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Insurance
Insurance
Insurance
Insurance
Products
Products
Products
Products
Invest
ment
Investment
Invest
ment
Investment
Products
Products
Products
Products
Credit
Credit
Credit
Credit
Products
Products
Products
Products
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Session2
Session2
Session2
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Risk Risk -+
SavingsBankDepos
its
S
hortTermDebt
Funds
LiquidFunds
LongTerm
DebtFunds
Gold
SecuredDebentures
BankFixedDeposits
FixedMaturityPlans
Unse
curedDebentur
es
SectoralEquityFunds
DirectE
quity
Hybri
dFunds
D
iversifiedEquityFunds
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Risk Risk -+
SavingsBankDepos
its
S
hortTermDebt
Funds
LiquidFunds
LongTerm
DebtFunds
Gold
SecuredDebentures
BankFixedDeposits
FixedMaturityPlans
Unse
curedDebentur
es
SectoralEquityFunds
DirectE
quity
Balan
cedFunds
D
iversifiedEquityFunds
Attheen
dofsession1wehad
reachedh
ereonthe
spectrum
of
Inve
stmentPr
oducts.
Now,
welookalittledeeper
intotheLiquidFundsand
FMPs.
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Risk Risk-+
LiquidFunds
FixedMaturityPlans
Let
us
now
get
backtoLiquid
FundsandFMPs.
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Liq
uidFunds(alsocalled
CashFundsor
MoneyM
arketFund
s)areschemesthatinvest
theircorpusin
de
btinstrumentsofmaturity
between
1dayan
d180day
s,
buttypically
around30to60d
ays;them
aturityins
ome
casesm
aygouptooneyear.
These
securit
iesarehighlyliquid.
The
typicalinvestment
optionsforthesef
unds
includeTreasuryBills(issuedb
ygovernme
nts),
CommercialPapers
(issuedby
companies)and
CertificatesofDepo
sit(issuedb
ybanks).
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*
Defaultrisk:S
incetheliqu
idfundsinvestin
veryshortmaturity
securities
they
car
ry
a
relativelylow
defau
ltrisk.
Also,asanorm
,the
liquidfu
ndsinvestinsecuritieswithahighcredit
quality
thatis,t
heyinvestinshortma
turity
governm
ent
securities
orfinanciallys
ound
compan
ies/banks.
LiquidFundshaveaverylowriskprofile:
*
Ma
rketrisk:A
gain,since
theliquidfu
nds
investin
veryshortmaturitysecuritiestheyc
arry
arelativ
elylowinterestraterisk.
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Debtsecuritie
s,
traded
inthema
rket,
aresubjecttointerestraterisk
.
Thepricesofthesesecuritiesvaryas
the
gen
erallevel
ofinteres
tratesin
the
marketvariesw
henthein
terestrate
sgo
up,
thep
ricesofthesesecuritiesfall,and
vice
versa.
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The
logicis
very
simp
le.
When
new
securitiespayinghig
herratesofinterestcomein
themarket,theold
ersecuritiespayinglower
ratesof
interestbe
comeless
valuablethe
demand
forthesese
curitiesfalls.
Sotheirp
rices
fall.
Wh
enthepricesofthesecuritiesfall,the
valueofholdingsofthefundsfa
lls.
Thisfallinthevalueofholdingsisreflected
intheNA
Vofthefun
d.
Thisisthe
int
erestrater
isk.
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The
effectofa
changein
interestra
teon
theprice
ofthedebtsecurity
dependso
nthe
term
ormaturityofthesecur
itylonge
rthe
term,
hig
heristhee
ffect.
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The
totalcorp
usofaMFisdividedinto
units.
E
ach
unit
represents
an
inve
stor's
proportio
nateowne
rshipofth
eportfolio
held
bytheM
F.
Thenetvalueoft
hisshareofthe
portfolioisNAV(NetAssetVa
lue).
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
dividedby
Totalnumberofu
nits
Totalnumberofu
nits
Totalnumberofu
nits
Totalnumberofu
nits
isequalto
NAV
NAV
NAV
NAV
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
Netvalue
oftotalpo
rtfolio
dividedby
Totalnumberofu
nits
Totalnumberofu
nits
Totalnumberofu
nits
Totalnumberofu
nits
isequalto
NAV
NAV
NAV
NAV
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SECURITIESANDEXCHANGEBOARDOFINDIA
MUTU
AL
FUN
DS
REG
ULATIO
NS,
1996
SECURITIESAND
EXCHANGEBOAR
DOFINDIA
MUTU
AL
FUN
DS
REG
ULATIO
NS,
1996
Comput
ationofNetAssetValue
48.(1)Eve
rymutualfun
dshallcompu
tetheNetAs
set
Valueofeachschemebydividin
gthenetassetsof
the
schemebythe
numberofun
itsoutstandingon
the
valuationdate.
(2)The
NetAssetVa
lueoftheschemeshallbe
calc
ulatedandpu
blishedatleastintwodaily
new
spapersatintervalsofnotexceedingone
week.
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SincetheLiq
uidFunds
holdsecu
rities
withvery
shortmaturities,
theycarryver
ylow
interestr
aterisk.
As
wehaves
aidearlier,
theeffectofa
changeininterestrateonthepriceofthe
debt
security
dependso
ntheterm
ormatur
ityof
thesecu
ritylong
ertheterm
,higheristhe
effect.
