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Jitendra Virahya s





Virahya s


There is a vast difference between theory and practice. The practical training program is designed with the purpose of bridging gap between theory and practice. As such I am fortunate to have an opportunity to undergo my project and thus my practical training with Reliance Life Insurance Company Limited.

Summer training was an exposure to corporate functional environment. It was opportunity & great pleasure for me to be in Corporate Environment and having interaction with concerned people.

This project is based on a brief study of six weeks of training period. Efforts have been made to present all authentic information as far as possible.

With a sense of great pleasure & satisfaction I present this report entitled as the Study on Portfolio Management in context to Reliance Life Insurance culmination of my efforts of last six weeks. Completion of this project, is no doubt, is a product of invaluable support & contribution of a number of people.

I wish to express my gratitude to those who generously helped me in completing this research work with their knowledge & expertise. A project of this nature calls for intellectual nourishment, professional help & encouragement from various quarters.

I present my gratitude to project guide Mr., Sr. Sales Manager for giving me the opportunity to work for Reliance Life Insurance Company Ltd., for being constant guiding force & a source of Illumination throughout this entire period .I would also extend my gratitude to Mr. va (Executive Territory Manager) for his useful suggestions.

My special thanks to all employees of Reliance Life Insurance Company Ltd, Jhalawar, who extended their precious cooperation & for the patience they showed while entertaining my queries.

I am immensely thankful to all agents who took out time from their busy schedule and enthusiastically responded to my queries and provided me with all the valuable information.

1. Reliance Life 2. Insurance The Great Founder ADA Group Structure About Reliance Life Vision & Mission Vision Mission Goals Achievements Leadership Team Corporate Offices A Brief Introduction

General Malhotra Committee Report Structure Competition Regulatory Body Investments Customer Service

3. Purpose & need of Insurance in India 4. IRDA Regulations pertaining to Agents / Agency in brief Definitions IRDA guidelines for Agents Insurance Act, 1938

5. Investment Portfolio Management Industry Scope Key Problems of running such businesses Size of Global Fund Management Industry Philosophy, Process and People

6. Investment Managers and portfolio Structure Investment styles Performance Measurement Risk Adjusted performance measurement Security

7. Classification of Securities

8. Classification of Funds 9. The Securities Market Public offer and private placement Physical nature of securities Divided and Un-divided securities Recruitment & selection Debt Equity Hybrid

10. Types of Financial Market Raising capital Derivative Products Analysis of Financial Market Financial Markets in Popular Culture

11. Measuring financial Instruments 12. Diversification Return Expected while diversifying Loss or Gain Risk and return Diversification Capital allocation line The risk free assets Systematic risk and specific risk

13. Reliance life Portfolio Management

14. Conclusion 15. Recommendations 16. Bibliography 17. Annexure

The Analyst Different Fund options

LIC act 1938 Constitution of LIC

Investment Portfolio Management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange Traded Funds) . The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more

generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking". The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Fund manager (or investment adviser in the India.) refers to both a firm that provides investment management services and an individual who directs fund management decisions. Investment Philosophy of Reliance Life Reliance Life Insurance seeks consistent and superior long-term returns with a well defined and discipline investment approach symbolizing integrity and transparency to all stakeholders Reliance Life offers the different fund options to the

Customers ULIP Equity Pure Equity Infrastructure Mid-Cap Energy Super Growth High Growth Growth Plus Growth Balanced Corporate Bond Pure Debt Gilt Guaranteed Bond-I Money Market Capital Secure

The Great Founder

"Pursue your goals even in the face of difficulties, and convert adversities into opportunities." - Dhirubhai Hirachand Ambani
Few men in history have made as dramatic a contribution to their countrys economic fortunes as did the founder of Reliance, Shri. Dhirubhai H Ambani. Fewer still have left behind a legacy that is more enduring and timeless.

As with all great pioneers, there is more than one unique way of describing the true genius of Dhirubhai: The corporate visionary, the unmatched strategist, the proud patriot, the leader of men, the architect of Indias capital markets, the champion of shareholder interest. But the role Dhirubhai cherished most was perhaps that of Indias greatest wealth creator. In one lifetime, he built, starting from the proverbial scratch, Indias largest private sector enterprise. When Dhirubhai embarked on his first business venture, he had a seed capital of barely US$ 300 (around Rs 14,000). Over the next three and a half decades, he converted this fledgling enterprise into a Rs. 3,25,000 crore colossusan achievement which earned Reliance a place on the global Fortune 500 list, the first ever Indian private company to do so. Under Dhirubhais extraordinary vision and leadership, Reliance scripted one of the greatest growth stories in corporate history anywhere in the world, and went on to become Indias largest private sector enterprise. Through out this amazing journey, Dhirubhai always kept the interests of the ordinary shareholder uppermost in mind, in the process making millionaires out of many of the initial investors in the Reliance stock, and creating one of the worlds largest shareholder families.

ADA Group Structure

About Reliance Life Insurance

Reliance Life Insurance offers you products that fulfill your savings and protection needs. Our aim is to emerge as a transnational Life Insurer of global scale and standard.

Reliance Life Insurance is an associate company of Reliance Capital Ltd., a part of Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of Indias leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary investments, private equity and other activities in financial services. Reliance Anil Dhirubhai Ambani Group also has presence in

Communications, Energy, Natural Resources, Media, Entertainment, Healthcare and Infrastructure.

Vision & Mission

Empowering everyone live their dreams.

Create unmatched value for everyone through dependable, effective, transparent and profitable life insurance and pension plans.

Our Goal
Reliance Life Insurance would strive hard to achieve the 3 goals mentioned below: 1. Emerge as transnational Life Insurer of global scale and standard 2. Create best value for Customers, Shareholders and all Stake holders 3. Achieve impeccable reputation and credentials through best business practices

RLIC has been one of the fast gainers in market share in new business premium amongst the private players with an incremental market share

of 4.1% in the Financial Year 2007-08 from 3.9% in April 07 to 8% in Feb 08. ( Source: IRDA)

Also continues to be amongst the fast growing Private Life Insurance Companies with a YOY growth of 195% in new business premium as of Mar08.

A Company that has crossed 1.7 Million policies in just 2 years of operation, post take over of AMP Sanmar business.

Initiated Express Life an Unique Over the Counter sales process for Unit Linked Insurance Policies in the Industry.

Accomplished a large distribution ramp-up in the Industry in a short span of time by opening 600 branches in 10 months taking the overall branch network above 740.

RLIC continues to be one of the two Life Insurance companies in India to be certified ISO 9001:2000 for all the processes.









Ceritificate of Merit in the Financial Services category by Council for Fair Business Practices (CFBP).

Leadership Team
BOARD OF DIRECTORS Gautam Doshi, Director Gautam is the Group Managing Director of Reliance Anil Dhirubhai Ambani Group and Director of Reliance Life Insurance Company Limited.

