SECURITIZATION

AND MUTUAL
FUNDS
Unit 2
Prof. Vidya CM
 Disclaimer: The PPTs are for classroom discussion only

Topics covered
➢Securitization of debt-
➢ Meaning-Features- Special Purpose Vehicle- Pass Through Certificate & mechanism –Benefits of
Securitization – Issues in Securitization
➢Stock Broking:
➢ introduction, bodies Regulating Stock Broking Firms-Functions of Stock Broking Firms - Services of
Depository and functions -Stock lending and Borrowing
➢Mutual fund:
➢ Types of Mutual Funds
➢ Advantages of mutual funds - Exchange Traded Funds-Trust-AMC-Custodians-Sponsor – Hedge
funds- Regulations on mutual funds in India- Net Asset Value - Selection of a Fund – Performance
Evaluation of Mutual funds.
Securitization of debt
◦ The process of securitization typically involves the creation of pool of assets from
the illiquid financial assets, such as receivables or loans which are marketable. In
other words, it is the process of repackaging or bundling of illiquid assets into
marketable securities. These assets can be automobile loans, credit card
receivables, residential mortgages, or any other form of future receivables.
◦ “Securitization is a process by which a company clubs its different financial
assets/debts to form a consolidated financial instrument which is issued to
investors. In return, the investors in such securities get interest.”
Mechanism of Securitization
◦ Creation of Pool of Assets - The process of securitization begins with the creation of
a pool of assets by separation of assets backed by similar types of mortgages in
terms of interest rate, risk, and maturity.
◦ Transfer to SPV - Once assets have been pooled, they are transferred to a Special
Purpose Vehicle (SPV) specially created for this purpose.
◦ Sale of Securitized Papers - SPV designs the securitized instruments based on the
nature of interest, risk, tenure, etc. by converting them into marketable securities
and issuing them to the investors. The investors are then given a Pass Through
Certificate or Pay Through Security.
◦ Administration of assets - The administration of assets then passes back to the
originator which collects principal and interest from the underlying assets and
transfers it to SPV, which works as a conduit or channel.
◦ Recourse to Originator – In case of default in payment by the borrowers (obligors),
the liability to pay transfers to the originator from the SPV.
◦ Repayment of funds – The SPV repays the invested amount to the investors in the
form of interest and principal that arises from the assets pooled.
◦ Credit Rating to Instruments - Sometimes before the sale of securitized instruments,
credit rating can be done to assess the risk of the issuer
Features of Securitization
◦ Creation of Financial Instruments - Additional financial instruments by way of new
securities are created, backed by collaterals.
◦ Bundling and Unbundling - When the mortgaged-based assets are combined into
a pool based on the same interest rate and maturity period by the originator, it is
bundling. When these are broken into instruments of fixed denomination by the
SPV, it is unbundling.
◦ Tool of Risk Management - In case assets are securitized on a non-recourse basis,
then the securitization process acts as risk management as the risk of default is
shifted from the originator
◦ Structured Finance - The process of securitization is structured finance as the
financial instruments are tailor-made to meet the risk-return trade profile of the
investors.
◦ Securities are divided into tranches - Portfolio of different receivables or loans are
divided into several parts based on risk and return which are called tranches.
◦ Homogeneity - Under each tranche, the securities issued are of a homogenous or
similar nature and even meant for small investors who can afford to invest in small
amounts.
Participants in Securitization
◦ Primary Participants
◦ Originator – It is the initiator of the securitization process. It sells the illiquid assets
lying in its books to the special purpose vehicle.
◦ Special Purpose Vehicle (SPV) – After purchasing the illiquid assets from the
originator, the SPV makes an upfront payment to it. Then, it converts those illiquid
assets into marketable securities and issues them to the investors.
◦ The Investors - Investors are the buyers of securitized papers which may be
individual, an institutional investors such as mutual funds, provident funds,
insurance companies, Financial Institutions, etc.
Benefits of Securitization
◦ From the angle of the originator
◦ Off–Balance Sheet Financing - When loan/receivables are securitized, funds are
raised without increasing the liability side of the balance sheet of the company.
Financial assets i.e. illiquid mortgaged-based assets are sold to SPVs and in their
place, liquid assets in the form of cash are received from the SPVs.
◦ More specialization in main business - By transferring the assets, the entity could
concentrate more on its core business as servicing of loan is transferred to SPV
◦ Helps to improve financial ratios –
It helps to improve the Capital – to - Weighted Asset Ratio effectively in the case of
Financial Institutions and Banks. The reason is that by transferring the illiquid and risky
assets to SPVs, the risk-weighted assets are reduced.
◦ Reduce borrowing Cost – Since securitized papers are credit-rated due to credit
enhancement they can be issued at a lower rate of interest as the originator earns a
spread, resulting in reduced cost of borrowings.
Benefits of Securitization
◦ From the angle of the investor
◦ Diversification of Risk – The purchase of securities backed by different types of
assets provides the diversification of the portfolio resulting in a reduction of risk.
◦ Regulatory requirement - Acquisition of assets backed belonging to a particular
industry say micro industry helps banks to meet the regulatory requirement of
investment of funds in industry specific.
◦ Protection against default - In case of recourse arrangement, if there is any default
by the borrowers (obligors), then the originator shall make good the default
Recourse and Non Recourse debt
