Financial Services

Session with Prof Arindam Bannerjee

The financial services sector comprises of Merchant Banks, NBFCs, regulators, Asset Management Companies, Investment Banks, Wealth Managers,
Insurance companies.

How do the banks make money?

Merchant Banking or consumer banking is about accepting deposits and issuing loans. Now the idea is to give lesser rate of interests on the deposits and charge a higher rate of interest on the loan and make money in "the spread of the interest". It's called,"the spread"

Mutual Fund Companies like Fidelity are called Asset Management Companies (AMCs). In US, they are called Asset Managers. Banks can be sponsors to the mutual fund operators but they cannot operate a mutual fund. Similarly, investment banks cannot operate mutual funds. Sponsoring can be for the initial investment and protection money.

Mutual funds could be sectoral funds, diversifies funds among myriad categories.

Other financial servicec are Systematic Investment Plans, electroically traded funds etc.

Sovereign papers like kisan vikas patra and NSCs are guaranteeed by the government.

There is a category called derivatives. These are products within products. A derivative would always be linked to some product, like equity. For example, a reliance derivative product would be linked to reliance equity, debt instrument.

Derivatives can be:

Futures: You agree to buy or sell at a pre-determined price at a future date which is generally 3 months.
Options: You have the option to exercise the choice. You have oil futures and not oil options.
Swaps: 2 banks are involved in raising funds for their clients in different geographies.

There are index funds representing the entire stock index on a BSE for example and there are sectoral indexes. For example, index representing the infrastructure stocks.

Shorting strategy refers to a contrarian outlook of the market based on business fundaentals. George Soros has followed this strategy to make a lot of money. Please find out who that guy is. They have a bearish outlook to the market if the market is bullish and otherwise depending on their analysis of the situation.

Investment decisions.

Why are you investing?

Now it depends on the purpose of your investment. For example, you may need 10 lacs 10 years down the line for your son's education. You want a product that will give you return without risk. You would not want to take risks here.

Do you understand whwere you are investing? I forgot to ask the third question, he said there are 3

Okay, what do the investment banks do?

Investment banks provide advisory, underwriting services in case of IPOs, advisory of HNWIs, get banks together to fund M&As, sell securitised products. There are no investment banks recongnised in India. RBI has not even given a definition.

Lehmann Brothers, Meryll Lynch feel because of the sub prime crisis. AIG is an insurance company and not allowed to invest in mortgaged securities but they did and landed in this rut.