Satya Pal Talwar, Director Satya Pal is the Director of Reliance Life Insurance Company Limited. He holds an experience of more than 35 years in operations and policy formulation. Saumen Ghosh, Group President Saumen is currently the Group President of Reliance Capital Limited. Malay Ghosh President & Deputy CEO Malay leads all Sales & Distribution activities at Reliance Life Insurance Company Limited. His key focus is on rapid expansion of all channels and accelerating the companys growth trajectory. Maneesha Thakur, Chief Human Resources Officer Maneesha in her role as the Chief Human Resource Officer at Reliance Life Insurance Company Limited, has developed a performance driven and employee centric culture. She has been at the forefront of the organization growth by facilitating talent acquisition and management. Pournima Gupte, Appointed Actuary Pournima is the Appointed Actuary at Reliance Life Insurance Company Limited where she has the overall responsibility for statutory reporting, risk appetite, pricing, valuation, reinsurance, etc.

Leadership Team

C Mohan, Chief Technology Officer

Mohan is the Chief Technology Officer (CTO) of Reliance Life Insurance Company Limited and he is responsible for Information Technology Strategy Formulation and Deployment. R Rangarajan, Chief Investment Officer Rangarajan is the Chief Investment Officer at Reliance Life Insurance Company Limited. He along with his team strives to give the best possible returns on investments to shareholders and policyholders, keeping in mind their appetite for risk. Rangarajan draws on his in-depth knowledge of investment and experience of 25 years to ensure that the goals of the organization are met without any compromise on the benefits of the investors. S V Sunder Krishnan, Chief Risk Officer Sunder is the Chief Risk officer for Reliance Life Insurance and is responsible for overseeing Risk Management, Internal Audit and Compliance functions at Reliance Life Insurance. Saroj K Panigrahi, Head Legal, Compliance & Company Secretary 'Saroj K Panigrahi heads the Legal, Compliance and Company Secretarial function of Reliance Life Insurance'. He is armed with twelve years of valuable experience in the Corporate Legal, Commercial, Regulatory Compliance and Corporate Governance domains.

Corporate Offices

Call us at our 24 x 7 Call Center number-3033 8181 OR our Toll Free Number 1800 300 08181 Email us at rlife.customerservice@relianceada.com OR Write to us at

Registered Office: H Block, 1st Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai, Maharashtra 400710.

Corporate Office: Level 1, Midas Wing - A, Sahar Plaza, Andheri Kurla Road, Andheri (East) Mumbai - 400 059. Phone No: +91-22-3088 3444 Fax No: +91-22-3088 6587

In General
The business of insurance started with marine business. Traders, who used to gather in the Lloyds coffee house in London, agreed to share the losses of their goods while being carried by ships. The losses use to occur because of pirates who robbed on the high seas or because of the bad weather spoiling the goods or sinking the ships. The first insurance policy was issued in 1583 in England. In India, insurance began in 1870 with life insurance being transacted by an English company, the European and the Albert. The first insurance company was the Bombay Mutual Assurance Ltd.

In the wake of Swadeshi Movement in India in early 1900s, quite a good number of Indian companies were formed in the various parts of the country to transact insurance business. To name a few: Hindustan Cooperative and National Insurance in Kolkatta; United India in Chennai; Bombay Life, New India and Jupiter in Mumbai and Lakshmi Insurance in New Delhi.

In 1956, life insurance business was nationalized and LIC of India came into being on 1.09.1956. The Government took over the business of 245 companies (including 75 provident fund societies) who were transacting life insurance business at that time. There after, LIC got the exclusive privilege to transact life insurance business in India.

Malhotra Committee Report

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an

important part of the overall financial system where it was necessary to address the need for similar reforms

In 1994,

the committee submitted the report and some of the key

recommendations included: i) Structure Government stake in the Insurance Companies to be brought down to 50% All the insurance companies should be given greater freedom to operate

ii) Competition Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry No Company should deal in both Life and General Insurance through a single entity Foreign companies may be allowed to enter the industry in collaboration with the Domestic companies

iii) Investments Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%

iv) Customer Service Companies should pay interest on delays in payments beyond 30 days.

Computerization of operations and updating of technology to be carried out in the insurance industry .

The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry.

Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

Relevant laws were amended in 1999 and LICs monopoly rights to transact the insurance business in India came to an end. At the close of financial year ending 31 March 2004 twelve new companies were registered with the Insurance Regulatory and Development Authority (IRDA) to transact life insurance business in India.


Assets are insured because they are likely to be destroyed through accidental occurrences called perils. Few examples of perils are fire, floods, lightening, breakdowns, earthquakes, etc. perils are the events. Risks are the consequential losses or the damages.

The risk only means that there is only possibility of loss or damages. The damage may or may not happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty about the risk. Insurance is relevant if there are uncertainties. If there are no uncertainties about the occurrence of any event it cannot be insured against. In the case of human being, death is certain, but the time of death is uncertain. In the case of a person who is terminally ill, the time of death is not uncertain, though exactly not known. He cannot be insured.

Life insurance should ideally be bought for what it was always intended to do indemnify the nominees in case of an eventuality. Keeping this in mind all individuals should have a term plan in their insurance portfolio, irrespective of their profile. To take care of the investment and the tax-saving elements, individuals can invest in tax saving Unit linked insurance plans (ULIPs), which can invest up to 100% of the premium in market-linked instruments, is also an option, which individuals can opt for.

Life insurance can help in bringing economic development in the country by mobilizing public savings. Funds collected form the public is utilized in investment for economic growth. In any other investment or saving avenue, like bank deposits, savings certificates or mutual funds or shares and stocks etc., amount of funds available at any time will not be more than the amount saved, appreciation or interest earned till then. In life insurance, the amount available is the one that one wished to have at end of the savings period, which may range up to 30 or even more years.

Life insurance has advantages over other forms of savings:

Facility of nomination and assignment makes the claim settlement easy on death

Life insurance involves compulsory savings Tax benefits on premium paid as well as on the amount received by way of claim

Loans can be insured against a life insurance policy.

Mechanism of Insurance
The concept of insurance is that people exposed to the same risk come together and agreed to share a loss collectively if any of their members suffers it from that risk.

Insurance companies play the role of implementing this concepta) They bring together people exposed to the similar risk b) They collect members contribution in advance in the shape of premiums and create a fund out of which the losses are paid

The life insurance covers contingencies (death, retirement) and provides relief to the family in the event of death or retirement of the breadwinner.

Variable needs of life insurance can be a) Providing financial security to the family b) Provision for education, marriage, etc of the children c) Post-retirement income for self and dependents d) Special needs like Medical expenses


The Insurance Act, 1938 aimed to consolidate and amend the law relating to the business of insurance. It covers both life and non-life insurance business. It came into effect on 1st. July 1939. The act was amended in 1950 and again in 1999. Some of the Major changes brought about in 1950 were: Section 2 (5A) Chief Agent means person who, not being a salaried employee of an insurer, in consideration of commission Performs any administrative and organizing function for the insurer. Procures life insurance business for the insurer by employing or causing to be employed, insurance agents on behalf of the insurer. Section 2(17) Special Agent means a person who, not being a salaried employee of an insurer, in consideration of commission: Procures life insurance business for the insurer whether wholly or in part by employing or causing to be employed insurance agents on behalf of the insurer, but does not include a chief agent. He only procures business through agents but does not perform any administrative function like a chief agent. Special agents can do only life insurance business and not general insurance business. Individuals, companies or firms can become chief agents or special agents. Individuals, Directors or Partners, as the case may be, should be free from disqualifications specified for agents.

