Fund based

Financial
Services
M O D U L E 3 – M F & V E N T U R E C A P I TA L
S U G G E ST A M U T UA L F U N D P O R T F O L I O F O R O P T I M U M
RETURNS
Module II
Fund Investments: Mutual funds-meaning and importance-
organisation of mutual funds-types of schemes- fund units
and valuation- merits and demerits of mutual funds- mutual
fund regulations in India. Pension funds; Exchange Traded
Funds (ETFs)-ETF vs Mutual Funds investment implications
of ETF.
What are we going to learn
❖Mutual Funds: Concept- growth- types-product/scheme-functions of AMC-regulations regarding
mutual funds-mutual fund industry in India

❖Venture Capital- Dimensions- scope- stages of venture capital financing- Guidelines for venture
capital companies in India.
MUTUAL FUND
MUTUAL FUND
❖Mutual fund is the money pooled in by a large number of people (or investors) is what makes up a
Mutual Fund. This fund is managed by a professional fund manager.

❖It is a trust that collects money from a number of investors who share a common investment
objective and invests the same in equities, bonds, money market instruments and/or other securities.

❖And the income / gains 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. Simply put, the money pooled in by a large number of investors is what makes up
a Mutual Fund.
Mutual fund works on the principle
of “small drops of water make a big
ocean”.
 According to the Mutual Fund Fact Book (published by the
Investment Company Institute of USA), “a mutual fund is a
financial service organization that receives money from
shareholders, invests it, earns return on it, attempts to make it
grow and agrees to pay the shareholder cash demand for the
current value of his investment”.
 Features of Mutual Funds
1. Mutual fund mobilizes funds from small as well as large investors by selling units.
2. Mutual fund provides an ideal opportunity to small investors an ideal avenue for investment.
3. Mutual fund enables the investors to enjoy the benefit of professional and expert management of their
funds.
4. Mutual fund invests the savings collected in a wide portfolio of securities in order to maximize return
and minimize risk for the benefit of investors.
5. Mutual fund provides switching facilities to investors who can switch from one scheme to another.
6. Various schemes offered by mutual funds provide tax benefits to the investors.
7. In India mutual funds are regulated by agencies like SEBI.
8. The cost of purchase and sale of mutual fund units is low.
9. Mutual funds contribute to the economic development of a country.
Mutual Fund - Working
Growth of Mutual Fund
Ways of Investing in MF
SIP –
Systematic • Invest fixed sum of money
in a mutual fund scheme
Investment on regular intervals.
Plan
SIP is better

• Invest a bulk amount in a

Lumpsum mutual fund scheme.
Wonders of SIP MF

SIP MF
benefit:

Rupee cost Power of

averaging compounding
 Rupee cost averaging
❖You are investing Rs. 5,000 in SIP mode every month in HDFC Midcap Fund every 5th of a month.
❖The NAV is 10 rupees on 5th Jan. 2023

❖How many units will you get?

❖500 units

❖On February 2nd, the market fell and NAV became Rs. 9.5. Now how many units will you get?

❖526 units

❖Higher NAV, lower units, Lower NAV, more units

 Organization
Structure – Open
ended, Close
ended

Thematic /
solution
Management of
oriented – Tax
Portfolio –
saving,
Actively or
Retirement
Passively
benefit, Child
welfare, Arbitrage

Types / Products MF
/ Schemes Schemes

Market Investment
Capitalization – Objective –
Large, Mid, Small, Growth, Income,
Multi Liquidity

Underlying
Portfolio –
Equity, Debt,
Hybrid, Money
market
instruments,
Multi Asset
1. SCHEME CLASSIFICATION BY
ORGANIZATION STRUCTURE
SCHEME CLASSIFICATION BY ORGANIZATION STRUCTURE

• Open-ended schemes are perpetual, and open for subscription and repurchase on a
continuous basis on all business days at the current NAV.

