more years to earn 1.2 The numbers stack

Years Yearly Income Yearly expense Cash retained 1 600,000 360,000 240,000 2 660,000 388,800 271,200 3 726,000 419,904 306,096 4 798,600 453,496 345,104 5 878,460 489,776 388,684 6 966,306 528,958 437,348 7 1,062,937 571,275 491,662 8 1,169,230 616,977 552,253 9 1,286,153 666,335 619,818 10 1,414,769 719,642 695,127 11 1,556,245 777,213 779,032 12 1,711,870 839,390 872,480 13 1,883,057 906,541 976,516 14 2,071,363 979,065 1,092,298 15 2,278,499 1,057,390 1,221,109 16 2,506,349 1,141,981 1,364,368 17 2,756,984 1,233,339 2,140,612 18 3,032,682 1,332,006 1,700,676 19 3,335,950 1,438,567 1,897,383 20 3,669,545 1,553,652 2,115,893 1.3 The big question

If one were to analyze these numbers, you would soon realize this is a scary situation to be in. Few things are quite startling from the above calculations:

1

After 20 years of hard work you have accumulated Rs.1.7Crs.

2 3 Digital After you retire, assuming the expenses Since your expenses are fixed, your will continue to grow at 8%, Rs.1.7Crs is lifestyle has not changed over the good enough to sail you through years, you probably even suppressed roughly for about 8 years of post your lifelong aspirations – better home, retirement life. 8th year onwards you better car, vacations etc will be in a very tight spot with literally no savings left to back you up. 1.4 Lets Invest

Now, lets take another situation, instead of keeping the money idle, lets invest the same. Assume –

The monthly surplus of The investment grows 1G 20K gets invested in for 2G at a rate of 12% year the next 20 years on year

Retained cash Years Yearly Income Yearly expense Cash retained invested at 12% 1 600,000 360,000 240,000 2067062.8 2 660,000 388,800 271,200 2085518.7 3 726,000 419,904 306,096 2101667.7 4 798,600 453,496 345,104 2115623.4 5 878,460 489,776 388,684 2127487.4 6 966,306 528,958 437,348 2137368.8 7 1,062,937 571,275 491,662 2145363.8 The numbers stack 8 1,169,230 616,977 552,253 2151564.4 (post investment) 9 1,286,153 666,335 619,818 2156067.9 10 1,414,769 719,642 695,127 2158958.9 11 1,556,245 777,213 779,032 2160317.1 12 1,711,870 839,390 872,480 2160228.4 13 1,883,057 906,541 976,516 2158765.8 14 2,071,363 979,065 1,092,298 2156002.6 15 2,278,499 1,057,390 1,221,109 2152011.3 16 2,506,349 1,141,981 1,364,368 2146859.5 17 2,756,984 1,233,339 1,523,645 2140611.5 18 3,032,682 1,332,006 1,700,676 2133328 19 3,335,950 1,438,567 1,897,383 2125069 20 3,669,545 1,553,652 2,115,893 2115893 Total cash after 20 years 42,695,770 1.5 Magic of investment

With the decision to The cash balance has grown invest the surplus cash, to Rs.4.26Crs from Rs.1.7Crs. your cash balance has This is a staggering 2.4x times increased significantly the regular amount.

This translates to you being in a much better situation to deal with your post retirement life. 2 Where can you invest? Fixed Income

Fixed income investments are those which tend to protect your capital. They offer limited risk, hence limited reward. Typical instruments are –

 Fixed deposits offered by banks

 Bonds issued by the Government of India

 Bonds issued by Government related agencies such as HUDCO, NHAI etc

 Bonds issued by corporate’s

 As of April, the typical return from a fixed income instrument varies between 7% and 10.5%. Equity

Investment in Equities involves When an investor invests in buying shares of publicly listed equity, unlike a fixed income Indian Equities have companies. The shares are instrument there is no capital generated returns close to traded both on the Bombay guarantee. However as a 14% – 15% CAGR (compound Stock Exchange (BSE), and trade-off, the returns from annual growth rate) over the the National Stock Exchange equity investment can be past 15 years. (NSE). extremely attractive.

