INVESTOR EDUCATION

MUTUAL FUNDS

What Is A Mutual Fund?

A Mutual Fund is a product wherein an asset management company pools investible funds of various investors having a common objective as disclosed in an offer document. Investors are issued units, based on the amount of money they have invested. Investors of mutual funds are known as unit holders.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time.

The profits or losses are shared by the investors in proportion to their investments. Mutual Funds generally offer a variety of schemes with different investment. Before a mutual fund can collect funds from investors, it is required to be registered with Securities and Exchange Board of India (SEBI).

Benefits of Investing In Mutual Funds

• Beating Inflation
• Expert Fund Management
• Convenience
• Low Cost
• Diversification
• Liquidity
• Higher Return Potential
• Safety & Transparency

History Of Mutual Funds In India And Role Of SEBI

The Unit Trust of India was the first mutual fund in India, set up in the year 1963. In the early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, the Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter on an ongoing basis. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds regardless of their ownership (private, public or foreign) are governed by the same set of regulations.

How Is A Mutual Fund Set Up?

A mutual fund is set up in the form of a trust, which has a sponsor, trustees, an asset management company (AMC) and a custodian. The trust is established by one or more sponsors. The trustees of the mutual fund hold its property for the benefit of the unit holders. The AMC manages the funds by making investments in various types of securities. The custodian holds the securities purchased by the fund in its custody. The trustees are vested with the general power of superintendence and direction over the AMC. They monitor the performance and the regulatory compliance of the mutual fund. All these entities are regulated by SEBI.

SEBI regulations require that at least half of the directors of the AMC, as well as two thirds of the directors of the trustee company must be independent, which means that they should not be associated with the sponsors.

Net Asset Value (NAV)

The performance of a particular scheme of a mutual fund is denoted by the NAV.

Mutual funds invest the money collected from the investors in securities markets. In simple words, NAV is the market value of the securities held by the scheme. Since the market value of securities changes every day, the NAV of a scheme also changes every day. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

Types Of Mutual Funds Scheme

A.Schemes according to Accessibility of the Investment:

Depending on the accessibility of the investment, mutual fund scheme can be classified as an open-ended scheme or a close-ended scheme.

Open-ended Scheme:

An open-ended scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at the most recent NAV. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme:

A close-ended scheme has a stipulated maturity period. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed.

In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or listing on stock exchanges.

B. Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. These are the main types of schemes available:

Growth / Equity Oriented Scheme:

The aim of growth funds is to provide capital appreciation over the medium- to long-term. Such schemes generally invest a major part of their corpus in equities. Such funds have comparatively higher risks vs other scheme types. These schemes provide different options to the investors like a dividend option, capital appreciation, etc. The investors must indicate the option at the time of subscription, though they may change it at a later date. Growth schemes are good for investors who have a long-term outlook and are willing to take some additional risk.

Income / Debt Oriented Scheme:

The aim of income funds is to provide regular income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, the NAVs of such funds are affected by changes in interest rates. Opportunities of capital appreciation are also limited in such funds.

Balanced Fund:

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% each in equity and debt instruments. The NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund:

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds:

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive Index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage as the index being tracked. NAVs of such schemes increase and decrease based on the fluctuation of the index, though not exactly by the same percentage due to a tracking error that normally exists. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

Sector-Specific Schemes

These are the funds/schemes which invest in the securities of only those sectors that are specified in the offer documents. The returns in these funds are dependent on the performance of the sector being tracked. While these funds may give higher returns, they are more risky compared to diversified funds as the diversification is limited to companies in a particular sector.

Tax Saving Mutual Fund Schemes

Under specific provisions of the Income Tax Act, 1961, the Government offers tax incentives for investment in certain avenues. These schemes offer tax rebates to the investors in the form of Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth-oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

Fund Of Funds (FoF) Scheme?

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as an FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme by spreading risks across a greater universe. However, it cost more to invest in such a scheme as there are typically two layers of management fees.

Load Or No-Load Mutual Fund?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge is applicable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit.

The investors should take loads into consideration while making investment as they affect returns on the investment. However, the investors should also consider the performance track record and service standards of the mutual fund. Efficient funds may give higher returns in spite of having a load.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Can A Mutual Fund Impose Fresh Load Or Increase The Load Beyond The Level Mentioned In The Offer Documents?

