A Study On

“AWARENESS AND PERCEPTION OF PASSIVE INVESTING AMONG

INVESTORS IN SURAT CITY”

A Project Submitted to

BHAGWAN MAHAVIR COLLEGE OF BUSINESS

ADMINISTRATION

In partial fulfillment of the requirement

For the award of Degree of

“Bachelor of Business Administration”

In

Management

Under Faculty of Management

Submitted by

Het Desai

[Enrollment No.: E1808339000410195]

Under the Guidance of

PROF. RENCY DESAI

Veer Narmad South Gujarat University

[June 2021]
 DECLERATION

I, Het Desai from Bhagwan Mahavir College of Business Administration, Vesu – Surat, hereby declare that
the project report has been undertaken as a part of 6th Semester of Bachelor of Business Administration (BBA)
syllabus of Veer Narmad South Gujarat University, Surat. I declare that this report has not been submitted to
any other university or institute for any other purpose.

Date:

Place: Bhagwan Mahavir College of Business Administration

Het Desai
 ACKNOWLEDGEMENT

The work of doing research for the award of BBA degree needs supports of many people. First and foremost, I
acknowledge GOD for giving me the wisdom and confidence in accomplishing this work. It is these people
who have made sure that what was my passion and interest turned out to be a concrete body of knowledge
produced after rigorous empirical work and scientific analysis.

I wish to express my sincere thanks to Dr. Cheta Desai, I/C. Principal of Bhagwan Mahavir College of
Business Administration, Vesu – Surat, who gave me the chance to do this project report.

I wish to express my gratitude to my internal guide Prof. Rency Desai whose constant help and support at all
stages of this project has enabled me to complete it.

Last but not least, I thank all those who have helped me directly or indirectly during the course of this project.
 ABSTRACT

As technology keeps becoming more and more efficient, the investing space also keeps upgrading itself and as
a result brings new opportunities for disruption. One result of this is the growth of Passive Investing industry.
Simply put passive investing means the investor investing does not try to beat the market but just tries to
mirror the market (e.g., earn the return of NIFTY50 by creating a portfolio of NIFTY50 stocks).

Passive Investing’s share of global assets under management has grown rapidly from just 11% in 2011 to
31% in 2020.It is also growing in India and, in 2020 asset under management allotted to passive fund products
grew by 90% so it makes sense to take a deeper look at the passive investing industry with specific reference
to India.

This study aims to look and understand the Passive Investing landscape in India. Data identifying perception
and awareness level of investors in Surat city is also collected. Both primary and secondary data are used for
the purpose of this research.

For secondary data various research papers and data sources such as AMFI (Association of Mutual Funds in
India), SEBI (Securities and Exchange Board of India) data were used. As far as primary research is
concerned first hand data was collected through the help of an online questionnaire.

The research found that while the area of passive investing is growing very rapidly in India and there is
potential for growth, awareness regarding the products is very low among investors at least in Surat city.

The findings of the study can be applied to identify gaps of awareness among investors and to launch
awareness campaigns for the same. The findings can also be used to showcase the benefits of passive
investing products.

Further research identifying the perception and awareness of investor at a broader national scale can be done
to get a better idea about the perception of the investors of the country rather than just for Surat city. Research
identifying the efforts of asset management companies (AMCs) in promoting these products among their
clients, effect of regulators such as SEBI in promoting products with low fees can also be done.
 CONTENT OUTLINE OF THE PROJECT

Sr. No. Chapter Contents Page No.

1 Title Page i

2 Certificate Pages ii

2.1 Certificate by College iii

2.2 Declaration by scholar iv

3 Acknowledgements v

4 Abstract vi

5 Table of Contents -

6 List of Tables -

6.1 List of Charts/Graphs -

7 Chapter 1 Introduction/About Topic

1.1 What is Investing? 2

1.2 Types of Investments 2

1.3 What are Financial Markets 9

1.4 Types of Financial Markets 11

1.5 Participants in the Financial Markets 22

1.6 Classification of Investment Styles 26

1.7 What is Active Investing? 28

1.8 What is Passive Investing? 29

 1.9 Growth trend of assets under management (AUM) for passive 32
investing schemes in India

8 Chapter 2 Review of Literature 40

9 Chapter 3 Research Methodology

3.1 Need of the Study 46

3.2 Research Objectives 47

3.3 Research Design 47

3.4 Data Collection Methods 47

3.5 Sampling Plan 48

3.6 Limitations of the Study 48

3.8 Scope for Future Study 48

10 Chapter 4 Data analysis/Interpretation

4.1 Analysing perception and awareness of investors and potential 50

investors in Surat City towards Passive Investing Products

11 Chapter 5 Discussion

5.1 Summary of research findings 62

5.2 Conclusion 63

Bibliography 64

12 Appendices 66
 LIST OF GRAPHS

Graph Particular Page No.