Section 42A,

The certificate shall remain valid for a period of 12 months but shall be renewable.

Provisions stipulate the number of insurance agents that a chief agent may employ directly or through special agents. These provisions also stipulate the minimum business requirements.

For special agents also there are similar stipulations of minimum number of agents to be appointed and the minimum business requirements.

Some important Provisions of the Insurance Act, 1938


Registration of Insurance companies.


Maintenance and scrutiny of accounts and valuation reports.


Investment and utilization of funds.


Placing limits on the expenses of insurers.


Licensing of agents and their remuneration.


Prohibition of rebates.


Approval of premium rates and plans.


Maintaining solvency levels.


Constitution of Insurance Associations, Insurance Councils and Tariff Advisory Committees.


The Act also vests the IRDA with powers to: Inspect documents. Appoint additional directors. Issue directions. Takeover the management of the insurer through the appointment of an Administrator by the Central Government.


Protection of the policy holders interest by prohibition of policies from being called into question after 2 years. [Sec. 45]


Provision of nomination. [Sec. 39]


Provision for assignment. [Sec. 38]


Provision for easy settlement of dispute.

About IRDA

Composition of Authority under IRDA Act, 1999 As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA, which was constituted by an act of parliament) specify the composition of Authority The Authority is a ten member team consisting of (a) (b) (c) a Chairman; five whole-time members; four part-time members,

(all appointed by the Government of India)

Duties, Powers and Functions of IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA..


Subject to the provisions of this Act and any other law for the time being

in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business.


Without prejudice to the generality of the provisions contained in sub-

section (1), the powers and functions of the Authority shall include, (a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;

(b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;

(c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents;

(d) Specifying the code of conduct for surveyors and loss assessors;

(e) Promoting efficiency in the conduct of insurance business;

(f) Promoting and regulating professional organizations connected with the insurance and re-insurance business;

(g) Levying fees and other charges for carrying out the purposes of this Act; (h) calling for information from, undertaking inspection of, conducting enquiries and investigations insurance including audit and of other the insurers, intermediaries, intermediaries organizations

connected with the insurance business; (I) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938) (j) Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; (k) Regulating investment of funds by insurance companies; (l) Regulating maintenance of margin of solvency; (m) Adjudication of disputes between insurers and intermediaries or insurance intermediaries; (n) Supervising the functioning of the Tariff Advisory Committee; (o) Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f); (p) Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and (q) Exercising such other powers as may be prescribed

List of Life Insurers



Bajaj Allianz Life Insurance Company Limited . Birla Sun Life Insurance Co. Ltd HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd

Mr. Anil Kumar Tel : 020-4026666 Singh Fax : 020-4026789 Mr. Fabien Jeudy Mr. William John Martin
Mr. Avijit Chatterjee

2. 3.

Tel : 022 5678 3333 Fax: 022 5678 3232 Tel : 022-67516666 Fax: 022-2822 8844 Tel :022-56621996 Fax: 022-56622031




ING Vysya Life Insurance Company Ms. Tel : 080-25328000 Ltd. Hemamalini Fax: 080-25559764 Ramakrishnan Life Insurance Corporation of India Mr. T Bhargava Tel 56598701 Fax: 22824386 Max New York Life Insurance Co. Ltd Met Life India Insurance Company Ltd. Mr.John Charles Poole Mr. M S V S Phanesh Tel : 0124-2561717 Fax: 0124-2561764 Tel : 080-26438638 Fax: 080-26521970 Toll Free No. 1-60044-6969 Tel : 022-6621 5999 Fax:022-6621 5757, 6621 5858 Tel : 022-56392000 Fax: 022-56621471 Tel : 022-66516000 Fax : 022-66550711




Kotak Mahindra Old Mutual Life Insurance Limited

Mr. Andrew Willis Cartwright Mr. Sanjeev Kumar Pujari Mr. Heerak Basu


SBI Life Insurance Co. Ltd


Tata AIG Life Insurance Company Limited


Reliance Life Insurance Company Limited.

Ms. Pournima Gupte

Tel : 02230479600/3047978 4 Fax: 022-30479650 Tel: 0124-270 9000/01, Fax: 0124-270 9007. Tel: 0522-2337777 Fax: 05222378200 Tel: 04023434466-72 Fax: 04023434488 Tel: 022 40306300/6301 Fax: 022 40306347
Tel No.: 022-40976666


Aviva Life Insurance Company India Limited

Mr. Chandan Khasnobis


Sahara India Life Insurance Co, Ltd.

Mr. K K Dharni


Shriram Life Insurance Co, Ltd.

Mr N S Sastry


Bharti AXA Life Insurance Company Ltd.

Mr. G L N Sarma


Future Generali India Life Insurance Company Limited

Mr. Gorakhnath Agarwal


IDBI Fortis Life Insurance Company Mr. Michael J Wood Ltd.,

Tel No.: 022-24908109/10 Fax No.: 022-24941016 Tel: 0124 44215706 Fax: 0124- 4201109


Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. AEGON Religare Life Insurance Company Limited.

Mr. Paul Beresford


Mr. K.S. Gopalakrishna n

Mr. Pradeep Kumar Thapliyal

Tele No.022-67292929


DLF Pramerica Life Insurance Co. Ltd.

Ph. No.91-124-271700


Star Union Dai-ichi Life Insurance Co. Ltd.,


Phone: 02232909099

Investment Portfolio management

Investment Portfolio Management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange Traded Funds) . The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking". The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Fund manager (or investment adviser in the India.) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

Industry scope
The business of investment portfolio management has several facets, including the employment of professional fund managers, research (of individual assets and asset classes), dealing, settlement, marketing, internal auditing, and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution). Key problems of running such businesses Key problems include:

Revenue is directly linked to market valuations, so a major fall in asset prices causes a precipitous decline in revenues relative to costs; Above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance; Successful fund managers are expensive and may be headhunted by competitors; Above-average fund performance appears to be dependent on the unique skills of the fund manager; however, clients are loath to stake their

investments on the ability of a few individuals- they would rather see firmwide success, attributable to a single philosophy and internal discipline;

Analysts who generate above-average returns often become sufficiently wealthy that they avoid corporate employment in favor of managing their personal portfolios.

The most successful investment firms in the world have probably been those that have been separated physically and psychologically from banks and insurance companies. That is, the best performance and also the most dynamic business strategies (in this field) have generally come from independent investment management firms. Representing the owners of shares Institutions often control huge shareholdings. In most cases they are acting as fiduciary agents rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies they own via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings. In practice, the ultimate owners of shares often do not exercise the power they collectively hold (because the owners are many, each with small holdings); financial institutions (as agents) sometimes do. There is a general belief that shareholders - in this case, the institutions acting as agentscould and should exercise more active influence over the companies in which they hold shares (e.g., to hold managers to account, to ensure Boards effective functioning). Such action would add a pressure group to those (the regulators and the Board) overseeing management.

However there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficiaries. Assuming that the institution polls, should it then: (i) Vote the entire holding as directed by the majority of votes cast? (ii) Split the vote (where this is allowed) according to the proportions of the vote? (iii) Or respect the abstainers and only vote the respondents' holdings?

