Description
Mutual funds are originated in Belgium, where in 1782, a company was started to finance investments in national industries associated with high risks.
MUTUAL FUND
MUTUAL FUND-Origination
• Mutual funds are originated in Belgium, where in 1782,
a company was started to finance investments in
national industries associated with high risks.
• In 1860, this movement spread to England and in 20
th
century to USA.
• In India first MF was started in 1964 when UTI was
established.
• From 1987 commercial banks in India started MF
business.
• Ex-CAN BANK MF, SBI MF, INDIA BANK MF, LIC MF, GIC
MF
Meaning & Definition
• MF is a collective investment arrangement.
• MF collects the savings from small investors, invest
them in Govt. & other corporate securities & earn
income through interest & dividends, besides capital
gains.
• The SEBI (MF) Regulation 1993 defines a MF as “a fund
established in the form of a trust by a sponsor, to raise
monies by trustees through the sale of units to the
public, under one or more schemes, for investing in
securities in accordance with these regulations”
Concept
• A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal.
• The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities.
• The income earned through these investments and the capital
appreciation realized are shared by its unit holders in
proportion to the number of units owned by them.
• Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a
relatively low cost.
Mutual Fund Operation Flow Chart
LEGAL STRUCTURE
FUND SPONSPOR/SETTLOR
KOTAK MAHINDRA FINANCE LTD.
TRUST
KOTAK MAHINDRA MUTUAL FUND
TRUSTEE
KOTAK MAHINDRA
TRUSTEE CO. LTD.
INVESTMENT
MANAGER &
ADVISOR
KOTAK MAHINDRA
ASSET
MANAGEMENT CO.
LTD.
UNIT
HOLDERS
Contd…
LEGAL STRUCTURE
APPOINTS
• CUSTODIANS
• REGISTRARS
• BANKS
• DISTRIBUTORS
INVESTMENT MANAGER & ADVISOR
KOTAK MAHINDRA ASSET
MANAGEMENT CO. LTD.
Constitution & Management of MF
• MFs in India are now governed under the SEBI
(MF) Regulations,1996.
• SEBI has provided a four-tier system for
managing the affairs of MFs. They are:
– The Sponsor
– The Trustee
– The AMC
– The Custodian
THE SPONSOR
• According to SEBI(MF) Regulation “ sponsor as
any person who, acting alone or in combination
with another body corporate establishes a MF.
• In other words, a MF is launched by a company
either public or private.
• Example: SBI MF is sponsored by SBI
»LIC MF sponsored by LIC
THE TRUSTEE
• SEBI defines “ a person who holds the property
of the MF in trust for the benefit of the unit-
holders & includes a trustee company & the
directors of the trustee company.
• They carry the crucial responsibility of
safeguarding the interest of investors.
• They monitor the operations of the different
schemes & they have wide ranging powers.
Asset Management Company
• The AMC actually manages the funds of the
various schemes.
• The success of the MF depend upon the
efficiency of AMC.
• AMC submits quarterly reports on the
functioning of the MF to the trustee.
Custodian
• Custodian provides custodial services &
ensures safe-keeping of securities.
• Maintains accounts of securities of a client.
• Collects dividends accruing to the client in
respect of securities.
• Helps in transfer of the securities and prevents
any manipulation of records & documents.
Types of MF
• According to Scheme of operation:
– Open-ended scheme
– Close-ended scheme
– Interval scheme
On the basis of Income:
– Income fund
– Growth Fund
– Balanced Fund
– Money Market Mutual fund
Open-ended Scheme
• When a fund is accepted & liquidated on a continuous
basis by a MF manager, it is called open-ended scheme.
• The fund manager buys & sells units constantly on
demand by the investor.
• The main objective of this fund is generation of income
in the shape of dividend.
• The scheme provides an excellent liquidity facility but
units are not listed.
• Prices are linked to the NAV of the units.
• The unit scheme 1964 of UTI, ULIP, Dhanraksha &
Dhanvirdhi of LIC MF.
Net Asset Value
• The NAV is nothing but the market price of each unit
of a particular scheme in relation to all the assets of
the scheme.
• Ex: The scheme size is Rs. 100 crores. The value of
each unit is Rs. 10. It has invested all the funds in
shares & debentures and the market value of the
investment comes Rs. 200 crores.
• NAV= 200 crores/100 crores*Value of each unit= Rs.
