Thursday, 9 March 2017


All credit rating agencies follow a specific step by step mechanism to do credit rating of the products specified by the client. The process of credit rating is very extensive and under it a detailed study is done considering various macro parameters. These parameters may include the changing political scenario, the pace of economic development and financial development of industry also. Any credit rating process starts only after the receipt of a formal request by the company which is willing to get rating of its financial products. The following steps are involved in this

1. Receipt of the request:- This is the first step of rating. First of all a formal request is received from the company which wants a rating for its financial products or any other instrument.Both rating agency and company enters into a formal agreement.The agreement contains very clearly that information provided by the company will be keep very confident by the credit rating agency. It is the right of the issuer company to accept or not to accept the credit rating done by the crefit rating agency. The issuer company is required to provide all material information to the credit rating agency for the rating process.

2.Assignment to analytical team:- Once a formal request is received by the credit rating ageny and an agreement is made then an analytical team is made for the purpose of rating. The team generally comprises of two members who are expert in the related business area and in the rating process.

3.Obtaining information:- The analytical team formed collects the all required information from client company.generally a list of various components is provided to the client about whom the analytical team looks for detailed information. Through the past experience and expertise of the team members they know which type  of information and meterial facts influence the credit rating of the company. generally the analytical team asks for the financial statement of the company, cash flow statement and other significant.

4. Plant visits and meeting with management :- A plant visit is always important to understand the operations of a client's business. Therefore a team visits the plants and understands the production runs, the machineries used, the equipments and technical facilities and the human capital working in the plants. The team also tries to understand the influence of various factors on the operations of the client. A discussion is also made with the issuer to know about his business and the information is not disseminated among the public .Several key issues are identified with regard to financial performance of the industry and issuer company ,the potential of industry, the technical aspects related to the operations and other financial data for a broad disscussion in the internal committee.

5.Presentation of findings:- Once the analysis is completed then it is discussed extensively in the internal committee of the rating agency. This committee comprises of senior analysts of the rating agency. After discussion a consensus is developed with the regard to the rating to the issuer and the findingsof this team is forwarded to the rating committee.

6.Rating committee meeting:- The rating committee finally assigns the rating. There is no direct involvement of the issuer company in the rating committee. The rating committe makes a thorough analysis of all the factors and then finalize the rating of the issuer company.

7.Communication of decision:- The grades assigned by the rating agency are finally communicated to the client coampny. With the rating grades all supportive documents are provided to justify the grade given by the company .If the issuer company is not willing to accept the grades given the either it can sak for review of the rating or it can simply rejected . If rating is rejected by the client company then this information is also kept completely confidential and not disclosed to any party.

8.Dissemination to the public:- If the issuer accepts the rating done by credit rating agency then this information is dissemination among the public through printed reports.

9.Monitoring for possible change:- The task of credit rating agency is not over with the dissemination of information regarding credit rating among the general public but it is also obliged to continuously monitor the rating assinged to a particular instrument of the client company.If there is any significant impact on the rating assigned to the financial instrument or any other product by he political movements of any other trend in the industry then rating must be reviewed by the rating agency and informed to the general public by published reports.


Wednesday, 8 March 2017


Credit rating is actually a financial service provided by an approved body which rates the various debt securities of the company according to a set model. Various symbols are assigned to various securities according to default rate risk involved in that debt security. Default risk is associated with the capability of a company to make regular payment of interest on any loan taken by it and timely repayment of principal amount. Further it must be noted that neither a credit rating agency ensures the guarantee of any financail performance of the company nor it ensures against price risk, interest risk or exchange rate risk. It means if a debt instrument is rated very good then it does not mean that the investor will be able to earn huge capital gain by investing in the securities of that company. It only facilates the investors to take decisions on the basis of ranks assigned to various debt instruments in the form of various codes or symbols. The investors can analyze these ratings of debt instruments with high risk return perceptions. But no doubt that rating agencies helps to know the quality of credit risk involved in debt instruments and the rating of the debt instruments is done after a detail analysis of various important parameters of performance of a company.

