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VENTURE CAPITAL FINANCING

Venture capital financing is a type of financing by venture capital: the type of private equity

capital is provided as seed funding to early-stage, high-potential, growth companies and more

often after the seed funding round as growth funding round (also referred as series A round) in

the interest of generating a return through an eventual realization event such as an IPO or trade

sale of the company.

OVERVIEW

To start a new startup company or to bring a new product to the market, the venture needs to

attract funding. There are several categories of financing possibilities. Smaller ventures

sometimes rely on family funding, loans from friends, personal bank loans or crowd funding. 

More ambitious projects that need more substantial funding may turn to angel investors - private

investors who use their own capital to finance a ventures’ need, or  Venture Capital (VC)

companies that specialize in financing new ventures. VC firms may also provide expertise the

venture is lacking, such as legal or marketing knowledge.

HISTORY

A venture may be defined as a project prospective converted into a process with an adequate

assumed risk and investment. With few exceptions, private equity in the first half of the 20th

century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys,

Rockefellers, and Warburgs were notable investors in private companies in the first half of the

century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines

and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies.

Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become

Warburg Pincus, with investments in both leveraged buyouts and venture capital.

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VENTURE CAPITAL FINANCING PROCESS

There are five common stages of venture capital financing:

1. 

The Seed stage2.  The Start-up stage

3.  The Second stage

4.  The Third stage

5.  The Bridge/Pre-public stage

The number and type of stages may be extended by the VC firm if it deems necessary; this is

common. This may happen if the venture does not perform as expected due to bad management

or market conditions.

The following schematics shown here are called the process data models. All activities that find

 place in the venture capital financing process are displayed at the left side of the model. Each

 box stands for a stage of the process and each stage has a number of activities. At the right side,

there are concepts. Concepts are visible products/data gathered at each activity. This diagram is

according to the modeling technique founded by Professor Sjaak Brinkkemper of the University

of Utrecht in the Netherlands.

THE SEED STAGE

This is where the seed funding takes place. It is considered as the setup stage where a person or a

venture approaches an angel investor  or an investor in a VC firm for funding for their 

idea/product. During this stage, the person or venture has to convince the investor why the

idea/product is worthwhile. The investor will investigate into the technical and the economical

feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the

idea/product that is not fully developed or tested.  

If the idea is not feasible at this stage, and the investor does not see any potential in the

idea/product, the investor will not consider financing the idea. However if the idea/product is not

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directly feasible, but part of the idea is worth for more investigation, the investor may invest

some time and money in it for further investigation.

.

Risk 

At this stage, the risk of losing the investment is tremendously high, because there are so many

uncertain factors. Research by J.C. Ruhnka and J.E. Young shows that the risk of losing the

investment for the VC firm is around 66.2% and the causation of major risk by stage of 

development is 72%[. The Harvard repor t[1]  by William R. Kerr, Josh Lerner, and Antoinette

Schoar, however, shows evidence that angel-funded startup companies are less likely to fail than

companies that rely on other forms of initial financing.

THE START-UP STAGE

If the idea/product/process is qualified for further investigation and/or investment, the process

will go to the second stage; this is also called the start-up stage. A business plan is presented by

the attendant of the venture to the VC firm. A management team is being formed to run the

venture. If the company has a board of directors, a person from the VC firms will take seats at

the board of directors.

While the organisation is being set up, the idea/product gets its form. The prototype is being

developed and fully tested. In some cases, clients are being attracted for initial sales. The

management-team establishes a feasible production line to produce the product. The VC firm

monitors the feasibility of the product and the capability of the management-team from the board

of directors. 

To prove that the assumptions of the investors are correct about the investment, the VC firm

wants to see result of market research to see whether the market size is big enough, if there are

enough consumers to buy their product. They also want to create a realistic forecast of the

investment needed to push the venture into the next stage. If at this stage, the VC firm is not

satisfied about the progress or result from market research, the VC firm may stop their funding

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and the venture will have to search for another investor(s). When the cause relies on handling of 

the management in charge, they will recommend replacing (parts of) the management team.