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load is applicable only to prospective investments and not to the original investments. In case of the imposition of fresh loads or an increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are informed of the revised loads at the time of investment.

Sales or Repurchase/Redemption Price

The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. It may include a sales load, if applicable.

The repurchase or redemption price is the NAV at which an open-ended scheme purchases or redeems its units from the unit holders. It may include an exit load, if applicable.

Can A Mutual Fund Change The Asset Allocation While Deploying Funds Of Investors?

The fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. Considering the market trends, any prudent fund manager can change the asset allocation i.e. she can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on for the short term based on defensive considerations such as protecting the NAV. In case the mutual fund wants to change the asset allocation on a permanent basis, it is required to inform the unitholders and give them an option to exit the scheme at the prevailing NAV without any load.

Investing In Mutual Fund

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DEBT MARKETS

What Exactly Is Debt?

Debt is an amount of money borrowed by one party from another. Companies borrow to supplement equity funds (risk capital) for financing projects and meeting working capital needs. By definition, something that is borrowed has to be repaid at a point of time in the future. Debt does not assume any risk related to the venture, nor does it aspire to earn business profits. The compensation for lending money in the form of debt is interest, the rate of which is decided in advance.

Debt Products Available

Here is a list of products available to the individual investor in India:

A. Fixed deposits / Corporate bonds / Debentures:

This is the most popular debt product category. It is a deposit for a specific time period with a fixed rate of interest, which is to be paid along with the principal at maturity. Fixed deposits issued by banks and companies are popular with Indian investors. The rate of interest may be fixed or floating (linked to a benchmark rate). The tenure could be from 1 week to 10 years.

Bonds carry a fixed or floating rate of interest, which can be taxable or tax-free. There are many public sector companies which offer tax-free bonds.

These tax-free bonds are popular with investors who are in the highest income tax slab, since their pre-tax return is attractive compared to the risk of investing.

To assess the risk profile of the borrower, a credit rating is assigned by the credit rating agency. CRISIL, ICRA & CARE are the leading credit rating agencies in India.

An investor should check the credit rating and interest rate of the fixed deposit, corporate bond or debenture before investing.

Generally, the highest credit rating is AAA and as the credit rating falls, (from low risk to high risk) the rate of interest offered increases.

B. Government securities:

They are issued by the Reserve bank of India (RBI) on behalf of the central and various state governments. They carry a fixed rate of interest that is payable semi-annually, and a fixed tenure. The tenure can range from 1 year to 30 years. The principal amount is repaid at the maturity date.

Securities below the tenure of 1 year are called Treasury bills (T-bills). They are issued at a discount to the face value and redeemed at face value.

They are considered to be the safest amongst all debt products, as the central and state governments issue them.

C. Debt mutual funds:

These mutual fund schemes invest in government securities, corporate bonds (fixed rate and floating rate) and money market instruments. They seek to provide a steady return with relatively low risk.

They are ideal for investors with a low risk profile. They offer high liquidity and returns that are in line with those provided by corporate bonds. Returns are not guaranteed. They enjoy tax benefits. If debt funds are sold after 3 years, then the applicable long-term capital gains tax is lower than usual.

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Investing In Debt

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RESEARCH IN EQUITY MARKETS

RESEARCH & MORE

In India, there are more than 5,000 listed stocks available for investment. How does one go about selecting a particular stock? The process of research and analysis is like a filtration process, which enables one to filter and chose the stock or company, which matches one’s investment criteria. This process enables the identification of undervalued, overvalued and growth stocks.

Research Methodologies In The Equity Market

In the equity markets, there are broadly two types of research methods available:

A. Fundamental Research: In this method, the research analyst studies the fundamentals of the stock, which include:

• The business of the company
• The background of the promoters
• The shareholding pattern
• The current product and/or service portfolio
• The competitive positioning
• The historical performance and growth rates
• The detailed analysis of various financial statements such as the balance sheet, the cashflow statement and the profit and loss statement
• The analysis of various financial and operating ratios of the company
• The analysis of various valuation ratios
• Interactions with the management of the company
• Interactions with key vendors, customers, and suppliers

B. Technical Research: In this method, the research analyst studies past volume and pricing information of the stock. It makes certain key assumptions, such as:

• The market value of the asset reflects its supply and demand
• Supply and demand are driven by rational factors such as data and economic analysis, as well as irrational factors such as greed, panic, sentiment and guesswork.
• Markets and individual stocks move together

Differences between Technical and Fundamental Analysis

The main difference between technical analysis and fundamental analysis is the use of financial statements to value equities. Technical analysis is the practice of valuing stocks based on past volume and pricing information to predict future price movements. Fundamental analysis, however, takes a more formal approach. Fundamental analysts review the financial statements of a company and generate ratios, such as price-to-book value, price-to-earnings, return on equity, return on net worth, price-to-sales, price-to-cash earnings, enterprise value-to-EBITDA. These ratios are then used to value a stock.

Advantages And Disadvantages Of Technical Analysis

Advantages

• Technical analysis is easy to understand and can be performed relatively with the aid of a charting software
• Technical analysis does not rely on the use of financial statements for valuation
• Rather than strict fundamental valuation, technical analysis takes into account the "feeling" of the market, which is subjective.

Disadvantages

• The past is not always an indication of future results, calling into question the validity of technical analysis
• Technical analysis violates the premise of Efficient Market Hypothesis (EMH). EMH says it is impossible to "beat the market", because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

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DERIVATIVES TRADING

What are Derivatives Instruments?

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, indices, etc. Derivatives can be used to either to hedge the portfolio, indices or other investments, or to benefit from sharp movements in their prices. Four most common examples of derivative instruments are Futures, Forwards, Options and Swaps.

What is Futures Contract?

Stock & Index Futures are financial contracts where the underlying asset is an individual stock & Index. The Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement. Futures are traded in contracts of 1 month, 2 months and 3 months. All F&O contracts will expire on the last Thursday of the month, if the last Thursday is a trading holiday; the contracts expire on the previous trading day. Futures will trade at a Futures price which is normally at a premium to the spot price due to the time value.

Market Participants

There are three major participants in Derivatives.

1. Hedgers- Futures can be used to hedge the price movement of the underlying asset. Here, the goal is to prevent losses from potentially unfavourable price changes rather than to speculate.

2. Speculators/Traders- They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts

3. Arbitrageurs- Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets. Arbitrage originates when a trader purchases an asset cheaply in one location and simultaneously arranges to sell it at a higher price in another location

Futures terminologies

Let us understand various terms in the futures market with the help of quotes on Nifty futures from NSE:

Spot Price: The price at which an asset trades in the cash market.

Futures Price: The price of the futures contract in the futures market.

Contract Cycle: Maximum number of index futures contracts is of 3 months contract cycle- the near month (July 2020), the next month (August 2020) and the far month (September 2020). Every futures contract expires on last Thursday of respective month (in this case July 30, 2020). And, a new contract (in this example - October 2020) is introduced on the trading day following the expiry day of the near month contract.

Expiration Day: The day on which a derivative contract ceases to exist. It is last trading day of the contract.

Contract Size and contract value: Futures contracts are traded in lots and to arrive at the contract value we have to multiply the price with contract multiplier or lot size or contract size.

Basis: The difference between the spot price and the futures price is called basis.

Cost of Carry: Cost of Carry or CoC is the cost to be incurred by the investor for holding certain positions in the underlying market till the futures contract expires. The risk-free interest rate is included in this cost. Dividend payouts from the underlying are excluded from the CoC.

CoC is the difference between the futures and spot price of a stock or index. The Cost of Carry is important because higher the value of CoC, higher is the willingness of the traders to pay more money for holding futures.

Initial Margin: The amount one needs to deposit in the margin account at the time entering a futures contract is known as the initial margin.

Marking to Market (MTM): In futures market, while contracts have maturity of several months, profits and losses are settled on day-to-day basis – called mark to market (MTM) settlement.

Open Interest and Volumes Traded: An open interest is the total number of contracts outstanding (yet to be settled) for an underlying asset. The quotes given above show us on 21-July, 2020 Nifty futures has an open Interest of 13287675. It is important to understand that number of long futures as well as number of short futures is 13287675. This is because total number of long futures will always be equal to total number of short futures. Volumes traded give us an idea about the market activity with regards to specific contract over a given period – volume over a day, over a week or month or over entire life of the contract.