• Close-ended schemes have a fixed maturity date. The units are issued at the time of the
initial offer and redeemed only on maturity. The units of close-ended schemes are
mandatorily listed to provide exit route before maturity and can be sold/traded on the stock
exchanges.
 Difference between Open-ended
and Close-ended Schemes
1. The close-ended schemes are open to the public for a limited period, but
the open-ended schemes are always open to be subscribed all the time.
2. Close-ended schemes will have a definite period of life. But he open-
ended schemes are transacted in the company.
3. Close-ended schemes are transacted at stock exchanges, where as open-
ended schemes are transacted (bought and sold) in the company.
4. Close-ended schemes are terminated at the end of the specified period.
Open-ended schemes can be terminated only if the total number of units
outstanding after repurchase fall below 50% of the original number of
units.
2. SCHEME CLASSIFICATION BY
PORTFOLIO MANAGEMENT
SCHEME CLASSIFICATION BY PORTFOLIO MANAGEMENT

Active Funds: In an Active Fund, the Fund Manager is ‘Active’ in deciding whether to Buy, Hold, or Sell
the underlying securities and in stock selection. Active funds adopt different strategies and styles to
create and manage the portfolio.
• The investment strategy and style are described upfront in the Scheme Information document (offer document)
• Active funds expect to generate better returns (alpha) than the benchmark index.

Passive Funds: Passive Funds hold a portfolio that replicates a stated Index or Benchmark like Index
Funds, Exchange Traded Funds (ETFs)

In a Passive Fund, the fund manager has a passive role, as the stock selection / Buy, Hold, Sell decision is
driven by the Benchmark Index and the fund manager / dealer merely needs to replicate the same with
minimal tracking error.
3. CLASSIFICATION BY INVESTMENT
OBJECTIVES
CLASSIFICATION BY INVESTMENT OBJECTIVES

Mutual funds offer products that cater to the different investment objectives of the investors such as –
a. Capital Appreciation (Growth)
b. Capital Preservation
c. Regular Income
d. Liquidity
e. Tax-Saving

The schemes include: Growth, Income & liquidity.

Growth: Equity oriented, High risk, Long term capital appreciation

Income: Regular income providers, Beneficial for low risk low return

Liquidity: Ultra-short term, Very little return.

4. CLASSIFICATION BY UNDERLYING
PORTFOLIO
CLASSIFICATION BY UNDERLYING PORTFOLIO
1. Equity: Equity funds primarily invest in stocks, and hence go by the name of stock funds
as well. They invest the money pooled in from various investors from diverse backgrounds
into shares/stocks of different companies.
2. Debt: Debt funds invest primarily in fixed-income securities such as bonds, securities and
treasury bills. They invest in various fixed income instruments such as Fixed Maturity
Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly
Income Plans, among others.
3. Hybrid: As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of
bonds and stocks, thereby bridging the gap between equity funds and debt funds. The
ratio can either be variable or fixed.
5. CLASSIFICATION BY MARKET
CAPITALIZATION
CLASSIFICATION BY MARKET CAPITALIZATION
1. Large Cap: It invests at least 80% of the total assets in equity and equity-related instruments
of large-cap companies. Market cap Rs. 20000 Crore or more
2. Mid Cap: It invests at least 65% of the total assets in equity and equity-related instruments of
mid-cap companies. Market cap between Rs. 5000 cr. – Rs. 19999 cr.
3. Small Cap: It invests at least 65% of the total assets in equity and equity-related instruments
of small-cap companies. Market cap less than Rs. 5000 cr.
4. Multicap: It invests a minimum of 75% of the total assets in equity and equity-related
instruments. 25 % each minimum in Large cap, midcap and small cap mandatory.
5. Flexi-cap: Minimum 65 % in equity and equity related. Freedom to invest across large, mid and
small cap.
 6. CLASSIFICATION BY THEMATIC /
SOLUTION ORIENTED
CLASSIFICATION BY THEMATIC / SOLUTION ORIENTED
1. Tax Saving: ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks
among all categories of investors. They come with the lowest lock-in period of only three years.
Investing predominantly in equity (and related products), they are known to generate non-
taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a
long-term investment horizon.
2. Retirement Benefit: These schemes having a lock-in of at least five years or till the retirement
age, whichever is earlier.
3. Child Benefit: The scheme would have a lock-in of at least five years or till the child attains
majority age whichever comes earlier.
4. Sectoral: It is based on sectors like clean energy, IT or PSU banks
For example: A retired person who is 65
years need to focus and invest in debt
funds to get steady income
YOU TELL
Suresh is a boy who is 24 years old who studies MBA
and got placed in TCS with an annual take home salary
of Rs. 5,60,000. He is planning to invest some money
in mutual fund. Considering the above scenario, you
please help him to select one or multiple mutual
funds. Objectives are (Bike, Car, Marriage, House)
Advantages (Importance) of
Mutual Funds
1. Mobilise small savings: 7. Professional management:
2. Diversified investment: 8. Offer tax benefits:
3. Provide better returns: 9. Support capital market:
4. Better liquidity: 10. Promote industrial development:
5. Low transaction costs: 11. Keep the money market active:
6. Reduce risk:
 PROBLEMS OF MUTUAL FUNDS
IN INDIA
1. Liquidity crisis.
2. Lack of innovation.
3. Inadequate research.
4. Conventional pattern of
investment. 5. No provision for performance guarantee.
6. Inadequate disclosures.
7. Delays in service.
8. No rural sector investment base.
9. Poor risk management.
Asset Management Company
❖An asset management company (AMC) invests pooled funds from clients into a variety of
securities and assets. A fund house decides when, where and how to invest this money. Its decisions
will be in line with their stated investment goals.