    In nutshell , credit rating

* does not give any guarantee of price volatility and interest rate risk

* tells about credit risk only

* does not mean any recommedation of purchase of rated security

* does not ensures the liquidity of market

* should be used as a one parameter to take investment decision in addition to other parameters.

             A credit rating agency charges fee for providing the rating services to a company which is interested to get its debt instrument rated. If a company is in a good financial state then the company itself takes initiative to get its debt instruments rated. Because of the good rating of the securities of a company it gives further boost to the reputation of the firm and may help in raising further capital through debt instruments of other instruments. Although  there is no compulsion on the commpany to get its securities rated expect for certain instruments but if it is done it gives added information to the existing and potential investors to maintain faith in the financail help of the company .There is a possibility that same security is rated differently by different rating agencies. It only depends on the parameter and process consider by a rating agency to rate the securities. In addition to this rating agencies keep on tracking the performance of the company as per the rating methodology of the agency and if revised rating is required then the same is done and informed to the desired parties. Many times the rating agencies publish data regarding the performance of several securities of different companies at their own also but it is done as per the set system prevaling in an economy . To summarize it can be said that the credit rating is aimed----

* To reduce the information asymmetries prevailing in the market by providing information about the rated securities to various users of such information

* To help the investors to determine the creditworthiness of the issuer of securities by conducting research

* To solve the principal-agent problem by limiting the amount of risk that an agent take on behalf of principal

* To help portfolio managers

Tuesday, 7 March 2017


The indian financial system was organised up to 1970s. Fragmented and less transparent stock and commodity spot and futures markets with limited volume of trade were prevalen. The capital account was closed . The commodity derivative market had a large number of trade defaults during the period of three consecutive drought years and was closed in the latter part of the 1960s. With the nationalisation of the fourteen major private sector banks on July 1969, the indian banking system became predominantly owned by the goverment. Intrerest rates were controlled by the Reserve Bank of India. Elaborate price and quantity Controls were enforced on the financial sector. Large public sector monopolies dominant the financial service sector.
          The state developed monolithic finance companies to provide finanacial services. Development financial insititutions [ Industrial Development Corporation of india-1948, Industrial developmet bank of India-1964, state Financial Corporation], incurance [Life Incurance Corporation-1956, General Incurance Corporation-1973] and fund management [ Unit Trust of india -1964 for mutual funds] were established . however ,they were monopolies in their respective areas of functioning . These public sector organnisation had rigid investment gudielines.

           The controller of capital Issues [CCI] dicated whether ,and what price ,firms could sell shares to the public in the primary market. The secondary market witnessed scams and irregularities but, the price discovery was also relatively free in the secondary market.
              The following key weakness were found in the pre-liberlization period in the financial sector in india.

* Interest rates were administrative and pegged at unrealistically low levels. Resources were widely drawn from the banking system, to finance fiscal deficit.

* The banking industry was predominately public sector in the nature and the participation of the private sector was negligible. the quality of the banking system ,to the was largely determined by the public sector banks.

* Insurance sector was under the state monopoly. A limited range of life and non-life insurance products was avaliable to the public. Financial products which combined the features of life insurance and equity related instruments were inadequately developed.

* Mutual fund industry was also a public sector monopoly in terms of the both the number of funds and their market share till 1992.

* Foreign firms were not permitted to operate in insurance sector or mutual fund industry.

* Banks, pension fund and insurance companies were forced to purchase goverment bonds as their primary investments.

* There were no financial derivative market except the presence of a small currency forward market and local commodity derivatives markets.

* Prudential regulations were not adequate in the financial sector.

* Debt and money markets were not fully developed.

* Institutional and technological structure in the capital markets were outdated. Bombay Stock Exchange [BSE] did not have appropriate structures for governance and regulation.

* Limited usage of bank cards prevailed among the customers.

* The balance of payment crisis of the 1990s threatened the international credibility of the country. Non-debt capital inflows were required to fund the account deficit.

* Foreign equity capital through FDI and portfolio investment was neded for accelerating industrial growth.

* There was considerable growth in the size of the stock market and investment culture. This required regulations to protect investors'interests.