◦ Recourse Loan: The borrower is personally liable for the debt in a recourse loan. If the
borrower defaults on the loan, the lender can pursue the borrower's other assets,
beyond the collateral, to recover the outstanding debt.
◦ For example, if you take out a recourse mortgage and default, the lender can not only
seize the property but also go after your savings, and other investments, or even garnish
your wages to recover the remaining debt.
◦ Non-Recourse Loan: In a non-recourse loan, the lender's recovery is limited to the
collateral securing the loan. If the borrower defaults, the lender can seize the collateral
but cannot pursue the borrower's other assets.
◦ For example, with a non-recourse mortgage, if you default, the lender can only take the
property used as collateral. They cannot seek further compensation from your other
assets.
Problems in Securitization
◦ Stamp Duty - Stamp Duty is one of the major obstacles in India. Under the Transfer of
Property Act, of 1882, a mortgage debt stamp duty may go up to 12% in some states of
India and this impedes the growth of securitization in India.
◦ Taxation - Taxation is another area of concern in India. In the absence of any specific
provision relating to securitized instruments in the Income Tax Act, experts’ opinions
differ a lot. Differences of opinion exist as to whether SPV as a trustee is liable to be
taxed in a representative capacity or not.
◦ Accounting – Confusion exists in accounting aspects also. Transfer of mortgaged assets
to SPV is an off-balance sheet transaction in which the receivables are removed from the
balance sheet of the originator. However, the originator is still responsible for collecting
the interest and principal amount from the obligors and transferring it to the SPVs. For
this purpose, the experts say that the originator has to maintain accounting entries.
Again, a lack of clarity is there when the securitization is on a non-recourse basis
◦ Lack of standardization - Every originator follows his procedure for documentation and
administration of the securitization process. So, having a lack of standardization is
another obstacle to the growth of securitization.
◦ Inadequate Debt Market – The lack of existence of a well-developed debt market in
India is another obstacle that hinders the growth of the secondary market of securitized
or asset-backed securities.
◦ Ineffective Foreclosure laws – Since Foreclosure laws are not supportive of lending
institutions, this makes securitized instruments less attractive as lenders face difficulty in
the transfer of property if borrowers default
Securitization Instruments
◦ Pass-Through Certificates (PTCs) – This is a certificate given to the investors of
securitized instruments that interest and principal amount will be paid to them. They are
called PTCs because the interest and the principal amount are passed through from the
borrowers to originators, then to SPVs, and finally to the investors.
◦ Pay Through Security (PTS) – In this case, SPV issues new securities to the investors in
place of a pass-through certificate. These securities are generally considered safe
securities from which interest and payment of the principal amount are almost assured.
◦ Stripped Securities - Stripped Securities are created by dividing the cash flows
associated with underlying securities into two or more new securities such as (i) Interest
(IO) Securities and (ii) Principle Only (PO) Securities These are generally considered
volatile and less preferred by the investors
Stock Broking
◦ Topics covered
◦ Introduction,
◦ Bodies Regulating Stock Broking Firms-
◦ Functions of Stock Broking Firms –
◦ Services of Depository and functions
◦ Stock lending and Borrowing
Introduction to Stock Broking
◦ Stockbroking in India refers to buying and selling shares of publicly traded companies on
behalf of investors. Stockbrokers act as intermediaries between investors and the stock
exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange of
India (NSE)
◦ Here are some of the most popular stockbrokers in India:
◦ Zerodha
◦ Upstox
◦ Angel Broking
◦ ICICI Direct
◦ HDFC Securities
◦ Groww
◦ Here are some of the things to consider when choosing a stockbroker in India:
◦ Commissions and fees: Commissions are the fees that stockbrokers charge for buying
and selling stocks. Discount brokers typically charge lower commissions than full-service
brokers.
◦ Services offered: Consider the range of services that you need from a stockbroker. If you
are a new investor, you may want to choose a full-service broker that can provide you
with research and advice. If you are a more experienced investor, you may prefer a
discount broker.
◦ Online trading platform: Many stockbrokers now offer online trading platforms that
allow you to buy and sell stocks yourself. Consider the ease of use of the platform when
choosing a stockbroker.
◦ Reputation: It is important to choose a stockbroker with a good reputation. You can
check online reviews or ask friends or family for recommendations.
Bodies Regulating Stock Broking Firms
◦ All About SEBI (Securities and Exchange Board of India)The Securities and Exchange
Board of India (SEBI) is the principal regulator of the Indian stock market. Established in
1992, it plays a critical role in ensuring a fair, transparent, and efficient securities market
for investors.
◦ SEBI's Objectives:
◦ Investor Protection: SEBI's primary objective is to safeguard the interests of investors in
the securities market. It achieves this by setting regulations, ensuring timely disclosure of
information by companies, and handling investor grievances.
◦ Market Development: SEBI actively promotes the orderly growth and development of
the securities market. This includes introducing new products and services, encouraging
participation, and fostering a healthy market environment.
◦ Market Regulation: SEBI regulates the activities of stock exchanges, stockbrokers, and
other market intermediaries. It establishes rules for fair trading practices, prevents
manipulative activities like insider trading, and investigates market irregularities.
SEBI's Functions:

◦ Issuing Regulations: SEBI formulates regulations for various aspects of the securities
market, including listing of companies, trading practices, insider trading, and takeover
codes.
◦ Registration: SEBI registers stock exchanges, stockbrokers, market intermediaries like
depository participants, credit rating agencies, and investment advisors.
◦ Issue of Capital: SEBI regulates the public issue of capital by companies and ensures
compliance with disclosure requirements.
◦ Investor Education: SEBI promotes investor education through various initiatives like
workshops, publications, and investor awareness campaigns.
◦ Grievance Redressal: SEBI provides a platform for investors to lodge complaints against
listed companies or market intermediaries and facilitates their resolution
Services of Depository and functions
◦ Depositories in India are institutions that hold securities like stocks and bonds in electronic form instead
of physical certificates. This electronic form is called dematerialized form, or demat. Depositories play a
vital role in ensuring the safe, secure, and efficient settlement of trades in the Indian stock market.
◦ Currently, only two depositories, Central Depository Services (CDSL) and National Securities Depository
Limited (NSDL), are registered with SEBI
◦ Here are the key services and functions of depositories in India:
Services:
◦ Dematerialization: Converting physical share certificates into electronic form for easy and secure holding.
◦ Account Management: Issuing and maintaining demat accounts for investors.
◦ Settlement of Trades: Electronically facilitating the transfer of securities between buyers and sellers after
a trade is executed.
◦ Corporate Actions Processing: Handling corporate actions like stock splits, bonus issuances, and
dividend payouts electronically.
◦ Nominee Services: Holding securities on behalf of another person (beneficial owner).
Functions
◦ Safekeeping of Securities: Depositories securely hold dematerialized securities in their
electronic records.
◦ Reduced Risks: Dematerialization eliminates the risks associated with physical
certificates like loss, theft, or damage.
◦ Faster Settlement: Electronic settlement of trades speeds up the transaction process
compared to physical certificates
◦ Increased Liquidity: Dematerialized securities are easier to trade, leading to increased
market liquidity.
◦ Convenience: Demat accounts allow investors to conveniently manage their holdings
online.
Stock lending and Borrowing
◦ Securities Lending and Borrowing (SLB) is a mechanism through which clients can lend
or borrow securities at a specified price and time. Lenders and borrowers can quote a
lending fee and quantity at which they want to lend or borrow, and the order will be
executed if the quotes match the exchange.
◦ SLB is a legally approved medium for lending and borrowing securities. The regulations
were originally formed by SEBI in May 1997 and last modified in Nov 2012. All market
participants including retail (except Qualified Foreign Investors) in the Indian securities
market have been permitted to lend/borrow securities but only through an Authorized
Intermediary(AI).
◦ NCL (NSE clearing limited) and BOISL ( Bank of India Share Holding Ltd ( BSE clearing
corporation) are the only 2 authorized intermediaries presently, NCL is preferred and is
getting bulk of the transactions today.
How Does It Work?