❖An asset management company (AMC) invests pooled funds from clients, putting the capital to work
through different investments including stocks, bonds, real estate, etc. Along with high net worth
individual portfolios, AMCs manage funds and pension plans, and to better serve smaller investors
create pooled structures such as mutual funds, index funds, or exchange-traded funds.

❖Asset management companies are colloquially referred to as money managers or money

management firms. Asset management companies that offer public mutual funds or exchange-traded
funds are also known as investment companies or mutual fund companies.
As of July 2023, there are 45 mutual fund
companies in India. These companies offer a
total of 1,453 schemes
 Top 10 AMCs in India
1. SBI Mutual Fund
2. ICICI Prudential Asset Management Company
3. HDFC Asset Management Company
4. Birla Sun Life Mutual Fund (BSLMF)
5. Kotak Mahindra Asset Management Company
6. Nippon India Asset Management Company
7. Axis Asset Management Company
8. UTI Mutual Fund
9. IDFC Asset Management Company
10. DSP Mutual Fund
https://www.bankbazaar.com/mutual-fund/list-of-mutual-funds-in-india.html
 Functions of AMCs
❖Asset Allocation- Mutual fund comes with a definite financial aim that helps the asset manager to shortlist
and decide on which asset to invest in. For instance, many debt-oriented funds put no more than 20% of
their assets under management in equities.

❖Research and Analysis- Building portfolio rides on plenty of in-depth studies daily. Analysts study the
market, micro, and macro-economic aspects and fund performances regularly, and pass the reports to the
manager.

❖Portfolio Construction- An AMC will have a team of researchers and analysts who report their market
findings and trends to the fund manager. Based on these findings and investment objectives, he chooses
which securities to buy, sell, or whether to hold them.

❖Performance Review- Even with disclaimers in the fine print, an AMC faces a lot of flak from the investors
and trustees, if it cannot justify its investment decisions. It must also send regular updates to investors on
sales and purchases, NAV, portfolio details, etc.
 Structure of MF
1. Sponsor: The sponsor brings the capital to start a mutual fund. For example,
ICICI Bank and Prudential Plc. are the sponsors of ICICI Prudential Mutual
Fund. All sponsors must comply strictly with the SEBI guidelines.

2. Trust and Trustee: The sponsor sets up a trust and appoints trustees to
manage the Trust's operations. The trustee has two main functions:

a) to ensure that all funds are executed as per the defined objectives

b) to protect the investors’ interests at all times

3. Asset Management Company (AMC): The trustee appoints an AMC to

manage the investors’ funds. The AMC charges a fee for providing this service.
 Structure of MF
4. Custodian: The custodian protects the securities held by the mutual fund.
The custodian also sees to it that the securities are used for the intended
purposes only. (BACKEND)

5. Registrar and Transfer Agent (RTA): The AMC often outsources its back-
end operations to an RTA. That’s because RTAs are professionally managed
companies with expertise in mutual fund operations investor-related issues
(BACKEND). The RTA handles day-to-day operations such as:
• unit purchase and redemption requests
• Know Your Customer (KYC) formalities
• providing account statements
Example of SBI Mutual Fund
1. Sponsor – State Bank of India
❖5 years’ experience: The sponsor must have experience in the financial services industry for at least
five years.