Investing in some of the best Identifying such investments and well run Indian opportunities requires skill, companies has yielded over hard work and patience. 20% CAGR in the long-term. Real Estate

Real Estate investment involves transacting (buying and selling) commercial and non commercial land  Typical examples would include transacting in sites, apartments and commercial buildings.  There are two sources of income from real estate investments namely – Rental income, and Capital appreciation of the investment amount.

The transaction procedure can be quite complex involving legal verification of documents

The cash outlay in real estate investment is usually quite large.

There is no official metric to measure the returns generated by real estate, hence it would be hard to comment on this Commodities - Bullion

• Investments in gold and silver are considered one of the most popular investment avenues.

• Gold and silver over a long-term period has appreciated in value

• Investments in these metals have yielded a CAGR return of approximately 8% over the last 20 years

• There are several ways to invest in gold and silver. One can choose to invest in the form of jewelry or Exchange Traded Funds (ETF) Asset Allocation

Investments optimally should have a strong mix of all asset classes. It is smart to diversify your investment among the various asset classes. The technique of allocating money across assets classes is termed as ‘Asset Allocation’. 1G

For instance, a young professional may be able take a higher amount of risk given their age and years of investment available to them. Typically investor should allocate around 70% of their 2G investable amount in Equity, 20% in Precious metals, and the rest in Fixed income investments.

Alongside the same rationale, a retired person could invest 80 percent of their savings in fixed income, 10 percent in equity markets and a 10 G percent in precious metals. The ratio in which one allocates investments 3 across asset classes is dependent on the risk appetite of the investor. 3 Things to know before investing 3. Things to know before investing

•Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return

•Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However you have the risk of losing money when you adjust the return for inflation. Example – A fixed deposit which gives you 9% when the inflation is 10% means you are net losing 1% per annum.

• Investment in Equities is a great option. It is known to beat the inflation over long period of times. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky

•Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you

• Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging End of Module Contents

1. What is a stock market?

2. Stock market participants

3. The Regulator

4. SEBI Regulated entities

Module 2 Stock Market Participants & Regulator 1 What is a stock market? 1.1 What is a stock market?

• A stock market is where one goes to transact in shares and securities

• You access the market electronically from your computer and go about conducting your transactions (buying and selling of shares)

• You can access the stock market via a registered intermediary called the stock broker

• There are two main stock exchanges in India that make up the stock markets. They are the (BSE) and the National Stock Exchange (NSE) 2 Stock market participants 2. Stock market participants

Domestic Retail Participants – These NRI’s and OCI – These are are people like you and me people of Indian origin but transacting in markets based outside India

Participants Domestic Institutions – These Foreign Institutional Investors – are large corporate entities Non Indian corporate entities. based in India. Classic These could be foreign asset example would be the LIC of management companies, hedge India. funds and other investors

Domestic Asset Management Companies (AMC) – Typical participants in this category would be the mutual fund companies such as SBI Mutual Fund, DSP Mutual Fund, Fidelity Investments, HDFC AMC etc. 3 The Regulator 3. The Regulator

• In India the stock market regulator is called The Securities and Exchange board of India often referred to as SEBI. The objective of SEBI is to promote the development of stock exchanges, protect the interest of retail investors, regulate the activities of market participants and financial intermediaries. In general, SEBI ensures -

01 The stock exchanges (BSE and NSE) conduct their business fairly

02 Stock brokers and sub brokers conduct their business fairly

03 Participants don’t get involved in unfair practices

Corporate’s don’t use the markets to unduly benefit themselves 04 (Example – Satyam Computers)

05 Large investors with huge cash pile should not manipulate the markets

06 Overall development of markets 4 SEBI Regulated Entities SEBI Regulated Entities:

Entity Example of What do they do? In simpler words companies

Credit Rating CRISIL, ICRA, They rate the credit If a corporate or Govt entity wants to avail Agency (CRA CARE worthiness of corporate loan, CRA checks if the entity is worthy of and governments giving a loan

Debenture Almost all banks Act as a trustee to When companies want to raise a loan they Trustees in India corporate debenture can issue debenture against which they promise to pay an interest. These debentures can be subscribed by public. A Debenture Trustee ensures that the debenture obligation is honored

Depositories NSDL and CDSL Safekeeping, reporting and Acts like a vault for the shares that you buy. settlement of clients The depositories hold your shares and facilitate securities exchange of your securities. When you buy shares these shares sit in your Depositary account usually referred to as the DEMAT account. This is maintained electronically by only two companies in India 37 SEBI Regulated Entities:

Entity Example of What do they do? In simpler words companies

Depository Most of the banks Act as an agent to the two You cannot directly interact with NSDL or Participant (DP) and few stock depositories CDSL. You need to liaison with a DP to open brokers and maintain you DEMAT account

Foreign Foreign Make investments in India These are foreign entities with an interest to Institutional corporate, funds invest in India. They usually transact in large Investors and individuals amounts of money, and hence their activity in the markets have an impact in terms of market sentiment

Merchant Bankers Karvy, , Help companies raise If a company plans to raise money by floating Edelweiss Capital money in the primary an IPO, then merchant bankers are the ones markets who help companies with the IPO process

Asset HDFC AMC, Offer Mutual Fund An AMC collects money from the public, puts Management Reliance Capital, Schemes it in a single account and invest it in markets Companies SBI Capital with an objective of making the investments (AMC) grow and generate wealth to its investors. 38 SEBI Regulated Entities:

Entity Example of What do they do? In simpler words companies

Portfolio Wealth Offer PMS schemes They work similar to a mutual fund except in a Managers/ Management, PMS you have to invest a minimum of Portfolio Parag Parikh PMS Rs.25,00,000 however there is no such cap in a Management mutual fund System (PMS

Stock Brokers and , Act as a intermediary Whenever you want to buy or sell shares from Sub Brokers , ICICI between an investor and the stock exchange you have to do so Direct the stock exchange through registered stock brokers. A sub broker is like an agent to a stock broker

39 End of Module Contents

1. Overview

2. The stock broker

3. Depository and Depository Participants

4. Banks

5. Clearing Corporations

Module 3 Financial Intermediaries 1 Overview Overview

Apart from the stock exchanges, the following financial intermediaries form an integral part of the stock market ecosystem:

The Stock Broker

Clearing Corporations: NSCCL and Financial Depository and ICCL intermediaries Depository Participants

Banks 2 The Stock Broker A stock broker is your gateway to stock exchanges. To begin with, you need to open something called a ‘Trading Account’ with a broker.

➢ A trading account lets you carry financial transactions in the market. It is an account with the broker which lets the investor buy/sell securities.

The basic services provided by the brokers include:

1 • Give you access to markets and let you transact

2 • Give you margins for trading

• Provide support – dealing support if you have to call and trade; 3 software support if you have issues with the trading terminal • Issue contract notes for the transactions – a contract note is a written 4 confirmation detailing the transactions you have carried out during the day • Facilitate the fund transfer between your trading and bank accounts 5

• Provide you with a back office login – using which you can see the 6 summary of your account

The broker charges a fee for the services that he provides called the ‘brokerage charge’ or just brokerage. The brokerage rates vary, and its up to you to find a broker who strikes a balance between the fee they collect versus the services they provide. 3 Depository and Depository Participants Depository and Depository Participants

When you buy a share, the only way to claim your ownership is by producing your share certificate. A share certificate is nothing but a piece of document entitling you as the owner of the shares in a company.

Before 1996, the share certificate was in paper format; however, post 1996, the share certificates were converted to digital form. The process of converting paper format share certificates into digital format share certificates is called “Dematerialization” often abbreviated as DEMAT.

The share certificate in DEMAT format has to be stored digitally. The storage place for the digital share certificate is the ‘DEMAT Account’. Depository and Depository Participants Contd..

A Depository is a financial intermediary which offers the service of Demat account

A DEMAT account in your name will have all the shares in electronic format you have bought. Think of DEMAT account as a digital vault for your shares

At present there are only two depositories offering you DEMAT account services. They are The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited

To open a DEMAT account you need to liaison with a (DP). A DP helps you set up your DEMAT account with a Depository. A DP acts as an agent to the Depository 4 Banks Banks

Banks play a very straightforward role in the market ecosystem. They help in facilitating the fund transfer from your bank account to your trading account.

