Knowledge Center

A depository can be defined as an institution where the investors can keep their financial assets such as equities,bonds,mutual fund units etc in the dematerilased form and transactions could be effected on it.In India,there are two depositories namely,the National Securities Depository Limited (NSDL) promoted primarily by IDBI,the Unit Trust of India and the National Stock Exchange,and the Central Depository promoted by the Stock Exchange,Mumbai.

Besides providing custodial facilities and ematerialisation, depositories are offering various transactional services to its clients to effect buying,selling, transfer of shares etc. Through a system of paperless securities,depositories have made the going more easier to other institutions as well such as Stock Exchanges and its clearing houses, stock broking firms,equity issuing companies,share transfer agents etc.

Basic Services

Basic services of a depository includes maintainance of accounts of investors,dematerialisation and rematerialiosation of shares, settlement of market transaction through the release and receipt of securities in the investor's account ,off market transfers,inter-depository transfers,distribution of non- financial benefits from corporates to its shareholders, nomination facilities, transmission of shares,hypothecation of dematerialised securities for a bank loan,freezing of account to protect one's holdings when he is temporarily out of the scene etc.

Depository System: How it works

A depository system carries out its activities through various associates that include depository participants (DP), issuing companies and their share transfer agents,clearing corporation of Stock Exchanges etc. The depository is electronically linked to each of these business partners via satelite links or through leased lines.

In the case of NSDL, under which Geojit BNP Paribas Financial Services Limited is a Depository Participant,the Depository is electronically linked to DPs,clearing houses of Stock Exchanges, corporates and share transfer agents that are registered under the depository to avail its services etc through VSAT. This integrated system including the electronic links as stated above and the software at NSDL and each business partners end is called the National Electronic Settlement and Transfer System (NEST)

Depository Participant (DP)

A Depository Participant is the registered agent of the depository concerned(in our case,the NSDL) and it is through the DP that an investor gets the services of a depository.To avail this service,one has to open a Depository Account with the DP and shares for Dematerialisation have to be surrendered after it have been duly transferred to his name.

Banks,financial institutions and stock brokers are acting as Depository Participants after obtaining the required approval from SEBI and also complying with other statutory requirements.

The DP account links the investor to the Depository which in turn has electronic links with the Stock Exchanges, corporates and their Transfer agents etc as stated above.This interface of the depository with various associates opens up a lot of services to the investor through the DP account such as payment or receipt of shares towards his transactions via Stock Exchanges, receipt of bonus or right shares from the corporates in which he is a share holder,registering of share transfer, dematerialisation(means,converting physical shares ie, share certificates, in to electronic book entries), rematerialisation (that implies converting elctronic mode of shares into its physical form) and many more.

Benefits of Depository System

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.It has its own merits. Bad deliveries could be eliminated since shares are registered in the electronic form that can not be mutilated easily. Elimination of all risks associated with physical certificates Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements through and from the registrars etc.Such problems do not arise in the depository environment.

No stamp duty for transfer of any kind of securities in the depository. This waiver extends to equity shares, debt instruments and units of mutual funds etc in the depository.Thus,cost can be reduced.

Immediate transfer and registration of securities

In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for registration. Having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered and this usually takes many months. So long as the shares are with the company or its agent for transfer,the investor could not sell it in the market even the price is very attractive and this increases his opportunity cost.To overcome this problem, investors used to keep shares without effecting ownership transfer but this is risky because they will not get their entitlements for dividend,bonus,rights etc,if any, and the share in question will become bad delivery if one book closure is missed.

Trading Cycle

Trading is done under Rolling Settlement, where in each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. Settlement is on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

Faster disbursement of non cash corporate benefits

NSDL provides for direct credit of non cash corporate entitlements like rights,bonus etc to an investor's account, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit.

Low brokerage for trading in dematerialised securities

Brokers provide this benefit to investors as dealing in dematerialised securities reduces their back office cost of handling paper and also

Eliminates the risk of being the introducing broker.

Elimination of problems related to address Change, Transmission etc In case of change of address or transmission of demat shares, investors are saved from undergoing the entire change procedure with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.

Elimination of problems related to selling securities on behalf of a minor a natural guardian is not required to take court approval for selling demat securites on behalf of a minor.

Is DP Account a Must ?

To some extent, it is a must and for the rest, it adds convenience.

An investor who buys securities from exchanges connected to NSDL may receive his delivery in the dematerialised form as dematerialised securities can be delivered in the physical segment at the option of the seller. Therefore, those investors who buy securities from these exchanges should necessarily open a depository account to take delivery of demat securities.

Also, SEBI has made it compulsory for all categories of investors to settle trades in demat form with respect to a select list of scrips since Jan 4, 1999. Therefore, investors trading in these scrips will necessarily need a depository account to settle their trades. The list of scrips is being continuously expanded by SEBI. Therefore, every investor who trades in securities may have to open a depository account.

How the Depository Services could be Availed

A depository offers its services to the investors through its agents called Depository Participants (DPs). If the depository service has to be availed, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilise the bank's services.

Account Opening Procedure

To open an account, you can approach any DP of your choice and fill up an account opening form. At the time of opening an account, you have to sign an agreement with DP in the Depository(in our case, the NSDL) prescribed standard agreement, which details the rights and duties of the investor and his/her DP. All investors have to submit their proof of identity and proof of address along with the prescribed account opening form.

Proof of Identity : Your signature and photograph must be authenticated by an existing demat account holder with the same DP or by a bank manager. Alternatively, you can submit a copy of Passport, Card, PAN card with photograph.

Proof of Address: You can submit a copy of Passport, utility bill or bank statement. Also, remember to have original documents to the DP for verification. Passport-size photograph.

Any number of Accounts with any Number of DPs

There is no restriction as far as the number of accounts could be opened by an investor. One can open DP accounts with more than one Depository Participant.

No Securities Required for Account Opening

An investor can open a DP account even if he does not have any shares or other securities in his name while the account is opening.Similarly, no account balance is mandatorily required even in due course.

Account Opening when Shares are jointly held by two or more

When the securities are held jointly by two or more persons, one may have to open more than one account and this depends upon the combination and sequence of names. For example, if one security is held by person A & person B while another security is in the name of A&C, two accounts have to be opened. If there is yet another security in which A is the sole holder, one more account has to be opened in the name of A alone.

When the combination of names are the same while the sequence is different in the case of different securities that are being held by two or more persons,then,two options are opened to the investors. One is transposition(that is,changing the sequence of the names)of shares before the securities are sent for dematerialisation and then you can maintain the holdings in a single account.For example,if A is the first holder and B is the second holder in one security and B is the first holder and A is the second holder in another,you have to sent either of these securities to the company concerned to effect tranposition and there by the sequence of names could be made the same in both the securities(either A the first holder or B the first holder in both the securities)Both the securities could be maintained in a single account after effecting the required changes as stated above.

The second option is to open two accounts,one in which A is the first holder and B the second holder and the other one in which B is the first holder. One may choose any of these options depending on convenience and cost of maintaining accounts.

Transactions through Power of Attorney

In the absence of the account holder,a person authorised by the account holder to operate his account by executing a power of attorney and submitting the same to the Depository,only can operate the account of an investor.

Standing Instruction

In a bank account, credit to the account is given only when a 'paying in' slip is submitted together with cash/cheque. Similarly, in a depository account 'Receipt in' form has to be submitted to receive securities in the account. However, for the convenience of investors, facility of 'standing instruction' is given. If you say 'Yes' for standing instruction, you need not submit 'Receipt in' slip everytime you buy securities. If you are particular that securities can be credited to your account only with your consent, then do not say 'yes' [or tick ?] to standing instruction in the application form.

Nomination Facility

Nomination can be made by individual holders who are maintaining single or joint accounts.Nomination facility is also available to NRIs.Facility for nomination is available on account basis and not by security basis.

No nomination facility is available to companies,trust etc. A minor also,is restricted from nominating anyone by himself or through the guardian.

However, a minor can be a nominee and in such cases, the guardian should sign on behalf of the minor. Address and photographs of both the minor and the guardian should be sent to the Depository in such cases.

In the case of nomination, the nominee, that is the beneficiary, should be an individual and trust, companies etc should not be a nominee. At present, one nomination can be made for a depository account.

NRI too can be a Nominee

An NRI could be nominated to a depository account and this must be in accordance to the exchange control regulations in force from time to time.

Procedure for Nomination

The nomination form duly filled-in should be submitted to the DP either at the time of account opening or later.

The account holder, nominee and two witnesses must sign this form and the name, address and photograph of the nominee must be submitted.