❖Positive net worth: The sponsor must have a positive net worth. Having a positive net worth means
that the assets of the sponsor exceed their liabilities.

❖3 years’ profit: The sponsor must show profits in the previous three years (including the last
financial year).

❖40 % share in AMC: The sponsor must have a share of 40% or above in the AMC.
2. Trustee – SBI Mutual Fund Trustee
Company Private Limited
❖They are responsible for the fund’s performance.

❖They are answerable and accountable to the investors.

❖They are the representatives of the fund to the authorities.

❖They must ensure that the fund complies with the SEBI regulations.

❖Once every six months, they must report to SEBI about the funds’ activities.
3. AMC – SBIAMC Ltd.
❖Schemes: It can launch new schemes and close old schemes.

❖Expense Ratio: It can make decisions about the total expense ratio (TER), the assets a particular
scheme will hold, and much more.

❖Fund management: It is directly responsible for the fund’s performance. It is the fund manager’s
responsibility to ensure the fund provides maximum returns to the investors.

❖RTA and Custodian appointment: It appoints auditors, the registrar and share transfer agents, and
a custodian, as well as negotiates their compensation.

❖Accountability: It presents accounts to the trustees.

❖Investor education: The onus of investor education also lies heavily with the AMC.
4. Custodian – State bank of India
❖They are responsible for the safekeeping of records for the AMC.

❖They manage the delivery and transfer of securities.

❖They carry out recordkeeping and back-office processing for the mutual fund.

❖In case of asset purchases, the custodian ensures the funds are paid out to the seller..
5. RTA – CAMS & Karvy
❖It maintains exhaustive records of the investors, including folio, number of units, scheme details,
history of transactions, contact details of the investor, KYC of the investor

❖It sends account statements and periodic reports to the investors, as well as intimates them in case
of dividend declaration.

❖It maintains the list of investors including additions and deletions on each day.
 NAV
NAV stands for Net Asset Value.
It's a metric used to evaluate the value of a mutual fund.
NAV is the value of a fund's assets minus the value of its liabilities per unit.
•It's calculated by dividing the total asset value by the number of shares, then
subtracting the liabilities.
•NAV is commonly used as a per-share value calculated for a mutual fund or ETF.
•NAV is calculated at the end of each trading day based on the closing market prices of
the portfolio's securities.
NAV Formula
NAV = (Assets - Liabilities) / Total number of outstanding shares
Regulation of MF in India
•Every mutual fund must be registered with SEBI.

•A mutual fund is always set up as a trust, with sponsors, trustees, an asset management company
(“AMC”) and a custodian.

•An AMC of a mutual fund should have at least 50% independent directors, a separate board of trustees
which includes 50% independent trustees and independent custodians so as to manage any conflict of
interest among fund managers, custodians, and trustees.

•A single mutual fund can float different schemes but they have to be individually approved by the
trustees and all offer documents have to be filed with the SEBI.

•SEBI lays down certain restrictions on the fees that AMCs can charge for mutual funds and there is also
a cap on the expenses that can be added to the fund.
Regulation of MF in India
❖Market regulator SEBI oversees all mutual fund schemes in India. It issues strict guidelines that AMCs
must follow while managing funds. The guidelines call for complete transparency related to a mutual
fund scheme which include full disclosure of:
❖fund value
❖expenses
❖fund utilization as per the scheme’s objectives
Regulation of MF in India
•Mutual funds can advertise, but advertisements cannot have statements that are misleading. For
instance, no mutual fund can guarantee a return since returns depend on market performance.