Risk 

At this stage, the risk of losing the investment is shrinking because the nature of any uncertainty

is becoming clearer. The VC firm's risk of losing the investment has dropped to 53.0%.

However, the causation of major risk becomes higher (75.8%), because the prototype was not

fully developed and tested at the seed stage. The VC firm could have underestimated the risk 

involved, or the product and the purpose of the product could have changed during

development.[2] 

THE SECOND STAGE

At this stage, we presume that the idea has been transformed into a product and is being

 produced and sold. This is the first encounter with the rest of the market, the competitors. The

venture is trying to squeeze between the rest and it tries to get some market share from the

competitors. This is one of the main goals at this stage. Another important point is the cost. The

venture is trying to minimize their losses in order to reach the break-even. 

The management team has to handle very decisively. The VC firm monitors the management

capability of the team. This consists of how the management team manages the development

 process of the product and how they react to competition.

If at this stage the management team is proven their capability of standing hold against the

competition, the VC firm will probably give a go for the next stage. However, if the management

team lacks in managing the company or does not succeed in competing with the competitors, the

VC firm may suggest for restructuring of the management team and extend the stage by redoing

the stage again. In case the venture is doing tremendously bad whether it is caused by the

management team or from competition, the venture will cut the funding.

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Example

The portal site needs to be developed. (If possible, the development should be taken place in

house. If not, the venture needs to find a reliable designer to develop the site.) Developing the

site in house is not possible; the venture does not have this knowledge in house. The venture

decides to consult this with the investor. After a few meetings, the investor decides to provide the

venture a small team of web-designers. The investor also has given the venture a deadline when

the portal should be operational. The deadline is in three months.

In the meantime, the venture needs to produce a client portfolio, who will provide their menu at

the launch of the portal site. The venture also needs to come to an agreement on how these

 providers are being promoted at the portal site and against what price.

After three months, the investor requests the status of development. Unfortunately for the

venture, the development did not go as planned. The venture did not make the deadline.

According to the one who is monitoring the activities, this is caused by the lack of decisiveness

 by the venture and the lack of skills of the designers.

The investor decides to cut back their financial investment after a long meeting. The venture is

given another three months to come up with an operational portal site. Three designers are being

replaced by a new designer and a consultant is attracted to support the executives’ decisions. If 

the venture does not make this deadline in time, they have to find another investor.

Luckily for the venture, with the come of the new designer and the consultant, the venture

succeeds in making the deadline. They even have two weeks left before the second deadline

ends.

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Risk 

At this stage, the risk decreases because the start-up is no longer developing its product, but is

now concentrating on promoting and selling it. These risks can be estimated. The risk to the VC

firm of losing the investment drops from 53.0% to 33.7%, and the causation of major risk by

stage of development also drops at this stage, from 75.8% to 53.0%.

THE THIRD STAGE

This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to

expand the market share they gained in the previous stage. This can be done by selling more

amount of the product and having a good marketing campaign. Also, the venture will have to see

whether it is possible to cut down their production cost or restructure the internal process. This

can become more visible by doing a SWOT analysis. It is used to figure out the strength,

weakness, opportunity and the threat the venture is facing and how to deal with it.

Except that the venture is expanding, the venture also starts to investigate follow-up products and

services. In some cases, the venture also investigates how to expand the life-cycle of the existing

 product/service.

At this stage the VC firm monitors the objectives already mentioned in the second stage and also

the new objective mentioned at this stage. The VC firm will evaluate if the management team

has made the expected reduction cost. They also want to know how the venture competes against

the competitors. The new developed follow-up product will be evaluated to see if there is any

 potential.

.

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Risk 

At this stage, the risk to the VC firm of losing the investment drops from 13.6% to 20.1%, and

the causation of major risk by stage of development drops almost by half from 53.0% to 37.0%.

