to study the role of financial advisors in equity markets with respect to retail investors

7/31/2019 To Study the Role of Financial Advisors in Equity Markets With Respect to Retail Investors

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To Study the role of Financial Advisors incapital markets with respect to RetailInvestors.


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Acknowledgement


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TABLE OF CONTENTS


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Protect rights of the investors.

Indian capital markets have been receiving global attention, especially from soundinvestors, due to the improving macroeconomic fundamentals. The presence of a great poolof skilled labour and the rapid integration with the world economy increased Indias globalcompetitiveness. No wonder, the global ratings agencies Moodys and Fitch have awardedIndia with investment grade ratings, indicating comparatively lower sovereign risks.

The Securities and Exchange Board of India (SEBI), the regulatory authority forIndian securities market, was established in 1992 to protect investors and improve themicrostructure of capital markets. In the same year, Controller of Capital Issues (CCI) wasabolished, removing its administrative controls over the pricing of new equity issues. In lessthan a decade later, the Indian financial markets acknowledged the use of technology(National Stock Exchange started online trading in 2000), increasing the trading volumes by

many folds and leading to the emergence of new financial instruments. With this, marketactivity experienced a sharp surge and rapid progress was made in further strengthening andstreamlining risk management, market regulation, and supervision.

The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of newstock issue, the sale is known as Initial Public Offering (IPO).

The secondary market is the financial market where previously issued securities andfinancial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the governmentand companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91-Day T-Bills, 10-Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond.

The amount raised from the market, number of stock exchanges and otherintermediaries, the number of listed stocks, market capitalization, trading volumes andturnover on stock exchanges, and investor population.

The profiles of the investors, issuers, and intermediaries.


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Broad Constituents in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both publicand private. The following sources help companies raise funds:

Fund Providers are the entities that invest in the capital markets. These can be categorizedas domestic and foreign investors, institutional and retail investors. The list includessubscribers to primary market issues, investors who buy in the secondary market, traders,speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDRinvestors, etc.

Intermediaries are service providers in the market, including stock brokers, sub-brokers,financiers, merchant bankers, underwriters, depository participants, registrar and transferagents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers,

custodians, etc.

Organizations include various entities such as BSE, NSE, other regional stock exchanges,and the two depositories National Securities Depository Limited (NSDL) and CentralSecurities Depository Limited (CSDL).

Market Regulators include the Securities and Exchange Board of India (SEBI), the ReserveBank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority : The Securities Appellate Tribunal (SAT)

Participants in the Securities Market


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SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading,debt market segment, derivative trading), brokers, corporate brokers, sub-brokers, FIIs,portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers,bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture

capital investors, mutual funds, collective investment schemes.


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2. Types of Markets.EQUITY MARKET

History of the Market

With the onset of globalization and the subsequent policy reforms, significantimprovements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to fasterand cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equitymarkets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the

major global equity markets.

The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companiesand start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As aresult, stock markets became a peoples market, flooded with primary issues. In the first 11months of 2007, the new capital raised in the global public equity markets through IPOsaccounted for $107 billion in 382 deals out of the total of $255 billion raised by the fourBRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006.Today, the corporate sector prefers external sources for meeting its funding requirementsrather than acquiring loans from financial institutions or banks.

Derivative Markets

The emergence of the market for derivative products such as futures and forwards canbe traced back to the willingness of risk-averse economic agents to guard themselves againstuncertainties arising out of price fluctuations in various asset classes. By their very nature, thefinancial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset

prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averseinvestors. This instrument is used by all sections of businesses, such as corporates, SMEs,banks, financial institutions, retail investors, etc. According to the International Swaps andDerivatives Association, more than 90 percent of the global 500 corporations use derivativesfor hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter(OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the majorderivatives, whereas in the exchange-traded segment, interest rates, government debt, equityindex, and stock futures form the major chunk of the derivatives.


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What are futures contracts?

Futures contracts are standardized derivative instruments. The instrument has anunderlying product (tangible or intangible) and is impacted by the developments witnessed inthe underlying product. The quality and quantity of the underlying asset are standardized.Futures contracts are transferable in nature. Three broad categories of participants hedgers,speculators, and arbitragers trade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the businesscommunity dealing with the underlying asset to a future instrument on a regular basis.They use futures or options markets to reduce or eliminate this risk.

Speculators have a particular mindset with regard to an asset and bet on futuremovements in the assets price. Futures and options contracts can give them an extra

leverage due to margining system.

Arbitragers are in business to take advantage of a discrepancy between prices in twodifferent markets. For example, when they see the futures price of an asset getting outof line with the cash price, they will take offsetting positions in the two markets tolock in a profit.

Important Distinctions

Exchange-Traded Vs. OTC Contracts : A significant bifurcation in the instrument is

whether the derivative is traded on the exchange or over the counter. Exchange-tradedcontracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions)and no negotiation is required. The OTC market is largely a direct market between twoparties who know and trust each other. Most common example for OTC is the forwardcontract. Forward contracts are directly negotiated, tailor-made for the needs of the parties,and are often not easily reversed.

Distinction between Forward and Futures Contracts:

Futures Contracts Forward Contracts Meaning: A futures contract is acontractual agreement betweentwo parties to buy or sell astandardized quantity and qualityof asset on a specific future dateon a futures exchange.

A forward contract is a contractualagreement between two parties to buyor sell an asset at a future date for apredetermined mutually agreed pricewhile entering into the contract. Aforward contract is not traded on anexchange.

Trading place: A futurescontract is traded on the

centralized trading platform of an exchange.

A forward contract is traded in anOTC market.


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Transparency in contractprice: The contract price of afutures contract is transparent asit is available on the centralized

trading screen of the exchange.

The contract price of a forwardcontract is not transparent, as it is notpublicly disclosed.

Valuations of open positionand margin requirement: In afutures contract, valuation of open position is calculated as perthe official closing price on adaily basis and mark-to-market(MTM) margin requirementexists.

In a forward contract, valuation of open position is not calculated on adaily basis and there is no requirementof MTM on daily basis since thesettlement of contract is only on thematurity date of the contract.

Liquidity: Liquidity is themeasure of frequency of tradesthat occur in a particular futurescontract. A futures contract ismore liquid as it is traded on theexchange.

A forward contract is less liquid due toits customized nature.

Counterparty default risk: Infutures contracts, the exchangeclearinghouse provides tradeguarantee. Therefore,

counterparty risk is almosteliminated.

In forward contracts, counterparty risk is high due to the customized nature of the transaction.

Regulations: A regulatoryauthority and the exchangeregulate a futures contract.

A forward contract is not regulated byany exchange.

