Finly December 2018 by FINLY

FINLY| DECEMBER 2018 | Finstreet | SIMSR

From the Editor’s Desk

Dear Readers, We at Finstreet are proud to unveil the December edition of our monthly magazine FINLY for the academic year 2018-19. Our Cover Story helps us understand the ongoing tussle between the government and the RBI and how things may unfold in the coming months. Next in line, is the Eco Section, which explains in detail about the various aspects of etailing and the economics involved in its day to day operations. In the Sector Analysis, the authors inspect the Agriculture sector, with an in-depth analysis of the latest disruptions in the industry, along with covering the leading industry players. This month's Fintech Funda covers the emerging trends in Open Banking and how it may impact the future of traditional banking. We are fortunate to have Mr. Maheshwaran K, the outgoing student of PGDM-Finance and former co-convener, Quantinuum, to pen down his experiences during MBA in the Alumni Section. Aachman Vijayvargia and Karthik Venkateshwaren, current students of MMS Finance, have penned the experiences of their summer internships at ICBC Bank and Anand Rathi Financial Services respectively, which I am sure will definitely be useful for juniors for getting a feel of the type of companies that come to campus and the stay of their internship at any company in the future. In the end, we have introduced a new section called “Know Your Finance”, which contains information, breaking down some useful concepts in Finance, which would help any aspiring finance student to take baby steps in building the concepts as well as confidence in the subject. I am thankful to Prof. (Dr.) Pankaj Trivedi (Course Coordinator, PGDM Core, and Faculty Coordinator, Finstreet) for providing the much required mentoring, support and backing to the Finly team. I would also like to thank our New Sponsors, White Knight Ventures, for an enriching collaboration. We hope to continue the partnership for a very long time. We have received an overwhelming response for this month's call for article competition, with some high-quality content from some of the best management colleges of the country and I thank each and every participant for their sincere efforts and participation. This month's winner's and runner-up articles are a recommended read. I thank all our readers and faculty members for their constant love and support. Your reviews and feedback are much appreciated. Team FINLY has always been a strong set of focused individuals who put in a lot of efforts and dedication to stitch together this magazine and I can't thank them enough for their constant support and initiative. HAPPY READING!!! R Prasanth, PGDM-FINANCE, 2017-2019, K.J. SIMSR

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

Cover Story

Article of the Month-Winner

Article of the Month-Runner Up

Eco Section

Fintech Funda Alumni Section Sector Analysis Internship Diaries

Know your ď&#x20AC; nance

Independence of Central Bank

Cover Story

Pratik Sharma | MMS | 2018-20 Shraddha Joshi | MMS | 2018-20

INDEPENDENCE OF THE CENTRAL BANK In recent weeks, a conflict has surfaced between the Ministry of Finance Government of India and the Apex Monetary Authority -The Reserve Bank of India (RBI). The RBI feels that the Government is interfering in the working of the RBI, which might hamper its autonomy in keeping and improving the monetary position of the country in accordance with the global standards. This has led to the speculation that the Governor of RBI, Mr. Urjit Patel may step down from his position. The RBI, is a statutory autonomous organization which oversees the money supply regulation, monetary controls, foreign exchange, acts as a banker's bank and is the apex lender to the

government among others. HISTORY OF CONFLICTS BETWEEN THE GOVERNMENT AND THE RBI In October 2018, the Ministry of Finance moved to invoke Section 7 of the RBI Act. Section 7 gives powers to the government to seek consultations with the RBI. If necessary, the Government may issue certain binding orders on RBI in public interest. The three letters under Section 7, that were sent by the Government of India to the Reserve Bank of India for consultation included the issues like Capital Adequacy Norms for Banks governed by RBI, Liquidity Crisis, Credit to Micro, Small and Medium Enterprises (MSME) and lighter PCA (Prompt corrective action) norms for the PSBs (Public sector banks).

Cover Story

FINLY| DECEMBER 2018 | Finstreet | SIMSR

Cover Story

FINLY| DECEMBER 2018 | Finstreet | SIMSR

Amidst all this controversy, Mr. Arun Jaitley, the Finance Minister of India has asserted that the Government respects the RBI's Autonomy and also feels it is necessary to maintain the same. Accordingly, the finance ministry has not yet given direction to the RBI to follow the instructions issued by it while invoking Section 7 of the RBI Act.

Part 3: “Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.”

Section 7 – WHAT DOES IT SAY? WHEN DID IT BEGIN? Part 1: “The central government may from time to time give such directions to t h e B a n k ( R B I ) a s i t m a y, a f t e r consultation with the governor of the bank, consider necessary in the public interest.” Part 2: “Subject to any such directions, the general superintendence, and direction of the affairs and business of the Bank shall be entrusted to a central board of directors, which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”

After getting an overview of the entire situation, let's look from where the Independence of Central bank became the topic of discussion. It all started in June 2018, wherein a north block internal note said that the RBI had been conservative in its calculation and should pay the center ₹3.6 trillion. The Government had been asking for a new economic capital framework for long. Basically, the framework would

Cover Story

FINLY| JULY 2018 | Finstreet FINLY| DECEMBER 2018 | Finstreet || SIMSR SIMSR

decide the level of excess capital the RBI keeps with itself to battle systematic risks and the amount it finally pays as a dividend to the Government. The Government felt that the RBI is more conservative than other central banks when it comes to calculating capital needs as well as in the dividend being paid to the Centre. The RBI calculates its capital needs based on â&#x20AC;&#x153;stressed value at risksâ&#x20AC;? that is the market risk tailored for stressed market environments valuations at 99.99% confidence interval, while the Government wants the central bank to just use the value-at-risk (VAR) at a 99% confidence interval, which most other central banks use. Here is where the point of difference starts; Since the RBI is more risk-averse than the Government wants it to be. S h i f t i n g t o va l u e - a t- r i s k a t 9 9 % confidence interval would lead to a re d u c t i o n i n t h e a m o u nt o f R B I provisions, freeing up more money for the Centre. In fact, the adoption of a new model and a new dividend policy is going

FINLY| August 2016 | Finstreet | SI

to be a major topic of discussion at the n ex t R B I m eet in g to b e h eld o n November 19, 2018. The below mentioned chart was presented by the former Chief Economic Advisor Arvind Subramanian in its 201617 Economic Survey showing that only three nations- Norway, Russia and, Malaysia had central banks with higher equity as a percentage of total balance sheet than India. According to the existing norms, the RBI transfers a surplus from its balance sheet to the Centre every year as a dividend and the higher level of Equity as a percent of Central Bank Balance Sheet shows that the RBI keeps more reserves with them, on which Subramanian was of the opinion that there was no reason why the extra capital should be kept with RBI, and even at current levels the RBI is already highly capitalized. The key principle that should be observed in this process is that the excess capital in the RBI, including that created by demonetization, is suitable for an entry onto the balance sheet or a wealth gain and not an income gain, hence the

Cover Story

IMSR

FINLY| DECEMBER 2018 | Finstreet | SIMSR

uses to which it should be put should also be to the tune of a balance sheet entry. And of course, any strategy to use the excess capital must be done within relevant laws and with the full cooperation of the RBI. WHY WAS SECTION 7 INVOKED BY THE GOVERNMENT? So far the discussions and consultations between the Ministry of Finance and the Reserve Bank of India have taken place without resorting to the use of Section 7. The invocation of section 7 of the RBI Act gives the Government the scope to issue directions as it finds fit to the Reserve Bank of India. A recent judgment by the Hon'ble High Court of Allahabad in a case filed by power producers against the RBI's February circular that mandates early detection of stressed assets and their time-bound resolution is considered as the inspiration taken by the government in invoking section 7. The High Court had asked the finance ministry to have consultations with the RBI within 15 days, under Section 7 of the RBI Act 1934 to resolve the issue without issuing directives to the RBI. The order said “ The central government, however, is not expected to issue any directions, as contemplated under Section 7(1), indiscriminately or randomly. Such directions are possible when there exists sufficient material in support.” In its reply to the Ministry of Finance on the three letters, RBI has conveyed its position on the need to retain the

“stringent” prompt corrective action (PCA) framework for stressed banks and has stated that there is no liquidity crunch. The Ministry of Finance and the RBI have also differing views on the issue of capital adequacy norms for banks. The RBI has given instructions that the banks should maintain a capital-to-risk (risk-weighted) asset ratio (CRAR), including capital-conservation buffer, at 11.5% - 1 percentage point higher than Basel III norms. Besides, the common equity tier (CET)-1 of banks are required to be at least 5.5% of its risk-weighted assets — again 1 percentage point higher than the global norms. However, the Ministry of Finance wants the stipulation to be aligned with international practices so that banks can lend more and add to economic growth. As the Government wants to prop up investments, manage the fiscal situation, and increase the consumption in the economy and also that people are not upset with the government in the run-up to the elections, the government can insist on a large transfer from RBI's 'surplus' pool. The Finance Ministr y has suggested that the framework of corrective action be aligned with best global practices to allow banks to have room for growth. Viral Acharya, the deputy governor of RBI said: “Governments that do not respect the central bank's independence will sooner or later incur

FINLY| DECEMBER 2018 | Finstreet | SIMSR

the wrath of the financial markets, ignite an economic fire, and come to rue the day they undermined an important regulatory institution.” In another speech, on October 12th, titled 'Prompt Corrective Action: An Essential Element of Financial Stability Framework' Acharya warned the Government against diluting the risk threshold set out by the RBI in various indicators.

driver, it is a possibility that the government may not put on the seat belt and if you do not put on the seat belt, you get into an accident and the accident can be quite severe. The strained relationship between the two has been going on for quite a long time now as the government keeps interfering in the matters with the solutions it thinks fit right.

Raghuram Rajan, ex-governor of the RBI has also criticized the undue interference of the Government in the workings of the RBI. He said, “India needs a strong and independent RBI to ensure macroeconomic stability”.