The price signals generated by large active managers holding or not holding the stock may contribute to management change. For example, this is the case when a large active manager sells his position in a company, leading to (possibly) a decline in the stock price, but more importantly a loss of confidence by the markets in the management of the company, thus precipitating changes in the management team. Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings (i.e. 10% or more) and putting pressure on management to implement significant changes in the business. In some cases, institutions with minority holdings work together to force management change. Perhaps more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR. On the other hand, some of the largest investment managers such as Barclays Global Investors and Vanguardadvocate simply owning every company, reducing the incentive to influence management teams. A reason for this last strategy is that the investment manager prefers a closer, more open and honest relationship with a company's management team than would exist if they exercised control; allowing them to make a better investment decision.

The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure management teams. In Japan it is traditional for shareholders to be low in the 'pecking order,' which often allows management and labor to ignore the rights of the ultimate owners. Whereas US firms generally cater to shareholders, Japanese businesses generally exhibit a stakeholder mentality, in which they seek consensus amongst all interested parties (against a background of strong unions and labour legislation).

Size of the global fund management industry

Assets of the global fund management industry increased for the fourth year running in 2008 to reach a record $94.3 trillion. This was up 14% on the previous year and double from five years earlier. Growth during the past three years has been due to an increase in capital inflows and strong performance of equity markets. Pension assets totaled $38.2 trillion in 2008, with a further $26.2 trillion invested in mutual funds and $19.9 trillion in insurance funds. Together with alternative assets, such as those of sovereign wealth funds, hedge funds, private equity funds and funds of wealthy individuals, assets of the global fund management industry probably totaled around $150 trillion at the end of 2008. The US was by far the largest source of funds under management in 2008 with nearly a half of the world total. It was followed by the UK with 9% and Japan with 6%. The Asia-Pacific region has shown the strongest growth in recent years. Countries such as China and India offer huge potential and many companies are showing an increased focus in this region.

Philosophy, process and people

The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results.

Philosophy refers to the over-arching beliefs of the investment organization. For example: (i) Does the manager buy growth or value shares (and why)? (ii) Do they believe in market timing (and on what evidence)? (iii) Do they rely on external research or do they employ a team of researchers? It is helpful if any and all of such fundamental beliefs are supported by proof-statements.












implemented. For example: (i) Which universe of assets is explored before particular assets are chosen as suitable investments? (ii) How does the manager decide what to buy and when? (iii) How does the manager decide what to sell and when? (iv) Who takes the decisions and are they taken by committee? (v) What controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise?

People refer to the staff, especially the fund managers. The questions are, Who are they? How are they selected? How old are they? Who reports

to whom? How deep is the team (and do all the members understand the philosophy and process they are supposed to be using)? And most important of all, How long has the team been working together? This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover or changes to the team), then arguably the performance record is completely unrelated to the existing team (of fund managers).

Investment managers and portfolio structures

At the heart of the investment management industry are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments. Asset allocation The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the

individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices). Long-term returns It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

Diversification Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.

Investment styles

There are a range of different styles of fund management that the institution can implement. For example, growth, value, market neutral, small

capitalization, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.

Performance measurement
Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and docile data and close attention would be paid to the (percentile) ranking of any fund. Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industry wide,

there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions). An enduring problem is whether to measure before-tax or after-tax

performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realized capital gains (and not unrealized). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the aftertax position of some standard taxpayer.

Risk-adjusted performance measurement

Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the managers skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory. Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any

benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.

Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or out performance) due to the managers skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the managers decisions. Only the latter, measured by alpha, allows the evaluation of the managers true performance. Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other

factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers performance. For example, Fama and French (1993) have highlighted two important factors that characterize a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalization. Fama and French therefore proposed a three-factor model to describe portfolio normal returns (Fama-French three-factor model). Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpes (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.


A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures); equity securities, e.g., common stocks; and derivative (finance) contracts such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. What specifically qualifies as a security is dependent on the regulatory structure in a country. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.

Securities may be represented by a certificate or, more typically, "noncertificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Classification of Securities
Securities may be classified according to many categories or classification systems:

Issuer Currency of denomination Ownership rights Term to maturity Degree of liquidity Income payments Tax treatment Credit Rating Industrial Sector or "Industry" (Sector often refers to a higher level or broader category such as Consumer Discretionary whereas Industry often

refers to a lower level classification such as Consumer Appliances; See Industry for a discussion of some classification systems).

Region or Country (such as country of incorporation, country of principal sales/market of its products or services, or country in which the principal securities exchange on which it trades is located)

Market Capitalization State (typically for municipal or "tax-free" bonds in the India)

By type of issuer
Issuers of securities include commercial companies, government agencies, local authorities and international and supranational organizations (such as the World Bank). Debt securities issued by a government (called government bonds or sovereign bonds) generally carry a lower interest rate than corporate debt issued by commercial companies. Interests in an assetfor example, the flow of royalty payments from intellectual propertymay also be turned into securities. These repackaged securities resulting from a securitization are usually issued by a company established for the purpose of the repackagingcalled a special purpose vehicle (SPV). See "Repackaging" below. SPVs are also used to issue other kinds of securities. SPVs can also be used to guarantee securities, such as covered bonds.

New capital
Commercial enterprises have traditionally used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank

may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, the governments may raise capital through the issuance of securities (see government debt).

In recent decades securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet in order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way which makes them more attractive to investors. In other words, a basket of assets is typically contributed or placed into a separate legal entity such as a trust or SPV, which subsequently issues shares of equity interest to investors. This allows the sponsor entity to more easily raise capital for these assets as opposed to finding buyers to purchase directly such assets.

By type of holder
Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is

wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds.

The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment.

The last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called "buying on margin." Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to

A. These property rights enable A to satisfy its claims in the event that B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other institutional investors such as mutual funds are significant collateral takers or providers. In addition, private parties including funds and small institutions may utilize stocks or other securities as collateral for portfolio loans in securities lending scenarios, which may be structured into either recourse or nonrecourse packages and are often referred to as "hedge loans".

Debt and equity

Securities are traditionally divided into debt securities and equities.

Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated".

Corporate bonds represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days.

Money market instruments are short term debt instruments that

may have characteristics of deposit accounts, such as certificates of deposit, and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid.

Euro debt securities are securities issued internationally outside their

domestic market in a denomination different from that of the issuer's domicile. They include Eurobonds and Euro notes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A Euro note may take the form of euro-commercial paper (ECP) or eurocertificates of deposit.

Government bonds are medium or long term debt securities issued by

sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called treasuries. Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the open market operations of non-US central banks.

Sub-sovereign government bonds, known in the India as municipal

bonds, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments.

Supranational bonds represent the debt of international organizations

such as the World Bank, the International Monetary Fund, regional multilateral development banks and others.

An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and capital gain, whereas holders of debt securities receive only interest and repayment of principal

regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business


Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. However, from a legal perspective, they are capital stock and therefore may entitle holders to some degree of control depending on whether they contain voting rights.