20
Close-ended Scheme
• When units of a scheme are liquidated (repurchased)
only after the expiry of a specific period, it is known as a
close-ended scheme.
• These units are publicly traded through a SEs & main
objective of the fund is capital appreciation.
• The price is determined on the basis of demand and
supply.
• More tax from investors point of view.
• Example: Canshare of Canara bank, IndJyoti &
Swarnajyoti of Indian bank
Interval scheme
• It is a kind of close-ended scheme with a
peculiar feature that it remains open during a
particular part of the year for the benefit of
investors, either to relieve of their holdings or
to undertake purchase of units at the NAV.
• Under SEBI(MF) regulations, every MF is free
to launch any or both types of scheme
including interval scheme.
Income Fund
• The investor is assured of regular income at
periodic intervals, say half-yearly or yearly.
• The main objective of this fund is to declare
regular dividends & not capital appreciation.
• The average return is higher than of the
income from bank deposits.
• It is suitable for old and retired people who
may not have regular income.
Growth Fund
• This fund concentrate mainly on long-run gains
(capital appreciation).
• Funds are generally invested in equities and
involves more risk.
• This fund is suitable for salaried & business
people who have high risk bearing capacity.
Balanced Fund
• It may be called income-cum-growth fund.
• It aims at distributing regular income as well
as capital appreciation.
MONEY-MARKET MF
• These funds are basically open-ended MF.
• The funds are invested in highly liquid & safe
securities like treasury bills or inter bank
borrowings.
• These schemes are restricted only to
commercial banks & their subsidiaries.
• The minimum investment is Rs. 1 lakh.
Functions of MF
• Channelising savings for investment.
• Offering wide portfolio investment.
• Rendering expertise investment service at low cost.
• Providing research service.
• Introducing flexible investment schedules.
• Providing greater affordability & liquidity.
• Simplified record keeping.
• Supporting capital market.
Mutual Fund Expenses
• Investors in mutual funds pay the following fees:
• Distribution charges (Distribution charges pay for marketing and
distribution of the fund's shares to investors.)
• Front-end load or sales charge ( A front-end load or a commission paid
to a broker by a mutual fund when shares are purchased.)
• Back-end load (which is paid by the investor when shares are redeemed
depending on how long they are held. )
• 12b-1 fees (An annual fee for marketing and distribution services and
computed as a percentage of a fund's assets, subject to a maximum of
1% of assets.)
• Management fee (It is paid to the fund manager or sponsor who
organizes the fund)
• Other fund expenses (Board of directors' fees, Custody fee ,Fund
accounting fee, Registration fees, Shareholder communications
expenses, Transfer agent services fee
Benefits/Advantages of Investing Through
Mutual Funds
Professional Money Management
• Fund managers are responsible for implementing
a consistent investment strategy .
• Fund managers monitor market and economic
trends and analyze securities
Diversification
• Diversification is one of the best ways to reduce
risk.
• Mutual funds offer investors an opportunity to
diversify across assets.
Liquidity
• Investors can sell their mutual fund units on any
business day.
• Receive the current market value on their
investments within a short time period (normally
three- to five-days).
Affordability
• The minimum initial investment for a
mutual fund is fairly low for most funds
(as low as Rs500 for some schemes.
Convenience
• Convenience of periodic purchase plans, automatic
withdrawal plans and the automatic reinvestment of
interest and dividends & SIP.
• Reports and statements .
Tax benefits on Investment in
Mutual Funds
• 100% Income Tax exemption on all Mutual
Fund dividends .
• Deduction up to 1 lakh available u/s 80(c)
under investment in MF
• .
Flexibility and variety
• Pick from conservative, blue-chip stock funds,
Sectoral funds,
? Funds that aim to provide income with modest
growth those that take big risks in the search for
returns.
• You can even buy balanced funds, or those that
combine stocks and bonds in the same fund.
CURRENT STATUS OF MF IN INDIA
• The industry is in the institution building phase – setting
highest professional standards
• Enhancing credibility through transparency of operation
and frequency of disclosure
• Product range – conventional and new generation funds
– sector specific, index funds, exchange traded funds,
fixed maturity funds, systematic withdrawal, automatic
redemption funds etc.
• Since end 1999, moved away from assured return
schemes
• Predominance of non-individual investor base
Current Status….