FACTORS TO BE FOCUSSED ON TO EASE THE SITUATION

Historically, the government wants to focus on improving growth and it does all it can within the limits set by RBI, which are based on financial stability. The RBI is like a seat belt for government and as a

The first and foremost thing to ease the situation is to avoid a showdown. The pulling back of both sides is the most sensible thing that one can think of, but, it may not be possible for a couple of reasons. First, the pressures in the economy are real. Second, the broader debate on the

HOW CAN INDIA ACHIEVE FINANCIAL INCLUSION? FINLY| DECEMBER 2018 | Finstreet | SIMSR

proper role and functions of RBI has been going on for some years and needs to be resolved because it surfaces every now and then. There is a third factor that needs to be recognized - most importantly the personality of the present governor, who is seen as not just rigid but also uncommunicative. Past governors too have been rigid but were willing to engage in imparting information. And especially after the manner in which the last governor left (admittedly, at the end of his term), the government is reluctant to pull the trigger prematurely on this one.

1980s, when the government insisted and threatened to take away the banking license from the RBI, Dr. Manmohan Singh, the then governor, chose to back off and resign rather than allow any institutional damage to be done, as he faces a similar situation today. The Government should use its own resources to give money to the undercapitalized banks that it owns. In the long run, autonomy is important to preserve the democratic and economic health of our country and the Reserve Bank of India is of utmost for proper functioning of the Indian Economy.

We also have to bear in mind that the government is yet to find a suitable candidate for the post of the chief economic advisor. To look for a new governor and a top-flight economist to serve as the deputy governor, in an atmosphere of conflict would probably mean appointing an officer from the Indian Administrative Service as a governor, on the assumption that he/she will do the bidding on behalf of the government's interest. With criticism from influential quarters about filling senior economist positions with candidates from abroad, the search for suitable candidates will be a big ask, though internal promotion could offer a solution. The best answer in such situations is a tactical give-and-take. The board should advise in favour of more liquidity in the system while appointing a committee to go into the technicalities of whether the RBI has surplus reserves that can be handed over. Mr. Urjit Patel on his part can be advised to recall about how in the

Article of the Month - Winner

HOW DO ELECTIONS IMPACT THE MACROS OF THE INDIAN ECONOMY ?

Shipra Agarwal XIME Bangalore

INTRODUCTION Actions driven by perception, the need for prosperity and the integrating world are the reasons for the commotion around the globe. A slight increase in the momentum in any of these factors spurs a chain reaction disrupting the balance t h at we a re t r y i n g to m a i nta i n . Disruption can be associated with the economies of the world which have time and again created chaos given their inherent sensitivity towards the exogenous and indigenous events taking place on a real-time basis. Moving on to the Indian economy, every five years it goes through the process of disruption with the change in the ruling government. In this world driven by

network connectivity and data, different political parties have identified their own set of stakeholders whom they try to manipulate using social media. Every party has chosen different religion and communities as their stakeholder to win the favor of the majority and this is the main reason for the persistent culture divide in the country. Foundation of elections is laid upon the promises made by the politicians to the public and the despairing fact is that an initiative is taken towards the fulfillment of these promises close to the next elections to create a mirage of a great rule that people can reflect upon while casting their vote. Due to this reason right before the election, the government spending goes up but the

FINLY| DECEMBER 2018 | Finstreet | SIMSR

Article of the Month - Winner

question that is overlooked is “How does this expenditure really impact the economy?“ EXPENDITURE DURING ELECTIONS – ANYTHING BUT USEFUL The past records show that during the elections, the government's actual expenditure exceeds the budgeted estimates which lead to an increase in the fiscal deficit. Government embarks upon the journey of populism and spends heavily on social security schemes, farm loan waivers, salaries of public servants, etc. Politicians stress upon the need of the hour for the farm and non-farm sector to justify their actions. But the glaring reality is that these kinds of expenditures increase the stress of the economy and does little to relieve the farmers of their burden. In truth, the majority of the small and marginal farmers still approach the unorganized sector to borrow money. Farm loan waivers increase the state debt and simultaneously increase their interest payment obligation. Also, NPAs of the banks providing agricultural loan shoot up which makes them wary of the risk exposure in the districts with a high probability of loan waivers. On the other hand, another reality is that, in India, big farmers are able to get the loans easily because of bureaucracy and corruption prevalent in the country. Waivers create a moral hazard which is the reason behind big farmers deliberately not repaying the loans.

Elections are a costly affair and the economy does not gain anything from this non-productive expenditure. Political parties spend large sums of money on advertising, transportation, voter mobilization, propaganda and campaign material printing. F U N D I N G T O WA R D S E L E C T I O N ACTIVITIES – TRANSPARENT ENOUGH? A fact that we all know but needs to be pointed out is that the previously mentioned expenditures made are all explicit but the major portion of the spending goes on swaying the voters to their side. Now, where does this money come from? It is alleged that the major sources of funding are corporates and big business houses which transfer their unaccounted “black money” to the parties to do their bidding in return. This directly attacks the competitive environment and affects the growth rate. In 2008, the government took the first step towards making political funding transparent with the Right to Information Act which allowed disclosure of income tax returns of political parties. But this step has shown little to no effects as reports can be manipulated and it is difficult to point fingers when corruption is prevalent at all levels of the system. For the next elections, Finance Minister Mr. Arun Jaitley came up with electoral bonds to make the funding process transparent, but how successful it will be when the identity of the donors is kept secret, is yet to be seen.

FINLY| DECEMBER 2018 | Finstreet | SIMSR

Article of the Month - Winner

HOW DO THEY MAKE MONEY? THE OIL PRICING DILEMMA

Oil prices are yet another sensitive issue in India and most of the political parties claim to bring them down while campaigning for elections. For this reason, oil marketing companies increase the oil prices in the fear of gove r n m e nt i nte r ve nt i o n d u r i n g elections to keep the prices in check. This affects the stock prices of the oil marketing companies and they are exposed to the risk of both oil price trajectory and government policy during the election. Currently, OMCs are also facing the possibility of dilution of stake by the government in these companies. CONCLUSION In business parlance, investors expect a return for the efforts made but in India, we are witnessing a cycle of change of governments with low significant growth. In the midst of opportunistic politics, the greater good of the public is overlooked. The opportunity cost of the elections is the development of infrastructure and long-term benefits to the economy. We are still struggling for the survival of the majority of the population when the world is moving ahead with artificial intelligence. A dream is what we chase, the reality is what we face, a fusion of the two is the hope that we keep in our fragile hearts with the slight trepidation that one day this all will fade. Even with a hazy vision of a foggy future, we still hope for a better government, a better economy and a better tomorrow. "Acche Din Aayengeâ&#x20AC;?

Article of the Month - Runner Up

RE-IMPOSITION OF THE

Krunal Sampat KJ SIMSR MMS 2017-19

BACKGROUND OF US - IRAN RELATIONS Since the Islamic Revolution of 1979, the US has accused Tehran of being the first sponsor of radical and antiAmerican groups like Hezbollah and Hamas. Despite repeated sanctions, Iran has not stopped their ballistic missile program. In fact, it is boosting its missile capabilities in order to increase the accuracy, precision, and range. If Iran creates a nuclear bomb, it would certainly consolidate its role as an international superpower. It would also trigger an arms race with Saudi Arabia and the Emirates. Nuclear power will increase the risk of proliferation, nuclear disaster, and loss of American leverage in the area. UNSC was also concerned if radical outfits come in

possession of such powerful weapons. It could create mass destruction and volatility. SANCTIONS (1979, 1987, 1995, 2006) Iran had initially targeted investments in oil, gas, and petrochemicals, exports of refined petroleum products, banking, insurance transactions, shipping, and business dealings with the Islamic Revolutionary Guard Corps (IRGC). A G R E E M E N T S ( J O I N T COMPREHENSIVE PLAN OF ACTION) W i t h a c l e a r ta rge t to p re ve nt proliferation and make sure Iran only uses nuclear technology for peaceful purposes, an agreement on the nuclear program of Iran was reached at in July

FINLY| DECEMBER NOVEMBER 2018 2018 || Finstreet Finstreet || SIMSR SIMSR

Article of the Month - Runner Up

HOW DO THEY MAKE MONEY?

2015 between Iran, UNSC members, and the EU. Under the agreement, Iran agreed to eliminate its uranium stockpile and other nuclear programs. Iran will receive relief from all UNSC sanctions as well as multilateral and national sanctions related to the nuclear program, including steps on access in areas of trade, technology, finance, and energy.

RE-IMPOSITION OF THE IRAN SANCTIONS According to Obama, JCPOA was supposed to be a win-win agreement between UNSC members and Iran. While the primary reason for signing the agreement was to deter Iran from the Ballistic Missile Program in lieu of lifting economic sanctions. But Trump administration has decided to snap the iconic agreement and has re-imposed economic sanctions while threatening its allies from doing business with Iran. It wants Tehran to abandon its nuclear development and stop supporting terrorists' groups in the M i d d l e Ea st re g i o n . U n d e r t h e sanctions, the US can seize assets owned by blacklisted people & entities. Penalties have been exempted for 8

Article of the Month - Runner Up

countries importing Iranian crude as well as purchases made on humanitarian grounds like food and medicine. Phase 1 Sanctions - August 7 â&#x20AC;&#x201C; Purchase of US forex, Gold, Metal, Consumer Goods, Carpets, Pistachios, and Airlines

Phase 2 Sanctions - November 5 â&#x20AC;&#x201C; Iran's Port Operators, BFSI, SWIFT, Oil, Energy, Hydrocarbons I M PA C T O N O I L S U P P L I E S A N D PRODUCTION Major importers of Iranian crude include China, which constitutes 26% of it, India (23%), EU (20%) and South Korea (11%). It is estimated that in the short run US sanctions would cut roughly 2% of the global oil supplies while in the long run, lost oil production would be compensated primarily by Saudi Arabia, Russia, and the US. Oil traders across 8 countries have been given waivers to replace Iranian crude within a stipulated timeline. Even before sanctions were imposed, in July, Iranian crude exports were down 15 percent, from April levels. Major European MNC's started reducing their imports which saw a reduction of around 41% from the April levels. While most of Iran oil importing countries have cut their imports, China and India are aggressively stockpiling crude ahead of an

Article of the Month - Runner Up

FINLY| DECEMBER 2018 | Finstreet | SIMSR

expected shortage. Indian officials believe it's a difficult task to search for alternate suppliers in such a short duration and expects further waivers from the US. While July imports of China were up by almost 14% as compared to April, China was adamant on its stand on Oil imports wherein it won't cut nor boost Iranian crude imports.