Procedure for Transmission to Nominee

In case of the death of the sole holder or all the joint holders, the nominee must submit a duly filled-in transmission form and give the notarised copy of death certificate and an affidavit in the prescribed format. After verifying these documents, the DP will transmit the securities to the account of the nominee.

Procedure for Dematerialisation

Dematerialisation is the process by which physical certificates are converted to an equivalent number of securities in electronic form and credited in the investor's account with his DP.

As stated earlier,one can dematerialise securities which are duly trnsferred to his name.

In order to dematerialise certificates, an investor will have to first open an account with a DP and then request for the dematerialisation of certificates by filling up a Dematerialisation Request Form [DRF], which is available with DP and submitting the same along with the physical certificates. The investor has to ensure that before the certificates are handed over to the DP for demat, they are defaced by marking "Surrendered for Dematerialisation" on the face of the certificates.

Before defacing a share(by defacing,the share certificate loses the charecteristics such as certificate number,distinctive numbers etc that give the certificate a special identity)one should ensure whether the security is available for dematerialisation.In case,dematerialisation is not available for the said security,it should be sent to the company with a request to issue duplicate certificate and it can be brought back to its previous position.

Dematerialisation with Ownership Transfer

Dematerialisation is possible along with transfer of ownership under the Transfer and Demat Scheme, provided the company in question is offering this facility.

On completion of the process of registration of securities sent for transfer, the company or its R&T Agent will send an option letter to the investor, providing an option to dematerialise such securities. The investor may exercise this option by submitting demat request form together with the option letter to the DP. Then Company or its R&T Agent would confirm the demat request in the usual manner.

Procedure for Rematerialisation

The process of converting electronic forms of securities into physical form(share certificates) is called rematerialisation.

Those who wish to get back physical securities should make a request to the DP and the DP in turn will forward this request to the Depository.This will be intimated by the Depository to the registrar of the company in question and the certificates will be printed and despatched to the investor.

Procedure for Selling Dematerialised Securities

While selling dematerialised securities,the investor instructs his DP to debit his account by the number of securities sold by him and credit the broker's clearing account by the same number of securities.This delivery instruction has to be given to the DP using the delivery instruction booklet received from the DP when the account is opened.In simple terms,the procedure looks to be the following.

After the sale of securities in a Stock Exchange that has linked to the Depository,the investor gives instruction to his DP to debit his account and credit the broker's clearing member pool account with the same number of the security.

In the next stage,investor's broker gives instruction to his DP for delivery of the said securities to the clearing corporation before the pay-in day.

Subsequently,the broker receives payment from the Stock Exchange and the investor gets what is due to him from the broker.

Execution Date

It is the date on which securities will be actually debited from the seller's account. If execution date is written on the delivery instruction, the DP will enter the same in the computer(DPM system )and securities will be debited from the account only on that date.

Procedure for Buying Dematerialised Securities

The transactions relating to purchase of securities are as under. Investor purchases securities in any of the stock exchanges connected to the Depository through a broker.

Broker arranges payment to clearing corporation.

Broker receives credit of securities in his clearing account on the pay-out day. Broker gives instructions to DP to debit clearing account and credit client's account. Investor receives shares into its account. However, if standing instructions are not given at the time of opening the account, investor will give 'Receipt Instructions' to its DP for receiving credit. The investor should ensure that the broker transfers the securities purchased from the clearing account of the broker to the investor's depository account, before the book closure. If the securities remain in the clearing account of the broker, the company may give corporate benefits to the broker. Therefore, the investor may collect benefits from its broker.

Trading in Any Number of Securities

Under the dematerialised mode of trading,an investor can buy or sell even a single number of share and the market lot in its general sense is not applicable(like lots of 50,100 etc)

Market Trade and Off market trade

Any trade done and settled through a clearing corporation of a Stock Exchange is termed as the Market Trade. The Off Market Trade is one which is settled directly between two parties without the involvement of stock exchange or broker.

Depository Service Charges

There is no fee for opening a DP account with Geojit BNP Paribas Financial Services Limited. However, stamp paper charges as applicable need to be paid by the person desirous of opening a demat account. Click here to view the schedule of dp charges.

Account Freezing

Depository Account of one investor could be freezed temporarily for debit or for both debit and credit.So long as the account is freezed from debiting,no securities could be debited from the account while the inflows like bonus,rights etc are credited.This is a safe mechanism to protect one's account from unscrupulous elements.


Derivative contracts, commonly known as Derivatives are tradable instruments, which derive its value from an underlying asset or assets such as commodities, equities, equity indices etc. There are a variety of derivative products like swap, forward, futures, options etc. The latter two are widely applied in the equity market allover the world and have already been introduced in the Indian equity market too. This column deals with the salient features of futures and options since they are very much advantageous to equity investors.


Futures can be defined as derivative contracts based on an underlying asset or assets and the holder of the contract is entitled to purchase a specified quantity of the asset on a future date at the predetermined price. On the other side, the seller of the contract is under obligation to sell the agreed quantity of the asset in question as per the contract terms such as price, time etc.

Index Futures

Index Futures are future contracts on which the underlying asset is an index like equity indices like the Sensex or Nifty. For trading convenience, these contracts have been standardized as far as market lot, minimum contract value etc. are concerned. In the Indian Equity market context, two equity index or stock index futures are being traded and they are the index futures on the Sensex (BSE 30) and index futures on S&P CNX Nifty of the National Stock Exchange. Stock Futures on the Nifty started trading on 12, June, 2000 is the first derivative instrument in the Indian equity market which was followed by stock index futures on the Sensex. [The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark Nifty 50 Index. The Exchange introduced trading in Index Options (also based on Nifty 50) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. The Exchange has also introduced trading in Futures and Options contracts based on Nifty IT, Nifty Bank, and Nifty Midcap 50, Nifty Infrastructure, Nifty PSE, Nifty CPSE indices.]

Minimum Contract value and Market lot

As mentioned earlier, futures on the Sensex and Nifty are being traded in the standardised form, that is, the market lot, minimum contract value etc. are standardised. In the case of Sensex Futures, the market lot is decided as 50 units of the Sensex (one unit refers to the value of the index on the contract day) and it is 200 units as far as Nifty futures are concerned. Trading positions could be taken as multiple of these market lots.

The difference in the market lot as stated above occurred because of the stipulation by SEBI that a derivative contract should have a minimum value of Rs.2 lakhs for each. When the two stock futures were introduced, the value of the Sensex was a little over 4000 points and the Nifty was just above 1000.Hence,market lots as seen above were required to maintain a minimum value of Rs.2 lakhs per contract.

Contract Value

Contract value at any point of time is the value of the index at that time period multiplied by the market lot. Hence, the contract value may go up or down at different time intervals in accordance to the movement of the index on which the contract is based.

Maturity Period

In the derivative segment of the Indian equity market, contracts are available with three maturity periods at any point of time namely near month contracts, next month contracts and far month contracts. Contracts expiring during the ongoing month are called near month contracts and the other two refer to contracts having maturity dates during the subsequent months.For example, near month contracts for December are all contracts that mature on or before the last day of December while next month and far month contracts are those with maturity dates in January and February.

Normally,the duration of a contract is from the beginning of a month and expires on the last Thursday of that month.In case the last Thursday is a holiday,the working day prior to that will be treated as the expiry or settlement day.

As the contracts for a month expires on the last date decided as above,contracts for the third subsequent month would have opened automatically on the very next day so as ensure contracts having three maturity periods. For example, contracts for December expires on the last day of that month and March contracts will be opened on the next working day making the number of contracts into three (January, February and March) on maturity basis.

Trading and Settlement

Trading in Futures contracts can be effected on a daily basis and one can enter into the trading scenario as a buyer or seller through the Futures and Option Terminals of approved stock brokers(Geojit BNP Paribas has offered trading facilities in all Derivative products through all its branches)Whether to start as a buyer or seller depends on one's perspective about the value of the underlying asset,in our case the Nifty.If we expect that the market would go up within a time frame, futures contracts on Nifty would be bought and vice versa.

After entering into a futures contract,the trader can keep his position open till the day of settlement,normally the last Thursday of that month or the position could be closed out by effecting an opposite transaction (a sell against a buy and vice versa).So long as the position is open (open position refers to outstanding purchase or sales positions at any point of time),the same will mark to market (MTM, that is,revaluation of the asset on a daily basis) everyday at the daily settlement price, that is, the closing value of the index on that day and the difference will be credited or debited to the trader's account.Thus,the position will be brought forward to the next day at the daily settlement price.On the day of settlement (expiry day) all open contracts for that month will be closed out by the Exchange at the settlement price (Settlement price is the closing value of the asset on the day of settlement/maturity day).