Contract Specifications: Contract specifications include the salient features of a derivative contract like contract maturity, contract multiplier also referred to as lot size, contract size, tick size etc

Price band: Price Band is essentially the price range within which a contract is permitted to trade during a day.

Advantages and disadvantages of using futures Contract

Advantages

1. High liquidity provides in financial instruments.

2. Investors can use futures contracts to speculate on the direction in the price of an underlying asset

3. Pay less brokerage for trade activities using futures investments compared to other investment choices.

4. High leverage in order to gain maximum gains with limited investments

Disadvantages

1. Investors have a risk that they can lose more than the initial margin amount since futures use leverage.

2. Investing in a futures contract might cause a company that hedged to miss out on favorable price movements.

3. Margin can be a double-edged sword meaning gains are amplified but so too are losses.

4. The consequence of low commission charges can be over-trading by traders.

5. Future contracts which are not closed before expiry will be physically settled.

Forwards

It is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre-decided on the date of contract. Both the contracting parties are committed and are obliged to honour the transaction irrespective of price of the underlying asset at the time of delivery. Since forwards are negotiated between two parties, the terms and conditions of contracts are customized. These are Over-the-counter (OTC) contracts.

Major limitations of forwards

1. Liquidity Risk-

2. Counterparty risk-

What is Options Contract?

An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying asset on or before a stated date/day, at a stated price, for a price. The party taking a long position i.e. buying the option is called buyer/ holder of the option and the party taking a short position i.e. selling the option is called the seller/ writer of the option.

Stock options are traded in contracts of 1 month, 2 months and 3 months, while Nifty index options are traded in contracts of 1 month, 2 months, 3 months and maximum 5 Years. All 1-month Option contracts expire on the last Thursday of the month. Weekly Index option contracts expire on the last Thursday of the week. In case the last Thursday of the week is a trading holiday, the previous trading day is the expiry day.

Types of Options

There are two types of Options:

1. Call Options are investments where the buyer believes the underlying stock's market price will rise above the strike price on or before the expiration date of the option.

2. Put Options are investments where the buyer believes the underlying stock's market price will fall below the strike price on or before the expiration date of the option.

An option premium consists of components, namely Intrinsic value and the Time value.

What Options called at Strike price?

In the money (ITM) option: This option would give holder a positive cash flow, if it were exercised immediately. A call option is said to be ITM, when spot price is higher than strike price. And, a put option is said to be ITM when spot price is lower than strike price. In our examples, call option is in the money.

At the money (ATM) option: At the money option would lead to zero cash flow if it were exercised immediately. Therefore, for both call and put ATM options, strike price is equal to spot price.

Out of the money (OTM) option: Out of the money option is one with strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. And a put option is said to be OTM when spot price is higher than strike price. In our examples, put option is out of the money.

Currently all in the money options are physical settled, in case of position is not squared up.

Value of an option (premium)

There are two types of factors that affect the value of the option premium:

Quantifiable Factors:

· underlying stock price

· the strike price of the option

· the volatility of the underlying stock

· the time to expiration and

· the risk free interest rate

Non-Quantifiable Factors:

· Market participants" varying estimates of the underlying asset's future volatility

· Individuals" varying estimates of future performance of the underlying asset, based on fundamental or technical analysis

· The effect of supply & demand- both in the options marketplace and in the market for the underlying asset

· The "depth" of the market for that option - the number of transactions and the contract's trading volume on any given day.

Swaps

Swaps are not exchange oriented and are traded over the counter, usually the dealing are oriented through banks. Swaps can be used to hedge risk of various kinds which includes interest rate risk and currency risk. Currency swaps and interest rates swaps are the two most common kinds of swaps traded in the market.

How to open Derivatives Account

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CURRENCY MARKET

WHY INVEST IN CURRENCY?

Currency investing has recently attracted more interest as economic uncertainty has enveloped the globe. Historically, trading currencies was reserved to multi-national corporations and well-financed investors, but this market has been opened up to the average investor.

The foreign exchange market (forex) is where currencies are traded. For multinational companies, this market provides a means of doing business in other countries, facilitating the payment of bills in the local currency. For speculators, this market provides opportunities to take advantage of movements in exchange rates. Here are some reasons to consider investing in currencies.