Benefits of Derivatives

a. Price Risk Management : The derivative instrument is the best way to hedge risk thatarises from its underlying. Suppose, A has bought 100 shares of a real estate companywith a bullish view but, unfortunately, the stock starts showing bearish trends after thesubprime crisis. To avoid loss, A can sell the same quant ity of futures of the script forthe time period he plans to stay invested in the script. This activity is called hedging. Ithelps in risk minimization, profit maximization, and reaching a satisfactory risk-returntrade-off, with the use of a portfolio. The major beneficiaries of the futures instrumenthave been mutual funds and other institutional investors.

b. Price Discovery : The new information disseminated in the marketplace is interpreted bythe market participants and immediately reflected in spot and futures prices by triggering

the trading activity in one or both the markets. This process of price adjustment is often


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termed as price discovery and is one of the major benefits of trading in futures. Apartfrom this, futures help in improving efficiency of the markets.

c. Asset Class : Derivatives, especially futures, offer an exclusive asset class for not onlylarge investors like corporates and financial institutions but also for retail investors likehigh networth individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact that historically it has beenwitnessed that there lies an inverse correlation of daily returns in equities as compared tocommodities.

d. High Financial Leverage : Futures offer a great opportunity to invest even with a smallsum of money. It is an instrument that requires only the margin on a contract to be paid inorder to commence trading. This is also called leverage buying/selling.

e. Transparency : Futures instruments are highly transparent because the underlying

product (equity scripts/index) are generally traded across the country or even tradedglobally. This reduces the chances of manipulation of prices of those scripts. Secondly,the regulatory authorities act as watchdogs regarding the day-to-day activities takingplace in the securities markets, taking care of the illegal transactions.

f. Predictable Pricing: Futures trading is useful for the genuine investor class because theyget an idea of the price at which a stock or index would be available at a future point of time.

Mutual Funds:

A Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. Anybody with an investible surplus of as little as a few hundredrupees can invest in Mutual Funds. These investors buy units of a particular Mutual FundScheme that has a defined investment objective and strategy.

The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments,depending upon the schemes stated objectives. The income earned through these investments

and the capital appreciation realized by the scheme is shared by its unit holders in proportionto the number of units owned by them. Thus a Mutual Fund is the most suitable investmentfor the common man as it offers an opportunity to invest in a diversified, professionallymanaged basket of securities at a relatively low cost.


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The flow chart below describes broadly the working of a mutual fund:

TYPES OF MUTUAL FUND SCHEMES:

There are a wide variety of Mutual Fund schemes that cater to your needs, whateveryour age, financial position, risk tolerance and return expectations. Whether as the foundation

of your investment programme or as a supplement, Mutual Fund schemes can help you meetyour financial goals? These do not have a fixed maturity. You deal with the Mutual Fund foryour investments and redemptions. The key feature is liquidity. You can conveniently buyand sell your units at Net Asset Value (NAV) related prices, at any point of time. Schemesthat have a stipulated maturity period (ranging from 2 to 15 years) are called close-endedschemes. You can invest in the scheme at the time of the initial issue and thereafter you canbuy or sell the units of the scheme on the stock exchanges where they are listed. The market

price at the stock exchange could vary from the schemes NAV on account of dem and andsupply situation, unit holders expectations and other market factors. One of thecharacteristics of the close-ended schemes is that they are generally traded at a discount toNAV; but closer to maturity, the discount narrows. Some close-ended schemes give you anadditional option of selling your units to the Mutual Fund through periodic repurchase atNAV related prices. SEBI Regulations ensure that at least one of the two exit routes isprovided to the investor under the close-ended schemes.

By Structure:

Open-Ended Schemes

These do not have a fixed maturity. You deal with the Mutual Fund for yourinvestments and redemptions. The key feature is liquidity. You can conveniently buy and sellyour units at Net Asset Value (NAV) related prices, at any point of time.

Close-Ended Schemes

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are calledclose-ended schemes. You can invest in the scheme at the time of the initial issue andthereafter you can buy or sell the units of the scheme on the stock exchanges where they arelisted. The market price at the stock exchange could vary from the schemes NAV on accountof demand and supply situation, unit holders expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount toNAV; but closer to maturity, the discount narrows.


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Some close-ended schemes give you an additional option of selling your units to theMutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensurethat at least one of the two exit routes are provided to the investor under the close endedschemes.

Interval Schemes

These combine the features of open-ended and close-ended schemes. They may betraded on the stock exchange or may be open for sale or redemption during predeterminedintervals at NAV related prices.

By Investment Objective:

Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemesnormally invest a majority of their funds in equities and are willing to bear short-term declinein value for possible future appreciation. These schemes are not for investors seeking regularincome or needing their money back in the short term.

It is Ideal for investors in their prime earning years and seeking growth over the long term.

Income Schemes

Aim to provide regular and steady income to investors. These schemes generally

invest in fixed income securities such as bonds and corporate debentures. Capitalappreciation in such schemes may be limited.

Ideal for retired people and others with a need for capital stability and regular income andalso for people who need some income to supplement their earnings.

Balanced Schemes

Aim to provide both growth and income by periodically distributing a part of the income andcapital gains they earn. They invest in both shares and fixed income securities in the

proportion indicated in their offer documents. In a rising stock market, the NAV of theseschemes may not normally keep pace or fall equally when the market falls.

It is ideal for investors looking for a combination of income and moderate growth.

Money Market / Liquid Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. Theseschemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may

fluctuate, depending upon the interest rates prevailing in the market.


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An ETF is a basket of stocks that reflects the composition of an index, like S&P CNXNifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading value isbased on the net asset value of the underlying stocks that it represents. It can be compared toa stock that can be bought or sold on real time basis during the market hours. The first ETF in

India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed onthe NSE on January 8, 2002.

Capital Protection Oriented Schemes:

Capital Protection Oriented Schemes are schemes that endeavor to protect the capitalas the primary objective by investing in high quality fixed income securities and generatecapital appreciation by investing in equity / equity related instruments as a secondaryobjective. The first Capital Protection Oriented Fund in India, Franklin Templeton CapitalProtection Oriented Fund opened for subscription on October 31, 2006.

Gold Exchange Traded Funds (GETFs):

Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secureway to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges,without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF,opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007.

Quantitative Funds:

A quantitative fund is an investment fund that selects securities based on quantitativeanalysis. The managers of such funds build computer-based models to determine whether ornot an investment is attractive. In a pure "quant shop" the final decision to buy or sell is madeby the model. However, there is a middle ground where the fund manager will use human

judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme inIndia, Lotus Agile Fund opened for subscription on October 25, 2007.

Funds Investing Abroad:

With the opening up of the Indian economy, mutual funds have been permitted toinvest in foreign securities/ American Depository Receipts (ADRs) / Global DepositoryReceipts (GDRs). Some of such schemes are dedicated funds for investment abroad whileothers invest partly in foreign securities and partly in domestic securities. While most suchschemes invest in securities across the world there are also schemes, which are countryspecific in their investment approach.

Fund of Funds (FOFs):

Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of

these schemes comprise only of units of other mutual fund schemes and cash / money marketsecurities/ short term deposits pending deployment. The first FOF was launched by Franklin


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Templeton Mutual Fund on October 17, 2003. Fund of Funds can be Sector specific e.g. RealEstate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs orStyle specific e.g. Aggressive/ Cautious FOFs etc. Please bear in mind that any one schememay not meet all your requirements for all time. You need to place your money judiciously in

different schemes to be able to get the combination of growth, income and stability that isright for you. Remember, as always, higher the return you seek higher the risk you should beprepared to take.


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3. EXCHANGE PLATFORM. Domestic Exchanges

Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited(BSE) and National Stock Exchange of India Limited (NSE).

Bombay Stock Exchange (BSE)

BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equitybroking industry in India led to the formation of the Native Share Brokers Association in1875, which later became Bombay Stock Exchange Limited (BSE).BSE is widely recognized due to its pivotal and pre-eminent role in the development of the

Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screen-based order-driven trading system.