• You cannot transfer money from a bank account that is not in your name. You can link multiple bank accounts to your trading through which you can transfer funds and trade

• Dividend payments, money from buybacks will be sent to the primary bank account

• The primary bank account is connected not just to your trading account but also with the Depository and the Registrar and transfer agents (RTA)

• At this stage, you must have realized that the three financial intermediaries operate via three different accounts – trading account, DEMAT account and Bank account. All the three accounts operate electronically and are interlinked giving you a very seamless experience. 5 Clearing Corporations Clearing Corporations: NSCCL and ICCL

National Security Clearing Corporation Ltd and Indian Clearing Corporation are wholly owned subsidiaries of National Stock Exchange and Bombay Stock Exchange respectively. The job of the clearing corporation is to ensure guaranteed settlement of your trades/transactions. In a typical transaction, the clearing corporation’s role is to ensure the following:

Chat-bots can add a new dimension of ‘personal touch’ to enhance customer experience• Identify the buyer and seller and match the debit and credit process • Ensure no defaults – The clearing corporation also ensures there are no defaults •Whenby a either customer party. logs For into instance his or herthe account,seller after a selling chat- botthe canshares greet should the notcustomer be in a and discussposition customized to back offers out withthereby her/him defaulting instead in ofhis the transaction. conventional pop-up notifications or banners • For all practical purposes, its ok not to know much about NSCCL or ICCL simply •Duringbecause, the conversation you as a trader with the or investorcustomer, would the chatnot be-bot interacting can use advanced with these speech agencies and natural language processing capabilities, and sentiment analytics to gauge the tone, directly.emotions, You and just voice need to be aware that there are certain professional institutions accentwhich to are offer heavily solutions regulated that are and they work towards smooth settlement, and deeply customized efficient clearing activity. End of Module Contents

1. Angel Investment

2. Venture Capital Investment

3. Bank Funding

4. Private Equity Funding

5. Initial Public Offer (IPO)

Module 4 Avenues for raising capital 1. Angel Investment

• The angel investor puts initial money into the business in the pre- Seed revenue to kick start the business. This money is called ‘The Seed Fund’.

• Once the seed capital hits the company’s bank account, the money Initial share is referred to as the initial share capital of the company capital

• The only asset that the company has at this stage is the Seed fund put Company’s into the company. This is called the company’s valuation. valuation

• The total number of shares a company can issue is called the Authorised Authorized Capital. Capital

• The total number of shares a company issues and raises money with is Paid-up called the Paid up capital. capital 2. Venture Capital Investment

• A business • The investor • The company explores who typically can approach venture invests in such another VC capital early stage of and raise funding once business is another round it starts called a of VC funding generating Venture by allotting revenues. Capitalist (VC) shares from and the the authorized money that capital – this is the business called Series B gets at this funding. stage is called Series A funding. 3. Bank Funding

• Once the business is on a firm footing and the company has made some profits over the last few years, the company can expand capacity in the form of Capital Expenditure (Capex).

• A part of the capex requirement can be funded through the profits. This is also called funding through internal accruals

• Alternatively, the company can approach a bank and seek a loan. The bank would be happy to tender this loan as the company has been doing fairly well. The loan is also called ‘Debt’. 4. Private Equity Funding

If the company does not want to raise money through debt because of the interest rate burden and requires to raise significant funds then they cannot approach a typical VC because VC funding is usually small and runs into few crores. This is when a Private Equity (PE) investor comes into the picture

PE investors are quite savvy. They are highly qualified, and have an excellent professional background

They invest large amounts of money with the objective of not only providing the capital for constructive use but also placing their own people on the board of the investee company to ensure the company steers in the required direction 4. Private Equity Funding Contd..

Usually, when a PE invests, they invest with an objective to fund large capex requirements

Further, they do not invest in the early stage of a business; instead, they prefer to invest in companies that already have a revenue stream, and are in operation for a few years

The process of deploying the PE capital and utilizing the capital for the capex requirements takes a few years 5. Initial Public Offer (IPO)

When the capex requirement is huge and the management estimates this at hundreds of crores, the company may decide to issue shares to more investors

When a company files for an IPO, they have to offer their shares to the general public

The general public will subscribe to the shares (i.e if they want to) by paying a certain price

Since the company is offering the shares for the first time to the public, it is called the “Initial Public Offer’ End of Module Contents

1. Why do companies go public?

2. Merchant Bankers

3. IPO sequence of events

4. What happens after the IPO?

5. Few key IPO jargons

Module 5 The IPO Markets 1 Why do companies go public? Why do companies go public?