• Emergence of independent research bodies
evaluating performance and providing ratings
of funds
• Generating investor awareness and investor
interest in the industry
• Heavy concentration of investors from a limited
number of cities
REGULATORY FRAMEWORK
?Well Regulated - Strictly Regulated Industry.
?Regulation is comprehensive, sensitive and
supportive of healthy development of industry.
?Pro-active initiatives from the regulator. The
Regulation is constantly reviewed and amended
periodically.
?Guidelines on a variety of subjects such as
valuation, benchmarking, disclosure issued
regularly to match with best practices.
?Yearly inspection of all mutual funds – a support
to the healthy development.
REGULATORY FRAMEWORK contd..
?Self regulatory process is in built in Mutual Fund structure and set
up.
?Separate Auditors for Asset Management Company and for
Mutual Fund.
?Trustees are first level Regulators.
?Their general and specific duties and responsibilities are well spelt
out.
?Quarterly compliance test and Certification by Trustees.
?AMCs to record investment decisions and investment
management process.
?Partner relationship of SEBI with AMFI
CREDIT
RATING
Origin
• The credit rating concept originated in the
USA in 1860 by Henry Vannum Poor.
• In 1906, Moody’s Investor Agencies started
rating Railroad giving more thrust to the
concept.
• In India the CR was introduced by CRISIL in
1988, followed by ICRA & CARE in1991 &
1993.
Credit Rating Agencies in India
• Credit Rating Information Services Limited (CRISIL)
• Investment Information and Credit Rating Agency of India
(ICRA)
• Credit Analysis and research (CARE)
• Duff Phelps Credit Rating Pvt. Ltd. (DCR India)
* Onida Individual Credit Rating Agency of India(ONICRA)
CREDIT RATING-INTRODUCTION
• A credit rating assesses the credit worthiness of an
individual, corporation, or even a country.
• Credit ratings are calculated from financial history and
current assets and liabilities.
• A credit rating tells a lender or investor the probability
of the subject being able to pay back a loan.
• A poor credit rating indicates a high risk of defaulting
on a loan, and thus leads to high interest rates.
Definition
• Moody's: “Ratings are designed exclusively for the
purpose of grading bonds according to their
investments qualities”.
• Australian Ratings: ‘A corporate credit rating provides
lenders with a simple system of gradation by which the
relative capacities of companies to make timely
repayment of interest and principal on a particular
type of debt can be noted’.
Definition
• CRISIL: “Credit rating is an unbiased (neutral) and
independent opinion as to issuer’s capacity to meet its
financial obligations. It doesn’t constitute a recommendation
to buy/sell or hold a particular security”.
• ICRA: “Ratings are opinions on the relative capability of
timely servicing og corporate debt and obligations. These are
not recommendations to buy or sell…neither the accuracy
nor the completeness of the information is guaranteed.
Concept of Credit Rating
• Credit rating is an assessment of the capacity of the issuer of
debt security by an independent agency, to pay interest and
repay principal as per the terms of issue of debt.
• A rating agency collects the qualitative as well as quantitative
data from a company which has to be rated & assesses the
relative strengths & capacity of company to honour its
obligations contained in the debt instrument throughout the
duration of the instrument.
• The ratings are expressed in code numbers which can be
easily understood by the investors.
Classification of Credit Rating
• Debenture and Bond Rating:
• Equity Rating:
• Fixed Deposit and Certificate of Deposit:
• Commercial Paper:
• Chit Fund Rating:
• Banks Rating-CRAMEL (c-capital adequacy, r-resourse raising
ability, a-asset quality, m-management evaluation, e-earning
potential, l-liquidity)
• Customer Rating:
• Sovereign credit ratings
Country risk rankings (June 2011)
The table shows the ten least-risky countries for investment as of June 2011.
Rank Previous Country Overall score
1 1 Norway 92.44
2 6 Luxembourg 90.86
3 2 Switzerland 90.20
4 4 Denmark 89.07
5 3 Sweden 88.72
6 12 Singapore 87.65
7 5 Finland 87.31
8 7 Canada 87.24
9 6 Netherlands 86.97
10 13 Germany 85.73
Rating Process
• Primary Stage
– Rating Request
– Assigning Rating team
• Fact Finding and Analysis Stage
– Collection of information
– Meetings and plant visits
– Preparation of Reports
• Rating Stage
– Preview Meeting
– Rating committee Meeting and Rating
• Final Stage
– Communication and acceptance
– Surveillance (continuous observation)
Rating Framework
• Industry Analysis:
– Demand
– Supply
– Structure of the industry
– Govt. policies.