•SEBI stipulates the following for open-ended and close-ended funds:

• An open-ended scheme needs a minimum corpus of 50 crores
• A closed-ended scheme needs at least 20 crores corpus
• SEBI checks mutual funds every year in order to make it in compliance with the regulations and guidelines.
TRY THIS
You are required to go through various Mutual fund schemes and select the scheme for any one
of the following:

1. Mr. Suresh - Age - 27 - Teacher - Salary - Rs. 40000

2. Mr. Thomas - Age - 48 - Businessman - Avg. Income per month - Rs. 70000

3. Ms. Aemani - Age - 66 - Retd. Sales tax officer - Pension - Rs. 67000 pm

You need to select one or two schemes and suggest them the SIP amount and tell the reasons.
CADL 1 – CLASS WORK – 3 MARKS
You need to revisit the Moodle page to check out the link of top 10 AMCs in India. Then find out
the following:

1. Total AUM (Asset Under Management)

2. Number of schemes

3. Top 2 schemes of each AMCs

4. Find out what is KIM & SID

YOUR ASSIGNMENT NEED NOT EXCEED ONE PAGE.

PENSION FUNDS
Pension funds, which are also known as retirement funds,
is a kind of savings scheme where you (as an employee)
invest a small portion of your income/salary into a
designated savings plan. The main objective of this plan is
to get a steady flow of income after you complete your
active years of service.
PENSION FUNDS
Pension funds are pools of savings accumulated during the
working life of individuals. At any given point in time, they
are the sum of the flow of the employer and employee
contributions, investment income, and eventual benefits
paid.
Pension funds are divided into two stages.
First stage is the accumulation stage
Vesting stage. In this stage, you start getting
annuities until death.
 TYPES OF PENSION FUNDS IN INDIA
1. NPS
The government of India introduced the National Pension Scheme (NPS) as a financial cushion for retired
persons. Some of its features are as follows:
• You have to invest in this scheme until 60 years of age.
• The least sum you must invest is Rs. 1000. There is no upper limit.
• Your money will be invested in debt and equity funds based on your preference.
• The returns depend on the performance of the funds you choose.
• When you retire, you can withdraw 60% of the savings.
• You must use the remaining 40% to buy an annuity – a retirement plan offering periodic income.
TYPES OF PENSION FUNDS IN
INDIA
2. Public Provident Fund (PPF)
PPF is a long-term investment scheme with a 15 years' tenure. Thus, the impact
of compounding is enormous, especially towards the end of the term. Every year
you can invest a maximum of Rs. 1.5 lakhs in your PPF account. You can pay
upfront or through twelve instalments staggered over the financial year. Your PPF
investments are eligible for tax deductions under Section 80C of the Income Tax
Act (ITA). The interest you earn is also tax-free.
 TYPES OF PENSION FUNDS IN INDIA
3. Employee Provident Fund (EPF) EPF is a government savings platform for salaried employees. Both your
employer and you have to make equal contributions towards your EPF account. Your share is removed from your
salary every month. The Employees' Provident Fund Organisation (EPFO) sets the interest rate on the
investment. On retirement, you receive the total funds contributed by you and your employer along with the
accrued interests.

4. Annuity plans with life cover Such plans provide a life cover along with a regular source of income. If an
unfortunate event occurs while the plan is active, your family member receives a lump-sum payout, however
there are other options too that do not offer this financial coverage. Annuity plans are of two types: A. Deferred
Annuity It is a contract with an insurance provider helping you build a retirement corpus. You can make a single
lump-sum payment or pay regular premiums over a fixed time-frame – the policy term. Thus, this scheme helps
you invest as per your resources.
 Exchange Traded Fund (ETF)
Exchange Traded Fund (ETF) An exchange traded fund (ETF) is a type of security that tracks an
index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange
the same way a regular stock can. An ETF can be structured to track anything from the price of an
individual commodity to a large and diverse collection of securities. ETFs can even be structured
to track specific investment strategies.

A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can
contain many types of investments, including stocks, commodities, bonds, or a mixture of
investment types. An exchange traded fund is a marketable security, meaning it has an associated
price that allows it to be easily bought and sold.
Types of ETFs
Bond ETFs

Bond ETFs are used to provide regular income to investors. Their income distribution depends on the performance of underlying bonds. They
might include government bonds, corporate bonds, and state and local bonds—called municipal bonds. Unlike their underlying instruments,
bond ETFs do not have a maturity date. They generally trade at a premium or discount from the actual bond price.

Stock ETFs

Stock ETFs comprise a basket of stocks to track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks.
The aim is to provide diversified exposure to a single industry, one that includes high performers and new entrants with potential for growth.
Unlike stock mutual funds, stock ETFs have lower fees and do not involve actual ownership of securities.