Convertibles are bonds or preferred stock which can be converted, at the

election of the holder of the convertibles, into the common stock of the issuing company. The convertibility, however, may be forced if the convertible is a callable bond, and the issuer calls the bond. The bondholder has about 1 month

to convert it, or the company will call the bond by giving the holder the call price, which may be less than the value of the converted stock. This is referred to as a forced conversion.

Equity warrants are options issued by the company that allow the holder of
the warrant to purchase a specific number of shares at a specified price within a specified time. They are often issued together with bonds or existing equities, and are, sometimes, detachable from them and separately tradable. When the holder of the warrant exercises it, he pays the money directly to the company, and the company issues new shares to the holder. Warrants, like other convertible securities, increases the number of shares outstanding, and are always accounted for in financial reports as fully diluted earnings per share, which assumes that all warrants and convertibles will be exercised.

The securities markets

Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary markets. The distinguishing difference between the two markets is that in the primary market, the money for the securities is received by the issuer of those securities from investors, typically in an initial public offering transaction, whereas in the secondary market, the securities are simply assets held by one investor selling them to another investor (money goes from one investor to the other). An initial public offering is when a company issues public stock newly to investors, called an "IPO" for short. A company can later issue more new shares, or issue shares that have been previously registered in a shelf registration. These later new issues are also sold in the primary market, but they are not considered to be an IPO but are often called a "secondary offering". Issuers usually retain investment banks to assist them in administering the IPO, obtaining SEC (or other regulatory body) approval of the

offering filing, and selling the new issue. When the investment bank buys the entire new issue from the issuer at a discount to resell it at a markup, it is called a firm commitment underwriting. However, if the investment bank considers the risk too great for an underwriting, it may only assent to a best effort agreement, where the investment bank will simply do its best to sell the new issue. In order for the primary market to thrive, there must be a secondary market, or aftermarket which provides liquidity for the investment security, where holders of securities can sell them to other investors for cash. Otherwise, few people would purchase primary issues, and, thus, companies and governments would be restricted in raising equity capital (money) for their operations. Organized exchanges constitute the main secondary markets. Many smaller issues and most debt securities trade in the decentralized, dealer-based over-the-counter markets.

Public offer and private placement

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and company law. Privately placed securities are not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not nearly as liquid as it is for public (registered) securities. Another category, sovereign debt, is generally sold by auction to a specialized class of dealers.

Listing and OTC dealing

Securities are often listed in a stock exchange, an organized and officially recognized market on which securities can be bought and sold. Issuers may

seek listings for their securities in order to attract investors, by ensuring that there is a liquid and regulated market in which investors will be able to buy and sell securities. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.

London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerized clearing/depositories called Euroclear (in Belgium) and Clearstream (formerly Cedelbank) in Luxembourg. The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext. There are ramp up market in Emergent countries, but it is growing slowly.

Physical nature of securities

Certificated securities
Securities that are represented in paper (physical) form are called certificated securities. They may be bearer or registered.

Bearer securities
Bearer securities are completely negotiable and entitle the holder to the rights under the security (e.g. to payment if it is a debt security, and voting if it is an equity security). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the United Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the Exchange Control Act 1947 until 1953. Bearer securities are very rare in the United States because of the negative tax implications they may have to the issuer and holder.

Registered securities
In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. Instead, the issuer (or its appointed agent) maintains a register in which details of the holder of the securities are entered and updated as appropriate. A transfer of registered securities is effected by amending the register.

Non-certificated securities and global certificates

Modern practice has developed to eliminate both the need for certificates and maintenance of a complete security register by the issuer. There are two general ways this has been accomplished.

Non-certificated securities
In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to maintain a legal record of their securities electronically. In the United States, the current "official" version of Article 8 of the Uniform Commercial Code permits non-certificated securities. However, the "official" UCC is a mere draft that must be enacted individually by each of the U.S. states. Though all 50 states (as well as the District of Columbia and the U.S. Virgin Islands) have enacted some form of Article 8, many of them still appear to use older versions of Article 8, including some that did not permit noncertificated securities. [1] In the U.S. today, most mutual funds issue only non-certificated shares to shareholders, though some may issue certificates only upon request and may charge a fee. Shareholders typically don't need certificates except for perhaps pledging such shares as collateral for a loan.

Global certificates, book entry interests, depositories

In order to facilitate the electronic transfer of interests in securities without dealing with inconsistent versions of Article 8, a system has developed whereby issuers deposit a single global certificate representing all the outstanding securities of a class or series with a universal depository. This depository is called The Depository Trust Company, or DTC. DTC's parent, Depository Trust & Clearing Corporation (DTCC), is a non-profit cooperative owned by approximately thirty of the largest Wall Street players that typically act as brokers or dealers in securities. These thirty banks are called the DTC

participants. DTC, through a legal nominee, owns each of the global securities on behalf of all the DTC participants. All securities traded through DTC are in fact held, in electronic form, on the books of various intermediaries between the ultimate owner, e.g. a retail investor, and the DTC participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc. in his brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold 1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers. These 1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC participant, or in an account at another DTC participant. Goldman Sachs in turn may hold millions of Coca Cola shares on its books on behalf of hundreds of brokers similar to Jones & Co. Each day, the DTC participants settle their accounts with the other DTC participants and adjust the number of shares held on their books for the benefit of customers like Jones & Co. Ownership of securities in this fashion is called beneficial ownership. Each intermediary holds on behalf of someone beneath him in the chain. The ultimate owner is called the beneficial owner. This is also referred to as owning in "Street name". Among brokerages and mutual fund companies, a large amount of mutual fund share transactions take place among intermediaries as opposed to shares being sold and redeemed directly with the transfer agent of the fund. Most of these intermediaries such as brokerage firms clear the shares electronically through the National Securities Clearing Corp. or "NSCC", a subsidiary of DTCC.

Other depositories: Euroclear and Clearstream

Besides DTC, two other large securities depositories exist, both in Europe: Euroclear and Clearstream.

Divided and undivided security

The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A share represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.

Fungible and non-fungible security

The terms "fungible" and "non-fungible" relate to the way in which securities are held. If an asset is fungible, this means that if such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the specific identical asset. In other words, the redelivery of fungibles is equivalent and not in specie. In other words, if an owner of 100 shares of IBM transfers custody of those shares to another party to hold them for a purpose, at the end of the arrangement, the holder need

simply provide the owner with 100 shares of IBM which are identical to that received. Cash is also an example of a fungible asset. The exact currency notes received need not be segregated and returned to the owner. Undivided securities are always fungible by logical necessity. Divided securities may or may not be fungible, depending on market practice. The clear trend is towards fungible arrangements. In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficientmarket hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In economics, typically, the term market means the aggregate of possible buyers and sellers of a thing and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

Types of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk.

Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market.

Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

Raising capital
To understand financial markets, let us look at what they are used for, i.e. what is their purpose? Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.

Individuals Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

puts money in a savings account at a bank; contributes to a pension plan; pays premiums to an insurance company; invests in government bonds; or invests in company shares.

Companies Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR).

Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.

Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk. It is also called financial economics.

Currency markets
Seemingly, the most obvious buyers and sellers of foreign exchange are importers/exporters. While this may have been true in the distant past, whereby importers/exporters created the initial demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS.[1] The picture of foreign currency transactions today shows:

Banks/Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists

Analysis of financial markets

Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation.

