RISK AND RETURN ANALYSIS CHAPTER 11.1 INTRODUCTION

Risk and return are most important concepts in finance. Risk and return concepts are basic to the understanding of the valuation of assets or securities.Return expresses the amount which an investor actually earned on an investment during a certain period. Return includes the interest, dividend and capital gains; while risk represents the uncertainty associated with a particular task. In financial terms, risk is the chance or probability that a certain investment may or may not deliver the actual/expected returns. The risk and return trade off says that the potential return rises with an increase in risk. It is important for an investor to decide on a balance between the desire for the lowest possible risk and highest possible return. Risk in investment exists because of the inability to make perfect or accurate forecasts. Risk in investment is defined as the variability that is likely to occur in future cash flows from an investment. The greater variability of these cash flows indicates greater risk. Variance or standard deviation measures the deviation about expected cash flows of each of the possible cash flows and is known as the absolute measure of risk; while co-efficient of variation is a relative measure of risk.The term "risk and return" refers to the potential financial loss or gain experienced through investments in securities. An investor who has registered a profit is said to have seen a "return" on his or her investment. The "risk" of the investment, meanwhile, denotes the possibility or likelihood that the investor could lose money.

If an investor decides to invest in a security that has a relatively low risk, the potential return on that investment is typically fairly small. Conversely, an investment in a security that has a high risk factor also has the potential to garner higher returns.Any rational investor, before investing his or her invertible wealth in the stock, analyses the risk associated with particular stock. The actual return he receives from a stock may vary from his expected return and the risk is expressed in terms of variability of return. The down side risk may be caused by several factors, either common to all stock or specific to a particular stock. Investor in general would like to analyze the risk factors and a through knowledge of the risk help him to plan his portfolio in such a manner so as to minimize the risk associated with the investment.RISK & RETURN Investment decisions are influenced by various motives. Some people invest in a business to acquire control & enjoy the prestige associated with in. some people invest in expensive yachts & famous villas to display their wealth. Most investors, however, are largely guided by the pecuniary motive of earning a return on their investment. For earning returns investors have to almost invariably bear some risk. In general, risk & return go hand in hand. Sometimes the best investments are the ones you don't make. This is a maxim which best explains the complexity of making investments. There are many investment avenues available for investors today.In financial planning, the investment goal must be considered in defining risk. If your goal is to provide an acceptable amount of retirement income, you should construct an investment portfolio to generate anexpectedreturn that is sufficient to meet your investment goal. But because there is uncertaintythat the portfolio will earn itsexpectedlong-term return, the long-termrealizedreturn may fall short of the expected return. This raises the possibility that available retirement funds fall short of needs - that is, theinvestor might outlive the investment portfolio.This is an example of "shortfall risk." Themagnitudeandconsequencesof the potential shortfall deserve special consideration from investors.[3]However, since theuncertaintyof return couldalsoresult in a realized return that ishigherthan the expected return, theinvestment portfolio might "outlive" the investor.Therefore, considerations of shortfall risk are subsumed by considering risk as theuncertainty of investment return.Different people have different motives for investing. For most investors their interest in investment is an expectation of some positive rate of return. But investors cannot overlook the fact that risk is inherent in any investment. Risk varies with the nature of return commitment. Generally, investment in equity is considered to be more risky than investment in debentures & bonds. A closer look at risk reveals that some are uncontrollable (systematic risk) and some are controllable (unsystematic risk). RETURNReturn is the primary motivating force that drives investment. It represents the reward for undertaking investment. Since the game of investing is about returns (after allowing for risk), measurement of realized (historical) returns is necessary to assess how well the investment manager has done. In addition, historical returns are often used as an important input in estimating future prospective returns. Components of ReturnThe return of an investment consists of two components.Current Return:The first component that often comes to mind when one is thinking about return is the periodic cash flow, such as dividend or interest, generated by the investment. Current return is measured as the periodic income in relation to the beginning price of the investment.Capital Return:The second component of return is reflected in the price change called the capital return- it is simply the price appreciation (or depreciation) divided by the beginning price of the asset. For assets like equity stocks, the capital return predominates.Thus, the total return for any security (or for that matter any asset) is defined as:Total Return = Current return + Capital return

RISK AND RETURN ANALYSISRISKInvestor cannot talk about investment returns without talking about risk because investment decisions invariably involve a trade-off between the risk & return. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. More specifically, most investors are concerned about the actual outcome being less than the expected outcome. The wider range of possible outcomes, the greater the risk. Investments have two components that create risk. Risks specific to a particular type of investment, company, or business are known as unsystematic risks. Unsystematic risks can be managed through portfolio diversification, which consists of making investments in a variety of companies & industries. Diversification reduces unsystematic risks because the prices of individual securities do not move exactly together. Increases in value & decreases in value of different securities tend to cancel one another out, reducing volatility. Because unsystematic risk can be eliminated by use of a diversified portfolio, investors are not compensated for this risk.Systematic risks, also known as market risk, exist because there are systematic risks within the economy that affect all businesses. These risks cause stocks to tend to move together, which is why investors are exposed to them no matter how many different companies they own. Investors who are unwilling to accept systematic risks have two options. First, they can opt for a risk-free investment, but they will receive a lower level of return. Higher returns are available to investors who are willing to assume systematic risk. However, they must ensure that they are being adequately compensated for this risk. The Capital Asset Pricing Model theory formalizes this by stating that companies desire their projects to have rates of return that exceed the risk- free rate to compensate them for systematic risks & that companies desire larger returns when systematic risks are greater. The other alternative is to hedge against systematic risk by paying another entity to assume that risk. A perfect hedge can reduce risk to nothing except for the costs of the hedge.