However, new follow-up products are often being developed at this stage. The risk of losing the

investment is still decreasing, because the venture relies on its income from sales of the existing

 product.[4] 

THE BRIDGE/PRE-PUBLIC STAGE

In general, this is the last stage of the venture capital financing process. The main goal of this

stage is for the venture to go public so that investors can exit the venture with a profit

commensurate with the risk they have taken.

At this stage, the venture achieves a certain amount of market share. This gives the venture some

opportunities, for example:

  Merger with other companies

  Keeping new competitors away from the market

  Eliminate competitors

Internally, the venture has to examine where the product's market position and, if possible,

reposition it to attract new Market segmentation. This is also the phase to introduce the follow-up

 product/services to attract new clients and markets.

Ventures have occasionally made a very successful initial market impact and been able to move

from the third stage directly to the exit stage. In these cases, however, it is unlikely that they will

achieve the benchmarks set by the VC firm.

Example

Faced with the dilemma of whether to continuously invest or not. The causation of major risk by

this stage of development is 33%. This is caused by the follow-up product that is introduced.[5] 

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VENTURE CAPITAL FIRMS AND FUNDS

Venture capitalists

A venture capitalist is a person who makes venture investments, and these venture capitalists are

expected to bring managerial and technical expertise as well as capital to their investments. A

venture capital fund refers to a pooled investment vehicle (in the United States, often an LP or 

LLC) that primarily invests the financial capital of third-party investors in enterprises that are too

risky for the standard capital markets or  bank loans. These funds are typically managed by a

venture capital firm, which often employs individuals with technology backgrounds (scientists,

researchers), business training and/or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to

generate high commercial returns at an early stage. By definition, VCs also take a role in

managing entrepreneurial companies at an early stage, thus adding skills as well as capital,

thereby differentiating VC from buy-out private equity, which typically invest in companies with

 proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in

realizing abnormally high rates of returns is the risk of losing all of one's investment in a given

startup company. As a consequence, most venture capital investments are done in a pool format,

where several investors combine their investments into one large fund that invests in many

different startup companies. By investing in the pool format, the investors are spreading out their 

risk to many different investments versus taking the chance of putting all of their money in one

start up firm.

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Diagram of the structure of a generic venture capital fund

Structure

Venture capital firms are typically structured as partnerships, the general partners of which serve

as the managers of the firm and will serve as investment advisors to the venture capital funds

raised. Venture capital firms in the United States may also be structured as limited liability

companies, in which case the firm's managers are known as managing members. Investors in

venture capital funds are known as limited partners. This constituency comprises both high net

worth individuals and institutions with large amounts of available capital, such as state and

 private pension funds, university financial endowments, foundations, insurance companies, and

 pooled investment vehicles, called funds of funds. 

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TYPES

Venture Capitalist firms differ in their approaches. There are multiple factors, and each firm is

different.

Some of the factors that influence VC decisions include:

  Business situation: Some VCs tend to invest in new ideas, or fledgling companies. Others

 prefer investing in established companies that need support to go public or grow.

  Some invest solely in certain industries.

  Some prefer operating locally while others will operate nationwide or even globally.

  VC expectations often vary. Some may want a quicker public sale of the company or 

expect fast growth. The amount of help a VC provides can vary from one firm to the

next.

  Venture partners  —  Venture partners are expected to source potential investment

opportunities ("bring in deals") and typically are compensated only for those deals with

which they are involved.

  Principal  — This is a mid-level investment professional position, and often considered a

"partner-track" position. Principals will have been promoted from a senior associate

 position or who have commensurate experience in another field, such as investment

 banking, management consulting, or a market of particular interest to the strategy of the

venture capital firm.

  Associate  — This is typically the most junior apprentice position within a venture capital

firm. After a few successful years, an associate may move up to the "senior associate"

 position and potentially principal and beyond. Associates will often have worked for 1 – 2

years in another field, such as investment banking or management consulting. 