1:Diversification

You can use currencies to balance your portfolio, particularly if it is heavily focused in U.S. equities. For example, it you believe the dollar will drop in the future, you can buy one or more currencies that you think will rise.

One difference between stocks and currencies is that stocks move independently of each other while currencies move relative to each other. With currencies, when one is rising, another must be falling.

2:Level Playing Field

Unlike stocks, the news that drives currency prices is available to everyone on a real-time basis. In theory, there are no "insiders" in the foreign exchange market which operates 24 hours a day around the world. Since currency valuations are driven by actual monetary flows and events that influence a country's economic health, you can do your own analysis of how these events might impact its currency.

3:Global Economic Hedge

There is a growing fear that current U. S. fiscal and monetary policies will generate inflation and weaken the dollar over time. Growing budget deficits, record low interest rates and the amount of money being created by the Federal Reserve are all reasons for concern, and these developments are being closely tracked by currency traders.1 The currency market allows you to select currencies based on how you perceive their relative values will change over time. You can bet both ways, either long or short depending on which direction you think a particular currency is headed. You can allocate your risk across the currencies of several countries, allowing you to profit from changing global macroeconomic conditions.

4: Capital Appreciation

Currencies are akin to currencies and stocks because they offer the potential for capital appreciation. If the value of your currencies rises against the dollar, you will profit. If your currencies fall relative to the dollar, you will lose money.

5: Hedge Against Political and Event Risk

Currencies can be played against each other based on your tactical assessment of important events going on around the world. Examples are changes in top leadership, interest rate fluctuations, currency revaluations, wars, political upheavals, trading sanctions, new tariffs, monetary policy changes, trade deficits, recessions, tax changes, import restrictions and health-related epidemics.

6: Risk vs. Reward

Currencies are subject to risks that go well beyond the borders of each country, so an understanding of the interaction of global economies is important. Perception can be more important than reality since it's impossible to know exactly how critical world events will all play out once they start. Any of these events can happen in an instant without warning, making currencies subject to significant short-term volatility.

The risks and rewards of the forex market are amplified by leverage. Your potential profit or loss is multiplied by the leverage ratio, which can be in excess of 100:1. It's similar to trading stocks on margin because you can risk more money than the value of your capital account. This opens the door to profits on tiny moves in currencies if the trade goes in your favor, but your losses are multiplied if it goes in the wrong direction.

To minimize risk, spread your investment like you would with equities, choosing the currencies of countries that you are following closely. It's important that those countries have a stable financial and banking system. Also, if you are going to use leverage, start slow and work your way up.

7: Trade on Low Margin:Currency Futures traders are required to deposit low margins, roughly 3 to 5% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and currencies, facilitates the taking of large positions at lower capital.

What is currency trading?

Currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies. The currency market The currency trading (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover. Every day more than U.S. $3 trillion in currencies change hands in a highly professional interbank market, in which electronic trading platforms link currency traders from banks across the world directly. FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders. At the end of each business day in Asia, traders pass their open currency positions on to their colleagues in Europe, who – at the end of their business day – pass their open positions on to American traders, who just begin their working day and pass positions on to Asia at the end of their business day. And there, the circle begins a new. This makes FX truly global and very liquid.

Currency terminology

Exchange rate: The exchange rate is a price - the number of units of one nation’s currency that must be surrendered in order to acquire one unit of another nation’s currency.

Various terminologies in currency market: Spot price:The price at which a currency trades in the spot market. In the case of USD/INR, spot value is T + 2.

Futures price: The price at which the futures contract trades in the futures market.

Contract cycle: The currency futures contracts on the SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given point in time.

Final settlement date: The last business day of the month will be termed the Value date/ Final Settlement date of each contract.

Expiry date:It is the date specified in the futures contract. All contracts expire on the last working day (excluding Saturdays) of the contract months. The last day for the trading of the contract shall be two working days prior to the final settlement date or value date.

Contract size:In the case of USD/INR it is USD 1000; EUR/INR it is EUR 1000; GBP/INR it is GBP 1000 and in case of JPY/INR it is JPY 100,000. ( Ref. RBI Circular: RBI/2009-10/290, dated 19th January, by which RBI has allowed trade in EUR/INR, JPY/INR and GBP/INR pairs.)

Basis:Basis can be defined as the futures price minus the spot price. In a normal market, basis will be positive. Futures prices normally exceed spot prices.