◦ Lenders: Investors who own shares can lend them to other investors for a fee. This is
often done with shares that are idle in their portfolios.
◦ Borrowers: Investors who believe a stock's price will decline can borrow shares to sell
them short. They hope to buy back the shares at a lower price later, profiting from the
price difference.
The process typically involves:

◦ Identification of eligible securities: Only certain securities are eligible for lending and
borrowing.
◦ Agreement on terms: Lenders and borrowers agree on the lending fee, duration of the
loan, and other terms.
◦ Collateral: Borrowers usually provide collateral, such as cash or other securities, to
secure the transaction.
◦ Delivery of shares: The borrowed shares are transferred to the borrower's account.
◦ Return of shares: The borrower must return the borrowed shares at the end of the loan
term, along with the lending fee.
Benefits of Stock Lending and Borrowing

For Lenders:
◦ Additional income: Earn a fee on idle shares.
◦ Diversification: Can be part of a broader investment strategy.
◦ Market liquidity: Helps improve market liquidity.
◦ For Borrowers:
◦ Short selling opportunities: Enables short selling to profit from declining prices.
◦ Hedging: Can be used to hedge existing long positions.
◦ Market liquidity: Contributes to overall market liquidity.
Eligibility criteria for lending and borrowing.

The minimum eligibility criterion to place SLB orders is mentioned below:

◦ Lending: The order value per security to lend is ₹1 lakh, below which orders will not be
processed.
◦ Borrowing: An order with a minimum of 500 shares must be placed.
• The lender will be eligible for all corporate actions.
• The clearing and settlement of trades are handled and guaranteed by Indian Clearing
Corporation Limited (ICCL).
• Only securities that are eligible for SLB can be lent and borrowed
• Like futures and options contracts, SLB contracts expire on the first Thursday of every
month.
• Contract expiry is on the first Thursday of every month for whichever series it is traded
on. In case of exchange holidays, the expiry will be on the next working day.
• Depository participant Charges (DP charges) of ₹13 + GST will be applicable when the
shares are moved from demat for settlement. If the primary (first) holder of the account
is a woman, the DP charges will be reduced to ₹12.75+ 18% GST.
• A processing fee of 20% on the lending and borrowing fee is applicable for completed
orders.
Mutual fund:

➢ Types of Mutual Funds

➢ Advantages of mutual funds –
➢ Exchange Traded Funds-
➢ Trust-AMC-Custodians-Sponsor –
➢ Hedge funds-
➢ Regulations on mutual funds in India- Net Asset Value –
➢ Selection of a Fund –
➢ Performance Evaluation of Mutual funds.
Schemes Based on the Maturity Period
Types of mutual fund schemes based on the maturity period are as follows-

• Open Ended Funds

• Close Ended Funds
Open Ended Scheme

◦ Open Ended Scheme

◦ This scheme allows investors to buy or sell units at any time. It does not have a fixed
maturity date either. You deal directly with the Mutual Fund for your investment and
redemption.

◦ The key feature is liquidity. You can conveniently buy or sell your units at net asset value
(“NAV”) related prices. The majority of mutual funds, 59% approximately are open-end
funds.
Close Ended Scheme
◦ This type of scheme has a stipulated maturity period and investors can invest only during the
initial launch period known as the New Fund Offer (NFO).

◦ Once the offer closes, no new investments are permitted. The market price at the stock
exchange could vary from the scheme’s Net Asset Value (NAV), because of the demand and
supply situation, unit holder’s expectations, and other market factors.

◦ Some close-ended schemes will give you an additional option of selling your units directly to
the mutual funds through periodic repurchases at NAV-related prices.

◦ SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.
Based on Principal Investments
◦ One of the most important points in the circular is that different types of mutual fund
schemes should be distinct in terms of investment strategy and asset allocation. The schemes
will be broadly classified into the following categories

◦ Equity Schemes
◦ Debt Schemes
◦ Hybrid Schemes
 Equity Schemes
◦ Equity mutual funds invest at least 65% of their assets in equity and equity-related
instruments.
◦ Equity - related Instruments means convertible bonds, convertible debentures, convertible
preference shares, and warrants carrying the right to obtain equity shares in Indian
companies;
◦ These funds aim for high returns by capitalizing on the growth potential of these companies.
The value of investments can fluctuate due to market conditions.
◦ Equity mutual funds can be sector-specific, diversified, or thematic, providing various
options based on investors' risk appetite and investment goals.
◦ Divided into

◦ Large cap Mutual funds

◦ Mid-cap Mutual funds
◦ Small Cap Mutual funds
Large Cap Mutual Funds

◦ As the name suggests, Large-cap funds invest in large listed companies, the top 100
companies according to market capitalization of 20,000 Crore or more
◦ These companies are market leaders in their respective industries like Reliance, TCS,
Infosys, Bharti Airtel, HDFC etc. Large-cap funds have to invest a minimum of 80% of
their assets in equity and equity-related instruments of large-cap companies.
◦ How much they want to invest in which large stock is decided by the fund's strategy.
◦ Due to their major exposure to big companies, large-cap funds are considered less
riskier and more stable.
Mid Cap Mutual Funds
◦ These Funds buy stocks of top companies between 101 to 250 according to market
capitalization. Mid-cap companies have a market capitalization between Rs.5000 crore
to Rs.20000 crore.
◦ These companies have a higher potential to grow. Some of these companies are Hitachi
Energy India, Bank of Maharashtra, Suzion Energy, Blue Star, etc.
◦ Mid-cap funds have to invest a minimum of 65% of their assets in equity and equity-
related instruments of mid-cap companies.
◦ Mid-cap funds are considered more riskier than large-cap funds but have chances to
surpass the returns of the latter. The average annual return of mid-cap funds is 26.95%,
as mentioned on ET money.
Small Cap Mutual Funds