The market tends to move in cycles. A John Train says:You need to get deeply into your bones the sense that any market, & certainly the stock market, moves in cycles, so that you will infallibly get wonderful bargains every few years, & have a chance to sell again at ridiculously high prices a few years later.Systematic RiskSystematic Risk, as the name suggests is the risk inherent in the economic system. Macro factors such as domestic as well as international policies, employment rate, the rate and momentum of inflation and general level of consumer confidence etc. are what constitute systematic risk. Generally, investors cannot hedge or diversify against this risk as it affects all kinds of asset classes and affects the entire economy as such.The systematic risk is further subdivided into three types.1. Market risk 2. Interest rate risk3. Purchasing power risk1. Market Risk:This is the possibility that the financial markets will drop in value and create a ripple effect in your portfolio. For example, if the stock market as a whole loses value, chances are your stocks or stock funds will decrease in value as well until the market returns to a period of growth. Market risk exposes you to potential loss of principal, since some companies don't survive market downturns. But the greater threat is the loss of principal that can result from selling when prices are low.2. Interest rate risk:This is the possibility that interest rates will go up. If that happens, inflation increases, and the value of existing bonds and other fixed-income investments declines, since they're worth less to investors than newly issued bonds paying a higher rate. Rising interest rates also usually mean lower stock prices, since investors put more money into interest-paying investments because they can get a strong return with less risk.3. Purchasing power risk:Variations in the return are caused also by the loss of the purchasing power of currency. Inflation is the reason behind the loss of the purchasing power. Purchasing power risk is probable loss in the purchasing power of returns to be received. Inflation may be demand pull or cost push inflation. On demand pull inflation the demand for goods and services are in excess of their supply. At full employment level of factors of production, economy would not be able to supply more goods in short run and the demand for the products pushes the price upwards. The equilibrium between the demand and the supply is attained at the higher price. The cost push inflation as the name itself indicates that the inflation or the raise in the price is caused by the increase in the cost. The increase in the cost of raw material, labour and equipment makes the cost of production high and ends in high price level. Thus the cost inflation has a spiraling effect on the price level. Unsystematic RiskThis is the risk inherent in a particular asset class. The best way to combat this risk is by diversification. However, one must remember that the diversification must be in the class of asset and not the asset itself. An example of the above is evenly distributing your portfolio in bank deposits, Reserve Bank of India (RBI) bonds, real estate and equities. That way if a certain unsystematic risk affects let's say the real estate market (say the prices crashes), then the presence of other classes of assets in your portfolio saves you from a total washout. However, note that diversifying within the same asset class (buying different equity shares) is not strictly combating unsystematic risk.Unsystematic risk can be classified into five types.1. Business Risk 2. Financial Risk 3. Regulation Risk 4. Reinvestment Risk 5. International Risk

1. Business Risk:It is that portion of unsystematic risk caused by operating environment of the business. Business risk arises from the inability of the firm to maintain its competitive edge and the growth of the stability of the earning variation that occurs in the operating environment is reflected in the operating income and expected dividends. It indicates business risk. Business risk is any risk that can lower a businesss net assets or net income that could, in turn, lower the return of any security based on it. Some business risks are sector risks that can affect every company in a particular sector, while some business risks affect only a particular company.2. Financial Risk:It refers to the variability of the income to the equity capital due to debt capital. Financial risk in a company is associated with the capital structure of the company. Capital structure of the company consists of equity funds and borrowed funds. The presence of debt and preference capital results in commitment of paying interest or prefixed rate of dividend.This arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings of such company may be more. Because of highly dependence on borrowings exposes to the risk of winding up for its inability to honour its commitments towards lenders and creditors. So the investors should be aware of this risk and portfolio manager should also be very careful.3.Regulation Risk:Some investment can be relatively attractive to other investments because of certain regulations or tax laws that give them an advantage of some kind. Municipal bonds, for example pay interest that is exempt from local, state and federal taxation. As a result of that special tax exemption, municipal can price bonds to yield a lower interest rate since the net after-tax yield may still make them attractive to investors. The risk of a regulatory change that could adversely affect the stature of an investment is a real danger. In 1987, tax laws changes dramatically lessened the attractiveness of many existing limited partnership that relied upon special tax considerations as part of their total return. Prices for many limited partnership tumbled when investors were left with different securities, in effect, than what they originally bargained for. To make matter worse, there was not an extensive secondary market for these liquid securities and many investors found themselves unable to sell those securities at anything but "fire sale" prices if at all.4. Reinvestment Risk:It is important to understand that YTM is a promised yield, because investors can earn the indicated yield only if the bond is held to maturity and the coupons are reinvested at the calculated YTM (yield to maturity). Obviously, no trading can be done for a particular bond if the YTM is to earned. The investor simply buys and holds. Reinvestment risk the YTM calculation assumes that the investor reinvests all coupons received from a bond at a rate equal to computed YTM at the bond, thereby earning interest over interest over the life of the bond at the computed YTM rate in effect, this calculation assumes that the reinvestment rate is the yield to maturity. If the investor spends the coupons, or reinvest them at a rate different from the assumed reinvestment rate of 10 percent, the realized yield that will actually be earned at the termination of the investment in the bond will differ from the promised YTM. And, in fact-coupons almost always will be reinvested at rates higher or lower than the computed YTM, resulting in a realized yield that differs from the promised yield. This gives rise to reinvestment rate risk. This interest-on-interest concept significantly affects the potential dollar return. The exact impact is a function of coupon and time of maturity, with reinvestment becoming more important as either coupon or time to maturity, or both, rises specifically.1. Holding everything else constant, the longer maturity of a bond, the greater the reinvestment risks. Holding everything else constant, the higher the coupon rate, the greater the dependence of the total dollar returns from the bond on the reinvestment of the coupon payments.In fact, for long-term bonds the interest-on-interest component of the total realized yield may account for more than three-fourths of the bond's total dollar return.

