Packaged Products and Other Securities

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Packaged Products and Other Security Types BUSINESS L1 REFRESHER Training i-Nautix

Course Outline:

Course Outline Mutual Funds Exchange Traded Funds Unit Investment Trusts Hedge Funds Depository Receipts Real Estate Investment Trust Annuities FX & Treasury 2

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3 Section 1 Mutual Funds

Mutual Funds:

Mutual Funds Definition: A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities Investors get share of the fund in proportion to their contribution to the fund. Mutual funds are managed by professionals who employ an investment strategy to meet the objectives(goal, growth, current income etc) stated in the prospectus. 4

Mutual Funds (Cont’d):

Mutual Funds (Cont’d) Advantages : Diversification: Reduce risk by offsetting losses from some securities with gains in other securities. Professional Money management : In-depth market research and analysis is performed when choosing the fund's investments. Liquidity: Fund shares can be liquidated upon request any day that the stock market is open Convenience: Many funds have relatively low initial investment requirements, automatic purchase plans, and automatic dividend reinvestments. Disadvantages : No involvement in the decision-making process: With a mutual fund, the portfolio manager makes all the decisions on buying and selling individual securities for the fund. Taxes: You may have to pay taxes for capital gains and/or income distributed by the fund during the course of the year. Risk and reward: Limit the potential appreciation of a single security. 5

Mutual Funds Types By Flexibility:

Mutual Funds Types By Flexibility Open Ended Funds Investors buy and sell shares back to the fund itself There is no limit on the number of shares the fund can issue Units trade at NAV and same price for all orders – no matter what time of day the order to buy or sell was entered. Closed End mutual funds Issue Fixed no. of units Units traded in exchange & OTC’s and redeemed only on termination. Unit price largely demands on supply demand conditions and trade at par or premium or discount to NAV. Premium / Discount (%) = (Market Value - NAV) / NAV 6

Mutual Funds Types Investment Objective :

Mutual Funds Types Investment Objective Equity Funds Invest in Equity with the primary purpose being to provide growth of capital For investors with longer-term investment horizon and higher risk appetite Balanced Funds Invest in a mix of stocks, bonds and money market instruments For investors looking for a mix between growth of capital and current income Bond Funds The main goal of these types of funds is to provide current income by investing in U.S. government, corporate or municipal debt obligations Money Market Funds These are the lowest-risk investment among all mutual funds in that they represent short-term investments in large, creditworthy banks and corporations However, they tend to provide the lowest returns. The main objective is to maintain a stable share price to protect capital 7

Mutual Funds Types – Load:

Mutual Funds Types – Load Front End Load Funds where a commission or sales charge applied at the time of the initial purchase Deducted from the investment amount and, as a result, it lowers the size of the investment Back End Load A fee (sales charge or load) that investors pay when selling mutual fund shares within a specified number of years. The fee amounts to a percentage of the value of the share being sold The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero No-Load No load funds do not impose any sales charges on investors 8

Mutual Funds Types - Example:

Mutual Funds Types - Example On 1st Jan ABC fund has a NAV = $12. The front-end and back end load for the fund is 3% . On 1st Jan The Offer price would be 12 + ( 3% of 12 ) = 12.36. An investment of $1000 would give 80.91 units. On 31 Jan the NAV is $14. The Selling price would be $14 - ( 3% of 14 ) = $13.58. Upon redemption of 80.91 units investor would get $1098.76. Nett Gain for investor is $1098.76 - $1000 = $98.76 Nett Yield or Gain % = (98.76/1000) X100 = 9.876% 9

Mutual Funds :Net Asset Value :

Mutual Funds :Net Asset Value NAV is mutual fund's price per share and is calculated by dividing the total value of all the securities in its portfolio, by the number of fund shares outstanding. Net of market value of assets at the end of trading day and liabilities to number of outstanding units. NAV is calculated at the close of business each day using the closing market value of the individual assets held by the fund. 10 Stock Price Quantity Amount ABC $20 100 $2,000 CDE $25 100 $2,500 DEF $15 100 $1,500 Total $6,000 Total Units 300 NAV $20 Stock Price Quantity Amount ABC $22 100 $2,200 CDE $23 100 $2,300 DEF $12 100 $1,200 Total $5,700 Total Units 300 NAV $19 Day 1 Day 2 Example :

Mutual Funds : Ordinary Dividend and Capital Gain Distributions:

Mutual Funds : Ordinary Dividend and Capital Gain Distributions When funds pass dividend and capital gains distributions on to shareholders, the nav drops by the amount distributed. although the nav drops, the value of investment does not change. dividend and cg distribution by mf can be Reinvested Withdrawn. Example : Investor A buys 50 units of a fund for $500; each unit has a NAV of $10.The mutual fund later makes a capital gain distribution of $1 per unit and an ordinary dividend distribution of $1 per unit; the total distribution is $2 per unit. A then receive a dividend of $100, and the NAV would drop to $8 per unit. The total value of 50 units would then be $400; however, will still total $500 ($400 unit value plus $100 dividend). A can reinvest the dividend and buy 12.5 addition units at $8 a unit. The value of your units would return to $500, and you would have 62½ units. If A does not reinvest, he will still have 50 units worth $400, plus $100 in cash. 11

Mutual Funds : Regulation Share Pricing:

Mutual Funds : Regulation Share Pricing NAV determination at the end of a given business day based on closing prices of underlying securities. Transmitted after Exchange closes. Mutual fund Unit Share prices are determined by assessing the fund's net asset value (NAV). The NAV reflects the current market values for all the securities in the fund's portfolio Unit Price based on FE loads 12 2. Exchange Traded Funds (ETFs)

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13 Section 2 Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs):

Exchange Traded Funds (ETFs) A type of security that tracks an index, a commodity or a basket of assets Listed and Traded on Stock exchanges Provides diversity of a fund along with features of a stock like the ability to short and trade on margin Benefits: Low costs as they are passively managed Flexibility to buy and sell unlike Mutual Funds or Unit Trusts Caveats: Passive management Credibility of the underlying assets 14

Exchange Traded Funds (ETFs) - Types:

Exchange Traded Funds (ETFs) - Types Major types of ETFs, Index ETF ETF that follows a specified benchmark index. Ex: Spider (SPDR) track S&P 500 Currency ETF ETF based on a single currency or a basket of currencies. Ex: Euro ETF, Yen ETF Commodity ETF ETF based on the value of an underlying commodity. Ex: Gold ETF Bond ETFs: ETF based on bonds Actively managed ETFs (AMETFs): Quite recent in nature. The very first AMETF was offered in March 2008 15

3. Unit Investment Trusts:

3. Unit Investment Trusts Characteristics: An exchange-traded mutual fund offering a fixed (unmanaged) portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors Fixed : Investment in Portfolio of Financial Instruments Fixed no. of Units Portfolio composition is maintained till the end. Passive Management of the fund and hence less Management fees. Portfolio dissolved on maturity date and paid in proportion to unit holders Caveats: Under extra-ordinary circumstances portfolio is re-visited and changed. Investors can redeem to sponsors close to NAV’s 16

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17 Section 4 Hedge Funds

Hedge Funds:

Hedge Funds Investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. Investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. Invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. Employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage. Fund managers invest their own money in the fund they manage, which serves to align their interests with investors in the fund. Less regulation as they deal with institutional investors or High Net worth Individual investors. Regulations passed in the United States and Europe after the 2008 credit crisis are intended to increase government oversight of hedge funds and eliminate certain regulatory gaps. 18

Hedge Funds (Cont’d):

Hedge Funds (Cont’d) Exceptions for Hedge Funds Need not register with SEC Need not be liquid on a daily basis No daily pricing of funds Need not disclose asset allocation on a periodic basis Risks with Hedge Funds Systemic risk refers to the risk of instability across the entire financial system, Transparency : As private, lightly regulated entities, hedge funds are not obliged to disclose their activities to third parties. Performance statistics for individual hedge funds are difficult to obtain, as the funds have historically not been required to report their performance to a central repository and restrictions against public offerings and advertisement have led many managers to refuse to provide performance information publicly 19

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20 Section 5 Depositary Receipts (DRs)

Depositary Receipts (DRs):

Depositary Receipts (DRs) Financial instrument issued by a bank representing a foreign company’s publicly traded shares Trades on the local stock exchange Makes it easier to buy shares in foreign companies The shares don’t leave their home state Benefits: Access to foreign markets for investors Access to global capital for firms Caveats: Subject to Currency and Political risk 21

Depositary Receipts (DRs) - (Cont’d):

Depositary Receipts (DRs) - (Cont’d) Two major types of Depositary Receipts American Depositary Receipts (ADRs) Issued by a US bank Represents a specified number of shares of a foreign company that is traded on US stock exchange The capital gains and dividends are realized in dollars Global Depositary Receipts (GDRs) Issued by a number of banks globally (more than one country) Represents a specified number of shares of foreign company An international bank uses its branches in various countries to achieve this 22

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23 Section 6 Real Estate Investment Trust (REITs)

Real Estate Investment Trust (REITs):

Real Estate Investment Trust (REITs) Funds with real estate properties or mortgages as underlying securities Traded on stock exchanges Distributes 90% of its income (rent from real estate) to shareholders Benefits: Easy liquidation of real estate assets Tax benefits in most of the countries Historically produced high yields Caveats: Subject to the volatility of interest rates (mortgage loans) Less income reinvestment scope 24

