information about derivatives

What is a Futures Contract?

Futures contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organised/standardised contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement entails paying/receiving the difference between the price at which the contract was entered and the price of the underlying asset at the time of expiry of the contract.

What is an Option contract?

Option contract is a type of derivatives contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer/holder of the option, purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.

Under Securities Contracts (Regulations) Act, 1956 options on securities has been defined as "option in securities" means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities. An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.

Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame.

As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.

What are Index Futures and Index Option Contracts?

Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.

An index in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy (Sectoral Index).

By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on expiry.

What is minimum contract size?

The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market.

What is the lot size of a contract?

Lot size refers to number of underlying securities in one contract. Additionally, for stock specific derivative contracts SEBI has specified that the lot size of the underlying individual security should be in multiples of 100 and fractions, if any, should be rounded off to the next higher multiple of 100. This requirement of SEBI coupled with the requirement of minimum contract size forms the basis of arriving at the lot size of a contract.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

valuable information on mutual funds

Frequently asked Questions about mutual funds

How do I invest in a scheme of a mutual fund?

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms, filled application forms can be deposited with mutual funds through these agents/distributors etc. Now a days post offices and banks also distribute the units of mutual funds. However, you may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them.

How do I fill up the application form of a mutual fund scheme?

You must mention clearly your name, address, number of units applied for and such other information as required in the application form. You must give your bank account details so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account details etc at a later date should be informed to the mutual fund immediately.

Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

How much should I invest in debt or equity oriented schemes?

It is for you to decide as to how much to invest where but you should take into account your risk taking capacity, age, financial position, etc. before making any investment. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks.

What should I look for into an offer document?

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. You should read the whole offer document very carefully. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed.

When will the investor get certificate or statement of account after investing in a mutual fund?

Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

What is sales or repurchase/redemption price?

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if any. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if any.

What is an assured return scheme?

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Can a mutual fund change the asset allocation while deploying funds of investors?

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

How do I know where the mutual fund scheme has invested money mobilised from the investors?

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.

Can a mutual fund change the nature of the scheme from the one specified in the offer document?

Yes.However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme from close-ended to open-ended scheme and in case of change in sponsor. The mutual funds are required to inform about any material changes to their unitholders.

At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.

How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.

In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

How do I know the performance of a mutual fund scheme?

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. NAV of mutual funds are required to be published in newspapers.The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place. The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

Is there any difference between issue of a mutual fund and an initial public offering (IPO) of a company?

Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

If schemes in the same category of different mutual funds are available, should I choose a scheme with lower NAV?

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs.10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc.

How do I choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

Are the companies having names like mutual benefit the same as mutual funds schemes?

You should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.

Is the higher net worth of the sponsor a guarantee for better returns?

In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.

Where do I look out for information on mutual funds?

Almost all the mutual funds have their own web sites. You can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. You can also log on to the web site of SEBI i.e. www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.

How can I redress my complaints?

You would find the name of contact person, in the offer document of the mutual fund scheme, whom you may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. You can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.

information on collective investment schemes

What is a Collective Investment Management Company (CIMC)?

A Collective Investment Management Company is a company incorporated under the provisions of the Companies Act, 1956 and registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999, whose object is to organise, operate and manage a Collective Investment Scheme.

Can an existing Collective Investment Scheme raise further funds?

An existing Collective Investment Scheme cannot launch any new scheme or raise money from the investors even under the existing scheme, unless a certificate of registration is granted to it by SEBI. In other words, after notification of regulations an existing collective investment scheme, even after obtaining provisional registration as well as after obtaining credit rating cannot mobilise funds from the public unless a certificate of registration is granted to it by SEBI.

Under what circumstances a company registered as a CIMC can raise funds from the public?

A registered CIMC is eligible to raise funds from the public by launching schemes. Such schemes have to be compulsorily credit rated as well as appraised by an appraising agency. The schemes also have to be approved by the Trustee and contain disclosures, as provided in the Regulations, which would enable the investors to make informed decision.

A copy of the offer document of the scheme has to be filed with SEBI and if no modifications are suggested by SEBI within 21 days from the date of filing then the CIMC is entitled to issue the offer document to the public for raising funds from them.

Will the unit certificates be listed on Stock Exchanges?

Yes, they have to be compulsorily listed on the Stock Exchanges as mentioned in the Offer document.

Are the investors entitled to receive information about the schemes where they have invested and at what interval?

The investors are entitled to receive a copy of the Balance Sheet, Profit and Loss account and a copy of the summary of the yearly appraisal report from CIMC, within two months from the closure of the financial year.

Further, the scheme wise annual report or an abridged form thereof has published in a national daily as soon as possible but not later than two calendar months from the date of finalisation of accounts.

Also, scheme wise un-audited quarterly financial results have to be published in a national daily by CIMC within one month from the close of each quarter.

Does filing of offer document of a scheme by a CIMC with SEBI mean that investment in that scheme is safe and sound?