Two types of margins need to be paid to take up and hold positions in the option segment.They are known as Initial margin and Mark to Market Margin. While the initial margin has to be paid upfront as a percentage of the value of the underlying before the deal is struck,mark to market margin emerges daily when the contract is mark to marketed and the same has to be paid on next day basis. Failure to pay margins by clients will result into compulsory close out of one's position as insisted by SEBI.


There are three types of intermediaries or members in the derivative segment and they are known as trading members, clearing members and trading cum clearing members.

Trading Members

Trading members are entitled to carry on the business of effecting buying and selling transactions in the derivative segment.However,they are not authorised to deal with clearing operations like the issues related to payment of margins,final settlement etc.

Trading cum Clearing Members

Trading cum Clearing members are authorised to take up the activities of both the trading member and the clearing member.

Geojit BNP Paribas Financial Services Ltd is a trading cum Clearing member in the derivative segments of both the NSE and the BSE.

Stock Futures

Stock Futures or equity futures can be defined as future contracts in which the underlying asset is an individual share.As mentioned earlier,the holder of such a contract is eligible to purchase a certain quantity of the equity in question on a future date at the mutually agreed price.

For the time being, stock futures have been introduced in 31 shares in the Indian equity market. The list is the same as the stocks on which option trading facilities are available.[ Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 175 securities stipulated by SEBI.]

List of Shares on which Futures and Options are Available

ACC, Bajaj Auto, BHEL, BSES, Bharat Petroleum, Cipla, Digital Globalsoft, Dr.Reddy's, Grasim, Hindalco, Gujarat Ambuja, HDFC, Hind.Lever, HPCL, ICICI, Infosys Technologies, ITC, Larsen & Toubro, Mahindra, MTNL, Ranbaxy, Reliance Industries, Reliance Petroleum, Satyam Computer, State Bank of India, Sterlite Opticals, Tata Power, Tata Tea, Telco, Tisco & VSNL

As far as other aspects of stock futures such as market lot,settlement date,minimum contract value etc are concerned, the terms and conditions are exactly the same as in the case of index futures.For example,the market lot of different stocks has been fixed with a view of maintaining a minimum value of Rs. 2 lakhs per contract as this has been insisted by SEBI.Similarly,settlement is on the last Thursday of each month and at any point of time,three month's contracts will be available. [ Contract size The value of the futures contracts on individual securities may not be less than Rs. 5 lakhs at the time of introduction for the first time at any exchange. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.]

Speculative Trading and Hedging

Futures are beneficial to operators to make gains through successful trading as well as hedging one's risk in other segments of the market like the equity segment.


Hedging is the act of taking a position in the futures market which is exactly the opposite of one's position in other segments of the market such as the equity segment,with a view of offsetting losses in one segment (say ,in equities) with a gain in the other (say, futures)

The rationale behind these acts lies on the fact that both segments of the market (Futures and equities) are moving in tandem and hence the loss on buying positions in equities could be eliminated or reduced to the minimum by taking a reverse position in the futures market. To elaborate,let us assume that one has a good equity portfolio of Rs.10 lakhs and he wants to hedge his portfolio against market falls. Simply speaking,he can do so by taking a sales position of Rs.10 lakhs or a little more in the futures segment.

Suppose that the market is falling in due course.It is no doubt that the investor would have lost on his portfolio.On the other side,he would have made a reasonable profit from the futures segment where he is a seller on the simple reason that he can settle the deal by purchasing futures contracts at a price lower than the one on which the sales were effected. Thus, the loss in equities are made up by the gain in futures as the market falls.

Speculative Trading

The main drawback of hedging is that the profit generated from one side is eaten up by the loss on the other and hence, profitability would be the minimum.Therefore, hedging is widely used by large fund managers, high networth individual investors etc and the major objective is to eliminate risk rather than making big gains from trading. Those who are interested in making gains can take positions in Futures contracts on the basis of his expectations regarding the way in which the market would move.


As mentioned earlier.options are another important derivative product that has widely been used in the stock market.It gives good trading opportunities with higher leverage of funds and one could make attractive gains if trading positions were taken on the basis of good assessment as far as the probable movement of the asset value is concerned.

Option can be defined as a derivative contract which gives the holder a right, but no obligation, to buy or sell a specified quantity of the underlying asset on a future date at the predetermined price. Accordingly,an option contract consists the following. Two parties,option buyer and option seller.Option buyer,also known as the option holder enjoys the right to purchase or sell the underlying as per the terms of the contract.However,it is not obligatory from his side that this right has to be executed. In other words,the buyer has absolute freedom to walk away from the contract if he feels that the terms of the contract are not in his favour. Option Seller,also known as option writer is obligated to buy or sell as per the contract terms provided the buyer comes forward to execute his rights. Underlying.The agreement is drwan on a specified quantity of an asset or assets and this is known as the underlying. Strike Price.Both the parties have agreed to transact the business at a particular price and this will be recorded on the contract.This is called the strike price or the exercise price.Expiry Date.The contract will be valid upto a certain point of time as recorded on the document and this is called the expiry date.

Option Premium

Option premium is the price that has to be paid by the option buyer to the seller to acquire the right to buy or sell.To the buyer,this is the cost of buying options whereas this is the income to the option seller.

Settlement Price

This is the price at which all outstanding positions are cleared by the Exchange on the settlement day (generally,the expiry day) and the price is arrived at on the basis of the spot value of the asset on that day.

Types of Options

Broadly, options can be classified into two namely call option and put option.

Call Option

A call option gives the right,but no obligation to the contract buyer to purchase a specified quantity of the underlying asset subject to the contract terms such as strike price,exercise date etc.

On the other side, the seller of a call option is bound to honor the rights of the buyer as per the contract terms.

Limited Risk and Unlimited Profitability to the Buyer

A call option is bought when the contract buyer is bullish(expects that the price would rise)about the underlying asset and expects that a profit could be made by exercising his right (to buy) at the strike price and selling the asset at a higher price which is decided by the spot value of the asset.If things are going as expected,the call buyer can make a handsome profit and this could be termed as unlimited. On the other side,his loss is limited only upto the premium paid if the value of the asset remained stagnant or even lower. For example,person A purchases a right to buy 100 shares of Infosys Technologies at a price of Rs.3500(strike price) per share on the last day of December,2001(expiry day) and the right is bought at a premium of Rs.100 per share.Also assume that Infosys share price has increased to Rs.3900 on the expiry day.The call buyer will purchase Infosys at Rs.3500/share(since this is the strike on the contract) from the call seller and the same will be sold at Rs.3900/share because it is the settlement value.His gain after deducting the premium is Rs.300 per share. Conversely,suppose that value of Infosys has come down to Rs.3,000 on the expiry day.He can simply walk away from the contract and what he has to lose is the premium and nothing more.

Limited Profit and Unlimited loss to the Seller

Unlike a call buyer,the writer of a call option is bearish on the underlying asset(expects that the price would fall) and the call is sold on expectation that a profit could be made to the extent of the premium received.So long as he is right, the seller makes a profit but this is limited to the premium.On the other side,the call writer may be a big loser if the value of the asset increases.In such an occasion, he has to buy it from the market at a higher price to fulfill his obligation to sell to the call buyer and this loss may be unlimited.

Covered Call

If a call is written on an asset on the backing of long position(buying) of the same asset in the cash market,it is known as a covered call.Since,the call seller has bought the required quantity of the asset in the cash market, losses due to a price increase of the asset could be eliminated.

Naked Calls

A naked call is one where the seller of the call option does not have position in the underlying asset.

Put Option

Put Option refers to a type of option contract which gives its buyer a right,but no obligation,to sell a specified quantity of the underlying asset on a future date at the agreed price(strike price)

On the other side,the seller of the contract is obligated to buy the asset from the contract buyer as per the agreed terms.

As stated earlier,the buyer enjoys unlimited profit and limited loss in the case of put option too while the seller has unlimited loss and limited profit.

In the case of put option,the contract buyer is bearish on the asset(expects that the price would fall)and intents to make a profit by selling at a higher price(strike price) and settling the same by purchasing at a lower rate on the settlement day.The extent to which the strike price(that is his selling price) is higher to the settlement price(that is his buying price) is his profit and this can be termed as unlimited.On the other side,the maximum loss that may incur to the contract buyer is limited upto the premium paid in case his expectations proved wrong.