To meet Capex requirement To avoid raising debt and resultant finance charges The promoters can reduce their risk exposure To provide exit opportunities for early investors

To reward employees with capital appreciation from ESOPs – (Employees working for the company would have shares To improve visibility – Since the allotted to them as an incentive. company has a status of being This sort of arrangement between publicly held and traded, there is a the employee and the company is greater chance of people’s interest called the “Employee Stock in the company, consequently Option”. The shares are allotted at creating a positive impact on its a discount to the employees.) growth. 2 Merchant Bankers Merchant Bankers

The first and foremost step for a company seeking to offer its shares to the public would be to appointThis a merchantthe next development banker. Merchant after thebankers traditional are also model called that Book provides the customer with Running Lead Managersa basic (BRLM)/Lead level digital Manager experience (LM) and perform the following functions:

Conduct a due diligence on the company filing for an IPO, ensure their legal compliance and also issue a due diligence certificate

Work closely with the company and prepare their listing Functions documents including Draft Red Herring Prospectus (DRHP).

Underwrite shares – By underwriting shares, merchant bankers essentially agree to buy all or part of the IPO shares and resell the same to public Help company arrive at the price band for the IPO. A price band is the lower and upper limit of the share price within which the company will go public.

Help the company with the road shows – This is like a promotional/marketing activity for the company’s IPO Contd..

Appointment of other intermediaries namely, registrars, bankers, advertising agencies etc. The Lead manager also makes various marketing strategies for the issue 3 IPO sequence of events 3. IPO sequence of events

Needless to say each and every step involved in the IPO sequence has to happen under the SEBI guidelines. In general, the following are the sequence of steps involved:

Appoint a merchant banker - In case of a large public issue, Step 1 the company can appoint more than 1 merchant banker

Apply to SEBI with a registration statement – The registration Step 2 statement contains details on what the company does, why the company plans to go public and the financial health of the company

Getting a nod from SEBI – Once SEBI receives the registration Step 3 statement, SEBI takes a call on whether to issue a go ahead or a ‘no go’ to the IPO

DRHP – If the company gets the initial SEBI nod, then the Step 4 company needs to prepare the DRHP. A DRHP is a document that gets circulated to the public. IPO sequence of events contd…

Market the IPO – This would involve TV and print Step 5 advertisements in order to build awareness about the company and its IPO offering. This process is also called the IPO road show

Fix the price band – Decide the price band between which Step 6 the company would like to go public. Of course this can’t be way off the general perception. If it is, then the public will not subscribe for the IPO

Book Building – Once the road show is done and price band fixed the company now has to officially open the window Step 7 during which the public can subscribe for shares. For example, if the price band is between Rs.100 and Rs.120, then the public can actually choose a price they think is fair enough for the IPO issue. The process of collecting all these price points along with the respective quantities is called Book Building. Book building is perceived as an effective price discovery method IPO sequence of events contd...

Closure – After the book building window is closed (generally Step 8 open for few days) then the price point at which the issue gets listed is decided. This price point is usually that price at which maximum bids have been received.

Listing Day – This is the day when the company actually gets Step 9 listed on the stock exchange. The listing price is the price decided based on market demand and supply on that day and the stock is listed at premium, par or discount of the cut-off price 4 What happens after the IPO? 4. What happens after the IPO?

During the bidding process (also called the date of issue) investors can bid for 1G shares at a particular price within the specified price band. This whole system around the date of issue where one bids for shares is referred to as the Primary Market.

The moment the stock gets listed and debuts on the stock G exchange, the stock starts to trade publicly. This is called the 2 Secondary Market.

Once the stock transitions from primary markets to secondary markets, the stock gets traded daily on the stock exchange. People 3G start buying and selling the stocks regularly. 5 Few key IPO jargons 5. Few key IPO jargons

• Before we wrap up the presentation on IPO’s let us review few important IPO jargons -

Under Subscription – Let’s say the company wants to offer 100,000 shares to the public. During the book building process it is discovered that only 90,000 bids were received, then the issue 01 is said to be under subscribed. This is not a great situation to be in as it indicates negative public sentiment

Over subscription – If there are 200,000 bids for 100,000 shares on 02 offer then the issue is said to be oversubscribed 2 times (2x)

Green Shoe Option – Part of the underwriting agreement which allows the issuer to authorize additional shares (typically 15 03 percent) to be distributed in the event of over subscription. This is also called the over-allotment option.