Sunday, 5 March 2017


The evolution of mutual fund industry in india tookplace with the establishment of Unit Trust of India in 1963. In the initial years private sector was not allowed to launch mutual funds.It was only in 1993 that private sector and foreign institutions were alloed to establish mutual funds in india. In india , mutual funds are established under the guidelines of SEBI[Security Exchange Board of India].

*Evolution of mutual funds in india:-

* Phase 1[1964-1987]:Establishment of Unit Trust of India

UTI[ Unit TRust of India] was established on 1963 by an Act of Parliament . US 64[Unit Scheme 1964] was the first scheme launched by UTI. Earlier the UTI was established under the regulatory and administrative control of Reserve Bank of India but in 1978 ,the Industrial DEvelopment Bank of India[idbi] took over the regulatory and administrative control of UTI. At the end of 1988 UTI had Rs 6,700 crores of assets  management .

*Phase 2 [1987-1993]: Enrty of public sector banks

In 1987 mutual funds were launched by public sector banks[SBI was first public sector bank followed  by Canbank launched mutual fund in 1978] and Life Incurance Corporation Of india [LIC] in june 1989 and General Incurance Corporation Of india [GIC] in December 1990. In 1989, Punjab National Bank [August 1989] and Indian Bank[November 1989] started their mutual fund schemes followed by Bank of India[ June 1990] and Bank of Baroda[Oct]

*Phase 3[1993-2003]: Entry of Private sector banks

A reform era took place in 1993 in mutual fund industry in india.It was the year private sector was allowed to enter in mutual fund industry as well as various regulations for mutual fund scheme came in to practice under the control of SEBi [Mutual Fund Regulation 1993 and all mutual fund schemes came under the regulations expect UTI.Kothari Pioneer [ now merged with Franklin Templetion] was the first private sector mutual fund registered in 1993. In 1996,SEBI[Mutual Fund] Regulations 1996 came into existences which were more comprehensive than the erlier regulations. During this phase there were a total of 33 mutual fund schemes with total assets of Rs:121805 crores.

*Phase 4[2003 onwards]: Growth and SEBI Regulation

In February 2003 , the Unit Trust of India Act, as bifurcated into two seprate entities. The assets representing the US 64 scheme was announced as the undertaking of Unit Trust of  india and it is functioning under the administration and rules framed by Goverment of India. The second is the UTi Mutual Fund, sponsored by SBI, PNB<BOB and LIC. It is registered with the SEBI and functions under the mutual Fund Regulations of SEBI.The initiatives took place in the begining of this phase has led to current growth and cosolidation of mutual fund industry in india.

Thursday, 2 March 2017


Every investor has his/her own risk perception and objectives of investment. Some of the investors are high risk taker and they expect higher returns for the reward of higher risk taking capacity and similarly others are happy with moderate  returns with lesser amont of risk. Similarly on the basis of time duration also there can difference in the investment criteria of the investors. All the iinvestors are not interested in very long term or medium term investment but they want to invest for short period of time.But all of the investors are attracted by mutual fund schemes because of the facility of professional various schemes are launched by mutual fund company. Any of the scheme offered by mutual funds can either be ope ended,close ended or an interval scheme.


1.Open-ended scheme:- An open-ended scheme has no fixed date of redmption.An investor buying an open- ended scheme is available for the investors after New Fund Offer[NFO}.There is no fixed end date.The investors can buy and sell the units of mutual fund at the reported Net AssetValue[NAV] of the fund.The fund sells and repurchase the units of mutual fund and if the mutual fund is form the fund.The liquidity is the main advantage of these types of funds.The total value of the open ended keeps on changing depending on the buying and selling activities of the unit holders.

Examples:- Axis Long Term Equity Fund-Dividend,Bharti AXA Tax Advantage Fund-ECO PLan ,Birla Sun Life Tax Plan Dividend Option,M Tax Gain Fund-Dovidend option,Kotak Tax SAver-scheme-Dividend,etc.

2.Close-ended scheme:-As the name suggests in case of close-ended scheme the redemption date of the fund is fixed and the investors cannot purchase the units of a close end scheme after the New Fund Offer{NFO}. The buying and selling of the close ended schemes take place among the unit holdrs thmselves.These schemes may be listed on the stock exchange to provide the liquidity to the investors. Therefore ,the investors can buy and sell standard lot of mutual fund scheme at the listed NAV[Net Asset Value] of the fund. These funds are more manageable on the part of fund managers because they can strateize the fund investment till the date of maturity .

