1.
Introduction:
In the evolving landscape of financial markets, the Securities and Exchange Board of India (SEBI)
plays a crucial role not just in regulation but also in investor education. This is particularly vital in
complex trading segments like futures and options (F&O), where retail investor participation is on the
rise. The utilisation of futures and options, in the younger population, has seen a significant rise which
underlies the importance of understanding the intricacies and risks associated with Futures and
Options as these are complex leveraged financial instruments that can lead to permanent loss of
capital if traded without knowing the risks.
Concepts and Applications:
Futures and options are derivative instruments, deriving their value from underlying assets like stocks,
indices, or commodities. While offering opportunities for hedging and speculation, they also carry
significant risks, often misunderstood or overlooked by retail investors. Futures and Options are two
varieties of financial derivatives investors can use to speculate on market price changes or to hedge
risk.
Options and futures allow an investor to buy an investment at a specific price by a specific date. Both
are market speculative strategies, however they are differentiated as – ‘An option gives the buyer the
right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the
contract’ while ‘A futures contract obligates the buyer to purchase a specific asset, and the seller to
sell and deliver that asset, at a specific future date.’
(a) Name of Campaign:
‘ Understanding Risks in Futures and Options for Retail Investors – from SEBI’
(b) Objectives of Training Program:
Increase awareness on the risks of F&O Trading for new retail investors
Understand the regulations governing F&O trading in India
Do`s and Don’t`s in F&O Trading
Know the Risks involved
(c) Use of Promotional Resources:
Mobile Phone Advertisements
Printing of Pamphlets, Brochures and Posters for distribution through print and electronic
media
Creating professional video clips on F&O Trading Risks for dissemination through social
media channels like Instagram and Facebook.
Developing and launching an interactive website and mobile application for ease of reference
and for booking conference slots
Advertising the schedule of Lectures, Talk shows and informative campaigns
(d) Content Creation:
Engaging various known personalities in the field of stock markets to deliver online video
content highlighting the risks with F&O.
Host regular talk-shows with Social Influencers for spread of campaign
Schedule lectures with industry experts one module at a time and advertise the schedule.
Major rules and regulations governing F&O from extant circulars should be highlighted in
flyers and distributed during online and offline workshops.
Learning material such as ‘Best Practices to Trade’ and ’Learning F&O through SEBI’ should
be made available to participants.
Creation of an online simulation tool to simulate Futures and Option Trading.
(e) Media Participation:
Engage print and online media to cover the scheduled talk-shows and lectures.
Allocate budget to spend on Print and Hoarding advertisements before and during the
campaign.
Host various quiz competitions across schools/colleges and through online mode to engage
the targeted young public. Media should be invited to cover and publish such events.
Officials from SEBI, Primary Dealers and Brokers should be invited for one-on-one interviews
and to share various insights on the future of F&O and associated risks investors face.
(f) Delivery of Content:
Content should be delivered by highlighting messages in promotional campaigns. Messages
such as ‘Know the Risks in Futures&Options Trading”, ‘F&O Trading: Know your Futures and
Options’, ‘Simulation Toolkit for Futures and Options: Download now for free’, ‘A guide to new
F&O Investors by SEBI’, ‘Risks and Future of F7O Trading’.
Share beneficial real-life investor stories on success and failures titled as ‘Trading and Risks
associated with F&O: Investor Stories on Profits and Losses’.
Dissemination of print material like pamphlets/brochures, highlighting availability of online
resources such as websites etc. during interaction with the audience.
(g) Taking feedback:
The effectiveness and reach of media campaigns on various media such as print, website
hits, Instagram and Facebook time viewed etc should be captured to study and re-design
delivery, if needed
Feedback from public during campaigns should be assesses to re-design lectures and other
promotional campaigns.
Online surveys should be run to capture specific feedback.
The above PR campaign will help educate and empower retail investors on the risks associated with
Futures and Options to help them take informative decisions. Through use of Infographics to simplify
and illustrate concepts such as margin requirements, settlement process, and the pricing of futures
and options will help the public to select future and option trading by hedging risks rather than on
borrowed convictions. Other Interactive tools like risk calculators, margin estimators, and scenario
analysis software should also be made available on SEBI's website.