Fixed Price IPO – Sometimes the companies fix the price of the IPO and do not opt for a price band. Such issues are called 4 fixed price IPO. 0 .

Price Band and Cut off price – Price band is a price range between which the stock gets listed. For example if the price band is between Rs.100 and Rs.130, then the issue can list within 05 the range. Let’s says it gets listed at 125, then 125 is called the cut off price. End of Module Contents

1. What really is the stock market?

2. How does the stock get traded?

3. What happens after you own a stock?

4. How to calculate returns?

5. Where do you fit in? Module 6 The Stock Markets 1 What really is the stock market? What really is the stock market?

• The stock market is a place where market participants can access any publicly listed company and trade from their point of view, as What moves the stock? long as there are other participants who have an opposing point of view.

• The stock exchange has to ensure that these two • The price of a stock moves because of orders are matched, and the trade gets executed. expectation of news and events.

This is the primary job of the stock market – to • The news or events can be directly related to create a marketplace for the buyer and seller. the company, industry or the economy as a whole.

• In some cases there would be no news but still the price could move due to the demand and supply situation. 2 How does the stock get traded? How does the stock get traded?

Let’s say you decide to buy shares of Company A. You will have to go through the following steps:

You need to login to your trading account (provided by your stock broker) and place an order to buy Company A. Once you place an order, an order ticket gets generated containing the details of your account, the price at which you 1 want to buy the shares and the quantity you want to purchase.

Before your broker transmits this order to the exchange he needs to ensure you have sufficient money to buy these shares. If yes, then this order ticket hits the stock exchange and then the exchange (through their order matching algorithm) tries to find a seller 2 who is willing to sell you the shares you want to buy.

Once the trade is executed, the shares will be electronically credited to your DEMAT account. Likewise the shares will be electronically debited from the 3 sellers DEMAT account. 3 What happens after you own a stock? What happens after you own a stock?

• After you buy the shares, the shares will now reside in your DEMAT account. You are now a part owner of the company, to the extent of your shareholding. • By virtue of owning the shares you are entitled to few corporate benefits like dividends, stock split, bonus, rights issue, voting rights etc.

A note on holding period:

Holding period is defined as the period during which you intend to hold the stock. You may be surprised to know that the holding period could be as short as few minutes to as long as ‘forever’. When the legendary investor Warren Buffet was asked what his favorite holding period was, he in fact replied ‘forever’. 4 How to calculate returns? How to calculate returns?

If your trade generates a good return all your past stock market sins are forgiven. This is what really matters. Returns are usually expressed in terms of annual yield. There are different kinds of returns that you need to be aware of. The following will give you a sense of what they are and how to calculate the same…

Absolute Return – This is return that your trade or investment has generated in absolute terms. It helps you answer this question – I bought Company A at 3030 1G and sold it 3550. How much percentage return did I generate? The formula to calculate the same is [Ending Period Value / Starting Period Value – 1]*100

Compounded Annual Growth Rate (CAGR) – An absolute return can be misleading if you want to compare two investments. G CAGR helps you answer this question – I bought Company A at 2 3030 and held the stock for 2 years and sold it 3550. At what rate did my investment grow over the last two years? You can use the following formula to calculate CAGR –

CAGR = ((Ending value/Beginning value)^(1/no. of yrs))-1 5 Where do you fit in? Where do you fit in?

Each market participant has his or her own unique style to participate in the market. Irrespective of what they do, they can be categorized as either a trader or an investor. There are different types of traders :

Traders:

1. Day Trader – A day trader initiates and closes the position during the day. He does not carry forward his positions. He is risk averse and does not like taking overnight risk. 2. Scalper – A type of a day trader. He usually trades very large quantities of shares and holds the stock for very less time with an intention to make a small but quick profit. 3. Swing Trader – A swing trader holds on to his trade for slightly longer time duration, the duration can run into anywhere between few days to weeks.

Investors:

1. Growth Investors – The objective here is to identify companies which are expected to grow significantly because of emerging industry and macro trends.

2. Value Investors – The objective here is to identify good companies irrespective of whether they are in growth phase or mature phase but beaten down significantly due to the short term market sentiment thereby making a great value buy. End of Module Contents

1. The Index

2. Practical uses of the Index

3. Index construction methodology

4. Sector specific indices

Module 7 The Stock Markets Index 1 The Index The Index

There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange and CNX Nifty representing the National Stock exchange.