As far as the seller of put option is concerned,his profit is limited to the premium received while the loss may go up to any level,subject to the difference between the strike price(at which he was forced to buy as per contract terms)and the settlement price on which he has to sell or settle the account.

For example,a put option on Infosys is bought at a strike price of Rs.3200 and on payment of a premium of Rs.80 per share.In this case,the contract buyer starts to make profit when the price of Infosys falls to Rs.3120(strike price minus premium) and continues to gain to the extent of the price fall. On the other side,his maximum loss is only upto the premium in case the price of Infosys is going up.

From the above discussion,it is clear that the risk is much higher in option writing(selling) than in option buying.Option buyers also enjoy higher leverage to their funds in the sense that big positions of buying and selling could be maintained by payment of a small premium which is just a fraction of the value of the assets underlying.

Intrinsic Value

The difference between strike price of a contract and the spot value of the underlying asset at any point of time is the intrinsic value.Based on this,option contracts are said to be in the money at the money and out of the money.

In the Money

A contract is in the money when the contract is in favour of the buyer,that is,a profit could be made by trading or exercising his rights. In fact,it depends on the difference between the strike price and the exercise value and hence will differ in the case of call option and put option. A call option is in the money when the settlement value of the asset is higher than the strike price. A put option will be in the money when the settlement value is lower than the strike price.

At the Money

An option contract is said to be in the money when there is no cash flow from exercising the contract.Such a situation arises when the strke price is equal to the exercise price and the case is the same in both call options and put options.

Out of the Money

An option contract is out of the money when the contract is not in favour of the buyer,that is,a profit could not be generated by exercising the right or by trading.

A call option is out of the money at times when the strke price is higher than the spot value of the asset.In such circumstances, a profit could not be made from the contract.

A put option is out of the money when the strike price is lower than the spot value or settlement price of the asset.

When a contract is out of the money,the premium fetched by it may be lower as compared to other times.A contract which may be out of the money at a point of time may turn to be in the money at another time and vice versa.s

Settlement in option contracts

As stated earlier, each option contract carries an expiry date beyond which,the contract does not have any value and all contracts have to be settled on the settlement date that may be either the expiry date itself or any day prior to that.On the day of settlement,all open positions(buying or selling of calls and put which are not covered by an opposite transaction) which are in the money are compulsorily settled by the Exchange at the settlement price which is the spot value of the asset in question on the settlement day and subsequently, he profit is handed over to buyers.All contracts at the money or out of the money on the settlement day will be allowed to expire as worthless.

American Options

In American Model of options,call or put contracts can be settled on any day that falls between the date of entry and the expiry date.

European Options

In the European Model of options,settlement on all open positions could be undertaken on the final settlement day alone. However,buying positions could be squarred up or selling positions could be covered by opposite transactions on a daily basis.


When an option buyer comes forward to execute his right to buy or sell,the obligation to honor this right falls upon a seller and a notice may be served for this purpose.The process of vesting obligation on a seller is called assignment.

Options trading in the Indian Equity Market
Index Options

Options on stock indices commenced on June,4,2001 in the Futures & Option (F&O) segment of the National Stock Exchange and subsequently in the Stock Exchange,Mumbai.

Index Options can be defined as contracts on which the underlying asset is a stock index.These option contracts give us the right to buy or sell equity indices as per the contract terms such as strike price,expiry date etc and the transaction will be settled in cash because index can not be handed over from person to person.

Currently,index options are available on the S&P CNX Nifty of the NSE and on the Sensex(BSE 30)of the Stock Exchange,Mumbai.

Equity Options

Besides index options,equity options or stock options are also commenced on July,2,2001 and option trading is available on 31 individual stocks.The list is the same as those stocks on which Stock Futures are available and it has already been covered.

Since the launch of the Index Derivatives on the popular benchmark Nifty 50 Index in 2000, the National Stock Exchange of India Limited (NSE) today have moved ahead with a varied product offering in equity derivatives. The Exchange currently provides trading in Futures and Options contracts on 9 major indices and more than 100 securities.

Salient Features
Market Lot

As seen earlier in Futures,option contracts are standardised products as far as minimum value,market lot,expiry dates etc are concerned.Like Futures contracts,the minimum value per contract has been fixed at Rs.2 lakhs as recommended by SEBI and the market lots are designed so as to maintain the above stated minimum value.Hence,option contracts on Nifty are available in the lots of 200 units and its multiples while the Sensex is being traded in 50 units lots. As far as stocks options are concerned,market lot differs from scrip to scrip and this is decided so as to ensure the minimum value of Rs.2 lakhs per contract.

[The value of the option contracts on Nifty may not be less than Rs. 5 lakhs at the time of introduction.]

Expiry date

At any point of time,three varieties of option contracts are available when looked from the maturity angle, namely the near month,next month and far month contracts and the expiry dates are on the last Thursday of each month(near month refers to contracts that expire in the current and the other two are contracts having expiry dates in the next two subsequent months respectively) For example,in January,all January contracts are near month contracts, Februry and March contracts are next month and far month contracts respectively. [ Trading cycle Nifty 50 options contracts have 3 consecutive monthly contracts, additionally 3 quarterly months of the cycle March / June / September / December and 5 following semi-annual months of the cycle June / December would be available, so that at any point in time there would be options contracts with at least 3 year tenure available. On expiry of the near month contract, new contracts (monthly/quarterly/ half yearly contracts as applicable) are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract.] BANKNIFTY weekly options contracts have 7 weekly expires excluding the expiry week of monthly contract. New serial weekly options contract is introduced after expiry of the respective week’s contract]

Trading and settlement

Final settlement of option contracts is on the last Thursday of each month and all open positions on the settlement date will be closed out by the Exchange at the settlement price (spot value of the asset on the settlement date) if the contracts are in the money.Option contracts out of the money or at the money will be allowed to expire because they are worthless from the point of view of option buyers.

Besides,final settlement of the contracts by the Exchanges concerned,buying or selling positions of option holders and writers could be traded on a daily basis and positions could be closed out at any time by entering into an opposite transaction.For example, a buying position in a type of contract could be closed out by effecting a sell and vice versa and profit can be booked without waiting for the final settlement day.Thus,options are giving profitable trading opportunities to the partcipants on a daily basis.

Trading Terminologies

One can enter into the option segment as a buyer or seller in any contract type like call or put and can walk away with the profit,if any,at any point of time.The following are some of the major terminologies used by the traders.


One is long in a stock when he is having a purchase position in it.Hence,buying positions in call or put options can be termed as long positions.


A short position occurs when we have an obligation to deliver(for example,delivery of shares towards our sales).In options too,the term short is used in the same sense and it can be defined as the selling positions in call or put options.

Opening Buy (buy open)

Opening buy refers to the purchase of an option contract which has the effect of creating a fresh purchase position(long) or adding to the existing long position of a trader.Purchase can be effected in either call options or put options.

Opening sell (sell open)

Opening sell means a sale position in either the call or put options and it creates a fresh sell position(short) or adding to one's existing short(sale) position.

Close out

Close out is a buying or selling transaction which closes an open position fully or partly.For example,a purchase position in an option contract can be offsetted by the sale of a contract having the same charecteristics.

Closing Buy(buy close)

Closing buy refers to a purchase transaction which has the effect of closing out a short position(sale position) partly or wholly.For example,a call option seller can close his short position through the purchase of a call option and this is similar to short covering in the equity segment.

In order to cover a short position in call having some special features such as underlying asset,strike price,exercise date etc,one should select a call option having the same charecteristics.Note that a call option cannot be closed out by a put option or vice versa.

Though both the options should fundamentally be the same ,the premium on which they are bought and sold may be different since this is determined by the market forces from time to time.It gives an opportunity to the trader to make gains from buying and selling of option contracts.For example,if the sale of the contract was at a higher premium than the premium for purchase,the trader would have made a profit in the above case.

Closing Sell (sell close)

Closing sell means a sale transaction which offset a long position either wholly or partly.For example,the buyer of a put or call can eliminate his long position by effecting a sale in the same type of contract and this is similar to squarring up of long positions in the equity market.As stated earlier,a long position in call can be closed out by the sale of a call option only and the basic charecteristics of both the contracts such as underlying asset,strike price,expiry date etc should be perfectly matched to each other.

As stated earlier,the difference in premium ,if any,is the profit/loss of the trader.

Option Class

Option class may be defined as all listed options of a particular type(all call options or all put options) on an underlying asset.For example,all call options on Infosys is one class while all put options are another class.

Option Series

An option series consists of all the listed options contracts of a given class that have the same strike price and expiry date.

Open Interest

Open interest refers to the total number of contracts outstanding on a particular asset at any point of time that are not yet offsetted by counter transactions or settled through delivery or payment of cash.