5. International Risk:

International risk can include both country risk and exchange rate risk. i. Exchange Rate Risk:All investors who invest internationally in today's increasingly global investment arena face the prospect of uncertainty in the returns after they convert the foreign gain back to their own currency. Unlike the past when most U.S. investors ignored international investing alternatives, investors today must recognize and understand exchange rate risk, which can be defined as the variability in returns on securities caused by currency fluctuations. Exchange rate risk is sometimes called currency risk. Currency risk affects international mutual funds, global mutual funds, closed-end single country funds, American depository receipts, foreign stocks and foreign bonds. For example, a U.S. investor who buys a German stock denominated in marks must ultimately convert the returns from this stock back to dollars. If the exchange rate has moved against the investor, losses from these exchange rate movements can partially or totally negate the original return earned.ii. Country Risk:Country risk, also referred to as political risk, is an important risk for investors today. With more investors investing internationally, both directly and indirectly, the political, and therefore economic, stability and viability of a country's economy needs to be considered. The United States has the lowest country risk, and other countries can be judged on a relative basis using the United States as a benchmark. Example of countries that needed careful monitoring in the 1990s because of country risk included the former Soviet Union and Yugoslavia, China, Hong Kong and South Africa.

iii. Liquidity risk Liquidity risk is the risk associated with particular secondary market in which a security trades. An investment that can be bought or sold quickly and without significant price concession is considered liquid. The more uncertainty about the time element and the price concession, the greater the liquidity risks. A treasury bill has little or no liquidity risk, whereas a small OTC stock may have substantial liquidity risk. \

RISK AVOIDANCE: Investment planning is almost impossible without a thorough understanding of risk. There is a risk/return trade off. That is, the greater risk is accepted, and the greater must be the potential return as reward for committing ones fund to an uncertain outcome. Generally, as the level of risk rises, the rate of return should also rise, and vice versa. One way to handle risk is to avoid it. Risk avoidance occurs when one chooses to completely avoid the activity the risk is associated with. In the investment world, avoidance of some risk is deemed to be possible through the act of investing in risk-free investments. Stock market risk can be completely avoided by one choosing to have no exposure to it by not investing in equity securities.1. Risk transfer: Another way to handle risk is to transfer the risk. Risk transfer in investing can be done where one may choose to purchase a municipal bond that is insured. One may purchase a put option on a stock, which allows the person to put to or sell to someone his or her stock at a set price, regardless of how much lower the stock may drop. There are many examples of risk transfer in the area of investing.2. The Risk Averse Investor: Do investors dislike risk? In economics in general, and investments in particular, the standard assumption is that investors are rational. Rational investors prefer certainty to uncertainty. A risk-averse investor is one who will not assume risk simply for its own sake and will not incur any given level of risk unless there is an expectation of adequate compensation for having done so. In fact, investors cannot reasonably expect to earn larger returns without assuming larger risks. Investors deal with risk by choosing (implicitly or explicitly) the amount of risk they are willing to incur. Some investors choose to incur high level of risk with expectation of high levels of return. Other investors are unwilling to assume much risk, and they should not expect to earn large returns.

MEANING OF RETURN:Return is one of the primary objectives of investment, which acts as a driving force for investment. Risk is inevitable and it is positively correlated with expected return. Return to an investor is of two types, current yield and capital appreciation. Current yield is the return, which is got in the form of individuals/interest whereas capital appreciation is the return, which we get after liquidation of shares.Return = Current yield (dividend/interest) + CapitalAppreciation/ Capital GainTYPES OF RETURN1.HISTORICAL RETURNSReturn calculated are on past data which has already occurred is called as historical return. Historical return is a post-mortem analysis of investment, which lacks insight for future. Historical return is less risky and more accurate compared to expected return since it does not involve prediction of interest or dividend or closing price. Historical return is also called as post return or actual return.Return = Cash payment + Closing price - Beginning priceBeginning Price2.EXPECTED RETURNReturn calculated based or future estimates and calculation is called as expected return. Expected Return = Expected Dividend + Capital Gain (expected)Beginning price

RISK MEASUREMENTUnderstanding the nature of risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms makes it comparable with other stocks. Measurement cannot be assured of cent percent accuracy because risk is caused by numerous factors such as social, political, economic and managerial efficiency. Measurement provides and approximates qualification of risk.1.Volatility:Of all the ways to describe risk, the simplest and possibly most accurate is "the uncertainty of a future outcome". The anticipated for some future period is known as expected return. The actual return over some past period is known as the realized return. The simplest fact that dominates investing is that the realized return on an asset with any risk attached to it may be different from what was expected. Volatility may be described as the range of movement (or price fluctuation) from the expected level of return. The more a stock. For example, goes up and down in price, the more volatile that stock is. Because wide price swings create more uncertainty of an eventual outcome, increased volatility can be equated with increased risk. Being able to measure and determine the past volatility of a security is important in that it provides some insight into the riskness of that security as an investment.2.Standard Deviation:Investors and analyst should be at least familiar with study of probability distributions. Since the return, an investor will earn from investing is not known, it must be estimated.In statistics and probability theory, standard deviation (represented by the symbol sigma, ) shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the mean; high standard deviation indicates that the data points are spread out over a large range of values.The standard deviation of a random variable, statistical population, data set, or probability distribution is the square root of its variance. It is algebraically simpler though practically less robust than the average absolute deviation. A useful property of standard deviation is that, unlike variance, it is expressed in the same units as the data.FORMULARate of Return = Deviation = Return Avg. ReturnVariance (2) = Standard deviation = PROCEDURE TO CALCULATE STANDARD DEVIATION1. Calculate the mean of your data set.2. Subtract the mean from each of the data values and list the differences.3. Square each of the differences from the previous step and make a list of the squares. In other words, multiply each number by itself. Be careful with negatives. A negative times a negative makes a positive.4. Add the squares from the previous step together.5. Subtract one from the number of data values you started with.6. Divide the sum from step four by the number from step five.7. Take the square root of the number from the previous step. This is the standard deviation. You may need to use a basic calculator to find the square root. Be sure to use significant figures when rounding your answer.

Probability Distribution:Probability represents the likelihood of various outcomes and are typically expressed as a decimal (sometimes fractions arc used). The sum of the probabilities of all possible outcomes must be 1.0, because they must completely describe all the (perceived) likely occurrences. Probability distribution can be either discrete or continuous. With a discrete probability, a probability is assigned to each possible outcome. With a continuous probability distribution an infinite number of possible outcomes exist. The most familiar continuous distribution is the normal distribution depicted by the well-known bell shaped curve often used in statistics. It is a two-parameter distribution in that the mean and the variance fully describe it. To describe the single most likely outcomes from a particular probability distribution, it is necessary to calculate its expected value. The expected value is average of all possible return outcomes, where each outcome is weighted by its respective probability of occurrence. For investors, this can be described as the expected return. To calculate the total risk associated with the expected return, the variance or standard deviation is used. Since variance, volatility and risk can in this context be used synonymously, the larger the standard deviation, the more uncertain the outcome.Calculating a standard deviation using probability distributions involves making subjective estimates of the probabilities and the likely returns. However, we cannot avoid such estimates because future returns are uncertain. The prices of securities are based on investors' expectations about the future. The relevant standard deviation in this situation is the ex-ante standard deviation and not the ex-post based on realized returns. Although standard deviations are based on realized returns are often used as proxies for ex-ante standard deviations, investors should be careful to remember that the past cannot always be extrapolated into the future without modifications. Ex-post standard deviations may be convenient, but they are subject to errors. One important point about the estimation of standard deviation is the distinction between individual securities and portfolios. Standard deviation is a measure of the total risk of an asset or a portfolio, including therefore both systematic and unsystematic risk. It captures the total variability in the assets or portfolio's return, whatever the sources of that variability. In summary, the standard deviation of return measures the total risk of one security or the total risk of a portfolio of securities.