IMPACT ON BUSINESS DEALS Given the choice of doing business with Iran or the U.S, re-imposition of sanctions has increased the risk of doing business with Iran. With the Trump administration imposing hefty penalties on companies dealing with Iran, it has jeopardized existing and upcoming business deals between Iran and other MNC's. In order to comply with existing sanctions, 2 windows of 90 days and 180 days have been given for existing business commitments. Sanctions have impacted Iran business deals worth billions of dollars from major players like Daimler, Mercedes, Total Oil, Renault, Airbus, Boeing, and others. EFFECT ON IRAN'S ECONOMY Since the start of 2018, Iran's economy has been struggling with inflation control, growth, and rise in government

corruption. With re-imposition of sanctions, Rial's value has dropped by 69% Vis a Vis US Dollar which further led to hoarding of forex and gold. According to an IMF forecast in May, Iran's economy was supposed to be growing at around 4% in 2018 and 2019, which was updated to 1.5% and -3.6% in 2018 and 2019 respectively after the U.S sanctions.

INFLATION FORECAST As phase 1 and phase 2 sanctions have kicked in, buyers have started hoarding imported supplies which pushed prices of goods and commodities. IMF has predicted Iran's exports to come down â&#x20AC;&#x153;significantly over the next two years at least.â&#x20AC;? While IMF had predicted 2018

Article of the Month - Runner Up

FINLY| DECEMBER 2018 | Finstreet | SIMSR

inflation to be close to 12% in May, after the sanctions, was updated to 30% (an increase of 150%). For 2019, inflation was predicted at 12% in May which was further updated to 35% (an increase of 191%).

VIEWS FROM TEHRAN According to the latest IAEA report Iran has not violated any nuclear norms mentioned in the 2015 agreement. Iranian President Rouhani criticized the US for violating the JCPOA agreement and not respecting UNSC's decision. He said, â&#x20AC;&#x153;Iran would not bend to the language of force, pressure, and threatsâ&#x20AC;?. Reimposition of sanctions is more of an armtwisting strategy by Donald Trump without considering views of primary stakeholders of UNSC, and its impact on global trade.

BREAKEVEN OIL PRICE Even before the U.S pulled out of the nuclear deal, Iran's oil export has plunged by almost 40%. After sanctions, oil exports have been curtailed which has pushed the breakeven prices for Iran. In May, IMF had projected the breakeven price for 2018 to be 68$/Barrel, which has been updated to 98.6$/barrel in November (an increase of almost 45%) While projections for 2019's breakeven price in May was 71.6$, which has been updated to 95.4$ in November (an increase of around 33%)

Economics of E-tailing

ECO Section

Apoorva Sakunde | PGDM | 2018-20 Prachi Jain | PGDM IB | 2018-20

WHAT IS E-TAILING? E-tailing is a buzzword created for the process of electronic retailing. Any sale of a good taking place online, whether Business to Business (B2B) or Business to Consumer (B2C) comes under etailing. E-tailing is not a new concept, its presence can be dated to as early as 1994 when Amazon started selling books online. During the year 1997, Dell Computers booked profits to the tune of multimillion dollars by taking orders t h ro u g h i t s we b s i te s . W i t h t h e advancement of technology, shopping has now shifted from physical stores to virtual shops where a huge range of products is available for consumers just at their fingertips. With the help of images and videos related to products,

specification details, and reviews from other consumers, information regarding the products is communicated to the co n s u m e rs . D eta i l e d i nfo r m at i o n available on online stores eliminates the need of having a physical presence in a store before purchasing any good. There is a thin line of difference between e-commerce and e-tailing. In simple language, e-commerce can be defined as the transfer of money taking online during the exchange of any kind of goods or services between two parties. Whereas etailing is a subset of e-commerce in which a business transaction done for the sale of any physical good(s) is qualified as etailing. E-tailing has been expanding rapidly over the years; not only business giants but small and medium enterprises are also

ECO Section

FINLY| DECEMBER 2018 | Finstreet | SIMSR

opting for it to expand their reach, which was earlier restricted due to the need of physical presence at a place to operate the business. CHARACTERISTICS OF E-TAILING For making a strong presence and to withstand fierce competition, E-tailing websites must have some characteristics which distinguish them from their competitors and create a brand value among the users:

Amazon, Wal-Mart, Apple, JD.com, Alibaba etc. Alibaba and Amazon are major competitors at the global level. Amazon undoubtedly is the leading giant, with its presence in more than 50 countries and a consumer base of almost 1.2 billion. Alibaba has a lesser uniform presence, and is present in 15 countries and covers an online population of about just over a billion people.

JD.com also operates like Amazon and Alibaba, exclusively through online retail Ÿ Range of Products: Websites must have a wide range of products so as to stores. But others such as Apple and Walmeet the needs of all kind of customers Mart have a strong online presence apart from their brick and mortar retail stores. and provide suitable options They both sold more than 15 million worth of merchandise individually in the Ÿ Pricing: Companies must provide (Source: RBI) competitive pricing so that the previous year. customers do not choose the competitor because of a lower pricing Ÿ Dynamic to consumer's need:

Inventory and stocks should be updated dynamically and data should be updated on the website accordingly Ÿ Easy navigation: Websites with

complex navigation are not perceived easily by consumers. Easy navigation enhances the shopping experience and makes the consumer more comfortable

LOGISTICS IN E-TAILING

BIG PLAYERS OF THE WORLD

Logistics is one of the core components of the process of e-tailing. From the storing of products in the warehouse to cost of shipping, losses occurred due to reverse shipping in case of return of order and cancellation carry different value and add to the final value of the product. Different costs are involved in the process of shipment, returns, and storage.

Some biggies in the e-tailing world are

BUSINESS MODELS IN E-TAILING

Ÿ Consumer-friendly services: Delivery

times should be shorter; exchanges and returns policy should be easy to attract more consumers towards business

FINLY| DECEMBER 2018 | Finstreet | SIMSR

ECO Section

who is also the owner of the product. The e-commerce business model provides a framework for the B2B, B2C, C2C, or C2B business strategy. It includes the purpose and goals of the company and how it intends to achieve them. There are two types of business modelsâ&#x20AC;&#x201C; 1. Marketplace Model: This model involves inviting various sellers to list a n d s e l l t h e i r p ro d u c t s o n t h e company's platform. Hence, this model includes partnerships with wholesale sellers who stock their inventory, package the product as per the rules put forth by the company, or directly send the products to the courier partners. Marketplaces handle the marketing of the business as well as the creation of an online platform for the listing of the products for sale. They may also look into the shipment, delivery and payment help by tying up with certain logistics companies and financial institutions. The seller, in this case, receives intimation whenever an order is confirmed on the online platform. This is done either through automated or manual emails, calls, or spreadsheet files, which is decided in the contract between two parties concerned. A commission is charged by the platform owner after the product's payment and delivery is successful. This model transfers the loss to the seller as any damage to the product during the delivery process is borne by the seller,

Marketplaces, hence, provide a platform to the sellers to interact with the customers. These models are investorfriendly and highly scalable. 2. Inventory-Led Model: In this model, products are directly bought from the manufacturer or a middleman at discounted rates and sold to the customers. The owners cater to the setup and maintenance of warehouses and distribution centres, dispatching of the orders straight to the customers, marketing of the business, the creation of an online platform as well as the losses suffered if the products suffer any damage i.e. an end-to-end involvement. The entire margin belongs to the company and hence, there exists more scope for a commission, but this entire set-up demands a lot of investment upfront and is difficult to scale. REVENUE MODEL IN E-TAILING Revenue in e-commerce is generated by websites through commissions. The percentage of commission differs from p ro d u c t t o p ro d u c t o f d i f fe re n t categories. Different revenue models in the e-tailing industry are: 1. Direct Sales Model: This is the most commonly used revenue model by etailing websites. In here an online portal is created for selling of goods and goods are shipped as per order whenever a cu sto mer makes a p ayment. Fo r example, Flipkart, Myntra.

ECO Section

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2. Subscription Model: In this model, products are delivered to customers at regular intervals and a fee is charged for this. This model is used by companies to retain the customers having reliable income streams. For e.g. Thebigbokbox delivers a book box with selected books every month to its subscribers. 3. Credit Model: This model works on the basic concept of â&#x20AC;&#x153;Buy now pay laterâ&#x20AC;?. It allows a customer to buy goods on credit and later pay the amount with an added interest. For example, Lazypay. ADVANTAGES E- ta i l i n g co m e s w i t h n u m e ro u s advantages, the most important one being the ease to reach the customers worldwide. Even those who cannot visit a brick and mortar stores can purchase products through online retail stores and thus businesses can generate greater revenue. Online stores are open for business 24/7 and hence the customer can make purchases as and when he feels like. Cost of maintaining a store comes down drastically as storage of goods become simpler with virtual stores. The need for a physical presence at different locations is also eliminated due to this. Interaction with clients and analysis of their habits and shopping trends becomes easier for businesses so as to decide their marketing strategy and business plans for the future. With software coming under the category of

e-tailware, portfolio creation and management is getting easier. Also, inventory tracking and billing processes get easier. DISADVANTAGES Though e-tailing comes with a lot of benefits, this retail medium has some disadvantages as well. Online stores lack the touch-see-feel-hear factor. There are certain products which exclusively fall under this category. For instance, let us consider a home theatre system. The buyer would want to get a demonstration of the system before making any decision. This experience can be provided in a retail store and not on a virtual medium. Though costs related to maintaining the stores reduce substantially, there are several others costs that come up. Costs related to warehousing, packaging the products (especially if the products are large and fragile), distribution and shipping, timely and smooth delivery as well as costs of postage related to the products being returned need to be taken care of. Price comparisons on virtual sites become extremely easy and hence, customer loyalty becomes a major problem. Online businesses also need to shell out a generous amount of money on advertisements.