Time Value

An option contract is priced partly on the basis of the number of days left for its expiry and this is called time value.The premium on an option contract is decided by the intrinsic value and the time value.If more days are left to the expiry date,the premium would be higher due to better time value.

Q. What is the function of the Capital Market?
A. Capital Market enhances capital formation in the economy and comprises of -
  1. Primary Market is a place where new offerings by Companies are made either as an Initial Public Offering (IPO) or Rights Issue.
  2. Secondary Market is a market where securities are traded after being initially offered to the public in the Primary Market and/or listed on the Stock Exchange. Majority of trading is done in this market which comprises of equity market and debt market.
Q. What is an Equity Share?
A. An equity share represents the form of ownership. The holder of such a share is a member of the company and has voting rights.
Q. What returns can I expect from my investments in equity shares? What are the risks?
A. Equity shares are “High-Risk High-Return Investments.” The major distinction of Equity investment from all other investment avenues is that while the return from many avenues such as Bank Deposits,Small Saving schemes, Debentures, Bonds etc are fixed and certain, the earnings from equity investments are highly uncertain and varied. A good scrip picked up at the right time could fetch fairly good returns else the return may be meager or it may even turn negative, i.e. the invested fund itself may be eroded. In short, if the investment in fixed income category instruments is secured and risk-free to a large extent, investment in equities and related fields could be termed as risky.
Q. What is Dividend?
A. Dividend is the part of profit distributed by the company among its investors. It is usually declared as a percentage of the paid-up value or face value of the share.
Q. What is a Bonus Share?
A. A Share issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.
Q. What is a Bond?
A. A Bond is a promissory note issued by a company or government to its lenders. A Bond is evidence of debt on which the issuing company usually promises to pay the bondholder a specified amount of interest at intervals over a specified length of time, and to repay the original loan on the expiration date. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date.
Q. What is a Debenture?
A. It is a Bond issued by a company bearing a fixed rate of interest usually payable half-yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures. Debentures are normally secured/charged against the asset of the company in favor of debenture holder.
Q. What is a Stock Exchange?
A. A Stock Exchange is a place where the buyer and seller meet to trade in shares in an organized manner. There are at present 25 recognized stock exchanges in the country that are governed by the Securities Contact (Regulation) Act, 1956.
Q. What shares can I buy?
A. You can buy the shares that are listed on any of the recognized Stock Exchanges.
Q. Whom should I contact for my Stock Market related transactions?
A. To be able to buy or sell shares in the stock markets a client would need to be registered with a stock broker like Geojit Financial Services Ltd who holds membership in stock exchanges and who is registered with SEBI.
Q. Am I required to sign any agreement with the broker or sub-broker?
A. Yes, you have to sign the “Member-Client agreement” for the purpose of engaging a broker to execute trades on your behalf from time to time and furnish details relating to yourself to enable the member to maintain Client Registration Form.
Q. What is a Member–Client Agreement form?
A. This form is an agreement entered into between client and broker in the presence of witnesses wherein the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of broker’s capabilities to deal in the same.
Q. What is Buying and Selling?
A. There are several types of orders that you can dictate to a broker. The most common type, which is a regular buy or sell order, is called a market order. Another type of order is a limit order wherein you ask the broker to trade only if the price reaches a specific level. In a stop order, you tell the broker to sell your shares if the price drops to a certain level to prevent significant loss because if it drops to that level it is likely to drop further and your losses are likely to increase.
Q. How do I place my orders?
A. Trading can be done via the phone or by coming in person to the office of Barjeel Geojit or through any other facility provided by Barjeel Geojit like Internet trading. The dealer (employee of Barjeel Geojit who is supposed to input the investors order into the stock exchange order system) after checking the authenticity of the person calling and after checking the margin available in the account would put/enter the order into the stock exchange system.
Q. What is meant by bullish and bearish trend?
A. When the market goes up it is called a bullish trend and when the market goes down it is called a bearish trend.
Q. What is taking a position?
A. When you act upon a stock and buy into it, you are taking a position. A position is an amount of money committed to an investment in anticipation of favorable price movements.
There are two kinds of positions : -
  1. Long positions are what most people do. When you buy long, that means you are anticipating an upward movement in the price, and that is how you profit. People usually buy stocks at prices expecting to sell them later at higher prices and hence make profits.
  2. Short positions are the tricky ones. When you buy short, you are anticipating a fall in the price and the fall is the source of your profits. The shares will be sold and when the price falls they will be repurchased and given back and the difference is the where the investor profits. Of course, the investor who borrowed the shares carries the risk of not having the price move as anticipated, in which case he may lose money in repurchasing the stocks.
Q. What is an index?
A. An index is a stock-market indicator created as a statistical measure of the performance of an entire market or segment of a market based on a sample of securities from the market. An index is thus a means to evaluate the overall performance of a market or of a segment of the market. An index measures aggregate market movements.