The historical standard deviation can be calculated for individual securities or portfolios of securities using total returns for some specific period of time. This ex-post value is useful in evaluating the total risk for a particular historical period and in estimating the total risk that is expected to prevail over some future period.3. Beta:Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Beta is a relative measure of risk-the-risk of an individual stock relative to the market portfolio of all stocks. If the security's returns move more (less) than the market's return as (he latter changes, the security's returns have more (less) volatility (fluctuations in price) than those of the market. It is important to note that beta measures a security's volatility, or fluctuations in price, relative to a benchmark, the market portfolio of all stocks. Beta is useful for comparing the relative systematic risk of different stocks and, in practice, is used by investors to judge a stock's riskiness. Stocks can be ranked by their betas. Because the variance of the market is a constant across all securities for a particular period, ranking stocks by beta is the same as ranking them by their absolute systematic risk. Stocks with high betas are said to be high-risk securities.OPERATIONAL DEFINITION OF CONCEPTSPortfolio: In finance, a portfolio is a collection of investments held by an institution or a private individual. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.Portfolio Management:Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio ow;ner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest.These decisions always involve some sort of performance measurement, mostly expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles is compared.Risk:The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on. the greater the potential return.The reason for this is that investors need to he compensated for taking on additional risk.Return:The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage. The general rule is that the more risk you take, the greater the potential for higher return - and loss.Risk-Free Rate of Return:The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

These decisions always involve some sort of performance measurement, most y expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles is compared.Risk:The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on. the greater the potential return.The reason for this is that investors need to be compensated for taking on additional risk.Return:The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage. The general rule is that the more risk you take, the greater the potential for higher return - and loss.Risk-Free Rate of Return:The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

Risk-Return TradeoffThe principle thai potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.

1.2 INDUSTRY PROFILEHISTORY OF INDIAN STOCK MARKET:EvolutionIndian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century.By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850.The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60.In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.Pre-Independance Scenario - Establishment of Different Stock Exchanges1874With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business.

1875"The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay

1880'sDevelopment of cotton mills industry and set up of many others

1894Establishment of "The Ahmedabad Share and Stock Brokers' Association"

1880 - 90's Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal

1908"The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers.

1923When recession followed, number of brokers came down to 3 and the Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies

1940Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established

1944Establishment of "The Hyderabad Stock Exchange Limited"

1947"Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited"

Post Independance Scenario:The depression witnessed after the Independance led to closure of a lot of exchanges in the country. Lahore Estock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bnagalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were: 1. Bombay 2. Calcutta 3. Madras 4. Ahmedabad 5. Delhi 6. Hyderabad 7. Bangalore 8. Indore Many more stock exchanges were established during 1980's, namely:1. Cochin Stock Exchange (1980) 2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982) 3. Pune Stock Exchange Limited (1982) 4. Ludhiana Stock Exchange Association Limited (1983) 5. Gauhati Stock Exchange Limited (1984) 6. Kanara Stock Exchange Limited (at Mangalore, 1985) 7. Magadh Stock Exchange Association (at Patna, 1986) 8. Jaipur Stock Exchange Limited (1989) 9. Bhubaneswar Stock Exchange Association Limited (1989) 10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989) 11. Vadodara Stock Exchange Limited (at Baroda, 1990) 12. Coimbatore Stock Exchange 13. Meerut Stock Exchange Trading Pattern of the Indian Stock MarketIndian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:

Types of TransactionsThe flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:

Indian stock exchange allows a member broker to perform following activities: 1. Act as an agent, 2. Buy and sell securities for his clients and charge commission for the same, 3. Act as a trader or dealer as a principal, 4. Buy and sell securities on his own account and risk. Over The Counter Exchange of India (OTCEI)Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many functional inefficiencies. Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial Services.

Advantages of OTCEI1. Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India 2. The screen-based scripless trading ensures transparency and accuracy of prices 3. Faster settlement and transfer process as compared to other exchanges 4. Shorter allotment procedure (in case of a new issue) than other exchanges National Stock Exchange:In order to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.

NSE provides exposure to investors in two types of markets, namely: 1. Wholesale debt market 2. Capital market Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instrumets like treasury bills, government securities, commercial papers etc.

Trading at NSE 1. Fully automated screen-based trading mechanism 2. Strictly follows the principle of an order-driven market 3. Trading members are linked through a communication network 4. This network allows them to execute trade from their offices 5. The prices at which the buyer and seller are willing to transact will appear on the screen 6. When the prices match the transaction will be completed 7. A confirmation slip will be printed at the office of the trading member Advantages of trading at NSE 1. Integrated network for trading in stock market of India 2. Fully automated screen based system that provides higher degree of transparency 3. Investors can transact from any part of the country at uniform prices 4. Greater functional efficiency supported by totally computerized network.

1.3 COMPANY PROFILE

Overview

The IIFL Group is a leading financial services company in India, promoted by first generation entrepreneurs. We have a diversified business model that includes credit and finance, wealth management, financial product distribution, asset management, capital market advisory and investment banking.

We have a largely retail focussed model, servicing over 2 million customers, including several lakh first-time customers for mutual funds, insurance and consumer credit. This has been achieved due to our extensive distribution reach of close to 4,000 business locations and also innovative methods like seminar sales and use of mobile vans for marketing in smaller areas.