• Market Analysis:
– Market share
– Competitive edge
– Brand Equity
– Distribution Channels
– Research & Development.
Cont……
• Operational Efficiency:
– Availability of raw material
– Location factor
– Plant Capacity
– Technology
– Labour productivity
• Legal Position:
– Terms of debenture trust deed.
– Timely payment of interest & principal.
– Pending cases against the company.
– History of past legal records.
Functions of Credit Rating
Provided information's in a simple way
Provides unbiased opinion
Provides quality & dependable information
Low cost information
Provide basis for investment
Health discipline on corporate borrowings
Advantages of Credit Rating
• Advantages to Investor
– Assessment of Credibility
– Risk Indicator
– Protect against Bankruptcy
– Easy to understand
– Enables Quick Decisions
– Independent decision
– Portfolio Diversification
– Rating surveillance
Advantages to Rated Companies
* Sources of additional certification
* Increase the investor population
* Encourages financial Discipline
* Merchant bankers job made easy
* Foreign collaborations made easy
* Benefits the industry as a whole
* Low cost of borrowing
* Rating as a marketing tool
* Lowers the cost of borrowings
* Fosters a better image
Advantages to Intermediaries
• It enables proper planning, pricing,
underwriting and placement of the issues.
• Brokers and dealers could use rating to monitor
their risk exposures.
• This saves their time, cist, energy, and
manpower in analyzing the investment risk.
• Rating is also used in securitization of assets
and help the special purpose vehicle to
repackage the assets
RATING SYMBOLS FOR LONG-TERM INSTRUMENTS
SL. NO. CRISIL ICRA CARE SIGNIFICANCE
1 AAA LAAA CARE AAA Highest safe
2 AA LAA CARE AA High safe
3 A LA CARE A Adequate safe
4 BBB LBBB CARE BBB Mod safe
5 BB LBB CARE BB Inadq safe
6 B LB CARE B Risk prone
7 C LC CARE C Sub risk
8 D LD CARE D Default
doc_974649445.ppt
Mutual funds are originated in Belgium, where in 1782, a company was started to finance investments in national industries associated with high risks.
MUTUAL FUND
MUTUAL FUND-Origination
• Mutual funds are originated in Belgium, where in 1782,
a company was started to finance investments in
national industries associated with high risks.
• In 1860, this movement spread to England and in 20
th
century to USA.
• In India first MF was started in 1964 when UTI was
established.
• From 1987 commercial banks in India started MF
business.
• Ex-CAN BANK MF, SBI MF, INDIA BANK MF, LIC MF, GIC
MF
Meaning & Definition
• MF is a collective investment arrangement.
• MF collects the savings from small investors, invest
them in Govt. & other corporate securities & earn
income through interest & dividends, besides capital
gains.
• The SEBI (MF) Regulation 1993 defines a MF as “a fund
established in the form of a trust by a sponsor, to raise
monies by trustees through the sale of units to the
public, under one or more schemes, for investing in
securities in accordance with these regulations”
Concept
• A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal.
• The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities.
• The income earned through these investments and the capital
appreciation realized are shared by its unit holders in
proportion to the number of units owned by them.
• Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a
relatively low cost.
Mutual Fund Operation Flow Chart
LEGAL STRUCTURE
FUND SPONSPOR/SETTLOR
KOTAK MAHINDRA FINANCE LTD.
TRUST
KOTAK MAHINDRA MUTUAL FUND
TRUSTEE
KOTAK MAHINDRA
TRUSTEE CO. LTD.
INVESTMENT
MANAGER &
ADVISOR
KOTAK MAHINDRA
ASSET
MANAGEMENT CO.
LTD.
UNIT
HOLDERS
Contd…
LEGAL STRUCTURE
APPOINTS
• CUSTODIANS
• REGISTRARS
• BANKS
• DISTRIBUTORS
INVESTMENT MANAGER & ADVISOR
KOTAK MAHINDRA ASSET
MANAGEMENT CO. LTD.
Constitution & Management of MF
• MFs in India are now governed under the SEBI
(MF) Regulations,1996.