Real Estate Investment Trust (REITs):

Real Estate Investment Trust (REITs) Major REIT types, Equity REITs Invest and own properties. Own an equity in the property Revenues are from properties’ rents and capital appreciation of the property Mortgage REITs Invest and own property mortgages. Loan money for mortgages to property owners Revenues are from the interest from mortgage loans Hybrid REITs: Combine the strategies of both Equity and Mortgage REITs 25

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26 Section 7 Annuities

Annuities:

Annuities A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Suitable for investors with low risk tolerance Primarily used as a means of securing a steady cash flow for an individual during their retirement years. Fixed Annuities: Provide fixed Periodic Payments to the annuitant . Investment of the Annuity is largely into fixed income securities. Variable payments: The intent of variable annuities is to allow the annuitant to receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. Portfolio can comprise of combination of bonds and equity. 27

Annuities (Cont’d):

Annuities (Cont’d) Immediate Annuity Investor contributes a lump sum to the annuity account and immediately begin receiving regular payments, which can be a specified, fixed amount or variable depending upon your choice of annuity package and usually last for the rest of investors life. Chosen when investor has experienced a one-time payment of a large amount of capital, such as lottery winnings or inheritance. Convert a cash pool into a lifelong income stream, providing a guaranteed monthly allowance for your old age. 28

Annuities (Cont’d):

Annuities (Cont’d) Deferred annuities Structured to meet a different type of investor need - to contribute and accumulate capital over working life to build a sizable income stream for retirement. The regular contributions made to the annuity account grow tax sheltered until you choose to draw an income from the account. This period of regular contributions and tax-sheltered growth is called the accumulation phase. E.g.: Pension plan , Child education plan etc.. 29

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Section 8 Foreign Exchange & Treasury 30

Foreign Exchange (FX) :

Foreign Exchange (FX) Foreign Exchange Market Conventions Exchange of Currencies on a specified date EUR USD 31 COUNTERPARTY A COUNTERPARTY B

Foreign Exchange:

Foreign Exchange Over the Counter (OTC) Market Volume > $2000 billion a day Large Players exchange currencies: Banks Corporations Investors Governments Monetary Authorities Virtually a 24X7 market 32

Why does an FX Market exist?:

Why does an FX Market exist? Currency Conversion Trade Companies receiving payment in foreign currencies need to convert to their local currency Companies paying foreign businesses for goods and services Capital Flows Investors investing/divesting in a foreign country Companies borrowing/repaying funds in a foreign currency Speculation to take advantage of changing exchange rates 33

Expressing Exchange Rates:

Expressing Exchange Rates A foreign exchange rate is a means of expressing the value of one currency (called base currency) in terms of another (called counter currency) Quote Base Counter USD/INR 1 USD= 62 .00 INR USD/JPY 1 USD= 99 .6995 JPY 34

Foreign Exchange Instruments:

Foreign Exchange Instruments Spot FX Currency Exchange on the current ‘value date’ Forward FX Currency Exchange on a specific ‘future’ date at an agreed rate FX Swap Simultaneous purchase and sale of a given amount of FX for two different value dates FX Option Right without obligation to exchange currencies on a specific future date at an agreed rate 35

Foreign Exchange Market Participants:

Foreign Exchange Market Participants Banks as Market Makers Price Takers Investment Managers Central Banks Corporations Individual Investors Other Financial Institutions Other supra nationals 36

Market Makers:

Market Makers Market Making Banks Quote buy & sell prices, without necessarily knowing what price taker will do Inter-temporally long or short of a currency Success driven by: Risk Management & Control Position in Market Ability to draw offsetting buyers & sellers Bid-offer spread is reward for providing liquidity to markets Buy at bid Sell at offer (ask) 37

Methods of Trading Currencies:

Methods of Trading Currencies Telephone Reuters Dealing System Via Brokers Electronic (EBS & Reuters) Voice (traditional) Via Electronic Network FXAll Currenex Bank Proprietary Systems 38

Treasury:

Treasury A treasury department is responsible for managing risks and liquidity for an organization It deals with cash flow projections and invests the surplus money to generate additional return on equity It is basically profit centre of an organization The person heading the Treasury operations is called the Treasurer A treasury can deal with FX, Money & Debt Market Instruments, Equity, Bond, Commodities, Derivatives or a combination of all these financial instruments For a bank it is a very important place for additional cash generation and managing interest rate and currency risks 39

Primary Role of a Treasury:

Primary Role of a Treasury Cash Forecasting Working Capital Management Cash Management Investment Management Treasury Risk Management Management Advice Credit Rating Agency Relations Bank Relationships Fund Raising Credit Granting Other activities like systems integration in M&As 40

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41 Q & A

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42 Thank You

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