  Entrepreneur-in-residence (EIR)  —  EIRs are experts in a particular domain and

 perform due diligence on potential deals. EIRs are engaged by venture capital firms

temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their 

host firm although neither party is bound to work with each other. Some EIRs move on to

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MUTUAL FUND

A mutual fund is a type of professionally managed collective investment vehicle that pools

money from many investors to purchase securities.[1] While there is no legal definition of the

term "mutual fund", it is most commonly applied only to those collective investment vehicles

that are regulated and sold to the general public. They are sometimes referred to as "investment

companies" or "registered investment companies." Most mutual funds are "open-ended,"

meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered

a type of mutual fund.

The term mutual fund is less widely used outside of the United States and Canada. For collective

investment vehicles outside of the United States, see articles on specific types of funds includingopen-ended investment companies,  SICAVs,  unitized insurance funds,  unit trusts and

Undertakings for Collective Investment in Transferable Securities, which are usually referred to

 by their acronym UCITS.

In the United States, mutual funds must be registered with the Securities and Exchange

Commission, overseen by a board of directors (or board of trustees if organized as a trust rather 

than a corporation or partnership) and managed by a registered investment adviser. Mutual funds

are not taxed on their income and profits if they comply with certain requirements under the U.S.

Internal Revenue Code.

Mutual funds have both advantages and disadvantages compared to direct investing in individual

securities. They have a long history in the United States. Today they play an important role in

household finances, most notably in retirement planning.

There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end. The

most common type, the open-end fund, must be willing to buy back shares from investors every

 business day. Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment

trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds

have been gaining in popularity.

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Mutual funds are generally classified by their principal investments. The four main categories of 

funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid

funds. Funds may also be categorized as index or actively managed.

Investors in a mutual fund pay the fund’s expenses, which reduce the fund's returns/performance.

There is controversy about the level of these expenses. A single mutual fund may give investors

a choice of different combinations of expenses (which may include sales commissions or loads)

 by offering several different types of share classes.

History

The first mutual funds were established in Europe. One researcher credits a Dutch merchant with

creating the first mutual fund in 1774.[5] The first mutual fund outside the Netherlands was the

Foreign & Colonial Government Trust, which was established in London in 1868. It is now the

Foreign & Colonial Investment Trust and trades on the London stock exchange.[6] 

Mutual funds were introduced into the United States in the 1890s.[7] They became popular during

the 1920s. These early funds were generally of the closed-end type with a fixed number of shares

which often traded at prices above the value of the portfolio.[8] 

The first open-end mutual fund with redeemable shares was established on March 21, 1924. This

fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However,

closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929,

open-end funds accounted for only 5% of the industry's $27 billion in total assets.[9] 

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ADVANTAGES

Benefits Of Investing In Mutual Funds

Professional Management 

Mutual Funds provide the services of experienced and skilled professionals, backed by a

dedicated investment research team that analyses the performance and prospects of companies

and selects suitable investments to achieve the objectives of the scheme. 

Diversification

Mutual Funds invest in a number of companies across a broad cross-section of industries andsectors. This diversification reduces the risk because seldom do all stocks decline at the same

time and in the same proportion. You achieve this diversification through a Mutual Fund with far 

less money than you can do on your own.

Convenient Administration 

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad

deliveries, delayed payments and follow up with brokers and companies. Mutual Funds saveyour time and make investing easy and convenient.

Return Potential 

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they

invest in a diversified basket of selected securities.

Low Costs 

Mutual Funds are a relatively less expensive way to invest compared to directly investing in the

capital markets because the benefits of scale in brokerage, custodial and other fees translate into

lower costs for investors.

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Liquidity

In open-end schemes, the investor gets the money back promptly at net asset value related prices

from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the

 prevailing market price or the investor can avail of the facility of direct repurchase at NAV

related prices by the Mutual Fund.