The exchange opened up for foreign ownership (foreign institutional investment). Allowed Indian companies to raise capital from abroad through ADRs and GDRs. Expanded the product range (equities/derivatives/debt). Introduced the book building process and brought in transparency in IPO issuance. T+2 settlement cycle (payments and settlements). Depositories for share custody (dematerialization of shares). Internet trading (e-broking). Governance of the stock exchanges (demutualization and corporatization of stock

exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange inIndia and the second in the world to obtain an ISO 9001:2000 certification. It is also the firstexchange in the country and second in the world to receive Information SecurityManagement System Standard BS 7799-2-2002 certification for its BSE Online Trading

System (BOLT).

Benchmark Indices futures : BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas,BSE Metal, BSE FMCG

National Stock Exchange (NSE)

NSE was recognised as a stock exchange in April 1993 under the Securities Contracts(Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. Thecapital market segment commenced its operations in November 1994, whereas the derivativesegment started in 2000. NSE introduced a fully automated trading system called NEAT(National Exchange for Automated Trading) that operated on a strict price/time priority. This


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system enabled efficient trade and the ease with which trade was done. NEAT had lentconsiderable depth in the market by enabling large number of members all over the countryto trade simultaneously, narrowing the spreads significantly.The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12,

2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures andOptions trading system of NSE, called NEAT-F&O trading system, provides a fullyautomated screen based trading for S&P CNX Nifty futures on a nationwide basis and anonline monitoring and surveillance mechanism. It supports an order-driven market andprovides complete transparency of trading operations.

Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX NiftyJunior, CNX IT futures, CNX 100 futures, Bank Nifty futures

International Exchanges

Due to increasing globalization, the development at macro and micro levels ininternational markets is compulsorily incorporated in the performance of domestic indicesand individual stock performance, directly or indirectly. Therefore, it is important to keeptrack of international financial markets for better perspective and intelligent investment.

1. NASDAQ (National Association of Securities Dealers Automated Quotations)

NASDAQ is an American stock exchange. It is an electronic screen-based equitysecurities trading market in the US. It was founded in 1971 by the NationalAssociation of Securities Dealers (NASD). However, it is owned and operated byNASDAQ OMX group, the stock of which was listed on its own stock exchange in2002. The exchange is monitored by the Securities and Exchange Commission (SEC),the regulatory authority for the securities markets in the United States.

NASDAQ is the world leader in the arena of securities trading, with 3,900 companies(NASDAQ site) being listed. There are four major indices of NASDAQ that arefollowed closely by the investor class, internationally.

i. NASDAQ Composite: It is an index of common stocks and similar stocks likeADRs, tracking stocks and limited partnership interests listed on theNASDAQ stock market. It is estimated that the total components count of theIndex is over 3,000 stocks and it includes stocks of US and non-UScompanies, which makes it an international index. It is highly followed in theUS and is an indicator of performance of technology and growth companies.When launched in 1971, the index was set at a base value of 100 points. Overthe years, it saw new highs; for instance, in July 1995, it closed above 1,000-mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reachedthe 2000 level afterwards. It was trading at 1316.12 on November 20, 2008.


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ii. NASDAQ 100: It is an Index of 100 of the largest domestic and internationalnon- financial companies listed on NASDAQ. The component companiesweight in the index is based on their market capitalization, with certain rulescontrolling the influence of the largest components. The index does nt contain

financial companies. However, it includes the companies that are incorporatedoutside the US. Both these aspects of NASDAQ 100 differentiate it from S&P500 and Dow Jones Industrial Average (DJIA). The index includes companiesfrom the industrial, technology, biotechnology, healthcare, transportation,media, and service sectors.

iii. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time byCharles Henry Dow. He formed a financial company with Edward Jones in1882, called Dow Jones & Co. In 1884, they formed the first index including11 stocks (two manufacturing companies and nine railroad companies). Today,

the index contains 30 blue-chip industrial companies operating in America.The Dow Jones Industrial Average is calculated through the simple average,i.e., the sum of the prices of all stocks divided by the number of stocks (30).

iv. S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard andPoor's unit in 1957 to further improve tracking of American stock marketperformance. In 1968, the US Department of Commerce added S&P 500 to itsindex of leading economic indicators. S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US by market capitalization(in contrast to the FORTUNE 500, which is the largest 500 companies interms of sales revenue). The S&P 500 Index comprises about three-fourths of total American capitalization.

2. LSE (London Stock Exchange)

The London Stock Exchange was founded in 1801 with British as well asoverseas companies listed on the exchange. The LSE has four core areas:

i. Equity markets: The LSE enables companies from around the world to raise

capital. There are four primary markets; Main Market, Alternative InvestmentMarket (AIM), Professional Securities Market (PSM), and Specialist FundMarket (SFM).

ii. Trading services: Highly active market for trading in a range of securities,including UK and international equities, debt, covered warrants, exchange-traded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixedinterest, contracts for difference (CFDs), and depositary receipts.

iii. Market data information: The LSE provides real-time prices, news, and other

financial information to the global financial community.


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iv. Derivatives: A major contributor to derivatives business is EDX London,created in 2003 to bring the cash, equity, and derivatives markets closertogether. It combines the strength and liquidity of LSE and equity derivativestechnology of NASDAQ OMX group.

The exchange offers a range of products in derivatives segment withunderlying from Russian, Nordic, and Baltic markets. Internationally, it offersproducts with underlying from Kazakhstan, India, Egypt, and Korea.

3. Frankfurt Stock Exchange

It is situated in Frankfurt, Germany. It is owned and operated by DeutscheBrse. The Frankfurt Stock Exchange has over 90 percent of turnover in the Germanmarket and a big share in the European market. The exchange has a few well-known

trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX,MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50.DAX is a blue-chip stock market index consisting of the 30 major German companiestrading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetratrading system of the Frankfurt Stock Exchange.


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4. Regulatory Authority.There are four main legislations governing the securities market:

a. The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulatethe securities market.

b. The Companies Act, 1956 sets out the code of conduct for the corporate sector inrelation to issue, allotment, and transfer of securities, and disclosures to be made inpublic issues.

c. The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities through control over stock exchanges.

d. The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat securities.

In India, the responsibility of regulating the securities market is shared by DCA (theDepartment of Company Affairs), DEA (the Department of Economic Affairs), RBI (theReserve bank of India), and SEBI (the Securities and Exchange Board of India).

The DCA is now called the ministry of company affairs, which is under the ministryof finance. The ministry is primarily concerned with the administration of the Companies

Act, 1956, and other allied Acts and rules & regulations framed there-under mainly forregulating the functioning of the corporate sector in accordance with the law.

The ministry exercises supervision over the three professional bodies, namely Instituteof Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI),and the Institute of Cost and Works Accountants of India (ICWAI), which are constitutedunder three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country.

SEBI protects the interests of investors in securities and promotes the development of

the securities market. The board helps in regulating the business of stock exchanges and anyother securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds,registrars to an issue, merchant bankers, underwriters, portfolio managers, investmentadvisers, and such other intermediaries who may be associated with securities markets in anymanner.

The board registers the venture capitalists and collective investments like mutualfunds. SEBI helps in promoting and regulating self regulatory organizations.


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RBI is also known as the bankers bank. The central bank has some very important objectivesand functions such as:

Objectives

Maintain price stability and ensure adequate flow of credit to productive sectors.

Maintain public confidence in the system, protect depositors' interest, and providecost-effective banking services to the public.

Facilitate external trade and payment and promote orderly development andmaintenance of the foreign exchange market in India.

Give the public adequate quantity of supplies of currency notes and coins in goodquality.

Functions

Formulate implements and monitor the monetary policy.

Prescribe broad parameters of banking operations within which the country's bankingand financial system functions.

Manage the Foreign Exchange Management Act, 1999.