Financial markets in popular culture

Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view.

Stories that make the headlines involve the incompetent, the lucky and the downright skillful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example. Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.

Financial market slang

Geek, a Quant Grim, an ageless person known for his/her whistle and tendency to relate current events to financial market

Nerd, a Quant

Quant, a quantitative analyst skilled in the black arts of PhD level (and above) mathematics and statistical methods Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of frightening complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living.

White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares of an organization to help prevent the takeover of that organization by another party (that is making a hostile bid).

Poison pill, measures taken by a company to prevent being bought out by another company

Financial instrument
Financial instruments are cash, evidence of an ownership interest in an entity, or a c Categorization
Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange-traded derivatives and over-thecounter (OTC) derivatives.

Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

Measuring Financial Instrument's Gain or Loss

The table below shows how to measure a financial instrument's gain or loss: Instrument Type Categories Measurement Gains and losses Net Assets Loans and income when and in asset is derecognized or impaired (foreign Amortized costs exchange recognized immediately) Available Assets sale assets for financial Deposit account - Fair value Other comprehensive recognized income in net (impairment impairment net income


income immediately)

Contractual right to receive, or deliver, cash or another financial instrument. Investment theory Investment theory encompasses the body of knowledge used to support the decision-making process of choosing investments for various purposes. It includes portfolio theory, the Capital Asset Pricing Model, Arbitrage Pricing Theory, and the Efficient market hypothesis.

Modern portfolio theory Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced. The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line. MPT models an asset's return as a random variable, and models a portfolio as a weighted combination of assets so that the return of a portfolio is the weighted combination of the assets' returns. Moreover, a portfolio's return is a random variable, and consequently has an expected value and a variance. Risk, in this model, is the standard deviation of return.

Risk and return

The model assumes that investors are risk averse, meaning that given two assets that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher returns must accept more risk. The exact trade-off will differ by investor based on individual risk aversion characteristics. The implication is that a rational investor will not

invest in a portfolio if a second portfolio exists with a more favorable risk-return profile i.e., if for that level of risk an alternative portfolio exists which has better expected returns.

Mean and variance

It is further assumed that investor's risk / reward preference can be described via a quadratic utility function. The effect of this assumption is that only the expected return and the volatility (i.e., mean return and standard deviation) matter to the investor. The investor is indifferent to other characteristics of the distribution of returns, such as its skew (measures the level of asymmetry in the distribution) or kurtosis (measure of the thickness or so-called "fat tail"). Note that the theory uses a parameter, volatility, as a proxy for risk, while return is an expectation on the future. This is in line with the efficient market hypothesis and most of the classical findings in finance such as Black and Scholes European Option Pricing (martingale measure: in short means that the best forecast for tomorrow is the price of today). Recent innovations in portfolio theory, particularly under the rubric of Post-Modern Portfolio Theory (PMPT), have exposed several flaws in this reliance on variance as the investor's risk proxy:

The theory uses a historical parameter, volatility, as a proxy for risk, while return is an expectation on the future. (It is noted though that this is in line with the Efficiency Hypothesis and most of the classical findings in finance such as Black and Scholes which make use of the martingale measure, i.e. the assumption that the best forecast for tomorrow is the price of today).

The statement that "the investor is indifferent to other characteristics" seems not to be true given that skewness risk appears to be priced by the market[citation needed].

Under the model:

Portfolio return is the proportion-weighted combination of the constituent assets' returns. Portfolio volatility is a function of the correlation of the component assets. The change in volatility is non-linear as the weighting of the component assets changes.

An investor can reduce portfolio risk simply by holding combinations of instruments which are not perfectly positively correlated (correlation coefficient -1<(r)<0)). In other words, investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Diversification will allow for the same portfolio return with reduced risk. If all the assets of a portfolio have a correlation of +1, i.e., perfect positive correlation, the portfolio volatility (standard deviation) will be equal to the weighted sum of the individual asset volatilities. Hence the portfolio variance will be equal to the square of the total weighted sum of the individual asset volatilities. If all the assets have a correlation of 0, i.e., perfectly uncorrelated, the portfolio variance is the sum of the individual asset weights squared times the individual asset variance (and volatility is the square root of this sum). If correlation coefficient is less than zero (r=0), i.e., the assets are inversely correlated, the portfolio variance and hence volatility will be less than if the correlation coefficient is 0.

Capital allocation line

The capital allocation line (CAL) is the line of expected return plotted against risk (standard deviation) that connects all portfolios that can be formed using a risky asset and a riskless asset. It can be proven that it is a straight line and that it has the following equation. In this formula P is the risky portfolio, F is the riskless portfolio, and C is a combination of portfolios P and F.

The efficient frontier

Efficient Frontier. The hyperbola is sometimes referred to as the 'Markowitz Bullet' Every possible asset combination can be plotted in risk-return space, and the collection of all such possible portfolios defines a region in this space. The line along the upper edge of this region is known as the efficient frontier (sometimes "the Markowitz frontier"). Combinations along this line represent portfolios (explicitly excluding the risk-free alternative) for which there is lowest risk for a given level of return. Conversely, for a given amount of risk, the portfolio lying on the efficient frontier represents the combination offering the best possible

return. Mathematically the Efficient Frontier is the intersection of the Set of Portfolios with Minimum Variance (MVS) and the Set of Portfolios with Maximum Return. Formally, the efficient frontier is the set of maximal elements with respect to the partial order of product order on risk and return, the set of portfolios for which one cannot improve both risk and return. The efficient frontier will be convex this is because the risk-return characteristics of a portfolio change in a non-linear fashion as its component weightings are changed. (As described above, portfolio risk is a function of the correlation of the component assets, and thus changes in a non-linear fashion as the weighting of component assets changes.) The

efficient frontier is a parabola (hyperbola) when expected return is plotted against variance (standard deviation). The region above the frontier is unachievable by holding risky assets alone. No portfolios can be constructed corresponding to the points in this region. Points below the frontier are suboptimal. A rational investor will hold a portfolio only on the frontier.

The risk-free asset

The risk-free asset is the (hypothetical) asset which pays a risk-free rate. It is usually provided by an investment in short-dated Government securities. The risk-free asset has zero variance in returns (hence is risk-free); it is also uncorrelated with any other asset (by definition: since its variance is zero). As a

result, when it is combined with any other asset, or portfolio of assets, the change in return and also in risk is linear. Because both risk and return change linearly as the risk-free asset is introduced into a portfolio, this combination will plot a straight line in risk-return space. The line starts at 100% in the risk-free asset and weight of the risky portfolio = 0 (i.e., intercepting the return axis at the risk-free rate) and goes through the portfolio in question where risk-free asset holding = 0 and portfolio weight = 1.

Portfolio leverage
An investor adds leverage to the portfolio by borrowing the risk-free asset. The addition of the risk-free asset allows for a position in the region above the efficient frontier. Thus, by combining a risk-free asset with risky assets, it is possible to construct portfolios whose risk-return profiles are superior to those on the efficient frontier.

