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Mutual Funds, Hedge Funds, ECB, IDR, ADR & GDR

Mutual funds (Asset Management companies (AMC))

  • Specialized institutions pooling money from the public & investing in the stock market based on research, past trends, company performance etc. to maximize investors profit
  • Mutual funds do not eliminate risk but minimize the risk in term of risk appetite & allow for sharing of risk
  • Mutual funds make profit only when market is moving up
  • Any investor is welcomed for e.g. SBI mutual fund requires minimum investment of Rs. 100 only
  • Strict SEBI regulation with no leverage provided Has to deal with money in hand
  • Managed by MF managers (Asset management companies) for certain commission %


Mutual funds types

  • Portfolio type Equity, Debt, Gilt edged fund, Real estate fund
  • Income vs risk type 
  • Growth Fund 80 (Equity) + 20 (Debt)
  • Balance Fund 50 (Equity) + 50 (Debt)
  • Income Fund 20 (Equity) + 80 (Debt)


Hedge funds (Alternative Investment fund)

  • Hedge fund is a similar investment game as mutual funds, where High net worth individuals pool their money into high risky games to earn high return on investment.
  • Trading-techniques are far more complex than mutual funds
  • Hedge funds can make money even with share market going down.
  • SEBI Indian hedge fund to starts from 1 crore rupees; Foreign (offshore) hedge fund to start with 5 lakhs dollars
  • Not so strict SEBI regulation with leverage provided twice the amount but only for 2 days viz. T + 2


How Hedge funds make money

Short selling

  • Sell a large quantity of shares in the market at once which supposedly decrease the value of share as a result of mass selling.
  • Now, as soon as value of share falls, hedge fund managers buy sold quantity of shares & make profit.



  • Borrowing money to trade in shares beyond your limit to get good returns
  • But if market follows opposite steps against your move then may be risky



  • Profit from the price difference of securities between the two markets

 Arrangement of capital from outside India to expand Business

External commercial borrowing (ECB)

  • As the name suggest, it is when Indian company borrows money from external (non-Indian / foreign) sources for minimum average 3 years
  • Money is borrowed from foreign lenders via bank loans, fixed rate bonds, non-convertible shares, optionally convertible or partially convertible preference shares etc.
  • ECB money cannot be used to trade in share market or real-estate speculation or to acquire another company


ECB’s Positives
  • If American and European economy is not performing well, their banks and lenders will not find local borrowers even at dirt cheap interest rate.
  • So in this scenario, an Indian company can borrow money from abroad, at a lower interest rate than in India & everyone wins


ECB’s Negatives
  • In ECB, the borrower has to repay in foreign currency (usually dollar)
  • So If Rupee sharply weakens dollar let’s say from 1$ = Rs. 50 to 1$ = Rs. 60
  • Then Indian borrower will have to pay more amount of rupees to repay the same amount of loan he previously took


American Depository Receipt (ADR)

  • ADR is method of trading non-U.S. stocks on U.S. exchanges
  • Suppose, Indian company wants to raise money from America, by issuing shares in American stock exchange
  • But then Indian company will have to maintain accounts according to American standards
  • Hence to prevent this problem, Indian company gives its shares to American bank
  • American bank gives Indian company certain receipts, called ADR in return of those shares
  • Now Indian company can trade those ADR receipts in American share market, to raise money
  • But Indian company will have to pay dividends to investors in Dollars
  • ADR is two way fungible, Meaning, (from American investor’s point of view) if you’ve ADR, you can convert it into the underlying shares of that (foreign / Indian) company


Global Depositary Receipt (GDR)

  • Serve as same function like ADR, but on Global scale
  • Helps third world countries to raise money from the stock exchanges of developed countries
  • Several international banks such as JPMorgan, Citigroup, Deutsche Bank, Bank of New York issue GDRs


Indian Depository Receipt (IDR)

  • As ADR (American depository receipt) is from America’s point of view, Similarly, IDR (Indian depository receipt) is from India’s point of view
  • It allows a foreign company to raise money from Indian financial market
  • As part of financial reforms, IDR (Indian depository receipts) are also made two ways fungible
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1 Comment

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