Conclusion:
SEBI's public relations campaign to educate retail investors about the risks in F&O trading is a vital
initiative towards creating a more informed and resilient investment community. By providing
comprehensive educational resources, practical tools, and continuous support, the campaign aims to
empower retail investors to navigate the complexities of the F&O market with confidence and caution.
Educating investors about the regulatory framework governing F&O trading is essential for a holistic
understanding. This campaign will detail SEBI's role in market regulation, the rules and regulations
specific to F&O trading, and the rights and responsibilities of investors.
As the market evolves, SEBI's commitment to investor education will play a crucial role in maintaining
the integrity and stability of India's financial markets, ensuring that retail investors are well-equipped to
make sound investment decisions and will also help contribute to a more responsible and secure
investment environment.
2.
Introduction:
Mutual funds have emerged as a popular investment vehicle for individuals seeking to grow their
wealth. These funds pool money from multiple investors to purchase a diversified portfolio of stocks,
bonds, or other securities. Managed by professional fund managers, mutual funds offer the advantage
of diversification, professional management, liquidity, and the ability to participate in investments that
may be unavailable to individual investors due to high minimum investment requirements.
Mutual funds are preferred by the new investor class it provides flexibility to buy and sell mutual funds.
Most schemes are open-ended with minimum maturity of one year which gives flexibility to investors
to exit funds. Mutual fund managers are also getting requests to re-balance funds as the investors are
becoming more knowledge empowered.
Concepts and Applications:
A risk profile is the quantification of an investor's overall risk tolerance. It is the degree of risk attached
to the principal invested. Every investor has a different tolerance to market volatility or risk based on
several factors like disposable income, age etc. Therefore, financial institutions create risk profiling for
their investors which helps both the investor and financial advisor to create a specific investment
portfolio with an asset mix correlating to his risk profile.
By identifying the risk profile, organizations can take corrective/pre-emptive measures to minimize
losses. In case of Mr. Ashok, who has a moderate risk profile, a mutual fund which allows rebalancing
of portfolio between equity and debt is suitable. An equity portfolio gives high returns but with very
high risks while a debt portfolio is practically risk-free with slow growth.
There are many avenues of investment in both equities and debt funds, bonds and commodities,
however the most preferred method for investment is through mutual funds for the following reasons:
i) Mutual funds provide Diversification: By investing in a range of securities, mutual funds
reduce the risk of loss from any single investment. This diversification can protect the portfolio
from market volatility and sector-specific downturns.
ii) Mutual Funds are professionally managed: Fund managers are experienced professionals
who make informed decisions about buying and selling securities. Their expertise is
particularly valuable for investors who lack the time or knowledge to manage their
investments. Ease to Access and provide liquidity: Mutual funds are accessible to a wide
range of investors due to their relatively low minimum investment requirements. Additionally,
they offer high liquidity, allowing investors to buy or sell fund shares on any business day.
iii) Benefits of Economies to Scale: As pooled investments, mutual funds can negotiate lower
transaction costs, which can translate into higher returns for investors.
Investors like Mr. Ashok Pandit, seeking a moderate risk profile can benefit significantly from mutual
funds that rebalance between equity and debt. This approach offers a balanced exposure to the
growth potential of equities and the stability of debt t instruments.
Analysing Figure 1:
Rebalancing a mutual fund portfolio is crucial as denoted in Figure 1 on next page. As observed, the asset
allocation as on today holds 60% of stocks providing a moderate risk profile. However after 10 years, the
value of stocks grow exponentially raising the value of stock in the portfolio to 80% and increasing the risk.
As the stock market is prone to crashes, it is seen that the ‘moderate’ risk portfolio designed 10 years ago
has now transformed into a high-risk portfolio which goes against the investor profile.
Figure 1: Changing Portfolio risks over time
However, it is important to rebalance mutual funds over time. Rebalancing is when you buy or sell
investments to bring your asset allocation back in line with your targets. If the funds are not
rebalanced over time, it may be observed that the actual investment mix has drifted far from your
intended asset allocation.
Figure 2: Value of Investment in a Rebalanced portfolio Vs Without Rebalance
Box 2:
Figure 3: depicts the importance
of portfolio re-balance to maintain
the integrity of the selected
portfolio risk levels and risk
tolerance of the customer.