Industry ETFs

Industry or sector ETFs are funds that focus on a specific sector or industry. For example, an energy sector ETF will include companies operating
in that sector. The idea behind industry ETFs is to gain exposure to the upside of that industry by tracking the performance of companies
operating in that sector. One example is the technology sector, which has witnessed an influx of funds in recent years. At the same time, the
downside of volatile stock performance is also curtailed in an ETF because they do not involve direct ownership of securities. Industry ETFs are
also used to rotate in and out of sectors during economic cycles.
Types of ETFs
Commodity ETFs

As their name indicates, commodity ETFs invest in commodities, including crude oil or gold. Commodity ETFs provide several benefits. First,
they diversify a portfolio, making it easier to hedge downturns. For example, commodity ETFs can provide a cushion during a slump in the stock
market. Second, holding shares in a commodity ETF is cheaper than physical possession of the commodity. This is because the former does not
involve insurance and storage costs.

Currency ETFs

Currency ETFs are pooled investment vehicles that track the performance of currency pairs, consisting of domestic and foreign currencies.
Currency ETFs serve multiple purposes. They can be used to speculate on the prices of currencies based on political and economic
developments for a country. They are also used to diversify a portfolio or as a hedge against volatility in forex markets by importers and
exporters. Some of them are also used to hedge against the threat of inflation.

Inverse ETFs

Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and
repurchasing it at a lower price. An inverse ETF uses derivatives to short a stock. Essentially, they are bets that the market will decline. When
the market declines, an inverse ETF increases by a proportionate amount. Investors should be aware that many inverse ETFs are exchange
traded notes (ETNs) and not true ETFs. An ETN is a bond but trades like a stock and is backed by an issuer like a bank.
How to Begin Investing in ETFs
1. Find an investing platform:

2. Research ETFs:

3. Consider a trading strategy:

 DIFFERENCE BETWEEN ETF AND MF
ETF MF
ETFs are a type of index funds that track a basket of Mutual funds are pooled investments into bonds,
securities. securities, and other instruments that provide returns.

ETF prices can trade at a premium or at a loss to the Mutual fund prices trade at the net asset value of the
net asset value of the fund. overall fund.

ETFs are traded in the markets during regular hours Mutual funds can be redeemed only at the end of a
just like stocks are. trading day.

Some ETFs can be purchased commission-free and Some mutual funds do not charge load fees, but most
are cheaper than mutual funds because they do not are more expensive than ETFs because they charge
charge marketing fees. administration and marketing fees.

ETFs do not involve actual ownership of securities. Mutual funds own the securities in their basket.
 DIFFERENCE BETWEEN ETF AND MF
ETFs diversify risk by tracking different Mutual funds diversify risk by creating a
companies in a sector or industry in a single portfolio that spans multiple asset classes
fund. and security instruments.
ETF trading occurs in-kind, meaning they Mutual fund shares can be redeemed for
cannot be redeemed for cash. money at the fund's net asset value for that
day.
Because ETF share exchanges are treated as Mutual funds offer tax benefits when they
in-kind distributions, ETFs are the most tax- return capital or include certain types of
efficient amongst all three types of financial taxexempt bonds in their portfolio.
instruments.
VENTURE CAPITAL
VENTURE CAPITAL
•Venture capital is a form of private equity financing that is provided by venture capital firms or
funds to startups, early-stage, and emerging companies that have been deemed to have high
growth potential or which have demonstrated high growth.

•VCs firms can generally absorb several losses as long as they occasionally invest in a runaway success
to distribute returns to investors

•Venture Capital typically comes from institutional investors and high net worth individuals and is
pooled together by dedicated investment firms.

•It is the money provided by an outside investor to finance a new, growing, or troubled business.
The venture capitalist provides the funding knowing that there’s a significant risk associated with the
company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the
business rather than given as a loan.
Process of Venture Capital
Process of Venture Capital
Stages of Venture
Capital Financing
Stages of VCF
Expansion
Early Stage: Late Stage:
Stage:
Seed Financing: Related to
business idea generation and Fourth Stage Financing:
preparation of business plan Second Stage Financing: Market
Additions of new products,
penetration and break-even
Exploration of new markets etc.