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ECO Section

E-COMMERCE RETAIL IN INDIA 1. E-commerce Business Models in India

2. Scenario in India With access to the internet becoming easier and the mobile internet user base slowly spreading to rural areas, India has achieved a remarkable growth in the ecommerce sector in the last few years.

rate of 51%, the largest in the world. The revenue for this sector is believed to hit $120 billion in 2020. India's internet economy is expected to double from US$125 billion as of April 2017 to US$ 250 billion by 2020, majorly backed by ecommerce.

As per IBEF, the demand for the e- The Indian government has increased the commerce sector is growing at an annual limit of foreign direct investment (FDI) in the e-commerce market model up to 100 percent under the automatic route. As of July 2018, the government of India released the first draft of India's national policy on e-commerce. This draft provides a set of rules and policies which aim at

ECO Section

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providing a framework for the ecommerce industry as well as all players i n v o l v e d i n t h i s i n d u s t r y. T h e government is taking inputs from various industry players and working on the second draft of e-commerce policy as well. 4. E-tail players in India A few of the major e-tail players in the segments of travel, fashion, furniture, education, and real estate in India have been listed below:

CONCLUSION E-tailing is changing the way people shop globally. With an uncountable number of retailers available right at the click of a button and with secured payments, numerous payment options, easy returns, and services - this industry has a plethora of options for expansion and revenue generation.

The availability of a wide variety of products at competitive prices encompassing greater discounts and tem pt in g d ea ls co u p led w it h t h e increased convenience has left the online retailing growing at an astonishing rate. Instant gratification and path-breaking i n n o vat i o n s l i ke a n a l y t i c s - d r i ve n customer engagement, digital advertisements, mobile wallets, and hyper-local logistics have paved the path for future success.

In a nutshell, backed by favourable demographics, rising incomes, increased p e n e t rat i o n o f s m a r t p h o n e s a n d availability of internet access, government initiatives, technologyenabled innovations as well as by the entry of the foreign players, the ecommerce marketplace in India is said to follow an upward growth trajectory.

E-tailing is now an extremely familiar concept and people are at ease while using it due to easy to use interfaces and services provided to customers. It reaps benefits to customers and retailers, both. Where customers get diverse variety and heavy discounts without actually visiting a physical store, retailers get a global market with a substantially lower operational cost.

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Fintech Funda

UNLOCKING THE POTENTIAL OF OPEN BANKING â&#x20AC;&#x201C; POWERING A DIGITAL ECONOMY (UPI to UPI 2.0 JOURNEY)

Open banking can be defined as an ecosystem that furnishes the end user with data from financial institutions via Application programming interfaces (API's). API's helps an application to communicate and work with another application and seamlessly share information. Revenue Model - The building block of an open banking ecosystem is its open API architecture. The common misconception about an API is that it is an enabler of a product but API is a product in itself and demands a product strategy. A shift from building a scalable, secure, robust and agile API to allow the consumption by outside parties is the gateway to monetize the open banking ecosystem.

There are three types of API: 1. Private APIs: These are APIs used within a traditional banking organization, which reduces friction and improves operational efficiency. A large majority (88%) of banks believe that private bees are essential in 2018 2. Partner APIs: They are typically between a bank and specific third-party partners, which extend product lines, channels and so on 3. Open API: In this scenario, corporate data are made available to third parties, many of which have no formal relationship with the bank. Because of the open API structure, many banks are more concerned about the security aspect

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Fintech Funda

certain new features can increase adoption and patronage. A few potential features are listed below – One Click UPI payments – The user simply enters the UPI pin and approves the transaction Ÿ It has a Better UI/UX for faster adoption of USSD - enabled UPI by feature phone users Ÿ Better integration with BBPS (Bharat Bill Payment Systems) Ÿ Increased transaction value limits U s ef u l fo r s e g m e nt s w i t h h i g h e r transaction sizes such as education and SMEs Ÿ

Most banks easily accept APIs, from private APIs to partners and sometimes open APIs. Over time, it is believed that APIs will evolve into the most complete option in response to consumers' desire for more comprehensive digital solutions, which are not currently provided by existing organizations. This will also happen when traditional financial companies and banking institutions understand that they need their re-define their respective strengths and offer some competitive advantage. This partnership will enable banking organizations and financial technology companies to offer more to their customers than ever before. UPI – UPI 2.0 Unified Payments Interface (UPI) since its launch has allowed full-scale interoperability in the transfer of funds. With the launch of the second version, efforts have been made to shape UPI into an end-to-end digital transacting platform. The new UPI 2.0 has many features that will make customer's payments a smooth and convenient experience and ensure better security during transactions. The introduction of

INDIA LEAPS TOWARDS AN OPEN DIGITAL ECONOMY Over the past few years, India has witnessed several guidelines and reforms such as granting multiple licenses to small finance banks, payment banks and introduced the United Payments Interface in strengthening the payments ecosystem. To unleash the potential of a shared ecosystem a foundation has to be formed on four pillars: government, regulators, traditional institutions and fintech as a technology.

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Fintech Funda

1. GOVERNMENT To propel India towards a digital economy India is working aggressively in creating a positive digital ecosystem. The government is expediting the move towards a presence-less, paperless and cashless delivery system popularly known as India Stack. An upsurge is evident if we see the transaction volume using United payments interface which grew from 0.1 million in October 2016 to 312 million in August 2018 and transactions in terms of value rose from INR 0.5 million to over INR 542 billion during the same period.

and strengthening the open digital ecosystem. The key objectives of regulators should be to lay the groundwork of interoperability across payment systems and create an environment for innovation and personalized experience. Regulators have taken the following steps to address these areas – Ÿ Implementing Bharat Bill Payment Systems

2. REGULATORS

(BBPS) to improve the security and speed of bill payments Ÿ National Payments Corporation of India (NPCI) has paved the way for open banking by bringing Unified payments interface (UPI) and Aadhaar enabled payment services

Regulators have been instrumental in driving India's growth towards developing

Recent regulatory changes that can create an impact in the open banking industry – Ÿ Aadhaar Verdict- with the Supreme Court

barring private companies from seeking Aadhaar data, it will have an adverse impact on the digital payments industry, especially for small fintech companies and start-ups which use low-cost business

Fintech Funda

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models and Aadhaar database for doing e-KYC (Know your Customer) and esignatures. Now going back to the traditional way of verification of customers is riskier than the one based on Aadhaar. It will also increase the operational cost of Rs- 15 per person which is the current cost of e-KYC verification to Rs- 250 to 300 per person for a physical KYC Manav Jeet, managing director and chief executive officer, Rubique Technologies Pvt. Ltd, an online marketplace for financial products has quoted the following on the Aadhaar Verdict, which explains the potential cost burden on the consumer -: “This will lead to peculiar challenges faced by the customers in order to access credit. There will be delays in instant loan approvals. With the physical model, credit facilitation may take more than three days, against the 10-15 minutes for the online model. Also, the cost of accessing credit may go up due to the physical model. This burden will mostly be passed on to the borrowers”.

Ÿ Interoperability of Mobile Wallets - RBI

recently issued guidelines to allow interoperability for mobile wallets i.e. wallet to wallet transfer that are KYCcompliant. This move will enable transfer of funds seamlessly between mobile wallets. While operational guidelines will be issued separately by RBI, it is clear that the onus lies on KYC compliance which is a matter of concern after the Supreme Court's verdict The localization of payments system data mandated by RBI – In its notification dated 5th April 2018, the RBI directed all payment systems to be stored in data centers situated only in India. Under the said notification the RBI included 'full endto-end transaction details', 'payment instructions' and other information collected, processed, carried, etc. to be stored locally which have to be annually audited and reported to RBI Ÿ

3. TRADITIONAL INSTITUTIONS AND FINTECH The financial ser vices industry is embracing the open digital economy by enhancing its customer services through various delivery models.