No.

1. AUM allotted to Passive Funds 33

2. Share of ETFs Vs Index Funds in Passive AUM as of 2021 33

3. Indian ETFs AUM – Gold Vs Equity 35

4. Investors in Index Funds by Category 36

5. Investors in Equity ETFs by Category 36

6. Investors in Gold ETFs by Category 37

7. Graph showing the % of Indian large cap funds underperforming the 38

S&P BSE 100 INDEX

8. Active vs Passive Share of Assets under Management

9. Age of the Respondent 50

10. Gender of the Respondent 50

11. Level of Education 51

12. Have you ever heard of Passive Investing or Passive Funds before? 52

13. Are you aware or have you ever heard about any of the passive 52
products listed below?

14. Are you aware that you can invest in gold in India directly through 53
one of passive investment product and can trade it just like stocks on
exchanges?
15. Do you invest in mutual funds or have a financial advisor for selecting 54
portfolio or stocks?

16. If you answered yes then, how much attention do you pay to the fees 55
charged

17. If you do not invest through an then, would fees charged by the mutual 55
fund manager or the financial advisor impact your decision to invest
or where to invest

18. Are you aware that passive fund Managers charge less than half of the 56
fees charged by active fund managers?

19. How important it is to you that your portfolio earn higher returns than 57
the Benchmark or the overall market

20. Do you think one can earn more returns than the market(e.g. Nifty) 57
consistently on a risk adjusted basis

21. Would you agree that it is better to just invest in Nifty or some other 58
benchmark rather than investing in active funds?

22. Do you know that 87.95% of Indian large cap funds earned less return 59
the S&P BSE 100 index on a risk adjusted basis

23. Given you are provided more data would you in the future invest in 59
passive funds or allocate a portion of your portfolio to passive funds?

24. Overall, how would you rate passive investing as an investment option 60
on a scale of 1 to 5(1 being an extremely good option and 5 being not
at all preferable)
CHAPTER -1

INTRODUCTION

1
 Ø What is Investing?

Investing is the act of allocating resources, usually money, with the expectation of generating
an income or profit. You can invest in endeavours, such as using money to start a business, or
in assets, such as purchasing real estate in hopes of reselling it later at a higher price.

Ø Types of Investments

While the universe of investments is a vast one, here are the most common types of investments

- Stocks (Common Stock)

A buyer of a company's stock becomes a fractional owner of that company. Owners of a

company's stock are known as its shareholders and can participate in its growth and success
through appreciation in the stock price and regular dividends paid out of the company's profits.

* Benefits of Stocks

§ Potential profits

In terms of performance, common stocks are known to generate higher returns than deposit
certificates, bonds, etc. among other investment tools. Also, there is no limit up to which
investors can benefit from their investment in common stock shares.

Similarly, common stocks prove to be a more feasible and less expensive alternative to debts.
It is because companies do not have to pay interest to their investors and may choose to pay a
reward in case of excess profits.

§ Limited legal liabilities

Being passive holders, the obligations of common stock investors are limited as well. They do
not need to be concerned about the events that happen beyond financial investment. Further,
such stocks ensure a safe financial future in case a company is generating substantial returns
and is growing at a steady rate.

2
Also, investors are not exposed to the risk of losing more money than what they had invested
in. All of these tend to help investors make the most of the growth aspects of common stocks
without being tangled in unwarranted legal liabilities.

§ Gains

Though common stockholders are entitled to earn a return, its frequency is uncertain. For
instance, a company may not have enough earnings to offer dividends to its shareholders.
Alternatively, a company may decide to reinvest its profits into the venture for expansion
purposes. All of these make the scope of generating returns uncertain. Nonetheless, common
stockholders are more likely to generate substantial returns when compared to other investment
options.

§ Liquidity

Common stocks are liquid and hence, can be efficiently invested in or surrendered by the
investors. It helps investors to buy more shares and increase their shareholding in a particular
company. Similarly, they can readily surrender it if their investment is not turning out to be
profitable enough. Additionally, as such shares can be purchased at a fair price without
undergoing any hassles; this makes it a viable investment tool for many.

§ Voting rights

Each investor is vested with one voting right per share of common stock held. Notably, such
rights pertain to corporate policies and partaking in business decisions. For instance, investors
receive the right to elect a company’s board of directors through their voting right or may
decide the fate of a strategic policy. Notably, investors with substantial common stocks would
be able to make the most of such a power.