Start-up Financing: Helps in

product / service development,
creation of marketing plan etc.

Third Stage Financing: Bridge Financing: Pre-exit

First Stage Financing: Beginning Expansion of production and financing. To provide support for
of production, Introduction of capacity IPO
product in the market
Characteristics of Venture Capital
1. It is basically equity finance.

2. It is a long term investment in growth-oriented small or medium firms.

3. Investment is made only in high risk projects with the objective of earning a high rate of return.

4. In addition to providing capital, venture capital funds take an active interest in the management of
the assisted firm. It is rightly said that, “venture capital combines the qualities of banker, stock
market investor and entrepreneur in one”

5. The venture capital funds have a continuous involvement in business after making the investment.

6. Once the venture has reached the full potential, the venture capitalist sells his holdings at a high
premium. Thus his main objective of investment is not to earn profit but capital gain.
Types of Venture Capital Funds
•Seed money: Low level financing for proving and fructifying a new idea

•Start-up: New firms needing funds for expenses related with marketing and product development

•First-Round: Manufacturing and early sales funding

•Second-Round: Operational capital given for early stage companies which are selling products, but
not returning a profit

•Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly beneficial
company

•Fourth-Round & Bridge: Also called bridge financing, 4th round is proposed for financing the "going
public" process
Importance of venture capital
1.Fueling Innovation:

2.Job Creation:

3.Economic Growth:

4.Risk Mitigation:

5.Long-Term Investment:

6.Support Ecosystem Development:

7.Competitive Advantage:
Advantages of Venture Capital
•Cash inflow: They bring wealth and expertise to the company

•Large scale capital: Large sum of equity finance can be provided

•No repayment: The business does not stand the obligation to repay the money

•Additional services: In addition to capital, it provides valuable information, resources, technical

assistance to make a business successful
Drawbacks of Venture Capital
•Loss of control: As the investors become part owners, the autonomy and control of the founder is lost

•Complexity: It is a lengthy and complex process

•Uncertain: It is an uncertain form of financing

•No short run benefits: Benefit from such financing can be realized in long run only
Angel Investing
Angel investments are made by wealthy individuals (such as accredited
investors) that invest their personal money into a company in exchange for
equity in that company. This is the basic principle of angel investing.
Angel investors help startups during the seed stages, so there is a higher risk
in angel investments since they are connected to unproven business models.
Also, if the company does not have a product or even if they have customers,
they might not have significant revenue.
 Angel Investing
1.Early-Stage Funding: Angel investors typically fund startups in their earliest stages, before they have a proven track record or significant revenue. This funding is
crucial for startups to develop their products, conduct market research, and establish initial traction.

2.Risk-Taking: Angel investors are willing to take on high levels of risk in exchange for the potential for high returns. They understand that many startups fail, but
they also recognize that successful investments can yield substantial profits.

3.Value-Added Support: Beyond financial backing, angel investors often provide valuable support to startups in the form of mentorship, advice, and access to their
networks. This support can be instrumental in helping entrepreneurs navigate the challenges of building and scaling a business.

4.Diversification: Angel investors often build portfolios of investments in multiple startups across different industries. Diversification helps spread risk and
increases the likelihood of having at least some successful investments that generate substantial returns.

5.Exit Strategies: Angel investors typically look for opportunities to realize a return on their investment through exits such as acquisitions or initial public offerings
(IPOs). Successful exits can provide significant returns to investors and allow them to recycle their capital into new investments.

6.Seed Stage vs. Series A: Angel investors may participate in seed-stage funding rounds, which are very early investments in a startup, or in Series A rounds, which
occur after the startup has demonstrated some degree of market validation and is looking to scale its operations.

7.Impact on Innovation and Economy: Angel investors play a crucial role in fostering innovation and driving economic growth by providing capital to promising
startups that may not have access to traditional sources of funding. Their investments support the development of new technologies, products, and services that
can disrupt industries and create jobs.
Advantages of angel funding:

o Great for companies that need quick capital fast.

o Funds are not loans.

o Angel investors do not only provide money.

Disadvantages of angel funding:

o Higher risks.

o Pressure can be quite difficult to handle.