An investor holding a portfolio of risky assets, with a holding in cash, has a positive risk-free weighting (a de-leveraged portfolio). The return and standard deviation will be lower than the portfolio alone, but since the efficient frontier is convex, this combination will sit above the efficient frontier i.e., offering a higher return for the same risk as the point below it on the frontier.

The investor who borrows money to fund his/her purchase of the risky assets has a negative risk-free weighting i.e., a leveraged portfolio. Here

the return is geared to the risky portfolio. This combination will again offer a return superior to those on the frontier.

The market portfolio

The efficient frontier is a collection of portfolios, each one optimal for a given amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional return (above the risk-free rate) a portfolio provides compared to the risk it carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market portfolio, or sometimes the superefficient portfolio; it is the tangency-portfolio in the above diagram. This portfolio has the property that any combination of it and the risk-free asset will produce a return that is above the efficient frontieroffering a larger return for a given amount of risk than a portfolio of risky assets on the frontier would.

Capital market line

When the market portfolio is combined with the risk-free asset, the result is the Capital Market Line. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. Just the special case of the market portfolio with zero cash weighting is on the efficient frontier. Additions of cash or leverage with the risk-free asset in combination with the market portfolio are on the Capital Market Line. All of these portfolios represent the highest possible Sharpe ratio. The CML is illustrated above, with return p on the y-axis, and risk p on the x-axis. One can prove that the CML is the optimal CAL and that its equation is

Asset pricing
A rational investor would not invest in an asset which does not improve the riskreturn characteristics of his existing portfolio. Since a rational investor would hold the market portfolio, the asset in question will be added to the market portfolio. MPT derives the required return for a correctly priced asset in this context.

Systematic risk and specific risk

Specific risk is the risk associated with individual assets - within a portfolio these risks can be reduced through diversification (specific risks "cancel out"). Specific risk is also called diversifiable, unique, unsystematic, or idiosyncratic risk. Systematic risk (a.k.a. portfolio risk or market risk) refers to the risk common to all securities - except for selling short as noted below, systematic risk cannot be diversified away (within one market). Within the market portfolio, asset specific risk will be diversified away to the extent possible. Systematic risk is therefore equated with the risk (standard deviation) of the market portfolio. Since a security will be purchased only if it improves the risk / return characteristics of the market portfolio, the risk of a security will be the risk it

adds to the market portfolio. In this context, the volatility of the asset, and its correlation with the market portfolio, is historically observed and is therefore a given (there are several approaches to asset pricing that attempt to price assets by modelling the stochastic properties of the moments of assets' returns - these are broadly referred to as conditional asset pricing models). The (maximum) price paid for any particular asset (and hence the return it will generate) should also be determined based on its relationship with the market portfolio. Systematic risks within one market can be managed through a strategy of using both long and short positions within one portfolio, creating a "market neutral" portfolio.

Diversification in finance is a risk management technique, related to hedging, that mixes a wide variety of investments within a portfolio. It is the spreading out investments to reduce risks. any one investment. A simple example of diversification is the following: On a particular island the entire economy consists of two companies: one that sells umbrellas and another that sells sunscreen. If a portfolio is completely invested in the company that sells umbrellas, it will have strong performance during the rainy season, but poor performance when the weather is sunny. The reverse occurs if the portfolio is only invested in the sunscreen company, the alternative investment: the

Because the fluctuations of a single security

have less impact on a diverse portfolio, diversification minimizes the risk from

portfolio will be high performance when the sun is out, but will tank when clouds roll in. To minimize the weather-dependent risk in the example portfolio, the investment should be split between the companies. With this diversified portfolio, returns are decent no matter the weather, rather than alternating between excellent and terrible. There are three primary strategies used in improving diversification: 1. Spread the portfolio among multiple investment vehicles, such as stocks, mutual funds, bonds, and cash.

2. Vary the risk in the securities. A portfolio can also be diversified into different mutual fund investment strategies, including growth funds, balanced funds, index funds, small cap, and large cap funds. When a portfolio includes investments with varied risk levels, large losses in one area are offset by other areas.

3. Vary your securities by industry, or by geography. This will minimize the impact of industry- or location-specific risks. The example portfolio above was diversified by investing in both umbrellas and sunscreen. Another practical application of this kind of diversification is mixing investments between domestic and international funds. By choosing funds in many countries, events within any one country's economy have less effect on the overall portfolio. Diversification reduces the risk of a portfolio, and consequently it can reduce the returns. However, since diversification reduces the risk of an entire portfolio being diminished by a single investment's loss, it is referred to as "the only free

lunch in finance."[2] Statistical analysis shows that there may be some validity to this claim.[3]

Horizontal diversification
Horizontal diversification is when a portfolio is diversified between same-type investments. It can be a broad diversification (like investing in several NASDAQ companies) or more narrowed (investing in several stocks of the same branch or sector). In the example above, the move to invest in both umbrellas and sunscreen is an example of horizontal diversification. As usual, the broader the diversification the lower the risk from any one investment.

Vertical diversification
Vertical diversification is investment between different types of securities. Again, it can be a very broad diversification, like diversifying between bonds and stocks, or a more narrowed diversification, like diversifying between stocks of different branches. Continuing the example from the introduction, a vertical diversification would be taking some money from umbrella and sunscreen stock and investing it instead in bonds issued the government of the island. While horizontal diversification lessens the risk of investing entirely in one security, vertical diversification goes beyond that and protects against market and/or economical changes.

Return expectations while diversifying

The average of all the returns in a diverse portfolio can never exceed that of the top-performing investment, and will almost always be lower than the highest return. This is unavoidable, and is the cost of the risk insurance that diversification provides. However, strategies exist that allow the portfolio's manager to maximize returns while still keeping risk as low as possible. Although detailed calculations are beyond the scope of this article, these

Percent of strategies seek to maximize returns by giving different portfolio weights to investments based on their risk and return expectations. diversifia ble d 1 0.5 by the a intra- 0 statistical -0.5 -1 0% 25% 50% 75% 100% risk eliminate

Intra-portfolio correlation
Diversification portfolio can be quantified This is


measurement between negative one and positive

one that measures the degree to which the various Intra-portfolio assets in a portfolio can be expected to perform in a correlation similar fashion or not. A measure of -1 means that the assets within the portfolio perform perfectly oppositely: whenever one asset goes up, the other goes down. A measure of 0 means that the assets fluctuate independently, i.e. that the performance of one asset cannot be used to predict the performance of the others. A measure of 1, on the other hand, means that whenever one asset goes up, so do the others in the portfolio. To eliminate diversifiable risk completely, one needs an intra-portfolio correlation of -1. The linear relationship intra-portfolio and risk

between correlation diversifiable

elimination. Intermediate values fall on the same line.

A chart comparing diversification to risk protection

Number Stocks Portfolio of Average in Deviation of Standard Ratio of Portfolio to Standard Standard

Annual Deviation

Portfolio Returns

Deviation of a Single Stock

1 2 4 6 8 10 20 30 40 50 100 200 300 400 500 1000

49.24% 37.36 29.69 26.64 24.98 23.93 21.68 20.87 20.46 20.20 19.69 19.42 19.34 19.29 19.27 19.21

1.00 0.76 0.60 0.54 0.51 0.49 0.44 0.42 0.42 0.41 0.40 0.39 0.39 0.39 0.39 0.39

Capital market
The capital market is the market for securities, where companies and governments can raise long-term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange

Commission (SEC), oversee the capital markets in their designated countries to ensure that investors are protected against fraud. The capital markets consist of the primary market and the secondary market. The primary markets are where new stock and bonds issues are sold (underwriting) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually on an exchange (e.g. the New York Stock Exchange).