◦ Stocks of small companies are the major underlying assets of small-cap funds. These
companies have a market capitalization of less than Rs.5000 crore.
◦ They have a high growth potential but also a lot of risk is aligned with them. SEBI says all
the companies ranked from 251 onwards in terms of market capitalization are by default
becoming part of small-cap companies.
◦ JK Laxmi cement, Lux Industries, Edelweiss, Birla Corp, etc. Small-cap funds have to
invest a minimum of 65% of their assets in equity and equity-related instruments of
small-cap companies.
◦ Small cap funds can deliver fantastic returns but at the same time, the chances of
volatility are very high.
Debt Funds
◦ A debt fund is a Mutual Fund scheme that invests in fixed-income instruments, such as
Corporate and Government Bonds, corporate debt securities, and money market
instruments, etc. that offer capital appreciation.
◦ Debt funds are also referred to as Fixed Income Funds or Bond Funds.
◦ Debt funds are ideal for investors who aim for regular income but are risk-averse.
◦ Debt funds are less volatile and, hence, are less risky than equity funds.
◦ If you have been saving in traditional fixed-income products like Bank Deposits, and
looking for steady returns with low volatility, debt Mutual Funds could be a better
option, as they help you achieve your
Hybrid Funds
◦ It can be said that hybrid funds are a combination of equity and debt investments designed
to meet the scheme's investment objective.
◦ Each hybrid fund has a different combination of equity and debt targeted at different types
of investors.
◦ Features of a Hybrid Fund
◦ The major characteristics of a hybrid fund are explained below:
◦ a) It is a mixture
◦ In its investing strategy, it has a wide portfolio that includes equities, debt, and other assets.
Through a single fund, you can invest in multiple asset classes.
◦ b) It is always balanced
◦ Hybrid funds have a well-balanced portfolio allowing them to take advantage of the best
asset groups. It strives to provide larger returns with lower risks while also assisting you
in meeting both your short-term and long-term financial objectives. Equity components
contribute to long-term wealth generation, and debt securities protect against market
swings.
◦ c) The Investment Combinations Differ
◦ Different types of hybrid funds have different equity-debt combinations. They are
intended to fulfill the financial demands and investing objectives of various types of
investors. It also caters to large-scale investors' risk tolerance, which ranges from
conservative to moderate to aggressive.
◦ d) It is Known to Perform well in the long term
◦ The hybrid fund investment is appropriate for investors who can commit to holding the
units for at least three to five years.
Advantageous of Mutual Funds
◦ 1. Professional Management — Investors may not have the time or the required
knowledge and resources to conduct their research and purchase individual stocks or
bonds. A mutual fund is managed by full-time, professional money managers who have
the expertise, experience and resources to actively buy, sell, and monitor investments. A
fund manager continuously monitors investments and rebalances the portfolio
accordingly to meet the scheme’s objectives. Portfolio management by professional
fund managers is one of the most important advantages of a mutual fund.
◦ 2. Risk Diversification — Buying shares in a mutual fund is an easy way to diversify your
investments across many securities and asset categories such as equity, debt and gold,
which helps in spreading the risk - so you won't have all your eggs in one basket.
◦ 3. Affordability & Convenience (Invest Small Amounts) — For many investors, it could be
more costly to directly purchase all of the individual securities held by a single mutual
fund. By contrast, the minimum initial investments for most mutual funds are more
affordable.
◦ 4. Liquidity — You can easily redeem (liquidate) units of open ended mutual fund schemes to
meet your financial needs on any business day (when the stock markets and/or banks are
open), so you have easy access to your money. Upon redemption, the redemption amount is
credited in your bank account within one day to 3-4 days, depending upon the type of
scheme e.g., in respect of Liquid Funds and Overnight Funds, the redemption amount is paid
out the next business day.
◦ However, please note that units of close-ended mutual fund schemes can be redeemed only
on maturity. Likewise, units of ELSS have a 3-year lock-in period and can be liquidated only
thereafter.
◦ 5. Low Cost — An important advantage of mutual funds is their low cost. Due to huge
economies of scale, mutual fund schemes have a low expense ratio. The expense ratio
represents the annual fund operating expenses of a scheme, expressed as a percentage of
the fund’s daily net assets. Operating expenses of a scheme are administration, management,
advertising-related expenses, etc. The limits of expense ratio for various types of schemes
have been specified under Regulation 52 of SEBI Mutual Fund Regulations, 1996
◦ 6. Well-Regulated — Mutual Funds are regulated by the capital markets regulator,
Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations,
1996. SEBI has laid down stringent rules and regulations keeping investor protection,
transparency with appropriate risk mitigation framework and fair valuation principles.