* Limitations of Common Stocks

§ Market-linked risk

Since the prices of common stocks are subject to market volatility, stock prices tend to fluctuate
often. Further, the valuation of common stocks tends to undergo an abrupt change, which

3
makes the process of performance evaluation quite challenging. Additionally, in the case of
bankruptcy, common stockholders are more exposed to lose their entire investments.

§ Profits are not guaranteed

As the market forces tend to influence revenue generation for this stock option, income is often
not fixed. No such certainty is assured when it comes to generating profit at all. It proves to be
a significant drawback for individuals who invested in common stocks for its growth potential.

§ Lacks control

The scope of profiting from common stock investment largely depends on the business
strategies and associated policies, which means investors have no control whatsoever on it.
Also, the fact that investors do not have the right to partake in policymaking sessions or
scrutinise the company’s books of accounting or business plans limits their power.

- Bonds

Bonds are debt obligations of entities, such as governments, municipalities, and corporations.
Buying a bond implies that you hold a share of an entity's debt and are entitled to receive
periodic interest payments and the return of the bond's face value when it matures.

* Advantages of Bonds

Investment in bonds is advantageous to customers in extensive ways. Due to the dependability

of interest and principal returns, bonds have proved to be a stable investment option for
customers averse to excessive risk in the market. The advantages thus include-

§ Stability – Bonds are long-term investment tools that accrue assured returns in
comparison to other investment options. They provide a low-risk avenue to investors
apprehensive of the volatility of returns from equity. Even though dividend incomes
from equities are traditionally higher than coupon returns, bonds are comparatively
inelastic as compared to cyclical market fluctuations.

§ Indentures – Bonds grant a legal guarantee that binds borrowers to return the principal
amount to the creditors in due time. They serve as financial contracts which contain
details such as the par value, coupon rates, tenure, and credit ratings. Companies that
attract massive investments in their bonds are highly unlikely to default on interest

4
 payments due to their reputation in the securities market. Besides, bondholders precede
shareholders in receiving debt repayment in the event of an entity’s bankruptcy.

§ Portfolio diversification – Investors massively rely on investment in fixed-income

debt instruments such as bonds to diversify their investment portfolio as they offer
superior risk-adjusted returns on investment. Consequently, portfolio diversification
reduces the possibility of short-term losses due to increased allocation of investment
funds to fixed-income resources instead of solely depending on equities.

* Limitations of Bonds

Even though bonds are a low-risk investment option, they come with specific limitations that
investors should be acquainted with. The disadvantages include –

>>> Inflation’s influence – Bonds are susceptible to inflation risks when the prevailing rate
of inflation exceeds the coupon rate offered by issuers. Debt instruments which accrue fixed
interests face risks of devaluation too due to the impact of inflation on the principal value
invested.

>>> Limited liquidity- Bonds, although tradable, are mostly long-term investments with
withdrawal restrictions on the investment amount. Shares precede bonds in terms of liquidity,
as in bonds are liable to several fees and penalties if creditors decide to withdraw their debt
amount.

>>> Lower returns – Issuers offer coupon rates on bonds which are usually lower than returns
on stocks. Investors receive a consistent amount as interest over the tenure in a low-risk
investment environment. However, returns are much lower than on other debt instruments.

- Funds (Mutual Funds)

Funds are pooled instruments managed by investment managers that enable investors to invest
in stocks, bonds, preferred shares, commodities, etc. The two most common types of funds
are mutual funds, and exchange traded funds or ETFs. Mutual funds do not trade on an
exchange and are valued at the end of the trading day; ETFs trade on stock exchanges and, like
stocks, are valued constantly throughout the trading day. Mutual funds and ETFs can either
passively track indices, such as the S&P 500 or the Dow Jones Industrial Average, or can be
actively managed by fund managers.

5
* Advantages of Mutual Funds

1. Diversification

The advantage of mutual funds is that diversification is automatically done. Instead of buying
shares, bonds, and other investments on your own, you outsource the task to an expert.
2. Professional Management

Investing is obviously not an easy task. Investing, be it in shares, real estate, gold, bonds, and
so on depends on a multitude of factors that constantly need to be studied and understood.
Many people often think they can understand the market. A great percentage of these people
end up incurring a loss.

The advantage of mutual funds is that they are managed by professional experts. Thus, to
ensure your money is invested in the right place, you have to choose the right mutual fund.

3. Simplicity

While investing, the availability of information and data is particularly time-consuming. If all
the information would be easily available, investing would be much simpler.