Issue new currency and coins and exchange/destroy currency and coins not fit forcirculation.

Perform a wide range of promotional functions to support national objectives.

The DEA is the nodal agency of the Union government to formulate and monitor thecountry's economic policies and programmes that have a bearing on domestic andinternational aspects of economic management. Apart from forming the Union Budget everyyear, it has other important functions like:

i. Formulation and monitoring of macro-economic policies, including issues relating tofiscal policy and public finance, inflation, public debt management, and thefunctioning of capital market, including stock exchanges. In this context, it looks atways and means to raise internal resources through taxation, market borrowings, andmobilization of small savings.

ii. Monitoring and raising of external resources through multilateral and bilateraldevelopment assistance, sovereign borrowings abroad, foreign investments,and monitoring foreign exchange resources, including balance of payments.


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iii. Production of bank notes and coins of various denominations, postal stationery, postalstamps, cadre management, career planning, and training of the Indian EconomicService (IES).


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5. Financial Services in India- Brief Overview.

Financial Services in India- Brief Overview

Financial services industry is the mainstay of any economy as it mirrors the financialhealth of the country. Indian financial markets are highly regulated with different authoritieskeeping an eye on every avenue of financial sub-segments viz. Stock markets, mutual funds,insurance and banking. Stock markets are regulated by Securities and Exchange Board of India (SEBI) while Insurance Regulatory and Development Authority (IRDA) keeps an eyeon the insurance industry. Similarly, Reserve Bank of India (RBI) keeps a check on theIndian banking sector and Association of Mutual Funds in India (AMFI) takes care of the

mutual fund segment.

India boasts of a Rs 23, 000 crore (US$ 4.44 billion) - financial services distributionand advice market. Recent developments, Government measures, key facts and figurespertaining to the same are discussed hereafter.

Insurance Sector

Even when the turbulent times are prevalent in the global financial markets, Indianconsumers have not lost faith in their financial systems. This fact is majorly driving Indianinsurance market.

According to the data released by Life Insurance Council, total premium collected(including both new and renewal premiums) during April-September 2011 stood at Rs1,22,661 crore (US$ 23.69 billion). In the same period, the renewal premium collectionincreased by 17 per cent to Rs 73,575 crore (US$ 14.21 billion), as against Rs 62,818 crore(US$ 12.13 billion) in the corresponding period in 2010.

Till September 30, 2011, promoters of life insurance companies had injected over Rs

32,720 crore (US$ 6.32 billion) as capital. Also, there was an investment of more than Rs200,000 crore (US$ 38.62 billion) in infrastructure development in the sector.

The council further predicts an upsurge in new premium collections during October2011-March 2012.

Banking Services

Ratings agency Moody's believe that strong deposit base of Indian lenders and Government'spersistent support to public sector and private banks would act as positive factors for the 64

trillion (US$ 1.23 trillion) Indian banking industry amidst the negative global scenario.


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According to the RBI's 'Quarterly Statistics on Deposits and Credit of ScheduledCommercial Banks', March 2011, Nationalised Banks, as a group, accounted for 53.0per cent of the aggregate deposits, while State Bank of India (SBI) and its associatesaccounted for 21.6 per cent. The share of new private sector banks, Old private sector

banks, Foreign banks and Regional Rural banks in aggregate deposits was 13.4 percent, 4.6 per cent, 4.4 per cent and 3 per cent respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of 52.8 per cent in the total bank credit, with SBI and its associates at 22.1 per cent andNew Private sector banks at 13.2 per cent. Foreign banks, Old private sector banksand Regional Rural banks held relatively lower shares in the total bank credit with 4.9per cent, 4.6 per cent and 2.4 per cent respectively.

Another statement from RBI has revealed that bank advances grew 17.08 per cent

annually as on December 16, 2011 while bank deposits rose 18.03 per cent.

Mutual Funds Industry in India

Recent data released by AMFI stated that the cumulative average Asset UnderManagement (AUM) of all fund houses aggregated to about Rs 6,87,640 crore (US$ 132.77billion) in the last quarter of 2011.

Data compiled at the end of 2011 indicated that HDFC Mutual Fund maintained itstop position with an average AUM of Rs 88,737.07 crore (US$ 17.13 billion) while fundhouses namely Reliance, ICICI Pru, Birla Sunlife and UTI followed. By the end of 2011,there were a total of 44 fund houses in the country as against 42 in the first quarter of theyear.

Private Equity (PE), Mergers & Acquisitions (M&A) in India

Global consultancy firm Ernst & Young (E&Y) has stated that the value of M&Adeals involving Indian companies aggregated to US$ 34.4 billion in 2011 involving 806transactions. There were 177 outbound deals with an aggregate disclosed value of US$ 8.8

billion in 2011; forming 25.6 per cent of the total M&A pie.

Adani Enterprises' acquisition of Abbot Point Coal Terminal in Australia (US$ 2billion) and the GVK Group's purchase of Australia-based Hancock Coal's Queensland coalassets (US$ 1.3 billion) were among the biggest outbound deals recorded in 2011.

According to data released by auditing and consultancy firm KPMG, India Incwitnessed a 31 per cent increment in PE investment to US$ 7.89 billion during the first threequarters of 2011. PE firms like Blackstone India and Kohlberg Kravis Roberts & Co (KKR &Co) are betting high on Indian markets. The Blackstone India chief was reported to have said

that he intends to close 5-6 deals a year in India whose financial valuations would revolvearound roughly US$ 100 million to US$ 120 million each.


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Foreign Institutional Investors (FIIs) in India

Overseas entities are among the important drivers for Indian stock markets. FII flowsaccount for about 45 per cent of the market free-float, according to Jyotivardhan Jaipuria,Managing Director and Head of Research, DSP Merrill Lynch (India).

According to the data released by SEBI, FIIs purchased stocks worth Rs 600,000crore (US$ 116 billion) during 2011. FIIs were also seen attracted to the debt market in 2011wherein they infused Rs 42, 067 crore (US$ 8.12 billion). This intense interest in debtmarkets helped India get a net FII inflow of Rs 39, 353 crore (US$ 7.6 billion) (taking both-debt and stocks- into account) for the year.

The number of FIIs registered with SEBI stood at 1, 749 as of October 2011, whilethe number of FII sub-accounts was 6, 058 during the month.

Furthermore, FIIs injected Rs 41,253 crore (US$ 8 billion) in Government securities(G-secs) and Rs 68,289 crore (US$ 13.18 billion) in corporate bonds, as on October 31, 2011.

Financial Services in India: Recent Developments

India Infrastructure Finance Company Ltd (IIFCL) and IDBI Bank have inked a five-year memorandum of understanding (MoU) to launch infrastructure debt fund (IDF)

schemes. The IDF, for which IDBI Bank and IIFCL would play strategic investors, isexpected to get launched by the end of February 2012.

With an intension to strengthen its hold in southern India, the Uco Bank is planning toadd 11 more branches in Andhra Pradesh to its 66-branch-strong network in the state.The bank has made exemplary progress in recent past with 2,004 branches in thecountry and four abroad.

IRDA has recently launched a mobile application that enables comparison betweenvarious insurance products and premium rates. The application, compatible withAndroid, iPhone, Nokia and Blackberry platforms, has been developed to empowerconsumers/prospects to make informed decisions by comparing features of insuranceproducts through mobiles.

US-based financial services company Ameriprise Financial Inc has commenced itsoperations in India. It is the only international firm in India that would provide purefinancial planning and wealth management services to the Indian consumers.