◦ 7. Tax Benefits —Investment in ( Equity Linked Saving Scheme )ELSS upto ₹1,50,000
qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund
investments when held for a longer term are tax efficient
ETFs ( Exchange Traded funds)
➢ETFs are types of Mutual Funds that aim to track the performance of a specific index
such as
➢NIFTY 50, NIFTY Next 50, NIFTY Bank etc. These ETFs can be based on indices tracking
various asset classes like equity shares (NIFTY 50 ETF), bonds (10-year G-Sec ETF), Gold
(Gold ETF), Tri-party Repo (Liquid ETF) etc.
➢In an ETF, the weight of all securities mirrors the weight of the securities in the
underlying
➢benchmark index. For example, if ABC Bank has a weight of 10.52% in NIFTY 50, a NIFTY
50 ETF will also have ~10.52% of ABC Bank by weight in its portfolio
Advantage of ETFS
The Exchange Traded Funds (ETFs) are:
◦ Easy to Transact (Can be bought or sold on exchange)
◦ Frugal (Low cost)
◦ Transparent (Replicates the portfolio and return of stated index (subject to tracking
error)
ETFs are an investment medium which combine the features of mutual fund & stock
investing.
On one hand, investors can buy an ETF to get underlying Index returns at low cost (low
expense ratio) and on the other hand they can trade in an ETF like a stock at live NAV, to
benefit from intra-day volatility, if desired
Difference between ETF and Mutual funds
Hedge Funds
◦ A hedge fund is a pooled investment that is pulled by a partnership of institutional or
accredited investors.

◦ Investment in a Hedge fund is usually assumed to be a risky choice that requires a high
minimum investment or, say, net worth, often targeting affluent clients.
What is Hedge Fund?
◦ In Securities and Exchange Board of India (SEBI's) words, “Hedge funds, including fund
of funds, are unregistered private investment partnerships, funds or pools that may
invest and trade in many different markets, strategies and instruments (including
securities, non-securities and derivatives) and are not subject to the same regulatory
requirements as mutual funds.”

◦ There are different types of hedge funds depending on the securities they invest in and
the kind of strategies used to manage them.

◦ Hedge funds in India do not need to be necessarily registered with Securities and
Exchange Board of India (SEBI), or disclose their NAVs at the end of the day. All other
mutual funds are required to follow these regulatory requirements
How Do Hedge Funds Work?
◦ These funds use different trading techniques because of the securities and assets they
invest in. They invest in equities, debt, and also derivatives.
◦ Examples of derivatives include futures and options. Like equities and debt securities,
the trading technique could be trading in a stock market or buying it directly from the
company in a private placement.
◦ For example, with futures, there is a right or an obligation to buy or sell an underlying
stock at a pre-determined price, date, and time. Options trading are the same but
without an obligation. Investing in such securities automatically diversifies trading
techniques.
◦ Hedge Funds pool money from larger investors like high net worth individuals (HNI),
endowments, banks, pension funds, and commercial firms. They fall under the AIF
(alternative investment funds)-category III. This pooled money is used to invest in such
securities in national and international markets.
Difference between Hedge funds and
Mutual funds