Our evolution from an entrepreneurial start-up to a market leadership position is a story of steady growth by adapting to the changing environment, without losing the focus on our core domain of financial services. Our NBFC and lending business accounts for 68% of our consolidated income in FY13 and has a diversified product portfolio rather than remaining a mono-line NBFC. We are a leader in distribution of life insurance and mutual funds among non-bank entities. Although the share of equity broking in total income was only 13% in FY13, IIFL continues to remain a leading player in both, retail and institutional space.

LocationMumbai

Corporate officeIIFL Centre, Lower Parel

Registered officeIIFL House, Sun Infotech Park, Road No. 16V, Plo t No. B-23, Thane

Industrial Area, Wagle Estate,Thane,Maharashtra 4 00604

Year of1995

incorporation

IndustryFinan cial Services

Key businessesCredit& Finance, Wealth Management, FinancialProduct

Distribution, Capital Market Related

Employees14,00 0+

Business locationsAround 4,000 locations in 900 cities and towns

Global reachSri Lanka, Singapore, Dubai, New York, Mauritius , UK, Hong Kong,

Switz erland

ListingsNSE,BSE

Listing date17 Ma y, 2005

RegistrarsLinkIntime India Pvt. Ltd.

Short term debtCRISI L A1+ & ICRA (A1+)

rating

Long term debtICRA(AA-) & CRISIL AA-/Stable

rating

Domainswww.indiainfoline.com, www.iiflfinance.com,

www.ttweb.indiainfoline.com, www.flame.org.in

ISIN codeINE530B01024

Bloomberg codeIIFL IN EQUITY

We have a track record of uninterrupted profits and dividends since listing.

Revenues

EBIDTA

PAT

Net worth

ROE

Segmental revenue split

Vision To become the most respected company in the financial services space in India.

Values Values are IIFL are summarised in one acronym: GIFTS.

Growth with focused team of dynamic professionals.

Integrity in all aspects of business no compromise in any situation.

Fairness in all our dealings employees, customers, vendors and sharehol ders all included.

Transparency in what we do and in how and why we do it.

Service orientation is our core value, imbibed by all sales as well as suppo rt teams.

Business strategy

Steady growth by adapting to the changing environment, without losing th e focus on our core domain of financial services.

De-risked business through multiple products and diversified revenue strea m. Knowledge is the key to powe r superior financial decisions.

Keep costs low and continuou sly strive for innovation.

Customer strategy

Remain largely a retail focused organisation, driving stickiness through knowledge and quality service.

Cater to untapped areas in sem i-urban and rural areas, which is relatively safe from cut-throat competition.

Target the micro, small and m edium enterprises mushrooming across the country through a cluster approach for lending business.

Use wide multi-modal network serving as one-stop shop to customers.

People strategy Attract the best talent and driv en people. Ensure conducive merit envir onment. Liberal ownership-sharing.

Our logo

The Shree Yantra is regarded in India as the most powerful and mystically beautiful of all yantras (Sanskrit word for a symbol used to focus the mind). It predates the Vedas and is supposed to be the favourite Yantra of Lakshmi, the Goddess of Wealth and Prosperity. This powerful symbol, said to promote harmony and tranquillity as well, has endured for many centuries. IIFL is engaged in the business of creating wealth and the adoption of the Shree Yantra as its logo was but natural.

Positioning

When we pioneered online trading in India with the launch of our brand 5 paisa, the tag line was Its all about money, honey.

We recently realigned our positioning from Knowledge is the E dge to When its about Money .

The IIFL brand is associated with trust, knowledge and quality service. But more importantly, the brand stands for timely assistance provided to the countrys under-banked customers.

28

Our Strengths:

Managerial depth

Our promoters individually are first-generation Indian entrepreneurs with meritorious academic backgrounds and impeccable professional careers.

Nirmal Jain, Chairman, is a rank holder Chartered Accountant, Cost Accountant and an MBA from IIM Ahmedabad and Mr. R. Venkataraman, Managing Director, is an Electronics Engineer from IIT Kharagpur and an MBA from IIM Bangalore.

The Promoters have built the business from scratch, without pedigree of a large family business or inherited wealth and steered it towards a market leading position by dint of hard work and enterprise.

We have consistently attracted the best of the talent from across the financial sector private sector banks, foreign banks, public sector banks and established NBFCs. The senior management team have years of experience and backgrounds similar to promoters and leads competent teams. IIFL has uninterrupted history of profits and dividends since listing. We have delivered total shareholder returns of 34.3% CAGR from listing till March 31, 2013.

Governance

The Promoters have demonstrated an exemplary track record of governance and utmost integrity. There have been no notable regulatory strictures or oversight ever in the groups history. This is despite a widespread and broad range of operations governed by multiple regulators including RBI, SEBI, IRDA, FMC and NHB. In addition, we have eight licensed subsidiaries in major global financial centres.

Our Board has independent directors, highly respected for their professional integrity as well as rich financial and banking experience and expertise. We have an advisory board comprising stalwarts with long and immaculate careers in banks, public service and legal profession.

None of the promoters family members has held managerial or board position or have related-party or financial transaction of any significance, since listing. Further, we have not lent to any related party or associated concerns. The promoters do not have any other business interests and are committed to the core business of financial services under the IIFL umbrella.

People

Our people form the backbone of our organization and are the foundation of our success. We have significant ownership by employees with a credo of owners work, workers own, which has enabled us to maintain a highly motivated staff driven by owner mindset. We create owners out of our employees not just by offering a financial stake but also through autonomy to take decisions, make mistakes and grow confidence, competence and career.

Knowledge

IIFL is a knowledge driven organization and has over the years developed and institutionalized knowledge about its businesses at all the levels.

Our roots are in original research on economy, sectors, companies, capital markets and global financial trends. Our in-house research capabilities gives us an edge in understanding industry trends, macro-economic situations, business cycles, inflation and interest rate trends, technological changes, regulatory and legal updates, environmental factors impacting labour, raw material supply, pollution norms and for intermediate products- trends in end user sectors and for consumption products- trends in customers habits.

We have strong origination and KYC processes across our businesses to get deep understanding of customers needs and profile.