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Financial Services: Government Initiatives

The Government's top priority seems to be the enhancement of investor base for theIndian markets. That is why the Ministry of Finance started 2012 with a happy announcementby allowing foreign nationals, trusts and pension funds to invest directly in the country'slisted companies from mid-January 2012.

The Government of India has also decided to infuse Rs 6,000 crore (US$ 1.16 billion)in public sector banks during the remaining 2011-12 to ensure that the entities meetregulatory requirements. In 2010-11, the Government had provided Rs 20,157 crore (US$ 4billion) as its capital support to public sector banks.

In order to prepare public sector banks for neck-to-neck competition ahead andimprove their performance in future, the finance ministry has set new benchmarks for them to

achieve. The new benchmarks, that would calculate their functional and financial capabilityto qualify for capital infusion, entail three performance indicators - savings and currentdeposit ratio, employee-branch ratio and profit per employee.

Road Ahead

A report by The Boston Consulting Group (BCG) India, in association with anindustrial body and Indian Banks Associations (IBA) predicts that Indian banking sectorwould become the world's third largest in asset size by 2025. The report also analyses thatmobile banking would become the second largest channel of banking after ATMs. Given thepositive eco-system of the industry, regulatory and Government initiatives, mobile banking isanticipated to enhance from 0.1 per cent of transactions in a 45 per cent financial inclusionbase in 2010 to 34 per cent of the transactions with 80 per cent rural inclusion base by 2020,as per the report.

An industrial body predicts that the non-life insurance sector is poised to become a Rs90,000 crore (US$ 17.37 billion) industry (from the current level of Rs 47,000 crore (US$9.07 billion) by 2015; growing by over 18 per cent. Demand-driven economy, increasingconsumer base in motoring and healthcare, growth of services and small and medium

enterprises (SMEs) are certain factors that are attributed behind the strong forecast.


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6. Summary of Indian Equity Markets.The equity market comprises of the primary market and the secondary market with

key constituents being Domestic Institutional Investors such as mutual funds and insurancecompanies like LIC, Foreign Institutional Investors and retail investors who directlyparticipate in the capital markets.

Domestic Institutional Investors

The size of the Indian Mutual Fund industry (comprising both, equity and debt funds)is estimated at USD 162 billion.

Since the 1990s when the mutual fund space opened up to the private sector, the

industry has traversed a long path. Assets under Management have grown at a CAGR inexcess of 25% over the last four years, slowing down only over the last two years, as falloutof the global economic slowdown and financial crisis.

Source: AMFI data (the figures in the chart are in Rs. Billions)

Annual Data for April 2010 March 2011

518 new schemes were launched during the year as against 174 in the previous year.The amount mobilized was Rs. 124890 crores as against Rs.36166 crores in theprevious year.

Total Funds mobilized during the year stood at Rs. 88,59,515 crores as against Rs.1,00,19,023 crores in the last year representing a decline of 12%.

2319

3590

5385

4933

6139

5922

2006

2007

2008

2009

2010

2011

Average

AssetUnder Managementin INRBillion


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Redemptions at Rs. 89,08,921 crores were 10% lower than the redemptions of Rs.

99,35,942 crores in the previous year.

On a net basis, there was an outflow of Rs. 49,406crores as compared to an inflow of Rs. 83,081 crores in the last year.

The Assets Under Management as on March 31, 2011 stood at Rs. 5,92,250 crores asagainst Rs. 6,13,979crores as at the end of the previous year representing a decline of 4%.

AUM to GDP Ratio

The ratio of AUM to Indias GDP, gradually increased from 6 percent in 2005 to10.6percent in 2010. Despite this however, this continues to be significantly lower than the ratioin developed countries, where the AUM accounts for 20-70 percent of the GDP.

Source: AMFI and MOSPI

As a Regulator focused on protecting retail investors interests, SEBI has done acommendable job with the changes it has introduced in the regime in recent past such asabolition of entry load, abolition of additional management fee for schemes launched on noload basis, compliance with documentation/KYC norms, transferability of units of mutualfunds, etc.

However, the industry continues to be plagued by low margins and stiff competitionfrom other investment products such as those offered by of the life insurance industry and theportfolio managers. To develop the industry in a manner that is fair to all the stakeholders of the industry, amongst others, the following suggestions could be considered

6

8

10

15

11 10.6

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009 2010

AUM as a percentage ofGDP


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Allowing Asset Management Companies the flexibility to charge management fees. In aperfect competition scenario, the price of goods or services is efficiently determined by themarket itself. There are more than 35 asset management companies with many other in thepipeline. Over a period of time, the market should be able to price the services provided by

asset management companies in an efficient manner such that their interests are alsoprotected.

Mutual fund distributors in India are largely unregulated. Further, there are instances of distributors rendering investment advice without requisite qualification, information of mutual fund schemes/investor and consideration of the investors needs. Distributionsupported by quality investment advice is clearly the need of the hour. Herculean effort isrequired and the entire asset management industry should work towards this goal. Regulationof the distributors by a Regulator can be a point worth debating. More importantly, SEBIshould strongly reach out to create/support infrastructure to train the distributors to meet the

needs of the investors.

There are a plethora of similar sounding schemes offered by the asset managementcompanies resulting in a craving for lower number of schemes with similar investmentstrategy. Unfortunately, that is only one side of the story. The products are not innovative andoffer limited asset classes with inadequate opportunities for diversification. SEBI and themutual fund industry need to work towards amending mutual fund regulations and offeringmore diversified products such as Real Estate Mutual Funds, which despite enactment coupleof years ago have not seen the light of the day! This will help in optimising the utility of

mutual funds as well.

As regards investment by pension funds, the cu rrent regulations allow only about 10 percentof the pension fund corpus to be invested in the equities market directly or through mutualfunds. In contrast, internationally, up to 50 percent of pension funds are permitted to beinvested in equities. Also there are certain restrictions on the exposure of insurancecompanies to the capital markets which reduces the much needed inflow of long terminvestments into the capital market. Moving the Indian pension funds and insurancecompanies closer to international levels could give a much needed boost to domesticinstitutional investor participation.


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Foreign Institutional InvestorsThe number of FIIs/sub-accounts and the amountinvested by them in the Indian capital markets is a reflection of the potential of the Indianeconomy. In the last decade, the investment by FIIs/sub-accounts has multiplied 7 times andin the current fiscal (in the first half), it has already topped USD 12,289 million.

From time to time, SEBI has brought in changes which have supported the growth of investments by FIIs/sub-accounts. Some of the key changes include -

Qualified Institutional Buyers defined to include FIIs.

Allowing FIIs to invest in debt markets including corporate debt, government securities andsecurity receipts issued by Asset Reconstruction Companies.

Permitting stock exchanges to allow Direct Market Access (DMA) to institutional clients.An institutional investor can access brokers system from its office and can book ordersdirectly into the system. In DMA, t he brokers infrastructure is bypassed. However, thetrade and settlement obligations will continue to apply to the broker, as will the risk management compliance, which involves payment of margins and exposure limits arising

from orders and trades in the DMA. The DMA system helps in better and faster executionof orders with avoidance of leakage of sensitive information of trades.

The concessional taxation regime for listed securities and for FIIs has also supportedthe growth of FII investments though more certainty around the taxation consequences andeligibility of treaty benefits is desirable.

