DEPOSITORY

How is a depository similar to a bank?

A Depository can be compared with a bank,
which holds the funds for depositors. An analogy
between a bank and a depository may be drawn
as follows:
 Which are the depositories in India?
There are two depositories in India which provide
dematerialization of securities. The National Securities
Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL).
What are the benefits of participation in a depository?
The benefits of participation in a depository are:
 Immediate transfer of securities

 No stamp duty on transfer of securities

 Elimination of risks associated with physical certificates

such as bad
 delivery, fake securities, etc.

 Reduction in paperwork involved in transfer of securities

 Reduction in transaction cost

 Ease of nomination facility
 Change in address recorded with DP gets registered
electronically with all companies in which investor
holds securities eliminating the need to correspond
with each of them separately
 Transmission of securities is done directly by the DP
eliminating correspondence with companies
 Convenient method of consolidation of
folios/accounts
 Holding investments in equity, debt instruments and
Government securities in a single account; automatic
credit into demat account, of shares, arising out of
split/consolidation/merger etc.
 Who is a Depository Participant (DP)?
The Depository provides its services to investors through
its agents called depository participants (DPs). These agents
are appointed by the depository with the approval of SEBI.
According to SEBI regulations, amongst others, three
categories of entities, i.e. Banks, Financial Institutions and
SEBI registered trading members can become DPs.
Does one need to keep any minimum balance of
securities in his account with his DP?
No. The depository has not prescribed any minimum
balance. You can have zero balance in your account.
What is an ISIN?
ISIN (International Securities Identification Number) is a
unique identification number for a security.
 What is a Custodian?
A Custodian is basically an organization, which
helps register and safeguard the securities of its
clients. Besides safeguarding securities, a custodian
also keeps track of corporate actions on behalf of
its clients:
 Maintaining a client's securities account
 Collecting the benefits or rights accruing to
the client in respect of securities
 Keeping the client informed of the actions
taken or to be taken by the issue of securities,
having a bearing on the benefits or rights
accruing to the client.
 How can one convert physical holding into electronic
holding i.e. how can one dematerialise securities?
In order to dematerialise physical securities one has to fill in
a Demat Request Form (DRF) which is available with the DP
and submit the same along with physical certificates one
wishes to dematerialise. Separate DRF has to be filled for each
ISIN number.
Can odd lot shares be dematerialised?
Yes, odd lot share certificates can also be dematerialised.

Do dematerialised shares have distinctive numbers?

Dematerialised shares do not have any distinctive numbers.
These shares are fungible, which means that all the holdings of
a particular security will be identical and interchangeable.
 Can electronic holdings be converted into
Physical certificates?
Yes. The process is called Rematerialisation. If
one wishes to get back your securities in the physical
form one has to fill in the Remat Request Form
(RRF) and request your DP for rematerialisation of
the balances in your securities
account.
Can one dematerialise his debt Iinstruments,
mutual fund units, government securities in his
demat account?
Yes. You can dematerialise and hold all such
investments in a single demat account.
MUTUAL FUNDS
 What is the Regulatory Body for Mutual
Funds?
Securities Exchange Board of India (SEBI) is the
regulatory body for all the mutual funds. All the mutual
funds must get registered with SEBI.
 What are the benefits of investing in Mutual Funds?
There are several benefits from investing in a Mutual Fund:
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 analyse the markets and economy to pick good investment opportunities.
Spreading Risk: An investor with limited funds might be able to invest in only one
or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will
spread its risk by investing a number of sound stocks or bonds. A fund normally
invests in companies across a wide range of industries, so the risk is diversified.
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.
Regulations: All the mutual funds are registered with SEBI and they function within
the provisions of strict regulation designed to protect the interests of the investor.
 What is NAV?
NAV or Net Asset Value of the fund is the
cumulative market value of the assets of the fund net of
its liabilities. NAV per unit is simply the net value of
assets divided by the number of units outstanding.
Buying and selling into funds is done on the basis of
NAV-related prices.