Innovation

We have successfully executed a number of innovative and disruptive ideas in the financial services industry to rise from a start-up to leadership position in less than two decades. For instance:

We gave away all our research free on indiainfoline.com and acquired millions of readers.

We pioneered online trading and revolutionized broking at lowest rate of 5 basis points.

We inducted a high profile institutional team from a foreign brokerage house in a first of its kind deal in India broking industry.

Distribution reach

We are present in around 4,000 business locations across more than 900 cities in India. Our global footprint covers Colombo, Dubai, New York, Mauritius, London, Geneva and Singapore.

De-risked business

IIFL has a de-risked and diversified business model across multiple revenue streams. We offer multiple products across all segments of financial services.

Risk management

The basis of our risk management and hence our sustainability is our underlying conservatism. The objective of our risk management process is to insulate the company from risks associated with the business while simultaneously creating an environment conducive for growth.

The effectiveness of our risk management practice emanates from our rich experience. It is derived from a deep understanding of the Indian economy, sectorial trends and corporate fundamentals.

Our ability to manage organizational risk cascades from our board of directors, comprising professionals with rich and varied experience. The risk appetite defined by our board is reflected in our business plans and integrated into our operations.

We identify risks through appropriate systems, indicators and risk surveys reinforced by our mangers. The companys well-defined organizational structure, documented policies and standard operating procedures, authority matrix and internal controls ensure efficiency of operations, compliance with internal and regulatory requirements.

We continuously strengthen our risk measurement tools customized to the nature of each business segment. Many critical decision levels for investments, major lending and policy initiatives are institutionalized trough appropriate committees.

Well capitalized

The Group has net worth of around Rs20 billion. The company has a significantly unutilized capacity to leverage.

Technology

Right from inception, IIFL has incubated and developed next generation technology for its core businesses.

IIFLs front office software is seamlessly integrated to a highly automated proprietary back office, risk management and MIS software.

IIFL Trader Terminal is an entirely home grown proprietary technology, which allows trading in Equities Cash & Derivatives, Commodities, Forex, Mutual Funds, NFOs and IPOs on a single screen.

Customer service

Our existing customer service organization has evolved with the singular goal since inception that our customer experience should be the best. We offer services through multiple customer touch-points such as personal interaction at our offices, call centre, email, and online web-based interface. We have made significant investment in systems, technology, people and their training, to ensure high service standards. We have also won an award for Best Customer Service in Financial Services 2013.

34

What we do (Product an d Services)?

IIFL Group offers credit & finance facilities through its subsidiaries:

India Infoline Finance Ltd (98 .87% subsidiary); and

India Infoline Housing Financ e Ltd (Wholly owned subsidiary).

The NBFC has a high quality loan book of close to Rs10,000 crores, with a diversified portfolio including:

Home loans

SME & Trader lo ans

Healthcare & Eq uipment financing

Loans secured against Gold

Commercial Vehi cle financing

Loans secured against Property

Loans secured against Shares

We have chosen to be a dive rsified portfolio company rather than a mono-line NBFC. Weexercise utmost prudence in c redit selection, monitoring and avoid concentration. Our creditevaluation process not only ta kes into account the value and quality of the collateral, but alsothe cash-flows of the potential borrower. Backed by a diversified portfolio, robust creditassessment, effective risk ma nagement techniques and an efficient collect ion mechanism, thenet NPAs are kept well und er control at less than 0.2%. The NBFC and lending businessaccounted for 68% of our consolidated income in FY13.

35

Revenues

Loan book

36

Loan book break-up

NIM

37

Gross NPA

Net NPA

CAR

38

IIFL Group offers wealth adv isory services through its subsidiary IIFL W ealth Management Ltd (82.44% subsidiary).

There is an increasing need f or a comprehensive wealth management sol ution as opposed to disparate services to address c omplexity related to treasury, personal portfolio, cashflows and long-term investments. We are amongst the leading wealth management companies with Assets under Advice (AuA) of more than Rs40,000 crores with a HNI client base of over 4,000 families.

Our fixed income practice coupled with a large bond desk facilitate s direct access to sovereign, corporate and colla teralised debt.

The business grew revenues from Rs180 million in 2008-09 to Rs2 b illion in 2012-13. We have managed the five sig nificant constituents that go into successful wealth management and advisory services:

We distribute a range of financial products like life insurance, mutual funds, National Pension Scheme (NPS), gov ernment and corporate bonds. In fact, we a re a market leader among non-bank promoted entities in distribution of life insurance a nd mutual funds.

We follow an open architect ure approach and constantly try to innovate channels that reach out to customers in the most cost effective way possible. Our strength in semi-urban and rural areas has helped us reach several lakh first time customers. We conducted a survey of our 100 small customers. Watch them on www.indiainfoline.com/inclu sion

IIFLs annual premium mobil isation (APE) stood at over Rs320 crores during FY13.

We pioneered internet brokin g in India and rationalised brokerage rates fro m 150 basis points in the late nineties to 5 basis p oints. Although the share of equity broking in total income was only 13% in FY13, we continue to remain a leading player in both, ret ail and institutional space.

Our extension into commoditi es and currency advisory reconciles with its vision to emerge as a one-stop-shop financial intermediary. We are in the process of bui lding a culture of advisory and financial planni ng to move away from pure execution and d e-risk our business further.

IIFL Capital, the institutional equities division of the IIFL Group, is the f irst port of call for most leading foreign institutional investors and mutual funds that in vest in India. Our unmatched block placement c apability is renowned and is underpinned b y our reputation for integrity and client confidentiality.

Revenues increased 2.3% to R s552.53 cr in 2012-13.

Market share in equityMarket share in c ommodity

41We launched our Mutual Fu nd business to offer niche products. The IIFL Nifty ETF, our maiden scheme, carries the lowest expenses of any equity ETF in India.

Our passivelymanagedDiv idendOpportunities ETFhasbeen ranked the second best

performer by Value Researc h. A total of six schemes havebeen launc hed, including four

close-ended debt schemes and two open-ended equityschemes. T otalassetsunder

management(AUM)stoo d atRs3,271 millionas on Ma rch31,2013.