Source – PWC Strategy

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Fintech Funda

Some of the financial services firms' open banking delivery models are â&#x20AC;&#x201C; Cross-Industry Partnerships - Banks are partnering with adjacent industries such as retailers to provide digital solutions through their subsidiaries and NBFC's. Banks-Fintech Collaborations - Banks are emerging as accelerators for Fintech start-ups through various models like mentoring and collaborations, hackathons and innovation centers. Partnership with financial services firms and investments/acquisitions of tech companies Some of the Banks tie-up with NBFC's to launch co-branded credit cards using digital and API based technology and has also acquired startups to build an open banking platform. For example, ICICI Bank tied-up with MakeMyTrip to launch a range of co-branded credit cards. Consumers are increasingly getting attracted to non-traditional financial service providers - those involving payments and funds transfers. Personal finance and loans are considered to be the next avenues that are ripe for disruption in India. Financial institutions will also need to disrupt their own operations, which will introduce challenges in the shift of culture and mindset among institutions, employees, and consumers. This can occur in a variety of ways by adopting newer technologies such as Artificial

Intelligence or Blockchain, or by changing the cultural environment to the one that fosters innovation. Microsoft's MileIQ unit implemented Spend, which is Apple's enterprise-tobusiness expense tracking solution for mobile devices that automates data entry by logging into bank accounts and user cards. Purchases can be classified as business or personal expenses, while users can also add custom tags to purchases. The platform also supports the acquisition of photo receipts to be included in the expense report. THE ROAD AHEAD FOR OPEN BANKING IN INDIA With all the progressive initiatives by the government and the industry towards open banking, India is striving towards an Open digital Economy but the main focus now should be on developing the strong foundation and infrastructure to support the ever-changing BFSI ecosystem. While India has taken aggressive steps towards the initiative in the form of Aadhaar, eKYC, e-signature, affordable mobile data, and extensive smartphone penetration, there is still a considerable gap which needs to be fulfilled in terms of adoption of these reforms and techniques. Creating infrastructure and new reforms is just one aspect; the other aspect is educating people about the benefits of new reforms and the life-changing aspects. Banks have the opportunity to increase their revenue by 20%; if they take due advantage of the open banking system, they can leverage data monetization and also create a digital marketplace for their

Fintech Funda

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customers. Customers will have better products, access to good credits as well and more competition will bring better services to them. Countries like Sweden, UK, Netherlands, and Singapore are ready to take open banking forward. Unlike countries like India, Brazil, Italy, and South Africa, which are regarded as conservative for Open banking. Tencent and Alibaba have made progress in this field in China, rather than the country's banks and other financial institutions. Banks need to gear up and adopt the model before the big tech giants do that and go miles ahead. CHALLENGES OF OPEN BANKING 1. C ustomer Apathy: T h e b as ic requirement for open banking is to have the consent by the customers to access their data. On average, only 26% of customers globally are in favor of open banking (quoted by a global digital banking study conducted by RFI group across 10 markets surveying 20,000 customers) this percentage is very low as compared to the emerging markets. This is mainly due to two reasons - first is the concern over data security and privacy as customers fear frauds and second is their demand for value as consumers are yet to see tangible value in exchange of their trust

2. Customer Awareness: For a significant change, open banking required massive education to familiarize its customers with the concept and generate buy-in. Lack of awareness amongst the customers may be a result of banks' failure to effectively communicate the changes to the way banks work and the revised terms and conditions 3. Competition: As banks enter the digital era, they are accompanied by many nonbank forces like Amazon, many fintech firms, technology vendors and new puredigital entities. Each of these has been rewriting the rules of the banking system, challenging the banks to respond. The investment in fintech from $2 billion in 2010 is expected to reach $150 billion between 2019 and 2021, which indicates the market's confidence in these forces 4. Data Sharing: As open banking relies on data sharing, their difficulties range from losing control over customer data to losing market share. Banks are suffering from an anxiety when it comes to taking a decision on how much customer data can be subjected to exposure to participate in the open banking ecosystem 5. Legacy Constraints: Departmental structures, product-centricity, and compliance goals have been influencing the core banking system traditionally; these legacy systems have become more complex over time and prevent interoperability with open banking APIs FIRMS NEED TO ADDRESS A DIVERSE SET OF QUESTIONS TO BE CONFIDENT OF SUCCESS

Fintech Funda

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questions relating to technology including how they are built and embedding differentiating capabilities like artificial intelligence and data analytics. Companies need to be clear on how they will safeguard customers against fraud by managing cybersecurity, taking proper risk mitigation strategies and also stay abreast of the changing regulatory and legal expectations.

Firms need to take right actions to position themselves for success by addressing a number of diverse

While the future is unpredictable, firms ca n ta ke m a ny d ef i n i t i ve ste ps immediately. Forming a deliberate view of the questions above will help the company to embark the journey of open banking with confidence and will be equipped to take crucial decisions about which capabilities to build in order to compete.

Alumni Section

Maheshwaran K PGDM â&#x20AC;&#x201C; Finance | 2016-2018 Former Co-Convener, Quantinuum

I wish I could go back to the time where my alarm would wake my roommates before me, and most of the people I would see while walking to my class were known faces and I would happily smile at each one of them. Life has

changed since the day I stepped out of college. Life was so simple back then - go to class, learn, spend time with friends, worry about getting placed and no matter what happens, enjoy what you are doing. What I shall be talking in the article below would not be an advice, or how to tackle a campus placement interview, but my perspective of life at an MBA college and a simple fact that all students are like fishes in an aquarium where you can swim, dive, summersault or may even try to jump out of the aquarium to the safe shores. Because, at the end of the day, there are people who will put you back in the water. MBA is a sea. And when you step into the sea, believe me, you are on your own. Whatever you learn might or might not help you. So, I suggest you not to stop learning new things, rather, know yourself and what you are capable of doing, despite the situation. WHAT IS A B-SCHOOL FOR ME? B-School for me is a place where you learn what you don't know already. When I was working, I realised I wanted to learn about business. Back then, all the things I knew

Alumni Section

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about MBA was it has 4 major streams of Finance, Marketing, Operations and H.R. I had little idea of what each one was about. So, my understanding of a BSchool before joining SIMSR was â&#x20AC;&#x153;a place where I can learn about Businessâ&#x20AC;?. But, after the two years I realised that a B-School is a place where you learn much more than what expectations you might have had from the experience and you learn what all you need to know to be successful. With students from diverse backgrounds and the opportunity to network with them, helps you get a perspective on various aspects of professional as well as personal life. A B-School should help one to understand various aspects of business, be it the relevant knowledge or the right attitude to conduct yourself in the world outside. I feel that is what a B-School should primarily offer students. WHAT DOES AN MBA TEACH YOU? That's a tough question to answer. But I will try to answer it. MBA has taught me a lot of things. That's why it was a tough question to answer. When I started my life at SIMSR, there was too much information to grasp at one go from Finance, Operations, HR and Marketing. I found it interesting and it was all new. I tried to assimilate as much as possible. Theoretical knowledge is something I feel is very important for an MBA graduate. I do understand that there is a lot of concepts that you will be bombarded with within these two years. No one will expect you to

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remember all of them. At least none will from me, given that I consider myself an average student. But, what one has to know is that there is a theory behind every idea you will come up with. It will help you to structure it, make it effective, and measure it. You should be in a position to at least search for theoretical concepts for your idea, to understand it and execute it. For doing this you may not know all the theoretical concepts, but you should know at least the basic ones and how to effectively use them. That's the level of theoretical knowledge I gained from my MBA. Having said this, I spent a lot of time on c a s e st u d i e s a n d o t h e r B - S c h o o l competitions. I wanted to apply whatever concepts I learnt and case studies were the best way to do it. You get an opportunity to be evaluated by some of the best in the Industry. You feel a kind of joy in solving case studies, especially when you successfully arrive at the final solution. Also, when you work on a case study, you work as a team and you try to understand different perspectives that your teammates bring to the table and that would help you to improve your thinking. It will also help improve your problem-solving skills and analytical ability. Working in student driven committees formed a major part my learning. Apart from the analytical ability and academic acumen, people management and exposure to different situations are very important in an MBA program Committees give you that much-needed exposure to the things you want to know about and also help you learn how to

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Alumni Section

manage a team and more importantly work in a team. Majorly, MBA taught me the right way to use theoretical knowledge, improve my problem-solving ability and improve myself as a person to become a well rounded professional Most importantly, MBA taught me one thing, any point of time in your life there will be nothing that you know everything about. There is always something to learn. Listen to others and learn, for it will help you gain good knowledge, a different perspective as well as good friends and help build good relations in the process. Some common interview questions and my answers to them FIRSTLY, WHY DID I CHOOSE TO DO AN MBA? This question can have different answers. I suggest everyone be honest with this question. You ask yourself this question. Why did you want to do an MBA? It could be to learn things, It could be to grow up the corporate ladder, it could be to shift to a different domain, it could be because you felt being an MBA graduate adds value to yourself, selfimprovement. Take this answer and add details to it, add incidents from your life which made you think of this. Create questions from your answer and keep doing it unless you feel you are convinced. Let's say you don't have an answer and you just did an MBA. In that case, try to understand what all you learnt in your MBA and find an answer from it. The most personal answer will reflect your true self and this is what will

help you drive the entire interview. You will not find questions which will help you reveal your personality and what you really want in life. So try to include what you desire and what is your calling in questions such as these. WHAT MAKES YOU THE RIGHT PERSON FOR THIS JOB? This question is a risky one. If you can tackle it properly you are in. Because this directly answers a question which loosely translates to â&#x20AC;&#x153;Why should I hire you?â&#x20AC;? To answer this question try to understand the JD completely. Understand what it says and try to anticipate as to what you would be doing when you get into the job. Now, try to retrospect what you have done in life, what you want to do in life, what you have learnt in these two years which you want to apply throughout your life. Think of incidents where you have performed well. Now, all you have to do is to map both the things and structure your answer with some logic and backing. And the cleaner the mapping, the better your a n s w e r. T h e m o r e p e r s o n a l a n d individualistic you take your interview, the more you try to stand out from the crowd and that what is going to help. Lastly, I would say there could be lot of pressure in your MBA. But at the end of the day, it's all about enjoying the two years .This the last days of college life, for most. Try and make every moment a memory. Learn like you don't know anything and live like there is no tomorrow. I am might not have answered the questions in much detail. But, I am sure this will help you get a feel of the sea of opportunities in an MBA college.

Alumni Section

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I thank team Finly for giving me this opportunity to express my thoughts. The success of your MBA is not only in your placements. Its where and what you are after 10 years. All the best to all the students and wish you all success and happiness. Cheers! Thanks and Regards, Maheshwaran K

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Sector Analysis

AGRICULTURE Yash Gore | PGDM | 2018-2020 Mohak Shah | MMS | 2018-2020

INTRODUCTION Agriculture plays an important role in the Indian economy. It plays a major role in the overall development of the country as it contributes roughly 14% of the GDP and provides livelihood to more than 49% of the total workforce. Agriculture sector and rural economy have a significant role in ensuring food security, providing livelihood and fuelling growth in the manufacturing and service sectors for a developing economy like India. The development process has declining share in Agriculture and is impacting overall economy in terms of Ÿ Employment, wherein it employed

72% of the workforce at the time of independence which came down to 58% in 2001-02 further coming down to 49% in recent years Ÿ GDP contribution, wherein its share in

the total GDP was 55% during 1950-51 coming down to 14% in recent years Ÿ Export contribution, wherein at the time

of independence, our export basket was dominated by agro products, forming 70% of our total exports. As the economy developed, its share gradually fell down to the range of 12-13% in recent years. However, the falling share of agriculture does not undermine its significance in terms of employment, livelihood and food security.