As shown in figure 3, as time
passes and value of stocks go
up, the portfolio is rebalanced to
include debt funds such as bonds
and gold to match the risk
tolerance of customer
As shown in Figure 2, a re-balanced portfolio over a portfolio without any rebalance may give
significant returns. Figure 3 shows the importance of portfolio re-balance to maintain the risk profile
and risk tolerance limits of investor.
Benefits of Mutual Funds with Equity-Debt Portfolio Rebalance:
1) Risk Management - Periodic rebalancing helps maintain a consistent risk profile, reducing the
impact of market volatility. By selling high and buying low, rebalancing can also potentially
enhance returns.
2) Helps in Adaptability - This strategy allows the fund to adapt to changing market conditions.
For instance, during a market downturn, the fund might increase its bond holdings to reduce
risk.
3) Assures Disciplined Investment - Rebalancing enforces a disciplined approach to buying and
selling assets, avoiding emotional or impulsive investment decisions.
4) Helps understand Fund Strategy - It's crucial to understand the fund's rebalancing strategy,
including how often rebalancing occurs and the criteria used for asset allocation.
5) Helps Review Past Performance - While past performance is not indicative of future results,
reviewing a fund's historical performance can provide insights into how it has managed risk
and returns over time.
6) Facilitates new investment strategy: As a person progresses in career and life, their goals and
outlook and most importantly their financial objectives changes. A rebalancing portfolio allows
one to make changes in their portfolio and aligns with the new investment strategy.
Conclusion:
Mutual funds that periodically rebalance their portfolio between equity and debt offer a balanced
approach to investing making it suitable for individuals with a moderate risk appetite. This re-
balancing strategy combines the growth potential of equities with the stability of debt, managed within
a framework that maintains a consistent risk profile.
It is recommended that mutual funds should be re-balanced at least once a year or when there is a
sharp movement in a particular asset class or any particular financial sector. As with any investment,
it's important for investors to conduct thorough research and consider their financial goals and risk
tolerance when selecting or re-balancing a mutual fund.
Source:
Figure 1: [Link]
Figure 2 and 3: [Link]
happen
3.a
Introduction:
Higher education has become expensive and parents need to start investing as early as possible to
secure funding needs for their child`s higher education required at the ages of 18 and 23 years
considering graduation and post-graduation timelines respectively. Children`s education is one of the
most significant cash outflows that families in India nowadays have to deal with and which requires
professional planning. However, the payoff from a good education is one of the best investments. As
Benjamin Franklin once said ‘An investment in knowledge pays the best interest’.
Concepts and Applications:
Anuj and Neha want to plan for their daughter Riya`s higher education expenses who is 4 year old
presently. Riya education will need money at the age of 18 for graduation and perhaps at age 24 for
post-graduation. Financial planning needs to be for 14 year and 18 year outlook.
As of now, it is very early to contemplate her choice of career, which will impact the financial planning
and the investment corpus. However, considering a broad perspective of available career options as
of now coupled with expected inflation rate and other inputs, a comprehensive investment strategy is
designed for the parents as given below.
The thumb rules for parents investing for a child`s educations are:
1) Measure the time horizon
2) Estimate the cost of education
3) Make investment strategies
4) Buy a Life Insurance Cover
Sr Particulars Time and
. Costs Available Inputs
1. Riya`s Age 4 years Anuj`s Age 35 yrs
2. Time until age 14 years
18 Annual Income Rs. 15 lakh
3. Time left until 18 years
age 23 years
4. Cost of Rs. 10 lakh
education in
todays term
5. Rate of 8%
Inflation Assumptions
6. Corpus Rs. 30 lakh
needed at age
14 Anuj`s monthly salary 125000
7. Corpus Rs. 40 lakh
needed at age
23 Annual Bonus payments 100000
From the above data and assumptions, it is assumed that Anuj`s Annual Net Income is Rs. 15 lakh
after deduction of taxes. This entails a monthly income of Rs. 1,25,000/-.
Assumptions:
(i) It is assumed that Anuj lives in his own house and that there are no other expenses other
than groceries, electricity, school fees and other reasonable costs.
(ii) Education amount will be required for post graduate course at age of 23-24 assuming it
will be required for studies abroad, as per socio-economic factors of the parents.
(iii) It is assumed that the expenses for graduation will be covered by other investments like
gold, probable sale of land or simply by PPF instrument as the proposed study will be in
Indian colleges and not very expensive.