Our strength lies in gauging the market pulse and launching niche products with low churn and operational efficiency, thereby keeping costs low.The business leverages upon the strength of our research and placement capabilities of the institutional and retail sales teams. Our experienced investment banking team possesses the skill-set to manage all kinds of investment banking transactions. Our clo se interactions with investors as well as corporate helps us understand and offer tailor-made solutions to fulfil requirements.

We possess strong placeme nt capabilities across institutional, HNI and retail investors.

Some of our marquee transactions:

Awards:

1) Best Wealth Management House (India), 2011 & 2012, Triple A 2) No. 1 in Fixed Income Portfolio Management in India, 2012 Euro Money 3) Best Broking House with Global Presence, 2011 & 2012 D&B 4) Top Performer, Equity (FI Category), 2012 BSE Best Commodities Investment, 2012 Euro Money 5) Best Customer Service in Financial Services, 2013 - Retailer Customer Service Awards

India Infoline Ltd

BSE: 532636 | NSE: INDIAI NFO | ISIN: INE530B01024

Market Cap: [Rs.Cr.] 1,426 | Face Value: [Rs.] 2 Industry: Finance & Investments

49.651.40 (2.9%)

BSE2014 Jul 31,00:00

Day's High | Low50.25 | 47.05

Day's Volumes64,802

52Wk High | Low93.35 | 47.05

Open Price48.50

Turnover3,136,730.00

Deliverable Vol.15,345

6 Mth. Avg. Vol.280,636.89

49.901.35 (2.8%)

NSE2014 Jul 31,00:00

Day's High | Low50.45 | 47.40

Day's Volumes384,610

52Wk High | Low93.30 | 47.40

Open Price48.85

Turnover18,527,443.10

Deliverable Vol.148,065

6 Mth. Avg. Vol.662,095.40

Dividend History

DateDividendFace value Rs)

(Rs)

25-Jan-06210

21-Jul-06110

24-Mar-310

07

30-Jun-08610

30-Jan-092.82

18-Aug-1.22

09

27-Jan-101.82

8-Mar-1132

21-May-1.52

12

5-Feb-133

2

Annual dividend (Rs) Dividend % of FV

FY06330

FY07330

FY08660

FY092.8140

FY0103150

FY0113150

FY0121.575

FY0133150

45

Shareholding PatternMar-2013Dec-2012Sep-2012Jun-2012Mar-2012

Promoterand31.10 %31.61 %31.68 %31.60 %31.61 %

Promoter Group

Indian31.10 %31.61 %31.68 %31.60 %31.61 %

Foreign----------

Public68.90 %68.39 %68.32 %68.40 %68.39 %

Institutions43.68 %44.19 %44.70 %44.86 %44.16 %

FII39.34 %39.92 %40.08 %39.63 %39.84 %

DII4.34 %4.27 %4.62 %5.23 %4.32 %

Non Institutions25.22 %24.20 %23.62 %23.54 %24.23 %

Bodies Corporate2.78 %2.99 %2.29 %2.39 %2.05 %

Custodians----------

Total29,52,29,88328,99,57,95328,91,16,95328,90,81,95328,90,24,203

Philosophy:

IIFL (India Infoline) is comm itted to placing the Investor First, by continuously striving to increase the efficiency of th e operations as well as the systems and pr ocesses for use of corporate resources in such a way so as to maximize the value to the stakeholders. The Group aims at achieving not only the highest possible standards of legal and regu latory compliances, but also of effective management.

Committees:

Audit Committee

Terms of reference & Compo sition, Name of members and Chairman: Th e Audit committee comprises Mr Nilesh Vikams ey (Chairman), Mr R Venkataraman, Mr Kranti Sinha, two of whom are independent Dire ctors. The Chairman along with the Statutory and Internal Auditors are invitees to the Meeting. The Terms of reference of this committee are as under: - To investigate into any matter that may be prescribed under the provisio ns of Section 292A of The Companies Act, 195 6 - Recommendation and removal of Ex ternal Auditor and fixation of the Audit Fees. - Reviewing with the management the financia l statements before submission of the same to the Board. - Overseeing of Company's financi al reporting process and disclosure of its financial information. - Reviewing the Adequacy of the Internal Audit Function.

Compensation/ Remunerati on Committee

Terms of reference & Comp osition, Name of members and Chairman: The Compensation / Remuneration Committee co mprises Mr Kranti Sinha (Chairman) & Mr Nilesh Vikamsey, both of whom are independent Directors. The Terms of reference of this committee are as under: - To fix suitable re muneration package of all the Executive Directors and Non Executive Directors, Senior Employees and officers i.e. Salary, perquisites, bonuses, stock options, pensions etc. - Det ermination of the fixed component and p erformance linked incentives along with the performance criteria to all employees of the company - Service Contracts, Notice Period, Severance Fees of Directors and employees. - St ock Option details: whether to be issued at disc ount as well as the period over which to b e accrued and over which exercisable. - To con duct discussions with the HR department and form suitable remuneration policies.

Share Transfer and Investor Grievance Committee

Details of the Members, Compliance Officer, No of Complaints received and pending and pending transfers as on close of the financial year. The committee functions under the Chairmanship of Mr Kranti Sinha, a Non-executive independent Director. The other Members of the committee are Mr. Nirmal Jain and Mr. R Venkataraman. Ms Sunil Lotke, Company Secretary is the Compliance Officer of the Company.

Board of Directors

Mr. Nirmal Jain (Chairman, India Infoline Ltd).

Mr. R. Venkataraman (Managing Director , India Infoline Ltd).

Mr. Arun Kumar Purwar

(Independent Director of India Infoline Limited since March 2008).

Mr. Chandran Ratnaswami

(Non Executive Director of India Infoline Limited since May 2012).

Mr. Kranti Sinha (Independent Director of India Infoline Limited since January 2005).

Mr. Mahesh Narayan Singh

(Independent Director of India Infoline Finance Limited since September 2009).

Mr. Nilesh Vikamsey

(Independent Director of India Infoline Limited & India Infoline Finance Limited since February 2005).

Dr. Subbaraman Narayan

(Independent Director of India Infoline Limited since July 2012).

Mr. Vijay Kumar Chopra

(Independent Director of India Infoline Finance Limited since June 2012).