Transparency

You get regular information on the value of your investment in addition to disclosure on the

specific investments made by your scheme, the proportion invested in each class of assets and

the fund manager's investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular withdrawal plans and dividend

reinvestment plans, you can systematically invest or withdraw funds according to your needs and

convenience.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund

 because of its large corpus allows even a small investor to take the benefit of its investment

strategy.

Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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Well Regulated 

All Mutual Funds are registered with SEBI and they function within the provisions of strict

regulations designed to protect the interests of investors. The operations of Mutual Funds are

regularly monitored by SEBI.

  Increased diversification

  Daily liquidity

  Professional investment management

  Ability to participate in investments that may be available only to larger investors

  Service and convenience

  Government oversight

  Ease of comparison

 

DISADVANTAGES

  Fees

  Less control over timing of recognition of gains

  Less predictable income

   No opportunity to customize

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TYPES

There are 3 principal types of mutual funds in the United States: open-end funds, unit investment

trusts (UITs); and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit

investment trusts that trade on an exchange; they have gained in popularity recently. While the

term "mutual fund" may refer to all three types of registered investment companies, it is more

commonly used to refer exclusively to the open-end type.

OPEN-END FUNDS

Main article: Open-end fund

Open-end mutual funds must be willing to buy back their shares from their investors at the endof every business day at the net asset value computed that day. Most open-end funds also sell

shares to the public every business day; these shares are also priced at net asset value. A

 professional investment manager oversees the portfolio, buying and selling securities as

appropriate. The total investment in the fund will vary based on share purchases, share

redemptions and fluctuation in market valuation. There is no legal limit on the number of shares

that can be issued.

Open-end funds are the most common type of mutual fund. At the end of 2011, there were 7,581

open-end mutual funds in the United States with combined assets of $11.6 trillion.[13] 

CLOSED-END FUNDS

Main article: Closed-end fund

Closed-end funds generally issue shares to the public only once, when they are created through

an initial public offering. Their shares are then listed for trading on a stock exchange. Investorswho no longer wish to invest in the fund cannot sell their shares back to the fund (as they can

with an open-end fund). Instead, they must sell their shares to another investor in the market; the

 price they receive may be significantly different from net asset value. It may be at a "premium"

to net asset value (meaning that it is higher than net asset value) or, more commonly, at a

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"discount" to net asset value (meaning that it is lower than net asset value). A professional

investment manager oversees the portfolio, buying and selling securities as appropriate.

At the end of 2011, there were 634 closed-end funds in the United States with combined assets of 

$239 billion.[13] 

UNIT INVESTMENT TRUSTS

Main article: Unit investment trust

Unit investment trusts or UITs issue shares to the public only once, when they are created. UITs

generally have a limited life span, established at creation. Investors can redeem shares directly

with the fund at any time (as with an open-end fund) or wait to redeem upon termination of thetrust. Less commonly, they can sell their shares in the open market.

Unit investment trusts do not have a professional investment manager. Their portfolio of 

securities is established at the creation of the UIT and does not change.

At the end of 2011, there were 6,022 UITs in the United States with combined assets of $60

 billion.[13] 

EXCHANGE-TRADED FUNDS

Main article: Exchange-traded fund

A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-

end investment company, though ETFs may also be structured as unit investment trusts,

 partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). ETFs

combine characteristics of both closed-end funds and open-end funds. Like closed-end funds,

ETFs are traded throughout the day on a stock exchange at a price determined by the market.

However, as with open-end funds, investors normally receive a price that is close to net asset

value. To keep the market price close to net asset value, ETFs issue and redeem large blocks of 

their shares with institutional investors.