It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme for which the offer document has been filed or for the correctness of the statements made or opinions expressed in the offer document.

It is the responsibility of the CIMC to ensure that the disclosures made in the offer document are generally adequate and are in conformity with the Regulations.

Under what circumstances can an existing Collective Investment Scheme be wound up?

An existing collective investment scheme which failed to make an application for registration, or was not desirous of obtaining provisional registration, or has not been granted provisional registration, or having obtained provisional registration fails to comply with the provisions as laid down in the Regulations, was / is required to wind up the existing scheme (s).

What is the procedure for winding up of an existing Collective Investment Scheme?

First of all an existing collective investment scheme has to send an information memorandum to the investors who have subscribed to the schemes, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined.

The said information memorandum has to be dated and signed by all the Directors of the scheme. The information memorandum has to explicitly state that investors desirous of continuing with the scheme will have to give a positive consent, within one month from the date of the information memorandum, to continue with the scheme.

If, positive consent to continue with the scheme is received from only 25% or less of the total number of existing investors, the scheme shall be wound up and payment be made to the investors within three months of the date of the information memorandum.

What are the redressal mechanisms available to me, if I have invested in Collective Investment Schemes before the date of notification of the Regulations (i.e. before October 15, 1999)?

You may note that many of the existing collective investment schemes had collected funds from the public prior to coming into force of the regulatory jurisdiction of SEBI and any action by SEBI against defaulting entities does not necessarily ensure the refund of money invested by the investors in such entities.

If I have invested in CIS before notification of regulations does SEBI guarantee repayment of money now?

As a regulatory body SEBI can not guarantee or undertake the repayment of money to the investors.

Whom should I approach for Grievance Redressal?

You should approach CIS in this regard. If you do not get satisfactory response thereto you may write to SEBI. Further, you can approach district consumer redressal forums in case entities fail to honour their commitments or for any deficiency in service. For bouncing of cheques, investors can move the courts under section 138 of the Negotiable Instruments Act as the right to file criminal complaint exclusively vests with the beneficiary of the cheque.

Investors should further note that wherever they do not have a right to the land or to the produce arising out of the land such investment may be a deposit and where a company fails to repay the deposits, it attracts the provisions of section 58A of the Indian Companies Act, 1956. It is clarified that SEBI has no jurisdiction over such deposits.

What are the mechanisms available to an investor to know about the registration status of various entities either existing or new?

On grant of registration as a collective investment management company, SEBI shall issue a Press Release giving the name and address of the entities which have been granted registration. Further, the same shall be posted on the SEBI website: www.sebi.gov.in

What are the penal provisions if a registered collective investment management company violates certain provisions of the Regulations?

If, a registered collective investment management company violates certain provisions of the Regulations, then action in terms of suspension/ cancellation of

certificate may be initiated against the entity.

Further, SEBI may, in the interests of the securities market and the investors, initiate criminal prosecution under Section 24 of the SEBI Act, apart from passing of directions such as

1. requiring the person concerned not to collect any money from investor or to launch any scheme;
2. prohibiting the person concerned from disposing of any of the properties of the scheme acquired in violation of the Regulations;
3. requiring the person concerned to dispose off the assets of the scheme in a manner as may be specified in the directions;
4. requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme;
5. prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period

Investors may please note that answers given here are general in nature. The questions and the answers have been structured to enable the readers to gain a broad understanding of SEBI (Collective Investment Schemes) Regulations, 1999. For exact details the reader is advised to refer to the SEBI (Collective Investment Schemes) Regulations, 1999 which are available on our website. Readers may also note that these answers do not aim to explain the Regulations in force, since answers to questions involving particular case / fact pattern may depend upon administrative decisions and Court orders, if any, in respect of the same.

sailor

S : Sailing problem
A : Accommodation problem
I : Income problem
L : Leave problem
O : Officer problem
R : Release problem

problems

Every one in this world has their own good and difficult problems. If you are expecting any help from others you are going to suffer. Do not expect that any body will come for your help . No you are alone for all your problems . This world is friend when you are happy, not when you are in troubles. So prepare to tackle all problems by yourself. Equip your self with what ever you can gather and collide head on with the problem. Think of the rocks at the sea bed . They do not fear the waves. Stand like a rock. The problem will come and get destroyed by itself , if you are strong.

do not make enemies

If you do not like a person do not tell him on his face. Do not make enemies. In this present day world good friends are hard to get. So even if there are no good friends it is better if you do not have enemies. Just remember most of the people do not believe good things. Most of them oppose good things at the start. So if you tell some thing for their benefit they do not hear . So do not tell any body any thing about their improvement. Let them learn. If you tell any thing and they do not hear you will feel bad. Why that pain for you ? No logic isn't it.

help others

Whole world is full of people who had an urge to satisfy their ego. Just be different. You help others. Helping is divine. Help others without expecting any favor or recognition. Try to control your ego. You will stand apart from the crowd. Start helping others.