Cost of carry:The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures (in currency markets) the storage cost plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset. For currency derivatives carry cost is the rate of interest.

Initial margin:The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.

Marking-to-market:In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price which is known as marking-to-market.

A foreign exchange deal:Its always been done in currency pairs, for example, US Dollar – Indian Rupee contract (USD–INR); British Pound – INR (GBP-INR), Japanese Yen – U.S. Dollar (JPYUSD), U.S. Dollar – Swiss Franc (USD-CHF) etc. Some of the liquid currencies in the world are USD, JPY, EURO, GBP, and CHF and some of the liquid currency contracts are on USD-JPY, USD-EURO, EURO-JPY, USD-GBP, and USD-CHF.

Economic variables which affect foreign exchange market

Interest rates, inflation, and GDP numbers are the main variables; however other economic indicators such as unemployment rate, bop, trade deficit, fiscal deficit, manufacturing indices, consumer prices and retail sales amongst others. News and information regarding a country's economy can have a direct impact on the direction that the country's currency is heading in much the same way that current events and financial news affect stock prices, hence the importance of economic factors. The following eight economic factors will directly affect a currency's movements in the Forex market. Interest rates, inflation, and GDP numbers are the main variables; however other economic indicators such as unemployment rate, bop, trade deficit, fiscal deficit, manufacturing indices, consumer prices and retail sales amongst others.

News and information regarding a country's economy can have a direct impact on the direction that the country's currency is heading in much the same way that current events and financial news affect stock prices, hence the importance of economic factors.

Who can trade in Currency Futures markets in India?

Any resident Indian or company including banks and financial institutions can participate in the futures market. However, at present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.

Which currency pairs are listed?

Any currency can be traded on the international level. However, in India only 4 major currencies are traded against the Indian Rupee.

· USDINR

· EURINR

· GBPINR

· JPYINR

Which are the Exchanges used?

The commonly used exchanges on the national level are - Multi Currency Exchange (MCX- SX), National Stock Exchange (NSE) The most commonly used exchange on the international level - COMEX Who are the Regulators of the Market The currency market is regulated jointly by the Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI).

Currency Contracts Specification-Futures

SELECTING CURRENCY TYPE FOR TRADING

Currency trading have done exceedingly well over the years, in terms of risk management, volumes etc. However, before trading in currency you need to check the following:

The currency you wish to trade is listed on the exchange.

Check the contract specifications of that currency to ensure it suits you best.

There is enough liquidity in the NSE exchange for currencies of interest.

Currency price should be in sync with the physical market prices or its respective benchmark prices.

You can find detailed contract specifications on the websites of the exchanges

CURRENCY PRICE FLUCTUATION

There are circuit limits or daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit.Exchange shall compute the Index circuit breaker limits for 10%, 15% and 20% levels on a daily basis based on the previous day's closing level of the index rounded off to the nearest tick size. When the circuit limit is hit, there is a cooling period of fifteen minutes after which the trading will begin again with fresh circuit limits.

TERMINOLOGIES USED IN TRADING

Long- Long means buying a currency in anticipation that the price will move up.

Short – Short means selling a currency in anticipation that the prices will come down.

Stop loss -Stop loss is an order to limit an investor's loss on the position he holds. By placing a Stop Order, Investor actually set a loss level which investor is willing to undertake.

ELIGIBILITY TO OPEN CURRENCY TRADING ACCOUNT

Any individual, Hindu undivided family (HUF), proprietary firm, partnership firm, or a company can open an account with us. Only resident Indians can open currency trading account

HOW TO OPEN CURRENCY TRADING ACCOUNT

>Our team is happy to answer your queries and help you to start your investment. Please click here to contact us.

COMMODITY MARKETS

Why Invest In Commodities?

1. Speculation: Trading in commodities is done with a view to make profits.

2. Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity. Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.

3. Hedging: It provides a platform for producers to hedge their positions according to their exposure in physical commodity.

4. No Insider Trading:  Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.

5. Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.

6. Trade on Low Margin: Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.

7. Seasonality Patterns: Quite often provide clue to both short and long term players.

8. No Counter party Risk: Much like the stock exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.

9. Wide Participation: The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market. It would also ensure bringing the market closer to both, the user and the trader.