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Fixed
MaturityPlans
Fixed
Maturity
Plans(FMPs)arec
losed
(FMPs)arec
losed
endedM
Fschemes
investingindebtsecurities
endedM
Fschemes
investingindebtsecurities
withmediumtolong
maturities.
withmediumtolongmaturities.
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
CLOSEDENDEDSC
HEMES
Clo
seendedschemesaredefi
nedasschem
esin
whichtheperiodofm
aturityisspe
cified.
Intermsof
currentr
egulationfur
therpurchas
eofunitso
fthe
schemeis
notalloweda
fterinitialissue,butredem
ption
is
allowed
with
res
trictions,usually
asperiodic
redemptio
nfacility.Th
eschemesm
ayormayn
otbe
listedon
astockexcha
nge.
Incase
ofFMPs,how
ever,
redemptio
npriortoma
turityisnota
llowed,andlisting
ismandatory.
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Sinc
eFMPsare
closedende
d,andthere
isno
provisionforpremature
redemption,
theyholdsecurities
withmaturitiesexactly
matchingth
eirownmaturities;
thatis,
iftheFMPiso
f13months
,theywill
investin
securitiesthataregoingtomaturee
xactlyin13m
onths
orearlier.
Sotheydonothavetos
ellsecurities
inthe
market.So
themarket
pricesofthe
securitiesthatthey
holdisof
noconseque
ncetothem.
Thereforetheydo
notcarryin
terestraterisk.
Thereforeonma
turity,
theFM
Psaresure
tobe
redeemed
attheirface
valueplusa
ccumulatedinterest
(minusthe
fundmanage
mentexpens
es);thereis
norisk
ofachang
einvalueduetointerestratemovements.
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How
ever,beforethematuritytheinvestorsc
ansell
FMPsinth
emarket;inthemarketth
epriceofthe
FMPs
maynotbeequaltothe
irnominalvalue(facevalu
eplus
accumulated
interest
minus
the
fund
manag
ement
expenses
).Firstofall,
theywill
be
discountedforthe
waitingpe
riodtheonewhobuys
themhastowaittill
theirmatu
ritytogetbacktheinvestment.Their
value
mayalsoc
hangedueto
interestrate
movements.
The
marketrisk
inFMPsiszeroifthein
vestor
intendsto
holdthemtill
maturity;ifth
eintentionis
tosell
them
inth
emarket,theinvestoris
exposedtothefull
marketrisk
.
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The
FMPsalso
carrydefault
riskeven
ifthe
investorintendstohold
themtillmatu
rity.
Thedefa
ultrisk
canarisefromtwofacto
rs
-maturitym
ismatch
-defaultby
theborrower.
Maturitymismatc
hariseswhe
nthefundinvests
any
part
ofthe
FMP
corpusin
securities
whose
maturities
arelongerth
anthoseoftheFMP.
So,when
theFMP
matures,
the
fundmay
havetosell
these
securities
inthemarke
t,andthem
arketpricem
aybe
lessthantheirnominal
value.
Insuchacase,th
efund
mayhavetodefaultontheredemptio
noftheFMPs.
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The
defaultriskonaccounto
fthisfactorcanbe
assessedbycomparing
thematuritiesoftheFMPsand
ofthesecu
ritiesinwhichtheircorpus
isinvested.
The
secondfacto
rwhichgivesrisetodefaultrisk
inFMPsisthepossib
ilityofdefau
ltbytheborrower.
Underlying
everydebts
ecurityinwhichtheFMPinvests,
isaborrow
ingbyaborr
ower.Thepo
ssibilityofde
faultin
repaymentofprincipaland/orpay
mentofinterestby
thisborrow
ergivesrise
tothedefault
risk.
The
defaultriskonaccounto
fthisfactorcanbe
assessedfromthecred
itratingofth
eborrower.
WhatisCreditR
ating?
WhatisCreditR
ating?
W
hatisCreditR
ating?
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CREDITRATINGPROCESS
CREDITRATINGPROC
ESS
CREDITRATINGPROC
ESS
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ME
THODOLOGYFOR
RATING
ME
THODOLOGYFOR
RATING
C
REDIT
C
REDIT
ASSESSMENTOFBUSINESS
RISK.
ASSESSMENTOFFINANCIAL
RISK.
MANAG
EMENTEVALUATION
.
BUSINE
SSENVIRO
MENT
ANALY
SIS.
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CREDITRA
TINGSY
MBOLS
AAA
:HighestSafe
ty
AA
:HighSafety
A
:AdequateSa
fety
BBB
:ModerateSa
fety
BB
:InadequateS
afety
B
:HighRisk
C
:SubstantialR
isk
D
:Default
CRISIL
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Inv
estmentGrad
e
InvestmentGrad
e
LAAA
LAA+
LAA
LAA-
LA+
LA
LA-
LBB+
LBBB
LBBB-
CREDITRA
TINGSY
MBOLS
ICRA
Non
Non--
investmentG
rade
investmentG
rade
LBB+
LBB
LBB-
LB+
LB
LB-
LC+
LC
LC-
LD
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Risk Risk -+
SavingsBankDepos
its
S
hortTermDebt
Funds
LiquidFunds
LongTerm
DebtFunds
Gold
SecuredDebentures
BankFixedDeposits
FixedMaturityPlans
Unse
curedDebentur
es
SectoralEquityFunds
DirectE
quity
Balan
cedFunds
D
iversifiedEquityFunds
Atth
eendofsession2,
wehavec
overedup
tohereon
the
spectrum
ofInvestm
entProdu
cts.
Inth
enextsessio
nwe
mov
efurtherupo
nthe
riskscale.