IIFL Foundation

In line with IIFLs vision to b e the most respected company in the financial services space, the company recognises the importance of contributing to and sustaining social transformation. The IIFL Fou ndation has been set up to work in areas of skill development for various industries and to ensure financial inclusion through the suppor t and upliftment of the underprivileged sections o f society.

The IIFL Foundation focuses on specific areas of need, including health care and education. The foundation will screen and select institutions and developmental a gencies which are working in these domains and will provide necessary aid to improve the lives of the underprivileged and help them in achieving their potential.

The IIFL Foundation has init iated career guidance to the students of High School and Junior colleges in remote areas of M aharashtra to enable them to pursue the career which provides right employment opportuniti es.

FLAME

FLAME (Financial Literac y Agenda for Mass Empowerment) is an IIFL Foundation initiative to promote financial literacy amongst the masses in order to ma ke them an integral part of India's spectacular gr owth story. In an era of accelerating GDP a nd rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation 's economic prosperity. Financial inclusion has been quite high on the governmental agenda , given its emphasis on widening the Banking & Financial services network across the c ountry. The FLAME initiative stands committed to complement this effort by helping comm on people gain financial growth and sec urity though better awareness and education on t he variety of financial products while avoid ing the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes. Visit our dedicated site for financial l iteracy: www.flame.org.in

Scholarships

H Nemkumar and Nirmal Jain Scholarship (May 2012) India has a large number of gifted and deserving students who are unable to avail of a high-quality learning experience from reputed institutions in India or abroad due to financial or other constraints. Young India Fellows reaches out to such students. The YIF scholarships have been made possible by generous donations by a stellar set of individuals including Mr. Nirmal Jain and Mr. H Nemkumar on behalf of IIFL Foundation.

This year, 57 Young India Fellows of the Founding Class graduated and embarked upon careers ranging from design technology to rural development, from venture philanthropy to corporate strategy, and from ethnographic research to institution building. The Founding Fellows are Fulbright Scholars, INSEAD-Wharton MBA candidates, Prime Ministers, Rural Development Fellows, legal entrepreneurs, McKinsey and BCG consultants, budding psychologists, artists, writers and film makers, research scholars at leading think tanks and inspired entrepreneurs trying and testing new ideas for technology-driven social change. Expressing gratitude for the support offered by Mr. Nirmal Jain & Mr. Nemkumar, in launching this program in its founding year, the Young India Fellows awarded a personalized Valedictory Scroll to graduating Fellows.

Financial literacy for Supporting the Under-privileged

IIFL has also tied up with KJ Somaiya Institute of Management Studies & Research (SIMSR) to impart basic financial knowledge to underprivileged sections and physically handicapped sections of the society. The programmes covers lessons on savings, budgeting, banking, credit management, microfinance and self-help groups (SHGs). The IIFL Foundation under the FLAME initiative has tied up with Somaiya Institute to impart financial literacy to National Society for Equal Opportunities for the Handicapped India (NASEOH ) since the last two years.

SWOT ANALYSIS OF IIFL

STRENGHTS:

Low brokerage system

Effective after sales services system

Advisory desk operations provided by fuller ton Well established brand equity

Tele trade also possible

Freedom account with different facilities Personalize alerts

Consolidated statements-a unique service offering

WEAKNESSES:

Lack of Aggressive advertisements and sales promotion programmed. The working of the sales force is traditional.

Inventory investments should be more.

Miscommunication and ineffective co-ordination at various level of hierarchy.

OPPORTUNITIES:

Growing capital market in India & other country Political stability in India & other country

Better governance by SEBI

Decreasing interest rates in India, so people are motivated to earn more returns through capital market.

THREATS:

Demand & supply

Increasing competition in security market

Lost in faith in share market after big scams in the stock market

Natural calamities

Inability of customers to pay brokerage at the right time

High risk involved in the stock market.

COMPETITORS OF IIFL:

SHAREKHAN

RELIANCE MONEY

UNICON

KARVY

INDIABULLS

RK GLOBAL SECURITIES

RELIGARE

CHAPTER 2REVIEW OF LITERATURERETURN:Return can be defined as Income received on an investment plus any change in market price, usually expressed as a percent of the beginning market price of the investment. Rate of return (R) =DIV=dividend per share received in year. P1=price of share in the beginning of the year.P0=price of share at the end of the year.DIVIDEND YIELD: Dividend yield is the percentage of dividend income, and it is given by dividing the dividend per share at the end the year by the share price in the beginning of the year. Dividend yield=DIV/p0CAPITAL GAIN: Capital Gain is the difference of the share price at the end and share price in the beginning divided by the share price in the beginning. Capital Gain= (p1-p0)/p0Positive capital gain or loss: If the ending price were greater than the beginning price, there would be a positive capital gain or capital loss.Negative capital gain or loss: If the ending price were less than the beginning price, there would be a negative capital gain or capital loss.

Unrealized capital gain or loss: If an investor holds a share and does not sell it at the end of a period ,the difference between the beginning and ending share prices is the unrealized capital gain(or loss).AVERAGE RATE OF RETUEN: The average rate of return is the sum of the various one period rates of return by the number of periods. Average rate of return can be calculated as follows.Ro= = Ro = average rate of return.Rt=the observed or realized rates of return in periods 1,2,t n = the total number of periods.RISKRisk may be described as variability/fluctuation/deviation of actual return from expected return from a given asset/investment. Higher the variability, greater is the risk.TYPES OF RISK:The risk of a security can be broadly classified into two types. Such as systematic risk and unsystematic risk. Standard deviation has been used as a proxy measure for total risk.SYSTEMATIC RISK:Systematic risk is due to risk factors that affect the entire market such as investment policy changes, foreign investment policy, change in taxation clauses, shift in socio-economic parameters, global security threats and measures etc.Systematic risk is the risk that affects a security or portfolio due to its relationship with the market. Systematic risk is also called market risk, aggregate risk, or undiversifiable risk.Systematic risk cant be reduced through portfolio diversification. Since this risk is associated with overall market sentiment rather than performance of few stocks. Systematic risk results from forces which cant be controlled by a firm.Systematic risk is measured with beta coefficient. It represents the securitys volatility relative to that of an average security. if beta = 1 means that security is of average risk (or exactly in sync with market). If beta > 1 means that security has more unavoidable risk.If beta