10. Evolved Pricing: The rise in participation would decrease the risk of cartelisation, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational

Commodities Which We Can Trade

The following commodities are actively traded in these two Exchanges:

Multi Commodity Exchange (MCX)

Bullion: Gold and Silver

Metals: Aluminum, Copper, Zinc etc.

Oil and Oil Seed: Refined Soy Oil, Soy Bean etc.

Energy: Brent crude oil, Crude oil, etc.

Other commodities: Urad, Chana, Wheat, Guar Seed, Sugar, Potato etc.

National Commodity & Derivatives Exchange (NCDEX)

Metals:Aluminum, Copper, Nickel, Sponge iron and Zinc.

Oil and Oil Seed: Castor oil, Crude Palm oil, Soy Oil, Soy Bean etc.

Energy: Brent crude oil, and Furnace oil.

Agro Commodities: Cotton, Chana, Maize, Guar seed, Sugar, Rubber, etc.

For newly listed commodities please visit home page of exchange websites

www.mcxindia.com and www.ncdex.com

Exchange Timings To Trade In Commodities

Both MCX and NCDEX provide trading facility from Monday to Saturday.

Monday to Friday: 10.00am - 5.00pm for Agro-based commodities

Monday to Friday: 10.00am - 11.30pm for Precious / Base metals and Energy

Saturdays: 10.00am - 2.00pm for all commodities

Selecting Exchange For Trading

Both the commodity exchanges have done exceedingly well over the years, in terms of risk management, volumes or launching new & better commodity products. However, before choosing an exchange you need to check the following:

The commodity you wish to trade is listed on that exchange.

Check the contract specifications of that commodity to ensure it suits you best.

There is enough liquidity in the exchange for commodities of interest.

Commodity price should be in sync with the physical market prices or its respective benchmark prices.

You can find detailed contract specifications on the websites of the exchanges – www.ncdex.com and www.mcxindia.com

Margin Types

Margin: Margin is the amount that is required in advance to execute trades on the exchanges.

Initial Margin: Initial Margin is the amount of money deposited by both buyers and sellers of futures contract to ensure the performance of trades executed.

Maintenance Margin: Maintenance Margin is an amount over and above the Initial Margin to ensure that the balance in the margin account never goes below a pre-specified level.

Additional Margin: Additional Margin is the margin collected to protect the open positions from unexpected volatility prevailing in the market.

Marked To Market (MTM)?

On the day of entering into the contract, it is the difference of the entry value and closing price for that day. In case of carry forward position, MTM is the difference of the market price less yesterday's closing price.

Commodity Price Fluctuation

There are circuit limits or daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit. When the circuit limit is hit, there is a cooling period of fifteen minutes after which the trading will begin again with fresh circuit limits. For updated commodity specific circuit limits, please visit www.ncdex.com and www.mcxindia.com

Limitation

There is a limit to the quantity one can trade/hold in any given commodity at any point of time. There is a maximum permissible limit on holding a particular commodity for client as well as member. It varies from commodity to commodity and exchange to exchange.

Please see contract specification on exchange website for position limit at client and member level at www.ncdex.com and www.mcxindia.com

You will receive contract notes for your trades. Further, your dealer/relationship manager will update you accordingly.

Terminologies Used In Trading

Long- means buying a commodity in anticipation that the price will move up.

Short - means selling a commodity in anticipation that the prices will come down.

Stop loss - Stop loss is an order to limit an investor's loss on the position he holds. By placing a Stop Order, Investor actually set a loss level which investor is willing to undertake.

Eligibility To Open Commodity Trading Account

Any individual, Hindu undivided family (HUF), proprietary firm, partnership firm, or a company can open an account with us. Only resident Indians can open commodity trading account

Contract Note

you will receive a contract note on your registered address and also in the email id updated with us. However, if a client requires only Digital Contract Note, he/she will have to register for Electronic Contract Note as per the process suggested by SEBI.

Please note that digitally signed contract notes are valid documents under the Information Technology Act 2000 and the same are also available online under My Account which can be used for Income-tax purpose.

If the contract note is not delivered to your email id, there is a high possibility that it may have bounced back, reasons being- email id updated incorrectly, change in email id, email inbox full, etc. In such a scenario our systems will auto generate a hard copy of the contact note copy and dispatch the same through courier services to your registered mailing address.

