Mutual Funds (MF)

The investor world is shifting its base from equity and debt instruments to the mutual funds, the new era of financial instruments. The businesses of the mutual funds are exploding. The mutual funds are run by the fund houses and are handled by the fund managers. The mutual fund managers would invest in the secondary market on behalf of us. The fund houses would take some percent of the total assets of the mutual funds every year irrespective of the profit or loss.

But there are several benefits of investments in the MF and they are:

Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments.

Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities.

Spreading Risk: Obviously the spreading risk of the investor’s money gets reduced due to the diversification.

Transparency: Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type.

Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk/ return profile.

Thus the MFs play an important role in this investing world due to its flexibility and benefits.

debt investments

The investment towards the debentures and bonds are known as debt investments. Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender.


Each debt instrument has three features: Maturity, coupon and principal.

· Maturity: Maturity of a bond refers to the date, on which the bond matures, which is the date on which the borrower has agreed to repay the principal. Term-to-Maturity refers to the number of years remaining for the bond to mature. The Term-to-Maturity changes every day, from date of issue of the bond until its maturity. The term to maturity of a bond can be calculated on any date, as the distance between such a date and the date of maturity. It is also called the term or the tenure of the bond.

· Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the Debt Instrument) to the lender (the subscriber of the Debt Instrument). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond.

· Principal: Principal is the amount that has been borrowed, and is also called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate.

Products in Secondary Market

The Products in the secondary market is divided broadly into Shares and Bonds:

Shares:
Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.

Rights Issue of Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They have less voting rights.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, corporation or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
These are the products that are up for sale in the secondary markets.

Corporate actions and Its Influence on the Stock Investments

What are Corporate Actions?
Corporate actions tend to have a bearing on the price of a security. When a company announces a corporate action, it is initiating a process that will bring actual change to its securities either in terms of number of shares increasing in the hands on the shareholders or a change to the face value of the security or receiving shares of a new company by the shareholders as in the case of merger or acquisition etc. By understanding these different types of processes and their effects, an investor can have a clearer picture of what a corporate action indicates about a company's financial affairs and how that action will influence the company's share price and performance. Corporate actions are typically agreed upon by a company's Board of Directors and authorized by the shareholders. Some examples are dividends, stock splits, rights issues, bonus issues etc.

Dividends:
Dividend is distribution of part of a company's earnings to shareholders, usually twice a year in the form of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder.

Stock Split:
A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the numbers of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split.

Buyback of Shares:
A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth.

These are some of the corporate actions that influence the prices of the stocks in the market.

Derivatives: The New world of Stock Investments

Securities that derive their value from other financial instruments are known as Derivatives. The financial instrument can be an equity stock. In other words, A Derivative is a financial instrument that is derived from some other asset, index, event, value or condition. The derivatives are widely used by the insurance companies to hedge its bets on which direction the market is moving. Derivative instruments are used as financial management tools to enhance investment returns and to manage such risks relative to interest rates, exchange rates, and financial instrument and commodity prices.
There are different types of derivatives such as:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the NASDAQ.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options:

‘Calls’ give the buyer the right but not the obligations to buy a given quantity of the underlying asset, at a given price on or before a given future date.

‘Puts’ give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date.

Thus Derivatives plays a major role in the equity investments.

Equity investments

Why Equity investments?
When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term. Therefore

Ø Equities are considered the most challenging and the rewarding, when compared to other investment options.
Ø Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study and analyze them carefully before investing.

The factors that influence the price of a stock are broadly classified into two and they are
(1) Stock specific
(2) Market specific.

Stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills. Whereas the market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Thus equity investment is quite a wise option.

Secondary Market: The Gateway to Stock Investments.

Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. So the secondary markets are nothing but our stock exchanges.

It’s Role:
For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information through price discovery that guides management decisions. The secondary markets bring transparency in trading and also boost investor confidence on the stock markets.

The difference between the Primary Market and the Secondary Market:
In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.