A key change that could bring a paradigm shift in the asset management industry isallowing domestic fund managers to manage funds raised from offshore investors forinvestment in India. But for a taxation issue, such funds are being currently managed from

more tax efficient jurisdictions such as Singapore. If the taxation regime were to be amendedto provide for safe harbour rules exempting foreign funds from Indian taxation (in a


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manner similar to Singapore), then, the asset management industry would growexponentially.

Securities Lending and Borrowing (SLB) Scheme

SLB facilitates short-selling, increasing liquidity, improving pricing and arbitragebetween derivatives and cash markets. SEBI amended the SLB scheme in January, 2010 witha view to make short-selling more accessible to investors. This move provides the investorsincluding FIIs to have greater opportunity to access the Indian securities market. However,there are certain issues revolving around this amendment like the use of stock lending bypromoters, applicability of insider trading regulations and the takeover code.

In case of corporate action in SLB contract period, the lending and borrowing getssuspended. This condition should be relaxed.

Insurance companies should also be allowed to lend their securities, which iscurrently not permitted.

Presently, very high margins are required to be maintained under the SLB. SEBIshould consider relaxing the same in the due course.


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7. Retail investors.One of the daunting challenges before the Indian capital markets is expanding the

investor base and provides them access to high quality financial services. With a populationof more than a billion, a mere 1% of the population participates in capital markets, and of thatonly a fraction is active. Trading volumes in Indian Capital Markets are lower as compared toother markets such as United States, the United Kingdom, Germany, China etc.

Similarly, Indian households invest much less in equity markets than do theirdeveloped market counterparts, particularly in the United States and the United Kingdom. Asa result, retail equity ownership (non-promoter) amounts to only around 10 percent of totalequity ownership, and has come down by 3 per cent over the last seven years. Whilecorporates see markets to raise low cost risk capital, investors see liquid secondary marketsfor exit options. The regulated markets have grown significantly, but the markets need greaterdepth and liquidity.

Another challenge faced by the investors is the costs involved in trading (brokerage,commission, taxes etc.), which are comparatively higher in India than in developed markets.The investor participation is fairly shallow considering the size of the economy.

In order to overcome the above bottlenecks and to deepen the capital markets,participation of retail investors, directly and through intermediaries such as mutual funds andportfolio managers needs to be further promoted. This can be achieved only through investoreducation initiatives, development of quality independent financial advisors and using theInformation Technology to reach out across the length and breadth of the country.


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Investor Contribution as of DEC 31, 2011.

Source: AMFI data

Investor contribution remains skewed towards the corporate sector

Inspite of India offering an exciting retail environment, with abundant growthopportunities, participation from the segment of retail investors continues to remain atdeplorably low levels. As of March 31, 2010, the participation from the retail segment was

26.6%, a marginal increase from 21.3% as on March 31, 2009.Dependence on the corporate sector is still pretty pronounced at 51%, which is not

much of a change from last year. Volatile market conditions, sound a note of caution for theindustry, as high dependence on the corporate sector may result in the fund houses beingprone to unexpected redemption pressures.

The rationale behind institutional sales claiming such a large chunk of the AUM pie isthe benefit of tax arbitrage and lack of short-term investment options. When compared witheconomies like US and China, investments channelized through corporates, comprise only

around 15% and 30% of the assets under management (AUM), respectively.Overall, the assets under management recorded an impressive growth of 47%, as of

March 2010, which was predominantly driven by the corporate sector, posting the same levelof growth. In the same period, the retail sector also managed to report a strong growth of 84%in its assets under management, followed by the HNI segment growing 24%. It has beenobserved of late, that the HNI segment especially in Tier 2 &Tier 3 cities has expandedcreating a pool of investible surplus at the disposal of the mutual fund industry.

AUM under the various segments (In Rs Billion)

51%

3%

1%

19%

26%

Corporates - 51%

Banks - 3%

FII's - 1%

HNI's - 19%

Retail - 26%


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Source: AMFI data

Historically, it has been observed that an equity fund remains locked in for an averageof 18 months. As per AMFI statistics, around 40 per cent of retail investors exit from equityfunds before they complete two years. Even in the HNI segment, only 48 per cent investorsremain invested in equity funds for over two years. Growth in the equity base has beenparticularly sluggish in the past year, burdened with huge outflow of funds. Mutual fund netinvestments in equity have plummeted sharply over the last year from Rs 6,983 crores inMarch 2009 to an outflow of Rs 4,082 crores in March 2010. At this point, it is interesting to

make note of the movement of FII investments plotted against net mutual fund investmentsover the last decade.

Other aspects

Indian Depository Receipts (IDRs)IDRs are instruments in the form of depositoryreceipts created by a depository in India against the underlying equity shares of the issuingforeign company. IDRs are an important step towards integrating Indian capital markets withforeign markets and enabling Indian investors to hold stake in foreign securities.

For various reasons, IDR have taken more than couple of years to be operationalised.Also, there are certain unresolved tax issues relating to taxation of income from IDRs. Forexample, the concessional tax regime for listed securities does not extend to IDRs. Also,there is no clarity on taxability of conversion of IDRs into underlying foreign equity shares.

Further, IDRs could be made more attractive by introducing two way fungibility of IDRs and removing the mandatory lock-in of a year for conversion of IDRs into equity sharesof the foreign company .

891 922

49 193

2132

1,635

1145

51 181

3134

0500

1,0001,5002,000

2,5003,0003,500

20092010


36/60


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8. Objectives of the study. To find out the importance of a Financial Advisor in capital markets with respect to

Retail Investors.

To understand the functioning of capital market in India.

To study the various products available for investing in equity markets.

To understand the current investment climate of India.

To measure the current retail participation in capital market.

To understand the risk perception of retail investors.

To understand the various issues surrounding retail participation.

To study the various sources of information available for retail investors for investingin capital markets.


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9. Literature review.This section discusses the literature with regard to household saving motives, impact

of financial reforms on private saving, influence of financial advisors on household portfoliocomposition, and factors influencing household investments in risky assets.

According to Shiba (1978), target wealth-income ratio, inflation rate, knowledgeabout equity markets and relative price of housing were the major determinants of Japanesepersonal saving ratio. Palsson (1998) found that the households savings allocation was quitesensitive to the risk-free rate of return in Sweden during the period 1964-995. Guariglia(2001) observed that precautionary motive, health risk and longevity risk played a significant

part in determining individuals saving behavior in the UK. Unny (2003) showed thatincome, wealth, and education had a positive and significant effect, and the number of male

children and dependency ratio had negative effect on savings in rural Kerala.

Stahlberg (1980) found that the Swedish households private saving was obviouslylessened when it was complemented by forced saving. But the yearly total of an individualsprivate and forced saving throughout his working life was greater than what he could havechosen to save voluntarily. Bayoumi (1993) observed that the saving rate was significantlymore dependent on changes in wealth, income, and real interest rates. The financialderegulation had lowered the savings rate.

Polkovnichenko (2005) analyzed the portfolio of direct equity investors and foundthat the households p ortfolio was poorly diversified because of lower number of financialadvisors catering to a large number of population.

Shanmugham and Muthusamy (1998) found that Coimbatore investors equityportfolio diversification was moderate. Education and occupation of the investors had animpact on the use of technical analysis and fundamental analysis respectively. The SEBI-NCAER study (Kar et al. , 2000) found that the retail investment in shares, debentures andmutual funds was below 10% and the retail investor households portfolio was of relatively small value and undiversified. It was also found that one set of retail investors, in spite of their lower income and lower penetration level of consumer durables, were in the securitiesmarket, while another set of household with higher income and higher penetration level of consumer durables did not have investments in securities market. Vaidyanathan (2004)analyzed the household savings in India during the period 1961-2001 and found thathouseholds who had not been covered by any pension scheme used gold as an insurance andpension product.