The service is not chargeable to the client. But incase client requests for additional copies of the same it may be charged.

Types Of Orders

a) Limit Order: It is an order where the user specifies the price at (or better than) which the trade should be executed.

b) Market Order: It is an order which should be executed at whatever be the prevailing price on or after submission of such order. If there is no market at that point of time, it takes the last traded price and remains in the system.

c) Day Order: It is an order which is available for execution during the current trading session until executed or cancelled. All day orders will get cancelled at the end of the day during which such orders were submitted.

d) Stop Loss Order: It is an order placed which is kept by the system in suspended mode and will be visible to the market only when the market price of the relevant commodity reaches or crossed a threshold price, which is called as trigger price as defined by the member. It is used as a tool to limit the loss.

When Can Stop Loss Order Be Placed?

Stop Loss order can be placed while placing a fresh order as well as a square off order.

Basics of Stop Loss Order:

Buy: Market Price < Trigger price <= Order Price. (Trigger price entered should be greater than the market price)

Sell: Market Price > Trigger price >= Order Price. (Trigger price entered should be lesser than the market price)

When the market hits the trigger price, the order is forwarded to the exchange and the same gets traded at a price between the Trigger price and the Order price.

Call And Trade

Call & Trade is a service offered by www.investmentz.com for its customers, which provides customers with a facility to trade over the phone.

It is secure option to place a trade. Once you call our number, our Call & Trade dealer will ask a few questions to verify your identity. Only after your identity is verified, you would be able to place/ modify/ cancel orders.

Options Allowed In Commodity Derivatives?

Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.

Custody Charges

No. There are no custody charges for holding the demat units

Sales Tax

If the trade is squared off sales tax is not applicable. The sales tax is applicable only if a trade results into delivery for the seller. Normally it's the seller's responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery. Those who want to give (seller) physical delivery need to have sales tax registration number.

How Is The Futures Contract Defined?

Example: Gold Pure Mumbai 1-Kg future contract expiring on 20th Mar, 2015 is defined as "NCD-FUT-GLDPURMUMK-20-MAR-2015". Wherein "NCD" stands for NCDEX, "FUT" stands for Futures as derivatives product, "GLDPURMUMK" for underlying commodity and "20-MAR-2015" for expiry date

Trade Value Calculation Method

It is not necessary that the unit of quantity and price is the same. For eg. Price for Gold is expressed in Rs per 10 gms but the quantity is submitted in gms. Therefore the quantity can not be multiplied directly. The value of an order/trade can be computed by multiplying the quantity with the price and then the result by the 'multiplier'. For eg. Multiplier incase of Gold is 10.

Dematerialised Or Demat Form Of Commodities

Dematerialisation of commodities implies that these commodities are stored in Exchangedesignated vaults/warehouses and the record of the ownership is in electronic form, just like trading in equity shares. The legal and beneficial owner of the goods gets a credit in his account electronically, which is similar to holding a pass book in the bank. Similarly, transfer of ownership against buy and sale is done from one account to the other, just like money transfer through a cheque.

The depository keeps records of holding and transfers in electronic form. The opening of account and transfer instructions are carried out by the agents of the depository, called Depository Participants (DPs).

Physical Delivery And Demat Delivery

In case of physical delivery, a person gets a warehouse receipt in paper form, while in case of delivery in demat form, he gets a credit entry in his demat account.

Pay-in and Pay-out Time for e-Series Contracts

Funds and delivery pay-in-is at 1:00 pm and pay-out is at 5:30 pm. Pay-in and pay-out for eSeries products are executed on the T+2 basis. Settlement is done from Monday to Friday, excluding holidays notified by the Exchange.

Major Commodity Exchanges In India?

There are three national level commodity exchanges to trade in all permitted commodities. They are:

1.Multi Commodity Exchange of India Ltd, Mumbai (MCX) www.mcxindia.com

MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the world's top three bullion exchanges and top four energy exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.

2.National Commodity and Derivative Exchange, Mumbai (NCDEX) www.ncdex.com

A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

3.Indian Commodity Exchange Limited (ICEX) www.icexindia.com

It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).

How To Open Commodity Trading Account

Our team is happy to answer your queries and help you to start your investment. Please click here to contact us.

GLOSSARY

Advisory - KYC Compliance