Crowd funding
Crowdfunding is a way to raise money for a project or venture by asking many people to
contribute. Crowdfunding is a type of crowdsourcing and alternative finance.
Raising funds or capital from individuals or organizations that invest in (or donate to)
projects in return for a potential profit or a reward is called crowdfunding.
Advantages of crowdfunding:
o Keeping equity.
o Low financial risk.
o Tapping into an existing community.
❖ Crowdfunding campaigns are usually conducted online through a fundraising site.

❖ Crowdfunding is a way to raise funds for a specific cause or project by asking a large number of people to
donate money, usually in small amounts, and usually during a relatively short period of time.

❖ Crowdfunding can be used to fund a project, new business venture, product launch, or worthy cause.

❖ Crowdfunding can also be used by a business to ask the public for a contribution, usually in exchange for equity
in the company.

❖ There are four types of crowdfunding for startups:

◦ Reward-based crowdfunding Equity-based crowdfunding
◦ Debt-based crowdfunding Donation-based crowdfunding

❖Creative crowdfunding is a medium through which individuals and NGOs can raise funds for creative causes.

❖ Human capital crowdfunding is a way for people to raise money to back their personal growth or projects.

❖ Indiegogo is a popular rewards-based crowdfunding platform that connects new products and business ideas
with the necessary financing.
https://www.google.com/search?sca_esv=eecfb1e247dfd8d4&sca_upv=1&sxsrf=ACQVn0-6-
QvmFv6mFW1yNuYMoYJJJr7kXA:1708019303962&q=crowd+funding+website+india&tbm=
isch&source=lnms&sa=X&ved=2ahUKEwjp94bf862EAxW6xzgGHWrmCTwQ0pQJegQIChAB
&biw=1536&bih=730&dpr=1.25
Private equity
In the field of finance, private equity is stock in a private
company that does not offer stock to the general public.
Private equity is offered instead to specialized
investment funds and limited partnerships that take an
active role in the management and structuring of the
companies.
Guidelines of Venture Capital in India
Setting up of VCF:

A company, Limited Liability Partnership, trust or any other body corporate which satisfies the
eligibility criteria as provided under the AIF Regulations can set up a VCF in India by obtaining a
certificate of registration from the SEBI.

A VCF or any scheme launched by it should be close ended with a minimum tenure of 3 (three)
years and the tenure is to be determined at the time of filing application for registration with the SEBI
Guidelines of Venture Capital in India
Venture Capital in India governs by the SEBI Act, 1992 and SEBI (Venture Capital
Fund) Regulations, 1996

(i) VCF is a fund established in the form of a trust/a company including a body corporate and
registered with SEBI. It has a dedicated pool of capital, raised in the specified manner and invested
in VCUs in accordance with the regulations. VCU is a domestic company whose shares are not listed
on a stock exchange and is engaged in specified business.

(ii) The minimum investment in a VCF from any investor would not be less than Rs. 5 lakh and
the minimum corpus of the fund before it could start activities should be at least Rs. 5 crore.

(iii) The norms of investment were modified. A VCF seeking to avail benefit under the relevant
provisions of the Income Tax Act will be required to divest from the investment within a period of
one year from the listing of the VCU.
Guidelines of Venture Capital in India
(iv) The VCF will be eligible to participate the IPO through book building route as Qualified
Institutional Buyer.

(v) The mandatory exit requirement by VCF from the investment within one year of the listing of the
shares of VCUs to seek tax pass-through was removed under the SEBI (VCF) Regulation to provide for
flexibility in exit to VCFs (Earlier mandatory exit was there).

(vi) The VCFs were directed to provide with the information pertaining to their venture capital
activity for every quarter starting from the quarter ending December 31, 2000.

(viii) Automatic exemption was granted from applicability of open offer requirements in case of
transfer of shares from VCFs in Foreign Venture Capital Investors (FVCIs) to promoters of a VCU.
Module 3 in a nutshell
MUTUAL FUND
• Introduction
• Types / Classification / Categories / Schemes of MF
• AMC & its Functions
• Legal structure / Parties to MF
• Regulation of MF in India

VENTURE CAPITAL
• Introduction
• Process of VC
• Stages of VC
• Types of VC
• Advantages & Drawbacks
• Guidelines of VC in India