Apart from being a general market indicator, indices are used as a benchmark to evaluate individual portfolio performance. Professional money managers will always try to outperform the market, i.e. they will always try to do better than the indices. For example, if the value of a portfolio moves up by 10% while the index moved up by only 5% then the portfolio is doing better than the market.
We have 2 renowned indices viz.
  1. BSE Sensitive (BSE Sensex) and
  2. S&P Nifty 50 (Nifty)
BSE Sensex comprises of 30 large-cap companies. As the name suggests, it is a premier index on Bombay Stock Exchange (BSE). Nifty comprises of 50 large-cap companies on the National Stock Exchange (NSE).
Q. What is Methodology of trades?
A. The market watch, i.e the screen kept open normally on the trade screen would show the following columns -
  1. Best bid price
  2. Best bid quantity
  3. Best offer price
  4. Best offer quantity
  5. Last traded price
The first 2 columns as given above show the available buyers for a particular share in the stock exchange and the next 2 columns show the available sellers, and the fifth column shows the price at which the last trade took place. Hence when a investor wants to buy a share at “market price” ideally the 3rd and the 4th column would depict how many shares one can get at a stipulated price. The client can also put a limit price order which would sit in the order book till it reaches a price time priority when the trade can be executed.
Q. What is a Contract Note?
Contract Note is a confirmation of trades done on a particular day on behalf of the client. It establishes a legally enforceable relationship between the client and Geojit with respect to the settlement of the trades. The Contract Note would show settlement number, order number, trade number, time of trade, quantity and price of the trades, brokerage charged, etc and it would be signed by an authorised person of Geojit.
Q. What is pay-in day and pay-out day?
Pay-in day is the day when the broker shall make payment or delivery of securities to the exchange. Pay-out day is the day when the exchange makes payment or delivery of securities to the broker.
Q. What is a depository?
A. A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. There are two main depositories in India, namely, a) National Securities Depository Ltd. (NSDL) and b) Central Depository Securities Ltd. (CDSL), both of which are regulated by SEBI. Geojit Financial Services Ltd is a Depository Participant of NSDL and will hold your securities in electronic form.
Q. What should I do when I want to open an account with a DP?
A. You can approach Barjeel Geojit or any DP of your choice and fill up an account opening form. At the time of opening an account, you have to sign an agreement with DP in a NSDL prescribed standard agreement, which details your and your DP’s rights and duties.
Q. What do you mean by ‘Market Trades’ and ‘Off Market Trades’?
A. Any trade settled through a clearing corporation is termed as a ‘Market Trade’. These trades are done through stock brokers on a stock exchange. ‘Off Market Trade’ is one which is settled directly between two parties without the involvement of a clearing corporation. The same delivery instruction slip can be used either for market trade or off-market trade by ticking one of the two options.
Q. How do I deliver or receive shares to or from Geojit?
A. In case of sales, the investor would need to transfer the shares to the pool account of Geojit for the specified settlement number. The pool account number for shares sold on BSE is IN603287 and for NSE it is IN506594. The delivery should necessarily come from the demat account of the investor and not from any other person. Similarly Geojit would directly transfer shares bought to the account of the investor.
Q. How long does it take to receive my money for a sale transaction and my shares for a buy transaction?
A. The pay-out of funds and securities to the clients by Geojit will be within 24 hours of the pay-out.
Q. What is a Rolling Settlement?
A. In a Rolling Settlement trades executed during the day are settled based on the net obligations for the day. In NSE and BSE, the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 day.
Q. What is an Auction?
A. The securities are put up for auction by the Exchange on account of non-delivery of securities by the selling trading member to ensure that the buying trading member receives the securities due to him. The non-delivery by the trading member could arise on account of short delivery. The Exchange purchases the requisite quantity in the Auction Market and gives them to the buying trading member.
Q. What happens if I could not make the payment of money or deliver shares on the pay-in day?
A. In case of purchase on your behalf, the member broker has the liberty to close out transactions by selling securities in case you fail to make full payment to the broker for the execution of contract before pay-in day as fixed by Stock Exchange for the concerned settlement period unless you already have an equivalent credit with the broker. The shortages in case of sales are met through auction process and the difference in price indicated in Contract Note and price received through auction is paid by member to the Exchange which is then liable to be recovered from the client.
In both the cases any loss in transactions will be deductible from the margin money paid by you.
Q. What happens if I could not make the payment of money or deliver shares on the pay-in day?
A. In case of purchase on your behalf, the member broker has the liberty to close out transactions by selling securities in case you fail to make full payment to the broker for the execution of contract before pay-in day as fixed by Stock Exchange for the concerned settlement period unless you already have an equivalent credit with the broker. The shortages in case of sales are met through auction process and the difference in price indicated in Contract Note and price received through auction is paid by member to the Exchange which is then liable to be recovered from the client.
In both the cases any loss in transactions will be deductible from the margin money paid by you.
Q. What happens if the shares are not bought in the auction?
A. If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction, the transactions are closed out as per SEBI guidelines. The guidelines stipulate that “the close out price will be the highest price recorded in that scrip on the exchange in the settlement in which the concerned contract was entered into and upto the date of auction/close out OR 20% above the official closing price on the exchange on the day on which auction offers are called for, whichever is higher.”
Since in the rolling settlement the auction and the close out takes place during trading hours the reference price in the rolling settlement for close out procedures would be taken as the previous day’s closing price.
Q. What happens if I do not get my money or share on the due date?
A. In case a broker fails to deliver to you in time and make the proper payment of money/shares or you have a complaint against the conduct of the broker, you can file a complaint with the respective stock exchange. The exchange is required to resolve all complaints. To resolve the dispute the complainant can also resort to arbitration as provided on the reverse of Contract Note /Purchase or Sale Note. However, if the complaint is not addressed by the Stock Exchanges or is unduly delayed then the complaints along with supporting documents may be forwarded to Secondary Market Department of SEBI. Your complaint would be followed up with the exchanges for expeditious redressal.
In case of a complaint against a sub-broker, for redressal the complaint may be forwarded to the concerned broker with whom the subbroker is affiliated.
Q. What are the additional charges other than brokerage that can be levied on the investor?
A. The trading member can charge:
  1. Securities Transaction Tax.
  2. Service tax as applicable.
  3. Transaction charges levied by NSE, Stamp duty and other charges directly attributable to the transaction.
Note : The brokerage and service tax is indicated separately in the contract note.
Q. How are margins paid?
A. Exchange prescribes margin rules from time to time, which currently are calculated on the Value at Risk model. Margins are to be paid by the investor before placing the order.
Q. What are the rights of the investor?
A. The right to get - Proof of price/brokerage charged, Money/shares on time, Statement of Accounts and Contract Note from trading member.
Q. What are the obligations of the investor?
A. The obligation to - Sign a proper Member-Constituent Agreement
Possess a valid contract or purchase/sale note
Deliver securities & make payment on time
Provide Margin before trade
Q. What are the various kinds of accounts that I need to trade via Internet with Geojit?
A. Three kinds of accounts are required to be able to trade on-line. They are:
  1. E-Broking account with Geojit Financial Services Ltd
  2. Depository Participant (DP) account with Geojit Financial Services Ltd
  3. PIS Bank account which has developed an interface with “Geojit Financial Services Ltd” i.e. designated banks like IDBI bank, Axis Bank, Federal Bank and South Indian bank
Note : The brokerage and service tax is indicated separately in the contract note.
Q. What are the tax implications of investing in Indian equities?
A. Tax rates on investments gains are categorized as long term & short term capital gains.
  1. Long term capital gains Long Term investments that are held for more than 12 months are termed as long term capital assets. Profit on sale of such assets is termed as long term capital gain (LTCG) which as per the latest Budget notification will attract nil tax.
  2. Short term capital gains
Shares that are held for less than 12 months are classified as short term capital assets which as per the latest Budget notification will attract 15% tax.
Q. Who is a Portfolio Manager?
A. Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be is a Portfolio Manager.

Geojit is a SEBI Registered Portfolio Manager (Reg. No.INP000000316) that offers Discretionary Portfolio Management Services for Non-Residents who can invest a minimum of Rs. 25 lakhs.
What is a mutual fund?
A Mutual Fund is pool of money managed by a professional Fund Manager. The money is collected by trust from a number of investor who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. Income generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme's "Net Asset Value" or NAV. In other words, the money pooled in by a large number of investors is what makes up a Mutual Fund.
How is a Mutual Fund set-up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. 
What is an AMC (Asset Management Company)?
A Company registered with SEBI, which takes investment/divestment decisions for the mutual fund, and manages the assets of the mutual fund. An AMC may have several mutual fund schemes with similar or varied investment objectives. The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
What advantages do mutual funds have over individual securities?
The advantages of investing in a Mutual Fund are:
  • Professional Management
  • Diversification
  • Return Potential
  • Low Costs
  • Liquidity
  • Transparency
  • Flexibility
  • Tax benefits
  • Well regulated
What are the risks of a mutual fund?
This depends on the underlying instrument that a mutual fund invests in, based on its investment objectives. Mutual funds that invest in stock market-related instruments cannot be termed risk-free or safe as investment in shares are inherently risky by nature, whereas funds that invest in fixed-income instruments are relatively safe and those that invest only in short term government securities are the safest.
What kind of income can I expect from a mutual fund?
Investors' can select mutual fund schemes from following broad categories which could align with their income/investment needs:

High Risk - High Return: Equity Oriented Mutual Fund schemes.
Moderate Risk - Moderate Return: Balanced Mutual Fund Schemes.
Low Risk - Monthly Income Schemes: Monthly Income Plans.
Low Risk - Low Returns: Debt Oriented Mutual Fund Schemes.
What're the tax implications of investing in a mutual Fund?

Different tax treatment & rates are applied for Individuals/NRIs/Corporates investing in Mutual Funds. Tax structure varies from different categories of Mutual Fund schemes.

For Individuals/NRI:
Equity Oriented Mutual Fund schemes:

Long Term Capital Gains (if sold after 1 year from the date of investment): NIL Short Term Captial Gains (if sold before completing 1 year from the date of investment): 15%

Debt Schemes:

Long Term Capital Gains (if sold after 3 years from date of investment): 20% after providing indexation.
Short Term Capital Gains (if sold before 3 years from date of investment): 30%


All Dividends from MF units are tax free. But in case of Debt fund, AMC deducts Dividend Distribution Tax before distributing dividend income, it is tax-free in hands of investor.

What is net asset value?
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date.
What are close and open-ended mutual funds?
Open ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at prevailing NAV.

Close-ended mutual fund Schemes have a stipulated maturity period wherein an investor can invest only when subscription is allowed (generally during NFO). Exit is normally restricted and investors can liquidate their investment from the scheme only on its maturity. Few closed ended schemes get listed on Stock Exchanges, where option to sell is available, however market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders expectations and other market factors. Usually they are traded at a discount to NAV; but closer to maturity, the discount narrows..
What is a sales or repurchase/redemption price?
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price.

Repurchase or redemption price is the price or NAV at which scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.
What is Systematic Investment Plan or SIP?
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme.You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.

Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Rupee-Cost Averaging

With rupee-cost averaging, you invest a specific amount at regular intervals regardless of the investment's share (unit) price. By investing on a regular schedule, you can take advantage of market dips without worrying about when they'll occur. Your money buys more shares when the price is low and fewer when the price is high, which can mean a lower average cost per share over time.

The most important element of rupee-cost averaging is commitment. How frequently you invest (monthly, quarterly or even annually) is less important than sticking to your investment schedule.

Power of Compounding

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.


If you started investing Rs. 10000 a month on your 40th birthday, in 20 years’ time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.

However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60th birthday - more than double the amount you would have received if you had started ten years later!

Other Benefits of Systematic Investment Plans

Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your

financial objectives

Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.

Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.
Basics about PMLA
What is Money Laundering?
Money laundering broadly means the conversion or "Laundering" of money that is illegally obtained, so as to make it appear to have originated from a legitimate source. It was originally used in the context of terrorist, criminal, smuggling and drug-dealing activities. In a wider context, tax-evaded money is also covered.
What is the Prevention of Money Laundering Act (PMLA)?
As part of a global initiative, a Financial Action Task Force ("FATF") was created to help member countries draw up Anti-Money Laundering ("AML") legislation which would help implement the policies, techniques and counter-measures to combat money laundering. In India, The Prevention of Money Laundering Act, 2002 ("PMLA") was created under the aegis of FATF. The PMLA forms the core of the legal framework put in place by India to combat money laundering to be followed by banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc
What is FIU?
The Government of India set up Financial Intelligence Unit – India (FIU-IND) on18th November 2004 as an independent body to report directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND has been established as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence and enforcement agencies in pursuing the global efforts against money laundering and related crimes.
Are Mutual Fund Investors also covered by PMLA?
Yes, the PMLA covers all Financial Intermediaries, and this includes Mutual Funds. As such, all investors are required to submit necessary documentation that will help the Mutual funds complete the KYC procedure.
KYC formalities
What is KYC?
KYC is an acronym for “Know your Customer”, a term commonly used for Customer Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to ‘know’ their customers. This could be in the form of verification of PAN Number, identity and address, financial status, occupation and such other personal information.
What are the KYC requirements for a Mutual Fund Investor?
An Individual investor will have to produce copy of his PAN card as proof-of-identity and a separate document as proof-of-address. Non-Individual Investors will have to produce certain documents pertaining to their constitution / registration to fulfill the KYC process. A list of documents to be submitted can be found on the reverse of the KYC application form.
Why am I asked to prove my identity, if I have done no wrong?
As has been discovered in some terrorist acts such as the 9/11 bombings in New York or the attack on our Parliament in Delhi, white collared crime has arrived. Seemingly innocent people have been involved. It is also observed that had the checks, as now proposed by the PMLA, been in place, the detection or even pre-emption of the crime could have been possible. In this context, you will appreciate that providing your identity / address proof and information about your occupation and financial status will only help the Government in isolating the few who are involved in money laundering.
All this seems quite scary. Do I need to take any precautions?
Yes. You should be prudent in your money matters, just as you are in following some rules such as – say – not carrying unknown articles from unknown persons when you are traveling across cities. You should not receive or pay money on behalf of others, unless it is for a genuine transaction in which you have participated. You should also take care that you only deal with known individuals or companies which are registered with or regulated by SEBI, RBI, etc for all financial transactions. Please also ensure that you fill in forms completely and strike out any portions which you do not use or need.
Is KYC compliance required for a minor attaining majority?
Upon a minor attaining the age of majority (on completion of 18 years of age), he/she must complete the KYC process in his/her own name. The acknowledgement received should be registered with the mutual funds where he/she holds investments, along with other Bank Details, Signature, etc as per the requirements of the Mutual Fund.
What is CKYC?
CKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. The aim of this initiative is to have a structure in place which allows investors to complete their KYC only once before interacting with various entities across the financial sector. CKYC will be managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR). The objective of CKYCR is to reduce the burden of producing KYC documents and getting those verified every time when the investor deals with a financial entity for the first time. Thus, CKYCR will act as centralized repository of KYC records of investors in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.
What is CERSAI?
Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) is a central online security interest registry of India authorized by the Government of India to act as and to perform the functions of the Central KYC Records Registry under the PMLA (Prevention of Money-Laundering) rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in the digital form for a client.
What is the difference between KYC, eKYC and CKYC?

KYC – is the known and regular process in the Mutual Fund industry whereby the identity of an investor is verified based on written details submitted by him / her on a form, supplemented by an In Person Verification (IPV) process. Once the verification is done successfully, the relevant investor data is entered into the KRA Registration Agency (KRA) system and subsequently uploaded to their database.

eKYC – is KYC done with the help of a investor’s Aadhaar number. While completing the eKYC, the authentication of the investor’s identity can be done:

  1. Via One Time Password (Limits investments to Rs 50,000 per year per mutual funds and mandates investments via the online electronic mode) 3
  2. Via Biometrics (No limits on the investment amount here unless those specifically imposed by the scheme / Fund House)

This data is uploaded into the records of the KRA.

CKYC – is an initiative of the Government of India where the aim is to have a structure in place which allows investors to do their KYC only once. CKYC compliance will allow an investor to transact / deal with all entities governed / regulated by Government of India / Regulator (RBI, SEBI, IRDA and PFRDA) without the need to complete multiple KYC formalities which is an inconvenience / hindrance as of now. It will allow for larger market participation by investors, easing their journey on the financial highway. The CKYC processing is handled by CERSAI.

Is the information that is currently sought on the current KYC form and the new CKYC form, the same?
No. CKYC requires additional information (for e.g. – investor’s maiden name, mother’s name, FATCA information etc) to be collected and submitted to CERSAI for completion of the CKYC formalities of an investor.
Why are there so many ways of doing KYC? What are the intent / purpose behind this?

Money laundering has become a big problem worldwide threatening the stability of various regions by actively supporting and strengthening terrorist networks and criminal organizations. The links between money laundering, organized crime, drug trafficking and terrorism pose a risk to all financial institutions. This means that we need to know and understand our investors in a much better manner that ever before.

With this in mind, the Government / Regulatory Bodies are introducing new and novel ways, enabling people to complete their KYC formalities in a quick and convenient manner. The targeted aim is to ensure that an investor does his / her KYC formalities only once, post which the focus for the investor can subsequently shift towards the actual dealing with the financial institutions.

What is ‘KYC Identification Number’?
KYC Identification Number (KIN) is a 14 digit number allotted by CERSAI to an investor who has completed his / her CKYC formalities. This number should be mentioned each time the CKYC details are required to be accessed by any intermediary.
From when is the CKYC applicable and what procedure do I need to follow?
CKYC compliance is applicable for investments received from February 1, 2017 onwards. You need to note the following:
  1. New investors (investors who are not KRA compliant or CVL KYC compliant) will have to mandatorily submit the CKYC form along with the investment application. If the investor has filled the KRA application form in lieu of CKYC form, he will have to additionally submit the Supplementary CKYC form along with the KYC application form.
  2. Existing investors (investors who are KRA compliant) can continue making investments without any additional requirements.
Is CKYC compliance mandated for all categories of investors?
No. Currently, CKYC is applicable only to Individuals (both Resident Individuals and Non-Resident Individuals (NRIs)).
What are the documents to be submitted for completion of CKYC formalities?
You need to submit the following documents:
  1. Duly filled and signed CKYC application form OR KRA application form + Supplementary CKYC form
  2. One proof of Identity (self-attested copy)
  3. One proof of Address (self-attested copy)
  4. One photograph
Please elaborate on the documents to be submitted as proof for the information provided on the CKYC form.

You need to submit both proofs of identity as well as address.

For identity proof, you may submit any one document - PAN/ passport / voter ID/ driving license / Aadhaar card / NREGA job card / any other document notified by central government.

For address proof, you may use the same proofs as submitted as identity proof (except the PAN, since that does not specify the address). If your permanent address is different from the correspondence address, then you need to submit proof for both the addresses.

Copies of all documents that are submitted need to be compulsorily self-attested by the applicant and accompanied by originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorized for attesting the documents. For more details, please refer to the “instructions / guidelines” over-leaf on CKYC / Supplementary CKYC form.