• S&P stands for Standard and Poor’s, a global credit rating agency. S&P has the technical expertise in constructing the index which they have licensed to the BSE. Hence the index also carries the S&P tag. • CNX Nifty consists of the largest and most frequently traded stocks within the National Stock Exchange. It is maintained by India Index Services & Products Limited (IISL) which is a joint venture of National Stock Exchange and CRISIL. In fact the term ‘CNX’ stands for CRISIL and NSE. • An ideal index gives us minute by minute reading about how the market participants perceive the future. The movements in the Index reflect the changing expectations of the market participants. • When the index goes up, it is because the market participants think the future will be better. The index drops if the market participants perceive the future pessimistically. 2 Practical uses of the Index Practical uses of the Index

• Benchmarking – For all the trading or investing • Information – The index reflects the activity that one does, a yardstick to measure general market trend for a period of the performance is required. Assume over time. The index is a broad representation the last 1 year you invested Rs.100,000/- and of the country’s state of economy. A generated Rs.20,000 return to make your total stock market index that is up indicates corpus Rs.120,000/- . How do you think you people are optimistic about the future performed? Well on the face of it, a 20% and vice-versa. return looks great. However what if during the same year Nifty moved to 7,800 points from 6,000 points generating a return on 30%?

Continued.. Practical uses of the Index continued...

Trading – Trading on the index is probably Portfolio Hedging – Investors usually build a one of most popular uses of the index. portfolio of securities. While the stocks are Majority of the traders in the market trade the held from a long term perspective they index. They take a broader call on the could foresee a prolonged adverse economy or general state of affairs, and movement in the market (2008) which could translate that into a trade. potentially erode the capital in the portfolio. In such a situation, investors can use the index to hedge the portfolio. 3 Index construction methodology Index construction methodology

The Index is a composition of many stocks from different sectors which collectively represents the state of the economy. To include a stock in the index it should qualify certain criteria.

Once qualified as an index stock, it should continue to qualify on the stated criteria. If it fails to maintain the criteria, the stock gets replaced by another stock which qualifies the prerequisites.

There are many ways to assign weights but the Indian stock exchange follows a method called free float market capitalization of the company. So larger the market capitalization, higher the weight.

Free float market capitalization is the product of total number of shares outstanding in the market, and the price of the stock. 4 Sector specific indices Sector specific indices

While the Sensex and Nifty represent the broader markets there are certain indices that represents specific sectors. These are called the sectoral indices.

• The Bank Nifty on NSE represents the mood specific to the banking industry.

• The CNX IT on NSE represents the behavior of all the IT stocks in the stock markets.

• Both BSE and NSE have sector specific indexes. The construction and maintenance of these indices is similar to the other major indices. End of Chapter Contents

1. Mutual Funds & Benefits

2. MF types

3. Knowing the Difference between

1. Direct & regular plans

2. SIP & Lumpsum

4. Taxation rules Chapter 3 Mutual Funds 1. Mutual Funds & benefits 1. Mutual Funds & benefits

Most investment advisors would suggest mutual funds as an investment option since the money collected from various investors is pooled in and invested into various asset classes thereby diversifying risk and raising chances of generation of wealth.

MFs are among the most flexible and scalable options which cater to investors across the spectrum. They also offer a level of complexity or simplicity as desired by the investors making MFs a preferred instrument among the more evolved markets across the globe

What are the benefits of investing in MFs?

As an instrument of investment, MFs offer several advantages to investors:

1. Professional fund management 2. Transparency 3. Variety of options 4. Flexibility 5. Diversifying risk 6. Regulations 1. Professional fund management

• MFs are managed by qualified and professional fund managers who understand the nuances of investing money.

• MF houses have the ability to invest time and resources in research to understand the market and analyse stocks to identify appropriate investment avenues

2. Transparency

• MFs provide investors information related to the performance of their investments on a regular basis. They are also mandated to furnish details of all investments made by them under various schemes.

• This makes MFs among the most transparent investment options making them a choice for first time investors as well as experienced investors.