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Most ETFs are index funds. ETFs have been gaining in popularity. At the end of 2011, there

were 1,134 ETFs in the United States with combined assets of $1.1 trillion.[13] 

Investments and classification

Mutual funds are normally classified by their principal investments, as described in the

 prospectus and investment objective. The four main categories of funds are money market funds,

 bond or fixed income funds, stock or equity funds and hybrid funds. Within these categories,

funds may be subclassified by investment objective, investment approach or specific focus. The

SEC requires that mutual fund names not be inconsistent with a fund's investments. For example,

the "ABC New Jersey Tax-Exempt Bond Fund" would generally have to invest, under normal

circumstances, at least 80% of its assets in bonds that are exempt from federal income tax, from

the alternative minimum tax and from taxes in the state of New Jersey.[15] 

Bond, stock and hybrid funds may be classified as either index (passively managed) funds or 

actively managed funds

MONEY MARKET FUNDS

Money market funds invest in money market instruments, which are fixed income securities with

a very short time to maturity and high credit quality. Investors often use money market funds as a

substitute for bank savings accounts, though money market funds are not government insured,

unlike bank savings accounts.

Money market funds strive to maintain a $1.00 per share net asset value, meaning that investors

earn interest income from the fund but do not experience capital gains or losses. If a fund fails to

maintain that $1.00 per share because its securities have declined in value, it is said to "break the

 buck". Only two money market funds have ever broken the buck: Community Banker's U.S.

Government Money Market Fund in 1994 and the Reserve Primary Fund in 2008.

At the end of 2011, money market funds accounted for 23% of open-end fund assets.

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An open-end fund is one that is available for subscription all through the year. These do not have

a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV")

related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years.

The fund is open for subscription only during a specified period. Investors can invest in the

scheme at the time of the initial public issue and thereafter they can buy or sell the units of the

scheme on the stock exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the Mutual Fund

through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one

of the two exit routes is provided to the investor.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They are open for 

sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such

schemes normally invest a majority of their corpus in equities. It has been proven that returns

from stocks, have outperformed most other kind of investments held over the long term. Growth

schemes are ideal for investors having a long-term outlook seeking growth over a period of time.

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Income Funds

The aim of income funds is to provide regular and steady income to investors. Such schemes

generally invest in fixed income securities such as bonds, corporate debentures and Government

securities. Income Funds are ideal for capital stability and regular income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such schemes

 periodically distribute a part of their earning and invest both in equities and fixed income

securities in the proportion indicated in their offer documents. In a rising stock market, the NAV

of these schemes may not normally keep pace, or fall equally when the market falls. These are

ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate

income. These schemes generally invest in safer short-term instruments such as treasury bills,

certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes

may fluctuate depending upon the interest rates prevailing in the market. These are ideal for 

Corporate and individual investors as a means to park their surplus funds for short periods.

Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or 

sell units in the fund, a commission will be payable. Typically entry and exit loads range from

1% to 2%. It could be worth paying the load, if the fund has a good performance history.

 No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no

commission is payable on purchase or sale of units in the fund. The advantage of a no load fund

is that the entire corpus is put to work.

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OTHER SCHEMES:

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income

Tax laws as the Government offers tax incentives for investment in specified avenues.

Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed

as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to

investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds.

Special Schemes

  Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The

investment of these funds is limited to specific industries like InfoTech, FMCG,

Pharmaceuticals etc.

  Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or 

the NSE 50

  Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of industriesor various segments such as 'A' Group shares or initial public offerings.

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Net asset value or NAV

A fund's net asset value or NAV equals the current market value of a fund's holdings minus the

fund's liabilities (sometimes referred to as "net assets"). It is usually expressed as a per-share

amount, computed by dividing net assets by the number of fund shares outstanding. Funds must

compute their net asset value according to the rules set forth in their prospectuses. Funds

compute their NAV at the end of each day that the New York Stock Exchange is open, though

some funds compute their NAV more than once daily.

Net Asset Value (NAV)

The net asset value of the fund is the cumulative market value of the assets fund net of its

liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the

fund, this is the amount that the shareholders would collectively own. This gives rise to the

concept of net asset value per unit, which is the value, represented by the ownership of one unit

in the fund. It is calculated simply by dividing the net asset value of the fund by the number of 

units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit".

We also abide by the same convention. 