FOOD PROCESSING INDUSTRY FINLY|DECEMBER NOVEMBER2018 2018||Finstreet Finstreet||SIMSR SIMSR FINLY|

Sector Analysis

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We can observe the increasing Gross Value added by the agriculture sector from the following chart:

The chart given below depicts the value of Agricultural export over the years:

2013-14 to 284.83 MT in 2017-18. Agricultural productivity is measured in terms of yield per hectare of land. The productivity of food grains has improved to 2095 kg per hectare from 1380 kg per hectare in 1990-91. Today, India's agriculture has become more diversified as is evident from the fact that farmers are now producing larger quantities of commercial crops such as sugar (69 MT in 1950-51 to 348 MT in 2013-14), cotton (2.1 million bales in 1950-51 to 36.5 million bales in 2013-14), oilseeds ( 5.1 MT in 1950-51 to 32.4 MT in 2013-14), etc. The total area sown with Kharif crops reached 105.78 million hectares, as of September 2018. MONSOON - THE DRIVING FORCE BEHIND AGRICULTURE

AGRICULTURAL PRODUCTION

When former president Pranab Mukherjee was the finance minister in 2010, he famously said:"Monsoon is the real finance minister of India, not me!" Why is monsoon such a big deal in Indian agriculture industry? The reason behind this is more than half of India's farmers are dependent on rain-fed agriculture for their livelihood. A weak monsoon can decrease a farmer's output and a flash flood can wipe out his/her entire production within a day. A country where a large number of people are undernourished, there is no better news than a high level of food production.

India has been able to increase its food grain production by almost 5 times in the last 6 decades, from 51 million tonnes (MT) in 1950-51 to 264.4 MT in

At the beginning of the year, a good monsoon was highly anticipated, after having two consecutive drought years in FY15 and FY16. The agricultural sector

As far as Agri imports are concerned, they form merely 3% of our total imports. India has now become selfsufficient in terms of production of agro-products, this is considering the fact that at the time of independence one-fourth of our imports was agroproducts. Now we need to import only in case of severe shortages due to unfriendly weather conditions like drought or floods.

Sector Analysis

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showed a reasonably good performance in terms of growth rate in FY18 at 6.3%. ICRA expects agriculture, fishing, and forestry to grow by 3-3.2% in FY19, which is appreciably lower as compared to the previous FY. Despite the efforts made by the Narendra Modi Government which includes the likes of doubling farmer's income, an increase of MSPs of various crops, crop loan waivers announced by some state governments, the growth in the agriculture sector would be hampered. Kharif crops like cotton, oilseeds, coarse grains, and rice are highly dependent on monsoon. Production estimate of these crops usually determines its future price. As the Kharif sowing season has started to pick up across the country, 'the Ministry of Agriculture and Farmers' Welfare estimates this seasons' food production to be the highest for any Kharif season (July â&#x20AC;&#x201C; October) yet. The production is estimated to be more than 141.59 million tonnes, as per the first advance estimate released by the ministry on 26th September. These estimates come as a surprise, as earlier, the India Meteorological Department (IMD) has reported that India received 9% below average rainfall this year. Rainfall has been observed to be below average in all the regions, with east and northeast India receiving the least rain â&#x20AC;&#x201C; 24% below historical average. Interestingly, below 10% average rainfall in any given year is considered as a drought year. This year rain was observed to have

started early during the last week of May and later it continued to be patchy and measured a 9% decline as compared to the average rainfall. These ill-timed rains were reported in states like Punjab, Haryana & Rajasthan which has impacted crops like cotton and pulses, while the situation of other Kharif crops is satisfactory. Meanwhile, in case of commodities, prices of Kharif crops in the futures exchanges are now trading down as compared to June, when monsoon kicked off in the country in full flow. Price of cotton traded in the commodities has also decreased during the Kharif season (JuneOctober) Reportedly, during the harvesting period of cotton, the untimely rains have cast a shadow over the crop's future prospect. The ill-timed rains may hamper the quality, which is already distressed by an increase in pest attacks.

As per trade sources, production of Kharif crops for the season is expected to be about 50-55lakh bales against its earlier forecast of 60-65lakh bales. At the same time, production in soybean is expected to increase due to increased acreage. Extensive rains also lead to a delay in harvesting and could also pose a threat to

Sector Analysis

FINLY| DECEMBER 2018 | Finstreet | SIMSR

crop procurement. Moreover, the delayed withdrawal of monsoon is likely to lead to a drought-like situation in many parts of the country and expected to boost the moisture level in the soil which is good for Rabi crops. Reportedly, during these 3 months, 1310 people have lost their lives and 7.5 million people were affected across the country in 9 different states stated by the National Disaster Management Authority. PEST ANALYSIS OF AGRICULTURE IN INDIA POLITICAL Politics has a widespread effect on India's agriculture. The influence varies from the government's policies for agriculture to schemes for farmer welfare and development. The central government in power has a direct relation with such policies and schemes.

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precooling, labelling of fruits and vegetables have been exempted from the Goods & Service Tax ECONOMIC ŸThe per capita income has seen a

strong growth thereby leading to higher demand for food items Ÿ Inflation raises the price of farm inputs

as well as the output of agriculture, however, the prices of output don't increase proportionately to the increase in input prices as there is always a fear of substitution by cheaper imports ŸThe agriculture credit disbursal target

for 2017-18 of ₹10 trillion has been achieved. Farmers are allowed crop loans at a concessional rate of 7% The chart below indicates the Credit flow to Agriculture sector from the formal sources of finance:

SOME OF RECENT DEVELOPMENTS Ÿ A long-term irrigation fund has been

set up by NABARD. In Union Budget 2017-18, an addition of US$ 3.10 billion to this corpus was announced. Also, a dedicated micro irrigation fund is proposed to be set up. Ÿ NABARD is aiming to achieve the goal

of, 'per drop more crop'. The initial corpus of the fund is estimated to be US$ 775.67 million. Ÿ Ser vices like preconditioning ,

ripening, waxing, retail packing,

The government has announced to increase the minimum support price of certain key agricultural products so as to achieve its target of doubling the farmer's income by 2022.

Sector Analysis

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SOCIAL Ÿ India consists of 16% of the world's

population sustaining on just 2.4% of the land resource. The agriculture sector provides employment to 49% of the workforce and is a raw material source to a large number of industries Ÿ Despite the portrayal of farming as a

healthy and happy way of life, the agriculture sector experiences one of the highest numbers of suicides than any other sector. Farmers' suicide is not only reported in Vidarbha region of Maharashtra but also found in areas of Punjab, Uttar Pradesh, Kerala and several other parts of the country Ÿ Indian farmers have been facing

numerous socio-economic problems such as harassment by moneylenders, inability to repay debts following crop loss, not getting actual value for their output, etc.

Ÿ More and more farmers are adopting

mechanized farming, they are using tractors, tillers and other machines, this can be seen from the increased tractor sales volumes reported by companies such as M&M and Escorts Though there is an increasing adoption of newer methods & technologies, the extent of coverage is insufficient as a substantial percentage of the farmers still continue with their traditional practices and methods. This is partly due to resistance to change and partly due to lack of funds. Though NABARD and Regional Rural Banks have been active for providing credit to the farmers, further penetration and efforts are needed to convince the farmers to adopt newer methods and technologies. PERFORMANCE OF MAJOR STOCKS IN THE INDUSTRY UPL Ltd

TECHNOLOGICAL Ÿ UPL (United Phosphorus Ltd) has a

Some of the qualitative technological changes that have taken place since the green revolution in 1966 are: Ÿ Use of high-yielding genetically

modified (GM) seeds, chemical fertilizers, pesticides, threshing machines, etc is rising. This is evident from the increased revenues reported by companies such as Monsanto (GM seeds), Kaveri seeds, RCF (Urea based fertilizers), etc. Ÿ Farmers have increasingly resorted to intensive cultivation, multiple cropping, scientific water management etc.

keen ground-level understanding of farm realities, recognizing market gaps, launching relevant products around superior price-value and enhancing farm viability. The result is that the company accounts for a 14.3% share of India's organized crop protection chemicals sector, the largest market for the company Ÿ Revenues for the FY 2017-18 have

increased by 5% to reach ₹17,920 crores as compared to ₹17,124 crores for the previous year

Sector Analysis

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Ÿ In July, it announced the acquisition of

Ÿ In July '18, the company announced a

Arysta Lifescience Inc for $4.2 billion in an all-cash deal. This acquisition would provide UPL access to a variety of patented products through collaborations and partnerships as well as enhanced in-house R&D capabilities Ÿ The stock has given a return of 5% over

partnership with e-commerce firm Big Basket along with Yara Fertilisers and DeHaat to help small farmers in India raise their income by providing them with the required knowledge to use inputs timely and effectively. This will help farmers gain access to markets to sell their produce

the past year and 375% for the last 5 years

Ÿ Bayer CropScience suffered a similar

Kaveri Seeds Ÿ Kaveri seeds have a vast experience in

fate due to a poor monsoon season which led to a fall in its stock price from ₹4747 in June '18 to ₹3759 by the end of October '18

seed production of major agricultural crops backed by a very strong in-house R&D programme for crops like cotton, bajra, sunflower, rice, maize, and several other vegetable crops

which showed a 25% decrease in net profits due to poor sales in the same quarter

Ÿ Kaveri seeds was trading around ₹620

GOVERNMENT INITIATIVES

- ₹640 levels on the stock exchange in August 2018 after which it dropped down to ₹461 by the end of October