3. Variety of options

• MFs offer investors a wide range of schemes to choose from depending on their investment objectives and risk appetite. 4. Flexibility

• MFs offer investors the flexibility to choose the tenure of their investment based on their financial goals. This gives investors enough flexibility to plan their investments based on their comfort level and needs.

5. Diversifying risk

• Small investors have limited savings and a relatively small corpus of money to invest. Traditional avenues such as stocks and bonds are not always feasible because a small amount allows them to invest in few stocks or bonds.

• Since MFs invest the pool of money in a wide range of avenues or a large number of stocks, they inherently reduce the overall risk through diversification

6. Regulations

• All MFs are required to be registered with the Securities and Exchange Board of India (SEBI) and operate under the framework created by the regulator. From reporting to levying various fees on investors, SEBI regulates the MFs with the core objective of protecting investors against malpractices that could put their savings at risk. 2 Types of Mutual Funds 2. What are the different types of Mutual Funds?

MFs can be categorised on the basis of different parameters. Let’s look at some popular types.

On the basis of investment tenure

1G Open-ended funds: An open-ended fund is a scheme that can be subscribed to or redeemed at any time, much like a savings bank account, where you may deposit or withdraw money any time

Close-ended funds: A closed-ended fund is a subscription-based offering with a fixed time window for investing and a specified tenure for maturity - much like a fixed deposit with a bank.

On the basis of management style

G Actively managed funds: An actively managed fund is a scheme in which the investment 2 portfolio is actively managed by a fund manager. Such funds are assessed on an on-going basis and trading decisions on whether to buy, sell or hold an investment are taken by the fund managers based on market trends and their analysis.

Passively managed funds: Passively managed funds follow a market index. There is no investment decision or discretion of buy, sell or hold and thus require little analysis or inputs. Contd..

On the basis of investment

G Equity funds: Such funds invest primarily in equity instruments and their returns are directly linked 3 to the performance of the stock market.

Debt funds: These funds invest in a combination of debt instruments such as bonds, treasury bills, etc. While these offer higher liquidity compared to FDs, they yield higher returns over a longer period of time

Balanced funds: Also known as hybrid funds, these funds invest in equity and debt instruments. These are good for new investors who have a limited risk appetite that equity funds offer. 3 Knowing the Difference Choosing between direct and regular plans:

Expense ratio What is the difference Since a regular plan involves an between Direct and Regular intermediary (distributor or agent), it 1 involves payment of commission. In a plans? direct plan this cost is eliminated, resulting in marginally Investment in MFs can be made in one of higher NAV of Direct plans. two ways - through a financial intermediary in a ‘Regular’ plan or directly with a fund house which is known as a ‘Direct’ plan. Investor experience In a direct plan, the investors are also required to manage the transactions (buying and redeeming units) on 2 their own. Thus a direct plan is more suitable for experienced and advanced investors. Regular plans, on the other hand, offer convenience and handholding to new and inexperienced investors. What is the difference between SIP and lumpsum?

MFs offer a unique option to either invest a lumpsum at a time or to invest smaller amounts at a fixed interval. This often leads to a conundrum for first-time investors. Let’s understand the features and differences of these options -

Availability of funds to invest:

A lumpsum investment requires you to make a one-time investment. While it is a worthwhile avenue for an investor with a substantial corpus of money, it may not be a viable option for small investors. Systematic Investment Plans (SIPs), on the other hand, involve investing smaller amounts in a scheme on periodic intervals.

Rupee-cost averaging:

Investments in SIPs can be spread over a longer period of time thus leading to benefits from rupee-cost averaging irrespective of the market conditions whereas, investor making a onetime investment in MF, would subscribe to the units based on the NAV price as on that particular day. 4. Taxation rules What are the taxation rules related to MF investments?

 Long-term holding  Short-term holding

From a taxation perspective, gains on equity mutual funds and balanced funds held for more than 12 months are treated as long-term capital gains Equity and balanced funds attract (LTCG) and taxed at 10%. a 15% tax on short-term gains if redeemed before a 12 month However, long-term capital gains from period. equities are exempt up to 1 lakh in a financial year. LTCG over 1 lakh is taxable at the rate of 10% without the benefit of indexation. In case of debt funds, short term gains are taxed as per the In case of debt funds, gains are applicable income tax slab rate. considered as long term if holding period is more than 36 months. LTCG on debt fund are taxable at the rate of 20% after indexation. End of Chapter