Calculation of NAV 

The most important part of the calculation is the valuation of the assets owned by the fund. Once

it is calculated, the NAV is simply the net value of assets divided by the number of units

outstanding. The detailed methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

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Expenses accrued but not paid

Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing market price onthe principal exchange where the security is traded

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated.

For shares, this could be the book value per share or an estimated market price if suitable

 benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of 

comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing

securities moves in a direction opposite to interest rate changes Valuation of debentures and

 bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable

leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this

and adopt flexible valuation policies depending on the situation.

Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every

 passing day, interest is said to be accrued, at the daily interest rate, which is calculated by

dividing the periodic interest payment with the number of days in each period. Thus, accrued

interest on a particular day is equal to the daily interest rate multiplied by the number of days

since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become due on

the record date. There is a gap between the dates on which it becomes due and the actual

 payment date. In the intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily basis.

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SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for the securities market in India. It was established in the year 1988 and given statutory powers on

12 April 1992 through the SEBI Act, 1992. 

HISTORY

It was officially established by The Government of India in the year 1988 and given statutory

 powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI has it's

Headquarter at the business district of  Bandra Kurla Complex in Mumbai, and has Northern,Eastern, Southern and Western Regional Offices in  New Delhi,  Kolkata,  Chennai and

Ahmedabad respectively.

Controller of Capital Issues was the regulatory authority before SEBI came into existence; it

derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However in the year of 

1995, the SEBI was given additional statutory power by the Government of India through anamendment to the Securities and Exchange Board of India Act 1992. In April, 1998 the SEBI

was constituted as the regulator of capital markets in India under a resolution of the Government

of India.

The SEBI is managed by its members, which consists of following: a) The chairman who is

nominated by Union Government of India. b) Two members, i.e. Officers from Union Finance

Ministry. c) One member from The Reserve Bank of India. d) The remaining 5 members are

nominated by Union Government of India, out of them at least 3 shall be whole-time members.

The office of SEBI is situated at SEBI Bhavan, Bandra Kurla Complex, Bandra East, Mumbai-

400051, with its regional offices at Kolkata, Delhi,Chennai & Ahmadabad. It has recently

opened local offices at Jaipur and Bangalore and is planning to open offices at Guwahati,

Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.

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FUNCTIONS AND RESPONSIBILITIES

The Preamble of the Securities and Exchange Board of India describes the basic functions of the

Securities and Exchange Board of India as "...to protect the interests of investors in securities and

to promote the development of, and to regulate the securities market and for matters connected

therewith or incidental thereto".

SEBI has to be responsive to the needs of three groups, which constitute the market:

  the issuers of securities

  the investors

  the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative,  quasi-judicial and quasi-

executive. It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function and it passes rulings and orders in its judicial

capacity. Though this makes it very powerful, there is an appeal process to create accountability.

There is a Securities Appellate Tribunal which is a three-member tribunal and is presently

headed by Mr. Justice J P Devadhar, a former judge of the Bombay High Court.[6]  A second

appeal lies directly to the Supreme Court. 

POWERS

For the discharge of its functions efficiently, SEBI has been vested with the following powers:

1.  to approve by−laws of stock exchanges.sebi 

2.  to require the stock exchange to amend their by−laws. 

3.  inspect the books of accounts and call for periodical returns from recognized stock 

exchanges.

4.  inspect the books of accounts of a financial intermediaries.

5.  compel certain companies to list their shares in one or more stock exchanges.

6.  registration brokers.

these are types of brokers. 1.circuit broker 2.merchant broker 

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SEBI COMMITTEES

1.  Technical Advisory Committee

2.  Committee for review of structure of market infrastructure institutions

3.  Members of the Advisory Committee for the SEBI Investor Protection and Education

Fund

4.  Takeover Regulations Advisory Committee

5.  Primary Market Advisory Committee (PMAC)

6.  Secondary Market Advisory Committee (SMAC)

7.  Mutual Fund Advisory Committee

8.  Corporate Bonds & Securitization Advisory Committee