(iv) Considering inflation to remain below 10%.
Considering the above scenario, as the time horizon for investment is 18 years, the parents are
advised to invest in an SIP of a mid-cap or small-cap growth equity mutual fund to maximise their
earnings and beat inflation. An SIP in a good equity mutual fund (growth) with minimum 12% annual
growth (reasonable) will help collect Rs. 40 lakh as shown in calculator in picture 1:
Picture 1:
An SIP in an equity
based mutual fund
(growth strategy)
with monthly
investments of
Rs.6000/- giving an
annualized return
of 12% (realistic) is
recommended.
Conclusion:
An equity mutual fund is the best way to maximize savings, beat inflation and achieve desired goals
for children`s education. Government schemes such as Sukanya Samriddhi Yojana was a good
option, however it does not provide much flexibility, if funds are required early. Further, a mutual fund
scheme also allows exit and reinvestment into a new scheme by the asset management company, in
case the goals change or extra income is made available to the parents.
Sources: Groww mutual fund calculator [Link]
3.b
Introduction:
Retirement planning is a multi-step process that evolves over time. It takes account of the desired
lifestyle goals with a suitable and sustainable financial corpus for any exigency. Retirement planning
entails planning for the long time-horizon, expenses planning keeping in mind inflation, medical
emergencies etc. with the overall aim of leading a fun and stress-free retirement life. Young investors
in their 20`s or 30`s can take risk while people planning retirement at a later stage in life should be
more conservative.
Concepts and Application:
Retirement planning implies preparing for the forthcoming life to fulfil all life objectives easily. It also
entails the primary question of how much funds one needs to save for retirement. This question
requires analysis of the following:
1) Identification of income sources
2) Estimation of expenses
3) Implementing a savings plan
4) Managing assets and risks
5) Estimating future cash flows
In case of Anuj, it is known that he earns Rs.1500000 per month. It is assumed that his monthly
expenses are Rs.30000/-. Other investments such as PPF, monthly SIP for Riya, Lump-sum
investments or payouts and other land/gold based investments are also separated. As per current rate
of inflation of 6%, the rate of returns post tax comes out to be 8% and the real rate of return is
calculated to be 0.01886 or 0.001572 monthly.
Current Monthly
Expenses 30000
Current Age 32
Retirement Age 60
Life Expectancy 85
Rate of inflation 6%
Rate of Returns (post
tax) 8%
Real rate of return 0.018867925 0.001572327 (<--monthly)
Current Age 32
Years to Retirement 28
Years post Retirement 25
Future Monthly Expenses 153350.6009
Retirement Corpus ₹ 3,67,12,407.55
Monthly savings Required
12% Expected Rate of return 12% ₹ 13,308.42
8% Expected Rate of return 8% ₹ 29,208.97
1) The future monthly expenses @ 6% is calculated as:
(Current Age)*(Inflation Rate)^(Years to Retirement) = (32)*(1.06)^28 = Rs.1,53,350/- which
indicates that to maintain the same lifestyle as on today, Anuj has to Spend Rs.1,53,350 by age
85.
2) Real rate of return is calculated as: [(Rate of returns post tax) / (Rate of return)]-1 = 0.01886
3) The Retirement Corpus required to sustain above lifestyle is calculated as a function of Rate
of Return, Years post retirement and future monthly expenses which comes to be Rs. 3.67
crore.
4) The monthly savings required to be invested in an instrument (mutual fund) to gain 12% is
calculated as a function of Rate of return (12%) required, Years to retirement (28) and
Retirement corpus (3.67 crore).
5) We arrive at a monthly requirement of Rs.13,308/- which should be invested in equity mutual
fund to reach the corpus of 3.67 crore @ 12% annualized returns.
6) If Anuj is more conservative, he may invest in a debt mutual fund @ Rs. 29208/- to reach 3.67
crore @8% annualized returns.
Conclusion:
Retirement planning is essential to prepare for emergencies or unexpected expenses, it helps
accomplish family goals like travel, purchase of house, keeping up with lifestyle, rising healthcare cost
etc. It is also used to lessen the impact of inflation. The future can be uncertain, but it can be planned.
Diversification of retirement corpus into asset classes such as mutual funds, PPF deposits, National
Pension Saving (NPS) schemes, LIC policies can be highly beneficial.