• SEBI has provided a four-tier system for
managing the affairs of MFs. They are:
– The Sponsor
– The Trustee
– The AMC
– The Custodian
THE SPONSOR
• According to SEBI(MF) Regulation “ sponsor as
any person who, acting alone or in combination
with another body corporate establishes a MF.
• In other words, a MF is launched by a company
either public or private.
• Example: SBI MF is sponsored by SBI
»LIC MF sponsored by LIC
THE TRUSTEE
• SEBI defines “ a person who holds the property
of the MF in trust for the benefit of the unit-
holders & includes a trustee company & the
directors of the trustee company.
• They carry the crucial responsibility of
safeguarding the interest of investors.
• They monitor the operations of the different
schemes & they have wide ranging powers.
Asset Management Company
• The AMC actually manages the funds of the
various schemes.
• The success of the MF depend upon the
efficiency of AMC.
• AMC submits quarterly reports on the
functioning of the MF to the trustee.
Custodian
• Custodian provides custodial services &
ensures safe-keeping of securities.
• Maintains accounts of securities of a client.
• Collects dividends accruing to the client in
respect of securities.
• Helps in transfer of the securities and prevents
any manipulation of records & documents.
Types of MF
• According to Scheme of operation:
– Open-ended scheme
– Close-ended scheme
– Interval scheme
On the basis of Income:
– Income fund
– Growth Fund
– Balanced Fund
– Money Market Mutual fund
Open-ended Scheme
• When a fund is accepted & liquidated on a continuous
basis by a MF manager, it is called open-ended scheme.
• The fund manager buys & sells units constantly on
demand by the investor.
• The main objective of this fund is generation of income
in the shape of dividend.
• The scheme provides an excellent liquidity facility but
units are not listed.
• Prices are linked to the NAV of the units.
• The unit scheme 1964 of UTI, ULIP, Dhanraksha &
Dhanvirdhi of LIC MF.
Net Asset Value
• The NAV is nothing but the market price of each unit
of a particular scheme in relation to all the assets of
the scheme.
• Ex: The scheme size is Rs. 100 crores. The value of
each unit is Rs. 10. It has invested all the funds in
shares & debentures and the market value of the
investment comes Rs. 200 crores.
• NAV= 200 crores/100 crores*Value of each unit= Rs.
20
Close-ended Scheme
• When units of a scheme are liquidated (repurchased)
only after the expiry of a specific period, it is known as a
close-ended scheme.
• These units are publicly traded through a SEs & main
objective of the fund is capital appreciation.
• The price is determined on the basis of demand and
supply.
• More tax from investors point of view.
• Example: Canshare of Canara bank, IndJyoti &
Swarnajyoti of Indian bank
Interval scheme
• It is a kind of close-ended scheme with a
peculiar feature that it remains open during a
particular part of the year for the benefit of
investors, either to relieve of their holdings or
to undertake purchase of units at the NAV.
• Under SEBI(MF) regulations, every MF is free
to launch any or both types of scheme
including interval scheme.
Income Fund
• The investor is assured of regular income at
periodic intervals, say half-yearly or yearly.
• The main objective of this fund is to declare
regular dividends & not capital appreciation.
• The average return is higher than of the
income from bank deposits.
• It is suitable for old and retired people who
may not have regular income.
Growth Fund
• This fund concentrate mainly on long-run gains
(capital appreciation).
• Funds are generally invested in equities and
involves more risk.
• This fund is suitable for salaried & business
people who have high risk bearing capacity.
Balanced Fund
• It may be called income-cum-growth fund.
• It aims at distributing regular income as well
as capital appreciation.
MONEY-MARKET MF
• These funds are basically open-ended MF.
• The funds are invested in highly liquid & safe
securities like treasury bills or inter bank
borrowings.
• These schemes are restricted only to
commercial banks & their subsidiaries.
• The minimum investment is Rs. 1 lakh.
Functions of MF
• Channelising savings for investment.
• Offering wide portfolio investment.
• Rendering expertise investment service at low cost.
• Providing research service.
• Introducing flexible investment schedules.
• Providing greater affordability & liquidity.
• Simplified record keeping.
• Supporting capital market.
Mutual Fund Expenses
• Investors in mutual funds pay the following fees:
• Distribution charges (Distribution charges pay for marketing and
distribution of the fund's shares to investors.)
• Front-end load or sales charge ( A front-end load or a commission paid
to a broker by a mutual fund when shares are purchased.)