In mutual funds, the research and data collection is done by the funds themselves. All you have
to do is analyse the performance

Mutual fund dealers allow you to compare the funds based on different metrics, such as level
of risk, return, and price. And because the information is easily accessible, the investor will be
able to make wise decisions.

4. Liquidity

One advantage of mutual funds that is often overlooked is liquidity. In financial jargon,
liquidity basically refers to the ability to convert your assets to cash with relative ease.

For example: If you want to sell your house, how long would it take for you to sell it and get
the cash in hand? It would take you anywhere from a few weeks, to a few months.

Mutual funds are considered liquid assets since there is high demand for many of the funds.
You can, therefore, retrieve money from a mutual fund very quickly.

6
5. Cost

Mutual funds are one of the best investment options considering the costs involved. If you hire
a portfolio management service, you’ll typically be charged 2% to 3% of the total investment
per year. They will also deduct a share from your profit.

Mutual funds are relatively cheaper and deduct only 1% to 2% of the expense ratio. Debt
mutual funds usually deduct even lesser.

6. Tax Efficiency

Mutual funds are relatively more tax-efficient than other types of investments. Long-term
capital gain tax on equity mutual fund is zero, which means, if you sell your investment one
year after purchase, you do not have to pay tax.

* Disadvantages of Mutual Funds

1. Costs

Some mutual funds have a high cost associated with them. Mutual funds charge for managing
the funds, fund managers salary, distribution costs, etc. Depending on the fund, these charges
can be significant.

When you exit from your mutual fund, you might be charged an extra cost as exit load. Do
check out exit loads before investing in a fund. Typically, exit loads are applicable if you sell
your investments within a specified duration.

Investors should note that different funds have different expense ratios. Passively managed
funds like index funds or ETFs (Exchange Traded Funds) have lower expense ratios than
actively managed funds.

This is because passively managed funds track the underlying index and do not require a fund
manager to take active investment calls. Lower costs reflect the operational efficiency of a
mutual fund house.

2. Dilution

7
This is the most prominent of all the disadvantages. Diversification has an averaging effect on
your investments. While diversification saves you from suffering any major losses, it also
prevents you from making any major gains! Thus, major gains get diluted.

This is exactly why it is recommended that you do not invest in too many mutual funds. Mutual
funds are themselves diversifying investments. Therefore, buying many mutual funds in the
name of diversifying dilutes your gains.

- Investment trusts

Trusts are another type of pooled investment, with Real Estate Investment Trusts (REITs) the
most popular in this category. REITs invest in commercial or residential properties and pay
regular distributions to their investors from the rental income received from these properties.
REITs trade on stock exchanges and thus offer their investors the advantage of instant liquidity.

- Alternative investments

This is a catch-all category that includes hedge funds and private equity. Hedge funds are so-
called because they can hedge their investment bets by going long and short on stocks and other
investments. Private equity enables companies to raise capital without going public. Hedge
funds and private equity were typically only available to affluent investors deemed "accredited
investors” who met certain income and net worth requirements. However, in recent years,
alternative investments have been introduced in fund formats that are accessible to retail
investors.

- Options and derivatives

Derivatives are financial instruments that derive their value from another instrument, such as a
stock or index. An option is a popular derivative that gives the buyer the right but not the
obligation to buy or sell a security at a fixed price within a specific time period. Derivatives
usually employ leverage making them a high-risk, high-reward proposition.

- Commodities

Commodities include metals, oil, grain, and animal products, as well as financial instruments
and currencies. They can either be traded through commodity futures—which are agreements

8
to buy or sell a specific quantity of a commodity at a specified price on a particular future
date—or ETFs. Commodities can be used for hedging risk or for speculative purposes.

Ø What are Financial Markets

A Financial Market is referred to space, where selling and buying of financial assets and
securities take place. It allocates limited resources in the nation’s economy. It serves as an
agent between the investors and collector by mobilising capital between them.

In a financial market, the stock market allows investors to purchase and trade publicly
companies share. The issue of new stocks are first offered in the primary stock market, and
stock securities trading happens in the secondary market.

>> Functions of Financial Markets

• Intermediary functions: The intermediary functions of financial markets include the

following:

o Transfer of resources: Financial markets facilitate the transfer of real

economic resources from lenders to ultimate borrowers.

o Enhancing income: Financial markets allow lenders to earn interest or dividend

on their surplus invisible funds, thus contributing to the enhancement of the
individual and the national income.

o Productive usage: Financial markets allow for the productive use of the funds
borrowed. The enhancing the income and the gross national production.

o Capital formation: Financial markets provide a channel through which new

savings flow to aid capital formation of a country.

o Price determination: Financial markets allow for the determination of price of

the traded financial assets through the interaction of buyers and sellers. They
provide a sign for the allocation of funds in the economy based on the demand
and to the supply through the mechanism called price discovery process.