Some of the major government initiatives in the sector are given below:

Ÿ This happened mainly due to poor a

monsoon season as well as the decrease in its quarterly net profits which stood at ₹11.94 crores in September 2018 down 42.9% as compared to ₹20.91 crores in September 2017

Ÿ This was followed by weak Q2 results

1 . I n S e pte m b e r 2 0 1 8 , t h e G o I announced ₹15,053 crore procurement p o l i c y n a m e d ' P ra d h a n M a n t r i Annadata Aay SanraksHan Abhiyan (PM-AASHA), under which states can select their compensation scheme and also partner with private agencies to ensure fair prices for farmers

Bayer CropScience Ltd Ÿ Bayer CropScience, a global alliance

led by Bayer and IFC is primarily into Agri Care business which includes manufacturing, sales and distribution of insecticides, fungicides, herbicide, and various other agrochemical producers, as well as hybrid seeds

2. In September 2018, the Cabinet Committee on Economic Affairs (CCEA) approved a ₹5,500 crore assistance package for the sugar industry 3. The implementation of Pradhan Mantri Fasal Bima Yojana (PMFBY) will be made faster and the government is

Sector Analysis

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aiming to increase its coverage to around 50% of the gross cropped area in 2018-19 4. Going forward, the adoption of food Safety and quality assurance mechanisms such as TQM including ISO 9000, ISO 22000, Hazard Analysis and Critical Control points (HACCP), Good Manufacturing Practices (GMP) and Good Hygienic Practices (GHP) by the food processing industry will offer many benefits like better product quality, transparency in trade practices, and decrease in loss in transit 5. The Government of India has introduced the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) with an investment of ₹50,000 crore aimed at the development of irrigation sources in order to have a permanent solution for droughts in India MINIMUM SUPPORT PRICE (MSP)

prices for farmers would rise up to 47% but with higher prices for farmers, margins for middlemen would have to be squeezed. THE WAY FORWARD India's economy has been gaining momentum after the shock of demonetization and the GST implementation. This year has been a year of economic recovery, wherein agriculture has been supported by improved credit flows to the sector, good monsoon, and Union budget gave a big thrust to agriculture by way of focus on agriculture marketing and increased funds for insurance and irrigation schemes. Schemes such as PMKSY have reduced the dependence on monsoon. In the backdrop of the key growth opportunities and a supporting ecosystem of services and friendly policies from the government, the overall outlook for agriculture is positive.

The GoI has adopted the principle of buying farmer's produce at 1.5 times their input costs in this year's budget proposals which aims to combat the rural distress going on ahead of the general elections in 2019 and many other crucial assembly polls this year. Finance Minister Arun Jaitley said the government will now obtain 23 notified crops under the MSP system which earlier only helped farmers who grew paddy wheat and cotton. “With this system, we will benefit 90% of our farmers”, said Ramesh Chand, member of government think tank Niti Aayog. Chand further said that support

Internship Diaries

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THE COMPANY Established in 1994, Anand Rathi is one of India's leading financial services firm offering Wealth Management, Investment Banking, Corporate Finance & Advisory, Brokerage & Distribution services in the areas of equities, commodities, mutual funds, structured products, insurance, corporate deposits, b o n d s a n d l o a n s t o i n st i t u t i o n s , corporations, high-net worth individuals and families.

Karthik Venkateshwaren MMS Finance 2017-2019

I interned at Mumbai (Goregaon) in the IT department as an Information Systems Risk Analyst.

The firm has a vast footprint across India and also in select international locations such as Dubai, with presence across 1200 locations through its own branches, subbrokers & representative offices or associate companies. The group today employs over 2,500 professionals. The Anand Rathi Group is a member of the

Internship Diaries

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Bombay Stock Exchange (BSE), National Stock Exchange (NSE), MultiCommodity Exchange (MCX), National Commodity Exchange (NCDEX), Central Depository Services Ltd. (CDSL), National Securities Depository Limited (NSDL) and ARN holder. PLACEMENT PROCESS Anand Rathi visited the campus with Finance, Marketing and IT profiles. Due to previous IT experience in Financial services domain, I decided to take up the opportunity to work in the IT department of Anand Rathi. The selection process involved GD and PI. Irrespective of the profile selected, the students were divided into a group of 16 each. The GD process involved topics on current financial affairs. In order to avoid the usual situation where the discussion is dominated by few people, the panel took an active participation. After about 5 minutes, the panel started addressing some students individually, asking them to put forward their points. The panel then started throwing questions at the group and everyone was given an opportunity to answer individually. In the end, each member was asked to summarise the discussion. This aspect is important, as many tend to make the mistake of adding new points. Through this process, the panel wants to check the listening skills and learning potential. So it is always necessary to give a well-structured account of the points discussed. Based on the GD performance, an extensive shortlist for the interview round was announced,

with around 9-10 members from each GD group passing on to the next round. Around 20 candidates had their interview in the evening at the campus, while the rest were called on the next day to their Lower Parel office. The interview panel consisted of the VP of Investment Banking Division and the HR Head. The interview revolved around concepts of finance such as GDP calculation, Equity Market concepts, Basics of Derivatives, Significance of Financial Ratios and questions were thrown about the work experience if any, the candidate's strengths and weakness, and to describe any challenging moment that one might have faced in their professional/personal life. INTERNSHIP EXPERIENCE The project that was allotted to me required me to analyse their current Information System practices, compare it with Industry recommended practices, identify the gaps and risks, discuss with the stakeholders about their implications and recommend solutions based on the feasibility analysis. The learning at Anand Rathi was immense, I got the opportunity to interact with the senior management and understand their IT strategies. I had to interact with the IT support team to understand the workflow of the current processes. I was also required to interact with vendors to understand their current offerings and also the range of their offerings. Another challenging task was to compile t h e i n fo r m a t i o n ga t h e re d i n t o a

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structured report consisting of current process, challenges, gaps and recommendations. This entire exercise was for a duration of 2 months. I had a lot of help and patience from the team. I also had to look up some literature to have a better understanding of the Information System practices along with the technical understanding. MY SUGGESTIONS There is a possibility that the summer placement may leave you dissatisfied be it the role offered, the stipend stipulated or the brand of the company on offer. But, at the end of the day, the work during your internship, what you learn and how you project it in your CV matters the most during the final placements. One of the usual interview questions asked during the final Placements is about the learnings and the experiences during the summer internship. They give an important consideration to it, as the attitude towards work is one of the key parameters to test a candidate. No matter the profile you have worked on, every work has its set of challenges, learnings and deliverables, having a clear idea of these things and preparing a structured narrative would be helpful.

FINLY| DECEMBER 2018 | Finstreet | SIMSR

Internship Diaries

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automobile. The Mumbai branch focuses on Corporate Banking by providing s e r v i c e s l i ke C o r p o ra t e F i n a n c e , Institutional Banking and Investment Banking. Roles Offered ICBC had offered 4 profiles for their S u m m e r I nte r n s h i p p ro g ra m m e Corporate Banking 1 & 2 (Credit Analyst), Investment Banking, Treasury. I was selected for the Corporate Banking 2 profile. Ÿ Corporate Banking 1 & 2 - In CB-1 they

Aachman Vijayvargia MMS Finance 2017-2019 “Being at ICBC I noticed brilliant minds working around me with most of them being veterans in their respective field. Learning at ICBC has no limits, I could interact with different departments and take their help for working on day to day activities” ICBC is the largest bank in China, and the largest bank in the world by total assets, deposits, loans, number of customers and number of employees. In India, it has only one branch in Mumbai which is located at Bandra Kurla Complex (BKC). ICBC Mumbai Branch fosters closer ties with Chinese companies in India and provide support to the Indian i nf ra st r u c t u re s e c to rs ( p o we r, telecommunication, transportation) and extend financial services to other industries like heavy machines,

had offered a role of a credit analyst which had to deal with Chinese clients. While CB-2 had a similar role as CB-1. CB-2 involved working with Indian Clients which were among the top 100 companies in the country Ÿ Investment Banking – In Investment

Banking, the role involved generating lead sourcing for sell-side and buy-side mandate opportunities in the SinoIndia business corridor Ÿ Treasury – In Treasury, the role mainly

involved Assessment of Liquidity Risk Management of the Bank THE PROCESS ICBC had shortlisted candidates based on their profile. All the shortlisted candidate were fresher and belonged to commerce background in their graduation. The Process consisted of a PPT and then was followed by a single round of PI with the vertical head of the respective department to which you are shortlisted. The questions asked were purely CV

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based, with an addition of few questions on financial ratios, the India - China relationship and current happenings related to China. INTERNSHIP EXPERIENCE I would definitely say that ICBC is one of the best company that visit SIMSR in terms of the kind of profile that was on offer. The experience that you gain at ICBC will give you a deep insight of the Banking Industry and will help you in every aspect of your career. At ICBC you have a very open culture in every department. I had my Manager, Vice President, and Head of Department sitting right behind me which made them easily approachable. My work mainly involved in helping my manager by working on live deals. I had to carry out the due diligence report of the clients that ICBC was lending to. I had worked with clients in various sectors such as Steel, Automobiles, Infrastructure and Energy sector. Along with this, I was also given a project in which I had to identify the upcoming and growing sectors in India in 2018-19 and find out the companies in the respective sector that will be carrying out a Capex (Capital Expenditure) in the coming future. MY ADVICE TO JUNIORS My advice to students would be to prepare your CV well, have some knowledge as well as an opinion about the current happenings around the world. Interact with as many colleagues as possible in the given 2 months irrespective of your company. You will

make mistakes while working but learn from the mistakes and try not to repeat it again. Don't be afraid to ask doubts and try to get things cleared as and when it occurs. In conclusion, I would say the 2 months at ICBC was a transformative process of sorts for me. I grew as a professional and gained a lot personally as well by forming great relationships with the bright minds around me. The reputation brings with its name will definitely help any finance enthusiast in the long run. All the Best!!