Agell and Edin (1990) studied the portfolio allocation among Swedish earninghouseholds. They found that wealth, occupation, good advice regarding investment and

marginal income taxes had strong positive effects on ownership of different asset categoriesin the household portfolio choice. They also found a significant positive impact of age,


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education, occupation, and retirement status of the head of the household on the proportion of various assets in their portfolio. Hochguertel et al. (1997) studied the portfolio allocationamong the Netherlands households. They found that income, education, tax and reliablefinancial advisor had a positive impact on the proportion of financial wealth held in risky

assets, while age had a hump-shaped relationship. Bodie and Crane (1997) found that networth, good portfolio manager and home ownership had positive and significant impact, andage a negative and significant impact on long-term investment in equity. Guiso and Jappelli(1999) showed that ownership of risky assets was affected by wealth, age, education andindex of financial information.

Alessie et al. (1999) showed that income, total net worth, and employment status hadpositive impact, while household composition had a negative and significant impact onownership of risky assets. They equated financial interest to financial knowledge and foundsupport for the view that financial knowledge had strong relation to ownership of risky assets.Banks and Smith (1999) observed that age, wealth, and education had a significant impact onownership of risky assets. They also found that tax had a significant impact on tax preferredsaving products. Poterba and Samwick (1999) analyzed the portfolio allocation among eightasset categories using pooled data of 1983, 1989, 1992 and 1995 Survey of ConsumerFinance (SCF) (15,451 US households) and cross-sectional data of 1995 SCF (4,299households). They found that income, wealth, education and marginal tax rate had a positiveeffect on households asset allocation decision. Yilmazer (2001) found that the number of children had a positive and statistically significant impact on home ownership and negativeand statistically significant impact on the proportion of investments in shares. Rajarajan

(1999) studied Chennai investors financial investments and showed that life -cycle stage of individual investor was an important variable in determining the size of the investments infinancial assets and the percentage of financial assets in risky category. Mukhopadhyay(2004) studied the profile of 200 Kolkata investors and found that aged people preferred lessrisky investments while the youngsters were aggressive in risky investments.

Bayer et al. (1996) analyzed the impact of employer-sponsored retirement seminarson retirement saving, using 300 US firms (which sponsored pension plan to their employees)for the period 1993 and 1994, and found that employer-sponsored retirement seminars weresignificantly associated with higher rates of 401 (k) plan participation and contribution rate.Clark and Madeleine (2003) found that financial education seminars altered the respondents retirement goals and changed their retirement saving behavior in the form of change in theirsaving rate, including new supplement plan, and increase in their saving contribution tosupplementary plan. Sunden (2003) analyzed the impact of information and educationinitiative of pension reform on Swedish households. She showed that the information andeducation initiative had some success in increasing the knowledge about the reformedsystem.

The aforementioned studies have shown that the major determinants of portfolio

composition are age, income, education, home ownership, household size, occupation,financial advisors and marginal tax rate.


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Except for a very few studies, most of the earlier studies on retail portfolio

composition had focused on the impact of the abovementioned variables but not on thefinancial advice on the asset allocation of retail. Of late, very few studies, particularly in the

US, have attempted to study the relationship between financial advice and retail portfoliocomposition.

A few among the Indian studies, quoted in the literature review, have studied only theinvestors in capital market and not the households who have not invested in the capitalmarket instruments. The reforms in the Indian financial sector have led to the financialmarket becoming a complex one, posing a challenge to the Indian retail participation inmanaging their self-directed investments.

Hence, this research intends to examine the relationship between financial advice andretail portfolio composition along with other variables such as age, knowledge of financialtools, and investment climate.


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10. The Scope and Limitations of the Study. Area covered for survey is limited to Mumbai , thus the findings of this study cant be

applied to other cities of India.

Only retail investors have been included in the survey. Brokerage houses were notinvolved.

Sample size hasnt been determined using any quantitative technique.

The degree of variation of the findings hasnt been checked using any mathematicalmodel.

The study is restricted to only Equity Markets and doesnt cover other asset classes of a capital market such as bond, commodity etc.


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11. Research design. The research is a descriptive study since the main motive behind the study is to find

out the various issues surrounding the role of a financial advisor with respect to retailinvestors in capital market.

The ulterior motive was to find out how a retail investor gathers information beforemaking his investment decision

The major emphasis in this study was given on the involvement of a financial advisorin the investment decision making process of a retail investor.

Qualitative approach has been used to evaluate and analyze the findings and opinionsstated in the survey.

Sample Design: Sample size consisted of 200 people from Mumbai and suburbs.

The research is based on non-probabilistic convenience sampling technique.

Respondents were the people who are investing in capital market.

Data collection tools/methods used: Three different questionnaires for AMC personnel, Independent Financial Advisorsand Relationship Managers were prepared.


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12. Hypothesis testing.H 0: Retail Investors need Financial Advisors to assist them in making investment

decisions for investing in capital markets.

H A: Retail Investors do not need Financial Advisors to assist them in making investmentdecisions for investing in capital markets.

Thus the findings of the survey prove that Retail Investors need Financial Advisors

to assist them in making investment decisions for investing in capital markets.

Null Hypothesis, (Assumed Mean) 115Level of significance, 0.05Pop. St.dev., 60.14Sample size, n 200Sample mean, x-bar 109.833

Standard error of the mean, /sqrt(n) 4.25254Lower Critical Value -1.6449

Z-test Statistic -1.215 (Do not reject hypothesis because -1.44947> -1.64485).p-value 0.11218 (Do not reject hypothesis because p- value>) .


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13. Findings of the survey.1. Out of the sample size of 200 it was found that 12% had been investing for less than a year,27.5% were investing for the past one to four years, 22.5% had been investing for the pastdecade, 22% were investing for the past two decades and 16% for more than two decades.

2. Out of the sample size of 200 it was found that 19 % had investments in mutual funds,27% had investments in stocks, 8% in ULIP, 13% in gold, 24% in bank FDs and 9% innational saving certificates.

12%

27.5%

22.5%

22%

16%

119%

227%

38%

413%

524%

69%


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3. Out of the sample size of 200 it was found that 111 invested in capital markets, 63 investedin derivatives market and 26 invested in both.

4. Out of the sample size of 200 it was found that 16% traded on daily basis, 25% on weeklybasis, 28% on monthly basis, 16% semi annually and 15% annually.

0

20

40

60

80

100

120

1 2 3

1-Capital2-Derivatives3-Both

16%

25%

28%

16%

15%


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5. Out of the sample size of 200 it was found that 8% knew about fundamental analysis, 11%knew about technical analysis, 33% knew about both and 48% didnt knew about either.

6. Out of the sample size of 200 it was found that 68 people used fundamental or technicalanalysis for investing and the remaining didnt use them.

8%

11%

33%

48%

0

20

40

60

80

100

120

140

1 2

1-YES2- NO


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7. Out of the sample size of 200 it was found that 135 of the respondents occasionallyconsulted with financial advisors and 65 of the respondents always consulted with theirfinancial advisors.

8. Out of the sample size of 200 it was found that 129 of the respondents preferred to receiveinvestment tips in person and the remaining by mail.