The NAV of a mutual fund are required to be

published in newspapers. The NAV of an open end
scheme should be disclosed on a daily basis and the
NAV of a close end scheme should be disclosed at least
on a weekly basis
 Are there any risks involved in investing in Mutual
Funds?
Mutual Funds do not provide assured returns. Their
returns are linked to their performance. They invest in
shares, debentures, bonds etc. All these investments
involve an element of risk. The unit value may vary
depending upon the performance of the company and if a
company defaults in payment of interest/principal on
their debentures/bonds the performance of the fund may
get affected. Besides incase there is a sudden downturn in
an industry or the government comes up with new a
regulation which affects a particular industry
or company the fund can again be adversely affected. All
these factors influence the performance of Mutual Funds.
Some of the Risk to which Mutual Funds are exposed to is given below:

Market risk
If the overall stock or bond markets fall on account of overall economic factors,
the value of stock or bond holdings in the fund's portfolio can drop, thereby
impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can
negatively affect fund holdings. This risk can be reduced by having a diversified
portfolio that consists of a wide variety of stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates
rise, bond prices fall and this decline in underlying securities affects the fund
negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they
run the risk of the corporate defaulting on their interest and principal payment
obligations and when that risk crystallizes, it leads to a fall in the value of the bond
causing the NAV of the fund to take a beating.
 What are the different types of Mutual funds?

Mutual funds are classified in the following manner:

(a) On the basis of Objective

Equity Funds/ Growth Funds

Funds that invest in equity shares are called equity funds. They carry the principal
objective of capital appreciation of the investment over the medium to long-term. They are
best suited for investors who are seeking capital appreciation. There are different types of
equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified funds
These funds invest in companies spread across sectors. These funds are generally meant for
risk-averse investors who want a diversified portfolio across sectors.
Sector funds
These funds invest primarily in equity shares of companies in a particular business sector
or industry. These funds are targeted at investors who are bullish or fancy the prospects of a
particular sector.
Index funds
These funds invest in the same pattern as popular market indices like CNX Nifty or CNX
500. The money collected from the investors is invested only in the stocks, which represent
the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of
such funds is not to beat the market but to give a return equivalent to the market returns.
 Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act.
Opportunities provided under this scheme are in the form of tax rebates
under the Income Tax act.

Debt/Income Funds
These funds invest predominantly in high-rated fixed-income-bearing
instruments like bonds, debentures, government securities, commercial
paper and other money market instruments. They are best suited for the
medium to long-term investors who are averse to risk and seek capital
preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The
period of investment could be as short as a day. They provide easy liquidity.
They have emerged as an alternative for savings and short-term fixed
deposit accounts with comparatively higher returns. These funds are ideal
for corporates, institutional investors and business houses that invest their
funds for very short periods.
 Gilt Funds
These funds invest in Central and State Government
securities. Since they are Government backed bonds
they give a secured return and also ensure safety of the
principal amount. They are best suited for the medium to
long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-
income-bearing instruments (debt) in some proportion.
They provide a steady return and reduce the volatility of
the fund while providing some upside for capital
appreciation. They are ideal for medium to long-term
investors who are willing to take moderate risks.
b) On the basis of Flexibility

Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open
for subscription and redemption throughout the year. Their prices are linked to
the daily net asset value (NAV). From the investors' perspective, they are much
more liquid than closed-ended funds.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering
(IPO) and thereafter closed for entry as well as exit. These funds have a fixed
date of redemption. One of the characteristics of the close-ended schemes is
that they are generally traded at a discount to NAV; but the discount narrows as
maturity nears. These funds are open for subscription only once and can be
redeemed only on the fixed date of redemption. The units of these funds are
listed on stock exchanges (with certain exceptions), are tradable and the
subscribers to the fund would be able to exit from the fund at any time through
the secondary
market.
 What are the different investment plans
that Mutual Funds offer?
The term 'investment plans' generally refers to
the services that the funds provide to investors
offering different ways to invest or reinvest. The
different investment plans are an important
consideration in the investment decision,
because they determine the flexibility available
to the investor. Some of the investment plans
offered by mutual funds in India are:
 Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the
returns from investments are reinvested and very few
income distributions, if any, are made. The investor thus
only realizes capital appreciation on the investment. Under
the dividend plan, income is distributed from time to time.
This plan is ideal to those investors requiring regular
income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for
reinvestment of income distribution. This is referred to as
the dividend reinvestment plan. Under this plan, dividends
declared by a fund are reinvested in the scheme on behalf of
the investor, thus increasing the number of units held by the
investors.
 What are the rights that are available to a Mutual Fund holder
in India?
As per SEBI Regulations on Mutual Funds, an investor is entitled to:

1) Receive Unit certificates or statements of accounts confirming your

title within 6 weeks from the date your request for a unit certificate is
received by the Mutual Fund.