Know your Finance

Shubham Patel | MMS | 2018-2020 Samrudh Agarwal | PGDM | 2018- 2020 Shubham Goyal | MMS | 2018-2020

STOCK MARKET CORRELATION BETWEEN NIFTY & USD/INR Recently, we have become accustomed to reading headlines about the appreciating USD and a comparatively weaker INR. This, in turn, has led to va r i o u s s p e c u l at i o n s a b o u t t h e downtrend in Indian stock markets fueled by the increasing diffusion of capital by the FIIs from it. But have you ever pondered upon what might be the relation between a country's currency and its stock market index? Well, we are going to dig in about the correlation between them. With the booming Indian economy, Nifty has also grown exponentially, attracting foreign investors looking for higher returns. These foreign investors

bring in more funds into the local equity and debt markets resulting in the appreciating of the INR while the market goes up. However, the inverse of this situation holds true too. A strengthening dollar against the rupee is considered as a negative news and perceived as a warning bell for the Indian indices. The reason being that Nifty and INR are affected by several similar factors such as monetary policy, the outlook for the economy, governance, forex reserves, FII inflows, and outflows etc. The primary one being FII flows, as India is an emerging economy struggling with high current account deficits, negative exports and fiscal pressures and is in a constant need of foreign capital. There have been various occasions in the past when nifty and USD to INR have moved in tandem with each other.

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For example in 2013, INR depreciated significantly to ₹69 against 1 USD as a result of selling pressure by the foreign investors, diffusing around 1 billion of Indian equities in just 2 days leading to a fall in the Nifty. Then in May 2014, Nifty scaled new heights with INR appreciating against USD (₹58 to 1$) on account of favorable Lok Sabha election results of 2014 and a positive economic outlook. This indicates a positive correlation between USD-INR and Nifty. Meaning, when the INR appreciates, Nifty scales up and vice-versa although not by the same degree. The data for the last 10 years suggest an average positive correlation of 0.44 between Nifty and USD-INR i.e. 44% of the time movements in Nifty is because of movements in the currencies. Except for the period from 2012-2014 where Nifty has shown a temporary shift by rising while INR declined, Nifty has consistently risen and fallen with currency. In the period between April 2015 and February 2016, the rupee depreciated by nearly 7% forming a low of ₹68.71, while Nifty lost around 14% in the same period. In 2017, both Nifty and INR have seen very strong performances moving in tandem with

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each other. While till November 2018, Nifty has gained around 0.52% year to date compared with 13.5% depreciation of INR year to date which formed a low of ₹74.44 to 1 USD. However, the positive correlation between nifty and the rupee has come down in a couple of years mainly because of the changing constituents of the Nifty index. Presently, financial sector stocks dominate the index that is least impacted by strengthening dollar as compared to the information technology, auto stocks and pharmaceutical which benefit from a rising dollar or a falling rupee. Also, with the rise of DIIs as a prominent market force, the importance of and dependence on FIIs has come down, thus leading to a weakening correlation between nifty and the currencies. GENERAL AWARENESS FOREIGN DIRECT INVESTMENT (FDI) IN INDIA Foreign Direct Investment (FDI) is a major source of economic development in India. Through FDI, foreign companies invest in India to benefit from lower wages, special investment privileges and the rapid d eve l o p m e nt o f t h e co u nt r y. F D I outflowed in India after the economic liberalization which started in 1991. Since then FDI has steadily increased in India. In the year 2016-2017 India received the record investment of $60.1 billion in FDI. FDI CAN FLOW IN INDIA THROUGH 2 ROUTES: Ÿ Automatic Route: Through this route,

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FDI is allowed without the approval of the government. For most of the sectors 100% FDI is allowed through this route. Ÿ Government Route: FDI through this

route requires prior approval from the government. Some sectors allow FDI through the government route only. Whereas some sectors have a limit on FDI through automatic route and for FDI above the prescribed limit will require it to go through the government route.

Netherlands, and the USA have been the top countries from where FDI has come in India, Mauritius being the highest with $13.41 billion in the year 2017-2018. Several of India's reforms such as removing Foreign Investment Promotion Board (FIPB) and liberalizing FDI limits in key sectors such as retail, aviation, and biomedical industries have maintained India's high rankings in terms of FDI attractiveness. WHY INDIA FOR FDI?

DEFINITION OF INVESTORS UNDER FDI Ÿ According to the IMF, India is and will

Investors of FDI can be individuals, companies or foreign institutional investors. Investments can be made by non-residents in the equity shares or fully, compulsorily and mandatorily convertible debentures or fully, compulsorily & mandatorily convertible p refe re n c e s h a re s o f a n I n d i a n company, through the Automatic Route or the Government Route. Foreign investment in sectors/activities under the government approval route will be subject to government approval.

remain one of the fastest growing economies in the world. Since the launch of the Make in India initiative, FDI inflows have increased by 37%. India has gained 65 positions from 142nd (2014) to 77th (2018) in World Bank's Ease of Doing Business Ranking Ÿ India emerged as the top recipient of

G r e e n f i e l d F D I I n f l o w s f ro m t h e Commonwealth, as per a trade review released by The Commonwealth in 2018 Ÿ A c co rd i n g to a re c e nt m a r ket

MAJOR SECTORS WITH FDI INFLUX The major sectors like Infrastructure, Automobile, Pharmaceuticals, Chemicals, textiles etc. have allowed 100% FDI through the automatic route, while Insurance as a sector has 49% allowed FDI. Railways too have allowed 100% FDI for most of the areas other than the operations. In the aviation sector too for some areas 100% FDI is allowed under the automatic route while some areas have a limit and have to go through government route. Mauritius, Singapore, Japan,

attractiveness survey conducted by the E m e r g i n g M a r ke t P r i v a t e E q u i t y Association (EMPEA), India has become the most attractive emerging market for global partners (GP) investment for the coming 12 months Ÿ Annual FDI inflows in the country are

expected to rise to US$ 75 billion over the next five years, as per a report by UBS

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PERSONAL FINANCE HOW TO CHOOSE A MUTUAL FUND INTRODUCTION A mutual fund is made up of money that is pooled together by a large number of investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets. The money is given to a fund manager who invests the fund’s capital and attempts to produce capital gains and income for the investor. Before you invest, it is necessary to understand the fund's investment goals and make sure its level of risk matches with your risk appetite, as each fund has its own feature.

Ÿ Management fees which are paid to

fund managers for putting their expertise in enhancing the performance of a fund. This cost is usually between 0.5% and 2% of assets on average Ÿ Distribution and Service fees which

go towards paying brokerage commissions and towards advertising and promoting the fund. It also includes transaction costs paid while buying or selling of holdings in mutual funds. Funds that buy and sell frequently (that is, have a high turnover ratio) are costlier Ÿ Other Expenses includes record

keeping, legal expenses, accounting expenses, transfer agent expenses, and other administrative expenses

VARIOUS TYPES OF MUTUAL FUNDS:-

Various hidden costs involved in each of the above products are explained below:THE EXPENSE RATIO The annual expenses paid to operate a mutual fund is known as management expense ratio (MER). It includes:-

On the whole, expense ratios range from as low as 0.25% to as high as 2% or more for active specialty strategies. The average equity mutual fund charges around 1.3% - 1.5%. LOADS AND SHAREHOLDER FEES Loads are the commission paid to

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FINLY| DECEMBER 2018 | Finstreet | SIMSR

brokers who sell the mutual fund products in the market. Shareholder fees include the costs associated with the transaction of buying or selling a mutual fund that is incurred directly by the fund holder. These fees appear in the prospectus under the heading “Shareholder Fees.” Sales Loads – This fee is usually charged either upon purchase or else upon sale. Front-end load is the fees paid at the time of purchase of funds. Back-end loads are paid upon selling fund shares and is a bit more complicated. A typical example is a 6% back-end load if you sell the fund in the first year, 5% in the second year and zero if you sell after the seventh year. Some funds also charge a d d i t i o n a l fe e s a t t h e t i m e o f redemption known as redemption fees. After understanding the key terms, the following things are to be kept in mind while taking the final decision:Ÿ Try picking a no-load mutual fund to

make an easy exit from the fund and invest in other thousand available options Ÿ Expense Ratio should be within the

limits of 0.5% and 2%

Ÿ Diversification of assets is a smart way

of minimizing the risk of your portfolio Ÿ Know the appropriate benchmark for

your fund Ÿ One should measure the risk with

standard deviation. For e.g. Standard deviation of 10% depicts that the fund will deviate 10% from its average return Ÿ The Sensitivity of the fund with the

benchmarked fund should be measured with the help of beta. Beta is always benchmarked to one. For e.g. - if the fund's beta is 0.80, it is less sensitive to the benchmark movement or if it is 1.20, it is more sensitive relative to the benchmark movement Ÿ Compare Sharpe ratio of various funds

which shows the risk-adjusted return. It can be calculated by using formula (Return – Risk-free rate)/ (Standard deviation). Higher the Sharpe ratio, better the fund is suited for an investor All the aforementioned points are dynamic in nature which vary as per investors' goals and expectations. Before selecting any product, one should be sure that the risk appetite and all other factors of any investor should be matched with a fund manager.

Ÿ Avoid Mutual Funds with Turnover

Ratios of more than 50%. Such funds are comparatively costlier than others as they include huge distribution and service cost Ÿ Look for an experienced fund

manager whose philosophy agrees with your own when selecting a mutual fund

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We welcome your valuable feedback Finstreet, The Finance Committee of K.J. S.I.M.S.R.

Email Us At : finstreet@somaiya.edu