Examples:-ICICI Prudential R.I.G.H.T. Fund  Dividend ,ING Optimix Retireinvest Fund Series1-Dividend

3.Interval schemes:- These types of schemes have combined features of above two schemes. The interval schemes are close-ended but are also open for a specific period whih is already mentioned in the offer document. Generally these schemes are kept open ended for a minimum perod of 15 days and the investors need not to completely depend on the stock exchange to buy and sell the units of such schemes. These schemes may be listed on the stock exchanges. The Minimum duration to keep such schemes open ended are specified as per the guidelines of SEBI in India.

4.Equity funds:-Equity funds invest in equity shares of various companies. Equity shares are relatively higher risky avenues than debt securities and hybird securities therefore these funds are also riskier than debt funds. The equity funds can invest in equity stocks of a specific industry or in equity stocks of diversified industries depending on the feature of the equity scheme.

Examples:-Axis Long Term Equity Fund-Dividend,UTI equity fund ,Reliance equity funds, etc.

5.Income/dividend yield schemes:-These schemes invest in those equity stocks which have sound track record of past performance are less volatile on the stock market. The stocks which good dividend history are included in such mutual funds.

Tuesday, 28 February 2017


1. Administrative costs:-Mutual fund make huge payment to the Asset Management Company[AMC] for the management of fund.Similarly other service providers are also paid for the services they provide. These costs are charged from the total value of the fund despite the performance of fund. A large number of mutual fund schemes are launched by a mutual fund company but all such schemes do not perform well every time but these expenses are always deducted from the total assets of the fund and overall wealth of the unit holders is reduced.

2.Cost o fund management:- The mutual funds charge money from investors whenever they buy and sell the units of mutual fund known as entry load and exit load .This cost is above the cost of fund management and it increases the overall cost an investor has to bear.

3.Over-diversification:-Diversification of fund's portfolio is a good strategy opted by mutual fund managers.But many times due to over diversifiction the benefits obtained by some good securities are neutralized by the less performance of other securities in the portfolio and ultimately it reduces the overall assets of the fund.

4.Problems in tax planning:-The individual investor's tax liability is not considered by fund managers. The fund managers simply sell the security which results into huge loss.

5.No charge for non-performance:-The biggest incentive for investors to invest in mutual fund is the professional management of portfolio which an individual investor cannot do.But there is no provision or charge against the non-performance of fund leading to reduction in the  total assets of the fund.


Mutual funds provide various types of benefits to investors. Due to this there has been a tremendous growth in mutual fund industry in india  and world over.It is because of mutual fund schemes that common illiterate investor can take the benefit of a diversified portfolio in the stock market products. The following are main reasons of benefits to the investor.

1.Diversification:- Every mutual fund scheme invests in a good number of investment securities diversified within and among the industrial segments which gives the benefits of reduced risk to the investors. Creating a diversified portfolio is very difficult for an Individual investor.

2.Professional management:- Mutual fund schemes are managed by professional management which results in higher retruns on these schemes. The professional managers are well qulified and experienced about the prevailing market conditions and financial instruments.

3. Liquidity:- Most of the mutual fund schemes are listed in the stock exchanges and therefore  these schemes provide adequate liquidity to the investor depending on the structure of such scheme[whether open ended or close ended]. Moreover it is not possible for the investor to buy and sell stocks of companies of their own discreation.

4. Divisibility:- Mutual funds provide the facility of buying big stocks with small investment by the investors.An investor can buy only a standard size of any security listed in the stock exchange and many times the investor needs to invest in huge amount to purchase the stocks of good company. By simply buying a mutual fund scheme the investors'funds are invested in various securities of large number of investors and then these funds are collectively invested in stock market products.

5.Tax advantage :- The investors can get tax advantage in two ways. On one side by buying an ELESS the investors can save tax as his/her taxable income gets reduced . On the other hand the investors can defer their tax liability by choosing a scheme for a longer duration in which the money of the investor gets manifold and grow faster than other avenues of investment.