• Back-end load (which is paid by the investor when shares are redeemed
depending on how long they are held. )
• 12b-1 fees (An annual fee for marketing and distribution services and
computed as a percentage of a fund's assets, subject to a maximum of
1% of assets.)
• Management fee (It is paid to the fund manager or sponsor who
organizes the fund)
• Other fund expenses (Board of directors' fees, Custody fee ,Fund
accounting fee, Registration fees, Shareholder communications
expenses, Transfer agent services fee
Benefits/Advantages of Investing Through
Mutual Funds
Professional Money Management
• Fund managers are responsible for implementing
a consistent investment strategy .
• Fund managers monitor market and economic
trends and analyze securities
Diversification
• Diversification is one of the best ways to reduce
risk.
• Mutual funds offer investors an opportunity to
diversify across assets.
Liquidity
• Investors can sell their mutual fund units on any
business day.
• Receive the current market value on their
investments within a short time period (normally
three- to five-days).
Affordability
• The minimum initial investment for a
mutual fund is fairly low for most funds
(as low as Rs500 for some schemes.
Convenience
• Convenience of periodic purchase plans, automatic
withdrawal plans and the automatic reinvestment of
interest and dividends & SIP.
• Reports and statements .
Tax benefits on Investment in
Mutual Funds
• 100% Income Tax exemption on all Mutual
Fund dividends .
• Deduction up to 1 lakh available u/s 80(c)
under investment in MF
• .
Flexibility and variety
• Pick from conservative, blue-chip stock funds,
Sectoral funds,
? Funds that aim to provide income with modest
growth those that take big risks in the search for
returns.
• You can even buy balanced funds, or those that
combine stocks and bonds in the same fund.
CURRENT STATUS OF MF IN INDIA
• The industry is in the institution building phase – setting
highest professional standards
• Enhancing credibility through transparency of operation
and frequency of disclosure
• Product range – conventional and new generation funds
– sector specific, index funds, exchange traded funds,
fixed maturity funds, systematic withdrawal, automatic
redemption funds etc.
• Since end 1999, moved away from assured return
schemes
• Predominance of non-individual investor base
Current Status….
• Emergence of independent research bodies
evaluating performance and providing ratings
of funds
• Generating investor awareness and investor
interest in the industry
• Heavy concentration of investors from a limited
number of cities
REGULATORY FRAMEWORK
?Well Regulated - Strictly Regulated Industry.
?Regulation is comprehensive, sensitive and
supportive of healthy development of industry.
?Pro-active initiatives from the regulator. The
Regulation is constantly reviewed and amended
periodically.
?Guidelines on a variety of subjects such as
valuation, benchmarking, disclosure issued
regularly to match with best practices.
?Yearly inspection of all mutual funds – a support
to the healthy development.
REGULATORY FRAMEWORK contd..
?Self regulatory process is in built in Mutual Fund structure and set
up.
?Separate Auditors for Asset Management Company and for
Mutual Fund.
?Trustees are first level Regulators.
?Their general and specific duties and responsibilities are well spelt
out.
?Quarterly compliance test and Certification by Trustees.
?AMCs to record investment decisions and investment
management process.
?Partner relationship of SEBI with AMFI
CREDIT
RATING
Origin
• The credit rating concept originated in the
USA in 1860 by Henry Vannum Poor.
• In 1906, Moody’s Investor Agencies started
rating Railroad giving more thrust to the
concept.
• In India the CR was introduced by CRISIL in
1988, followed by ICRA & CARE in1991 &
1993.
Credit Rating Agencies in India
• Credit Rating Information Services Limited (CRISIL)
• Investment Information and Credit Rating Agency of India
(ICRA)
• Credit Analysis and research (CARE)
• Duff Phelps Credit Rating Pvt. Ltd. (DCR India)
* Onida Individual Credit Rating Agency of India(ONICRA)
CREDIT RATING-INTRODUCTION
• A credit rating assesses the credit worthiness of an
individual, corporation, or even a country.
• Credit ratings are calculated from financial history and
current assets and liabilities.
• A credit rating tells a lender or investor the probability
of the subject being able to pay back a loan.
• A poor credit rating indicates a high risk of defaulting
on a loan, and thus leads to high interest rates.
Definition
• Moody's: “Ratings are designed exclusively for the
purpose of grading bonds according to their
investments qualities”.