2) Receive information about the investment policies, investment

objectives, financial position and general affairs of the scheme.

3) Receive dividend within 30 days of their declaration and receive the

redemption or repurchase proceeds within 10 days from the date of
redemption or repurchase.

4) The trustees shall be bound to make such disclosures to the unit

holders as are essential in order to keep them informed about any
information, which may have an adverse bearing on their
investments.
5) 75% of the unit holders with the prior approval of
SEBI can terminate the AMC of the fund.

6) 75% of the unit holders can pass a resolution to

wind-up the scheme.

7) An investor can send complaints to SEBI, wh

will take up the matter with the concerned Mutual
Funds and follow up with them till they are resolved.
 What is a Fund Offer document?
A Fund Offer document is a document that offers you all the information
you could possibly need about a particular scheme and the fund launching
that scheme. That way, before you put in your money, you're well aware of the
risks etc involved. This has to be designed in accordance with the guidelines
stipulated by SEBI and the prospectus must disclose details about:

 Investment objectives
 Risk factors and special considerations
 Summary of expenses
 Constitution of the fund
 Guidelines on how to invest
 Organization and capital structure
 Tax provisions related to transactions
 Financial information
 What is Active Fund Management?

When investment decisions of the fund are at the

discretion of a fund manager(s) and he or she decides
which company, instrument or class of assets the fund
should invest in based on research, analysis, market news
etc. such a fund is called as an actively managed fund. The
fund buys and sells securities actively based on changed
perceptions of investment from time to time. Based on the
classifications of shares with different characteristics,
'active‘ investment managers construct different portfolio.
Two basic investment styles prevalent among the mutual
funds are Growth Investing and Value Investing:
 Growth Investing Style
The primary objective of equity investment is to obtain capital
appreciation. A growth manager looks for companies that are
expected to give above average earnings growth, where the
manager feels that the earning prospects and therefore the stock
prices in future
will be even higher. Identifying such growth sectors is the
challenge before the growth investment manager.

 Value investment Style

A Value Manager looks to buy companies that they believe are
currently undervalued in the market, but whose worth they
estimate will be recognized in the market valuations eventually.
 What is Passive Fund Management?
When an investor invests in an actively managed mutual fund, he or she leaves the
decision of investing to the fund manager. The fund manager is the decision-maker as
to which company or instrument to invest in. Sometimes such decisions may be right,
rewarding the investor handsomely. However, chances are that the decisions might go
wrong or may not be right all the time which can lead to substantial losses for the
investor. There are mutual funds that offer Index funds whose objective is to equal the
return given by a select market index. Such funds follow a passive investment style.
They do not analyse companies, markets, economic factors and then narrow down on
stocks to invest in. Instead they prefer to invest in a portfolio of stocks that reflect a
market index, such as the Nifty index. The returns generated by the index are the
returns given by the fund. No attempt is made to try and beat the index. Research has
shown that most fund managers are unable to constantly beat the market index year
after year. Also it is not possible to identify which fund will beat the market index.
Therefore, there is an element of going wrong in selecting a fund to invest in. This has
lead to a huge interest in passively managed funds such as Index Funds where the
choice of investments is not left to the discretion of the fund manager. Index Funds
hold a diversified basket of securities which represents the index while at the same
time since there is not much active turnover of the portfolio the cost of managing the
fund also remains low. This gives a dual advantage to the investor of having a
diversified portfolio while at the same time having low expenses in fund.
 What is an ETF?
Think of an exchange-traded fund as a mutual fund that trades like a
stock. Just like an index fund, an ETF represents a basket of stocks that
reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it
trades just like any other company on a stock exchange. Unlike a mutual
fund that has its net-asset value (NAV) calculated at the end of each trading
day, an ETF's price changes throughout the day, fluctuating with supply and
demand. It is important to remember that while ETFs attempt to replicate
the return on indexes, there is no guarantee that they will do so exactly.

By owning an ETF, you get the diversification of an index fund plus the
flexibility of a stock. Because, ETFs trade like stocks, you can short sell
them, buy them on margin and purchase as little as one share. Another
advantage is that the expense ratios of most ETFs are lower than that of the
average mutual fund. When buying and selling ETFs, you pay your broker
the same commission that you'd pay on any regular trade.