0

20

40

60

80

100

120

140

160

1 2

1- Ocassionally2- Always

0

20

40

60

80

100

120

140

1 2

1- In person2- By mail


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9. Out of the sample size of 200 it was found that 9% of the respondents used financialwebsites as a guide to investment decision, 19% used newspapers and magazines, 16% usedcompany annual reports, 13% used equity research report, 21% used financial advisors andbrokers and remaining 22% took help of their friends and family.

10. Out of the sample size of 200 it was found that 102 respondents were willing to postponetheir investment decision on unavailability of adequate information, 62 would not postponeand the remaining were not sure.

9%

19%

16%

13%

21%

22%

0

20

40

60

80

100

120

1 2 3

1- YES2- NO3- NOT SURE


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11. Out of the sample size of 200 it was found that 4% of the respondents didnt consider anyfactor before investing in a security, 27% considered current market news, 18% consideredtheir investment objectives, 24% considered their investment capital, 11% considered chanceof losing money and 16% considered chance of making money.

12. Out of the sample size of 200 it was found that 99 of the respondents relied on theirfinancial advisors for assessing the risk of the investment product and the remainingconsidered risk return trade off.

4%

27%

18%24%

11%

16%

98

98.5

99

99.5

100

100.5

101

101.5

1 2

1- rely on advisor2-look for risk &return


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13. Out of the sample size of 200 it was found that 133 of the respondents felt thatinformation available for investment was not easy to comprehend while remaining felt it wasvery easy.

14. Out of the sample size of 200 it was found that 56 of the respondents felt there was toolittle information for investment, 97 felt they received the right amount of information andthe remaining felt they had too much information which confused them.

0

20

40

60

80

100

120

140

1 2

1- NOT EASY2- VERY EASY

0

20

40

60

80

100

120

1 2 3

1- too little info2- rght amount of info3- too much info


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15. Out of the sample size of 200 it was found that 111 invested in bull market, 112 investedin bear market. The sum of respondents is more than the entire sample because somerespondents invested in both markets.

110.4

110.6

110.8

111

111.2

111.4

111.6

111.8

112

112.2

1 2

1- BULL MARKET2- BEAR MARKET


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14. Observations of the survey. It was observed from the survey that short term traders dont consider stock as

investments.

Respondents prefer investing in equity than in derivative market because derivativemarket is risky and they are unaware of the margin calculations on futures and theydont know how options are priced .

They want IPOs to come at discount rather than premium.

They are concerned about certain operators rigging price of certain small cap stocks.

They want corporate to pay more attention on governance and ethics.

The respondents want RBI to start reducing interest rates so that capex cycle picks upand they could participate in the ensuing growth.

They want the government to take action on policymaking, fiscal deficit and reductionin scams.

They want the government to take steps to increase private investment thus improvinginvestment climate of the country.

Majority of the respondents are unaware about the various tools for security analysisthus making them to rely on financial analysts and advisors for taking investmentdecisions.

People want to receive tips on investment in person so that they could clear theirdoubts and it is also a trust issue.

People prefer equity research reports over newspapers and magazines because theyget a detailed analysis in a research report.

People are generally risk averse because they are willing to postpone their investmentdecision on unavailability of adequate information on a security.

The respondents consider investment climate more important for participating in thecapital markets because they believe that momentum is like a rising tide that liftseverything.


53/60

People dont find information regarding a security easy to analyse, they ne ed moreclosure on that.

People regard the open information available for investing too little or too much

because they cannot pick the right information and discard the non sense. Generally retail investors who are working in non financial sectors dont find time to

analyse securities thus they dont participate in equity markets.

My overall observation was that retail investors are smart enough to know the kind of risk they take while they invest in capital markets, they are also aware that equities arethe asset class that can beat inflation.

They are also aware that they should have certain portion of their savings in equities.

Retail investors are needed to be explained that insurance and FDs are not the kind of products on which you can expect high returns.

Insurance is a hedging instrument against uncertainty and FDs are saving tools.Hence a customer should not allocate disproportionately towards these products.

Insurance is costly compared to Mutual Fund s because a person has to pay morecharge as compared to Mutual Fund s in which there is no entry load and expenseratio is also very low under 2.5% of total AUM.


54/60

15. Recommendations. The onus of increasing retail participation lies primarily on the government, by

improving the investment climate it can easily increase retail participation.

Financial advisors need to get involved with their clients more to understand theirinvestment goals.

Financial advisors need to analyse the risk profile of their clients rather than theirinvestment capital.

Thus they could provide them with a questionnaire for gauging the risk profile of theirclients.

They could even upload these questionnaires on their web sites.

By doing so they categorise the retail investors in various risk category and evendevelop structured products for them.

Stock brokers, financial analyst should be transparent regarding their calls on a certainsecurities and try to explain them on how they arrived to the correspondingconclusion.

The advisors should help regarding the IPO whether they are under priced or overpriced and by what margin.

Financial advisors shouldnt force their clients to invest because of brokerage theyshould look at long term and advice their clients to refrain from equities if there is toomuch uncertainty in the environment.

Financial advisors should analyse the volatility in the market and advise their clientson it i.e. how it would affect their portfolio.

Financial advisors could conduct programmes on fundamental and technical analysisof securities for their clients which would be like advising them on the tools availablethat could help them in their decision making.

Financial literacy has to be increased in India.

The large brokerage houses could tap college students who are in their growth stageand since they are young with disposable income they have a risk appetite that is

suitable for a capital market investor.


55/60

Insurance is a financial product which guarantees protection against risk hence it isnot regulated by the SEBI since traditional insurance products dont invest in capitalmarkets, but ULIPs is structured in such a way that a part of its fund is invested incapital market and yet ULIPs are not regulated by the SEBI. This anomaly has to be

rectified by the Finance Ministry or the FSDC.

Insurance are costly products as compared to MFs, insurance are one time investmentunlike MFs and since average age o f Indians has gone up, a person may end uppaying more premium, hence these points should be used as USP while promotingMFs against insurance.

Long term benefits of trail charges have to be explained to Relationship Managers(RM). For e.g : if a RM is earning 5% on a scheme and if the NAV of the schemeshoots up 5 times the RM will end up earning 5 times the commission that he wasearning before.

FDs are savings instrument and they are attractive only until interest rates are high,hence from a long-term perspective equities are always better. Fixed Maturity Plan scan provide better post tax returns than FDs in case of large sum, which have beendeposited as FD.

FDs provide returns which are not above the prevailing inflation rate hence the person who has invested in FD is suffering a net loss in real terms plus FDs are

illiquid, these points should be used as USP while promoting MFs against FDs.

All the above mentioned points should be explained, advertised and provided (in theinformation brochure) to a customer by the financial advisor so that he can take themost appropriate investment decision.


56/60

16. Conclusion.The equity market in India is extremely vibrant, but equity based funding solely,

cannot lead the economy to growth. The role of capital markets is vital for enhancing growthin wealth distribution and increasing availability of funds for infrastructure development. Oneof the underlying challenges that the capital market is dealing with is the issue of increasingthe out-reach & enhancing financial inclusion. The huge scale of the drive towards inclusivegrowth is intimidating, as various stakeholders like banks, insurance companies and assetmanagement companies struggle to move a step closer to the untapped areas and newer targetconsumers. The challenge lies in devising a cost-effective delivery model to reach out to thelow income group of society, penetrating the remote areas. The new schemes such as EquitySavings Schemes proposed in the current budget will definitely help to lure more retailparticipation. The lowering of Securities Transaction Tax by 20% i.e. from 0.125% to 0.1% is

also welcome. The road ahead for deepening the financial markets nee

to study the role of financial advisors in equity markets with respect to retail investors

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