• Australian Ratings: ‘A corporate credit rating provides
lenders with a simple system of gradation by which the
relative capacities of companies to make timely
repayment of interest and principal on a particular
type of debt can be noted’.
Definition
• CRISIL: “Credit rating is an unbiased (neutral) and
independent opinion as to issuer’s capacity to meet its
financial obligations. It doesn’t constitute a recommendation
to buy/sell or hold a particular security”.
• ICRA: “Ratings are opinions on the relative capability of
timely servicing og corporate debt and obligations. These are
not recommendations to buy or sell…neither the accuracy
nor the completeness of the information is guaranteed.
Concept of Credit Rating
• Credit rating is an assessment of the capacity of the issuer of
debt security by an independent agency, to pay interest and
repay principal as per the terms of issue of debt.
• A rating agency collects the qualitative as well as quantitative
data from a company which has to be rated & assesses the
relative strengths & capacity of company to honour its
obligations contained in the debt instrument throughout the
duration of the instrument.
• The ratings are expressed in code numbers which can be
easily understood by the investors.
Classification of Credit Rating
• Debenture and Bond Rating:
• Equity Rating:
• Fixed Deposit and Certificate of Deposit:
• Commercial Paper:
• Chit Fund Rating:
• Banks Rating-CRAMEL (c-capital adequacy, r-resourse raising
ability, a-asset quality, m-management evaluation, e-earning
potential, l-liquidity)
• Customer Rating:
• Sovereign credit ratings
Country risk rankings (June 2011)
The table shows the ten least-risky countries for investment as of June 2011.
Rank Previous Country Overall score
1 1 Norway 92.44
2 6 Luxembourg 90.86
3 2 Switzerland 90.20
4 4 Denmark 89.07
5 3 Sweden 88.72
6 12 Singapore 87.65
7 5 Finland 87.31
8 7 Canada 87.24
9 6 Netherlands 86.97
10 13 Germany 85.73
Rating Process
• Primary Stage
– Rating Request
– Assigning Rating team
• Fact Finding and Analysis Stage
– Collection of information
– Meetings and plant visits
– Preparation of Reports
• Rating Stage
– Preview Meeting
– Rating committee Meeting and Rating
• Final Stage
– Communication and acceptance
– Surveillance (continuous observation)
Rating Framework
• Industry Analysis:
– Demand
– Supply
– Structure of the industry
– Govt. policies.
• Market Analysis:
– Market share
– Competitive edge
– Brand Equity
– Distribution Channels
– Research & Development.
Cont……
• Operational Efficiency:
– Availability of raw material
– Location factor
– Plant Capacity
– Technology
– Labour productivity
• Legal Position:
– Terms of debenture trust deed.
– Timely payment of interest & principal.
– Pending cases against the company.
– History of past legal records.
Functions of Credit Rating
Provided information's in a simple way
Provides unbiased opinion
Provides quality & dependable information
Low cost information
Provide basis for investment
Health discipline on corporate borrowings
Advantages of Credit Rating
• Advantages to Investor
– Assessment of Credibility
– Risk Indicator
– Protect against Bankruptcy
– Easy to understand
– Enables Quick Decisions
– Independent decision
– Portfolio Diversification
– Rating surveillance
Advantages to Rated Companies
* Sources of additional certification
* Increase the investor population
* Encourages financial Discipline
* Merchant bankers job made easy
* Foreign collaborations made easy
* Benefits the industry as a whole
* Low cost of borrowing
* Rating as a marketing tool
* Lowers the cost of borrowings
* Fosters a better image
Advantages to Intermediaries
• It enables proper planning, pricing,
underwriting and placement of the issues.
• Brokers and dealers could use rating to monitor
their risk exposures.
• This saves their time, cist, energy, and
manpower in analyzing the investment risk.
• Rating is also used in securitization of assets
and help the special purpose vehicle to
repackage the assets
RATING SYMBOLS FOR LONG-TERM INSTRUMENTS
SL. NO. CRISIL ICRA CARE SIGNIFICANCE
1 AAA LAAA CARE AAA Highest safe
2 AA LAA CARE AA High safe
3 A LA CARE A Adequate safe
4 BBB LBBB CARE BBB Mod safe
5 BB LBB CARE BB Inadq safe
6 B LB CARE B Risk prone
7 C LC CARE C Sub risk
8 D LD CARE D Default
doc_974649445.ppt