Stock market
A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. the entire world economy.
[3] [1]

The total world derivatives market has been


estimated at about $791 trillion face or nominal value,

11 times the size of

The value of the derivatives market, because it is

stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. .

Invest ment Philosophy of Reliance Life

Reliance Life Insurance seeks consistent and superior long-term returns with a well defined and discipline investment approach symbolizing integrity and transparency to all stakeholders

Reliance Life offers the different fund options to the Customers

ULIP Equity Pure Equity Infrastructure Mid-Cap Energy Super Growth High Growth Growth Plus Growth Balanced Corporate Bond Pure Debt Gilt

Guaranteed Bond-I

Money Market Capital Secure

The Analyst

The Portfolio

The Portfolio

In Portfolio management Investment managers and portfolio structure is always matter At the heart of the portfolio management are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.

Asset allocation The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

Long-term returns It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are they more risky than cash.

Diversification Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.


The Agent should create awareness among the customers about the benefits of various insurance Plans / Products, and the Investment Philosophy offered by Reliance life to their customers 1. Agent should go for an extensive personal contact program with the

customers, so that customer may select insurance plans as well as the Fund Choice per their requirement and available finances for short and long term investment. 2. Suggestions by Policyholders (through agents) Fund switching facility should be finding through easy process. Customer (Policy holder) must aware about the different fund options and their investment benefits If a Policyholder wants to make a fix deposit of matured policy amount such facility should be available with the company on primary basis A help line desk should be provided in the companys Office Premises to give instant attention to Policyholders queries/ complaints.


www.irdaindia.org www.reliancelife.com www.insuranceinstituteofindia.com www.lifeinsurancecouncil.com Life Insurance IC-33 Reliance Life Circulars. Reliance Life Agency Channels Report for the Year 2009-10



LIC was established under this Act. Section 30 of LIC of India Act, 1956. From the appointed day i.e. 1.9.1956.The Corporation will have the exclusive privilege of carrying on life insurance business in India. Certificate granted to any insurer under the Insurance Act, 1938 should cease to have effect from the said date. Now, these provisions of section 30 have been altered by incorporation of Sec30A through IRDA Act, 1999. As a result, the exclusive privilege given to the corporation to transact life insurance business has ceased .

The provision of Sec.30A is reproduced hereunder: Notwithstanding anything contained in this act, the exclusive privilege of carrying on life insurance business in India by the corporation shall cease on and from the commencement of the Insurance Regulatory and Development Authority Act, 1999 and the corporation shall, thereafter, carry on life insurance business in India in accordance with the provisions of the Insurance Act,1938(4 of 1938).

Constitution of LIC

LIC is a body corporate having perpetual existence and common seal. The corporation shall consist of such number not exceeding sixteen as may be appointed by the central Government. One of these members shall be appointed by the Government to be the Chairman of the Corporation. The Chairman is the Chief Executive of the Life Insurance Corporation of India. Actuarial Valuation. [Section 26] The corporation shall, once at least in every two years, have an investigation to be conducted by the actuaries into the financial condition of its life insurance business, including a valuation of its liabilities and submit the report of the actuaries to the Central Government.[Section 26] Form 1986, the valuation is done every year. As required under section 28, 95% of the surplus disclosed by the actuaries valuation is to be distributed among with-profit policy holders. The remainder shall be paid to the Central Govt. Chief Agents and Special Agents [Section 36] Contracts of chief agents and special agents were terminated by LIC with effect from 1.9.1956.

Policies guaranteed by Central Government. [Sec.37]

The sums assured by all policies issued by the corporation including any bonuses declared in respect thereof, shall be guaranteed as to payment in cash by the Central Govt.

Section 38.

LIC shall not be placed in liquidation save by Central Government and in such manner as the Government may direct.



1. Scope To permit private companies to enter the insurance market, Government has enacted Insurance Regulatory and Development Act, 1999 The Act was passed by the Parliament in December 1999 The act provides for the establishment of the authority 1. to protect the interest oh holders of insurance policy; 2. to regulate, p4romote and ensure orderly growth of insurance industry. 3. for matters connected therewith or incidental thereto. The Act also sought to amend the following Acts 1. The Insurance Act, 1938 2. The Life Insurance Corporation Act, 1956 3. The General Insurance Business (nationalization) Act, 1972 The Act applies to the whole of India including J&K states. INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA) 1. Under this Act, an Authority called Insurance Regulatory and

Development Authority (IRDA), has been set up. 2. This is a corporate body established for the purpose and object as set out in the explanation to the title. 3. The authority replaces Controller under Insurance Act, 1938. 4. The first schedule amends Insurance Act, 1938. 5. It states that if the Authority is superseded by central government, the Controller of insurance may be appointed till such time as the Authority is reconstituted.

Constitution of IRDA Insurance Regulatory and Development Authority, consists of the following members 1. a chair person; 2. not more than five whole time members; and 3. not more than four partime members to be appointed by the central government. Members should be persons of ability; integrity; and standing They should have experience in the field of 1. Life insurance 2. General insurance 3. Actuarial science 4. Finance 5. Economics 6. Law 7. Accountancy 8. Administration 9. Any other discipline thought to be useful by the central government Chairperson, members, officers and other employees of the authority shall be public servants.

Functions: 1. 2. 3. 4. 5. 6. 7. 8. To issue certificate of registration, renew, withdrawal, suspend or To protect the interest of the policy holders / insured in the manner To specify requisite qualifications, code of conduct and training for To specify code of conduct for surveyors / loss assessors To promote efficiency in the conduct of insurance business To promote and regulate professional organizations connected with To undertake inspection, conduct enquiries and investigations To control and regulate the rates, terms and conditions to be

cancel such registration of insurance contract with the insurance company insurance intermediaries and agents

the insurance and reinsurance business including audit of insurers and insurance intermediaries. offered by the insurer regarding general insurance business not so controlled by Tariff Advisory Committee 9. 10. 11. 12. 13. To specify the form and manner for the maintenance of books of To regulate investment of funds by the insurance companies To adjudicate disputes between insurers and intermediaries of To supervise the functioning of Tariff Advisory Committee To specify the percentage of life insurance business and General accounts and the statement of accounts


Insurance business to be undertaken in rural or social sector

Insurance Advisory Committee 1. The Authority can constitute insurance advisory committee through a notification 2. Chairperson of the authority shall be ex-officio 3. Insurance Advisory Committee shall consist of not more than 25 members, excluding ex-officio members to represent the interest of commerce, industry, transport , agriculture, consumer forum, surveyors, agents, intermediaries, organization engaged in the safety and loss prevention, research bodies and employees association in then insurance sectors 4. Members of the authority shall be ex-office members of the committee 5. The objects of the committee shall be to advice the authority on matters relating to the making of regulations under section 26, as also on such matters as maybe prescribed.

Jitendra Virahya s