Is date of birth mandatory to be provided for CKYC compliance?
Yes, the date of birth is mandatory information required for processing of your CKYC application.
How would I know that my CKYC application is successful?
KIN is being allotted by CERSAI to investors whose CKYC application is found to be valid. An SMS / email will be Sent by CERSAI to the registered mobile number of the investor as soon as the KIN is generated at their end. Since CERSAI will not be sending any physical intimation, applicants should ideally provide their mobile number and/or email ID in the CKYC application form. 5
I do not have an email ID / mobile number. How will the KIN be informed to me?
Upon generation of a KIN, CERSAI as a process will communicate the same vide SMS / email provided on the CKYC form. In the absence of both the details, no communication will be sent by CERSAI. Such an investor needs to contact the entity to which the CKYC application form was submitted. You need to provide the details of the supporting documents (for e.g. if PAN copy was submitted as identity proof, then you would need to provide the PAN) that were submitted to the said entity. It is advisable that you provide an email ID / mobile number on the CKYC form so that you do not miss out on any important communication sent by CERSAI.
If my CKYC application is rejected / fails, will I be informed about the same?
If the CKYC application is not processed / rejected for some reason, no intimation will be sent to the applicant from CERSAI. The entity processing your CKYC application will be aware of such rejections and can approach in case of any queries.
Is CERSAI responsible for validation of investor data?
CERSAI will verify the details as against the supporting documents submitted by investor. However, the onus of completing the CKYC of a customer properly and correctly lies with the entity processing the CKYC.
How do I check the CKYC status online?
Currently, such an option is not available. If the investor is allotted the KIN, it is confirmation that the investor is CKYC compliant.
I have already obtained a KIN. Do I need to submit any more documents for CKYC compliance?
Investors who are already allotted a KIN are considered as CKYC compliant. Such investors do not need to submit any more documents for CKYC compliance. However, please ensure to keep the KIN details readily available as it needs to be mentioned on the application form at the time of investing.
Within how many days will I receive the KIN?
The KIN will be allotted by CERSAI within 4 – 5 working days.
Exceptions on documents required
I work in the Indian Army what are the acceptable documents as proof of address?
For Individuals with an Army Address (’56 APO’), Letter from Commanding Officer / Photo copy of Army Id card duly attested can be accepted as proof of address.
What are the valid documents as Proof of Identity?
Only a PAN card is a valid document for Proof of Identity.
I have printed my Bank Statement online which contains my address. Can I use it as a valid Proof of Address?
Bank/DP statements provided as proof of address must be on the letterhead of the Bank/DP. If not, they should carry the stamp of the bank and signature of an authorised person. Statements printed on plain stationery without the Bank/DP stamp and signature are not acceptable as a valid proof of address.
My Passport is expiring this month. Will it cause any problem in getting a KYC acknowledgement?
When documents such as Passports, Driving Licenses, etc carrying an expiry date are submitted as proof of address, the document must be current on the date of submission.
I haven’t received my latest Bank Statement. Can I use my last statement which was sent out 3 months before?
Electricity /Telephone bill, Bank passbook, Bank statement, Demat account statement submitted as proof of address should not be more than 3 months old as on the date of submission.
I cannot sign, will you accept a KYC application carrying Thumb impression?
KYC applications carrying thumb impression in lieu of signature can be accepted, provided the thumb impression is attested by a Notary or a Gazetted officer.
If the documents are in vernacular language, do I need to get a translated version in English?
If your proof of address document is in vernacular language, you will need to have the same translated into English and attested prior to submission.
Who are the attesting authorities?
Wherever attested copies are provided, attestation should be in original done by a Notary / Judicial Authority or a Bank manager of a Scheduled commercial bank / Multi national Bank (Excluding Grameen and Co-operative banks) can be accepted. Attestations by SEO, Police Inspector are not acceptable. Please ensure the attested copy carries the name, address, designation and seal / stamp of the attesting authority.
My name is spelt as John King on the PAN card, whereas I have given my name as John K with Mutual Fund. Will my application be rejected?
While the Mutual Fund will make every effort to ensure they accept applications with minor name variations (such as expanded initials, etc) this can only be determined on a case to case basis.
How will I know that the KYC compliance is registered in a Mutual fund?
KYC compliance for an investor in the folio will reflect in the account statement as “KYC Registered”.
Are there any special requirements for an NRI?

In addition to the certified true copy of the passport, certified true copy of the proof of overseas address and permanent address will also be required. The documents can be attested by a Consular Officer or an authorized official of overseas branches of scheduled commercials banks registered in India.

Apart from this, if any of the documents (including attestations / certifications) towards proof of identity or address are in a foreign language, please have them translated into English before submission.

I am an NRI living abroad. What documents are valid as Proof of Identity?
In case of an NRI, identity documents are a Passport and PAN card. This is mandatory and other documents such as driver’s license, electricity bill, bank statement etc. cannot be accepted.
I am a Person of Indian Origin (PIO). What documents are acceptable as Proof of Identity?
In case of PIOs, Identity document is a copy of the PIO card and PAN Card. The alternatives in lieu of a PIO card are
  • Copy of OCI card OR
  • Copy of foreign passport with place of birth as India OR
  • Indian passport copy of Self / Parents/ Grandparents (with proof of relationship) OR
  • Documents issued by a Government authority specifying place of birth as India
What is a valid Proof of address for NRI/PIO?

Documents for Address proof for NRIs/PIOs can be any document issued by local authority for Eg: Bank statements or Utility bills or driving license issued in your country of residence. Notarization/Attestation of such documents can be performed by any local authority in the country or the Consulate of the Republic of India or bank branches of scheduled commercial banks registered in India and Multinational banks in the country where the NRI / PIO resides.

NRI’s / PIO must provide their overseas address along with proof of such overseas address in the KYC application form. An address in India is not mandatory for NRIs / PIOs.

I am an existing NRI investor in a Mutual Fund. I have given my local address for correspondence. Can I continue to transact the same way?
Existing NRI / PIO investors who have provided only their local address must provide their overseas address as part of the KYC process.
My husband/Father/Partner is an NRI / PIO. I do not have a valid Proof of address in my name, but I hold investments with a Mutual Fund. How do I proceed with KYC?

Spouses / Children / Dependents of an NRI/PIO who do not have a proof of address can produce the proof of address of the sponsoring husband / parent with documents supporting the relationship such as marriage certificate/Visa, etc.

In case you desire to register an address in India for communication you must provide proof of address in your own name or that of an immediate relative with an additional document evidencing the direct relationship with such person i.e. Parent/Spouse/Child.

I live in UAE where post is delivered to a PO Box. Do you consider this a valid address for KYC?
A PO Box Address is adequate provided you can also provide us Proof for such PO Box such as bank statements, Telephone bills etc. carrying this PO Box address
I am an NRI who works for Merchant Navy. I do not hold an overseas address proof. What is the valid Proof of Address?
In case of Merchant Navy NRI’s, where overseas address proof is not available, please provide your local address in India with proof, along with a notarized copy of your Mariners’ declaration or CDC (Continuous Discharge Certificate)
I am an NRI as I frequently stay abroad, but I do not have any valid address proof overseas. What will be acceptable as Proof of Address?
Investor’s who travel frequently by nature of their profession and stay away in foreign countries in company’s accommodation or hotels (who become NRI and do not have a permanent address) but have a residential address in India, may provide such Indian address with proof. In addition, please also provide a letter of confirmation from your employer / business on company letterhead as an additional proof of address.
I invest in my minor child’s name? Do I need to get a KYC acknowledgement for my minor child as well?
KYC compliance is not mandatory for minors. The guardian must be KYC compliant.
Should I give the company proof of address on a letterhead?

All documents for non-individuals need to be on the company letterhead or in a letter format with the stamp of the firm/company.

Documents of Non-individual investors can be self attested by Director / Company Secretary / Partners / Trustees, only in case of registered entities. For All other (non registered) entities, documents must be attested by a Notary / Judicial Authority or a Bank manager of a Scheduled commercial bank / Multi national Bank (Excluding Grameen and Co-operative banks). Attestations by SEO, Police Inspector are not acceptable.

What are the documents that need to be submitted by Non- Individuals?
Sl No. Status Documents required (apart from copy of PAN card in the name of the non-individual
1 Hindu Undivided Family (HUF) Deed of Declaration
Latest Bank Passbook
Latest Bank statement
2 Company/Body Corporate Certificate of Incorporation
Memorandum and Articles of Association
Resolution of the Board of Directors
Authorised signatory list with specimen signatures
3 Partnerships firms Certificate of Registration
Partnership deed
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
4 Trusts, foundations, NGOs, Charitable Bodies, Clubs / Mutual Fund Schemes Certificate of registration
Trust deed
Signatory List with specimen signatures
5 Unincorporated association or a body of individuals Proof of Existence / Constitution Document
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
6 Foreign Institutional Investors (FIIs) Letter and Certificate of Registration issued by SEBI
Authorised Signatory list with specimen signature
7 Scheduled Commercial Banks and Institutions not incorporated under the Registered Financial Copy of Constitution / registration documents evidencing authority to invest Copy of Constitution / registration documents
Documents evidencing authority to invest
Authorised signatory list with specimen signatures
Note: On a need to need basis, additional documents may be requested apart from above stated documents.
Are there any additional requirements for investments managed by a Power of Attorney (POA) holder?
The POA holder is also required to be KYC compliant in his/her own name and produce a copy of the KYC acknowledgement for investments where he / she is a POA holder. This is apart from that of the investor on whose behalf the POA holder is investing.
My income status has now changed from what I have provided earlier in the KYC application form. Do I need to request for the change to reflect in my details submitted? How do I request for the change?
A change in income status must be intimated if such change results in a change in the income bracket you declared in the application form. Please apply to any POS in the specified form. No proof is needed for such change.
For determining financial status, will any supporting documents for annual income of an investor need to be submitted?
No documents are required to prove the financial status of an investor
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