9
 o Sale mechanism: Financial markets provide a mechanism for selling of a
financial asset by an investor so as to offer the benefit of marketability and
liquidity of such assets.

o Information: The activities of the participants in the financial market result in

the generation and the consequent dissemination of information to the various
segments of the market. So as to reduce the cost of transaction of financial
assets.

• Advantages of Financial Markets

>> Provides Payment System:

The financial system provides a payment mechanism for the smooth flow of funds among
peoples in an economy. Buyers and sellers of goods or services are able to perform transactions
with each other due to the presence of a financial system.

>> Links Savers and Investors:

The financial system serves as a means of bridging the gap between savings and investment. It
acquires money from those with whom it is lying idle and transfers it to those who need it for
investing in productive ventures.

>> Minimizes Risk:

It aims at reducing the risk by diversifying it among a large number of individuals. The
financial system distributes funds among a large number of peoples due to which risk is shared
by many peoples.

>> Helps in Capital Formation:

The financial system has an efficient role in capital formation of the country. It enables big
corporates and industries to acquire the required funds for performing or expanding their
operations thereby leading to capital formation in the nation.

>> Raises Standard of living:

10
It raises the standard of living of peoples by promoting regional and rural development of the
country. The financial system promotes the development of weaker sections of society through
cooperative societies and rural development banks.

>> Enhance liquidity:

Maintaining optimum liquidity in an economy is another important role played by the financial
system. Its facilities free movement of funds from households (savers) to corporates (investors)
which ensures sufficient availability of funds in the economy.

>> Promotes Economic Development:

The financial system influences the pace of economic growth or development of an economy.
It aims at optimum utilisation of all financial resources by investing all idle lying resources
into useful means which leads to the creation of wealth.

Ø Types of Financial Markets

11
>> Money Markets

• Definition:

Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market has
become a component of the financial market for buying and selling of securities of
short-term maturities, of one year or less, such as treasury bills and commercial papers.

It is a market for short term securities with maturity less than one year which . This market is
regulated by Reserve Bank of India.

• Features of Money Market Instruments:

1. High Liquidity

One of the key features of these financial assets is high liquidity offered by them. They generate
fixed-income for the investor and short term maturity make them highly liquid. Owing to this
characteristic money market instruments are considered as close substitutes of money.

2. Secure Investment

These financial instruments are one of the most secure investment avenues available in the
market. Since issuers of money market instruments have a high credit rating and the returns are
fixed beforehand, the risk of losing your invested capital is minuscule.

3. Fixed returns

Since money market instruments are offered at a discount to the face value, the amount that the
investor gets on maturity is decided in advance. This effectively helps individuals in choosing
the instrument which would suit their needs and investment horizon.

4. CASH MANAGEMENT

For clients, brokerage firms typically use money market mutual fund to give cash management
services.

• Purpose of Money Markets

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1. Maintains Liquidity in the Market

One of the most crucial functions of the money market is to maintain liquidity in the economy.
Some of the money market instruments are an important part of the monetary policy
framework. RBI uses these short-term securities to get liquidity in the market within the
required range.

2. Provides Funds at a Short Notice

Money Market offers an excellent opportunity to individuals, small and big corporations, banks
of borrowing money at very short notice. These institutions can borrow money by selling
money market instruments and finance their short-term needs.

It is better for institutions to borrow funds from the market instead of borrowing from banks,
as the process is hassle-free and the interest rate of these assets is also lower than that of
commercial loans. Sometimes, commercial banks also use these money market instruments to
maintain the minimum cash reserve ratio as per the RBI guidelines.

3. Utilisation of Surplus Funds

Money Market makes it easier for investors to dispose off their surplus funds, retaining their
liquid nature, and earn significant profits on the same. It facilitates investors’ savings into
investment channels. These investors include banks, non-financial corporations as well as state
and local government.

4. Aids in Financial Mobility

Money Market helps in financial mobility by allowing easy transfer of funds from one sector
to another. This ensures transparency in the system. High financial mobility is important for
the overall growth of the economy, by promoting industrial and commercial development.

5. Helps in monetary policy

A developed money market helps RBI in efficiently implementing monetary policies.

Transactions in the money market affect short term interest rate, and short-term interest rates
gives an overview of the current monetary and banking state of the country. This further helps
RBI in formulating the future monetary policy, deciding long term interest rates, and a suitable
banking policy.

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 • Money Market Instruments

1. Treasury Bills (T-Bills)

Treasury bills or T- Bills are issued by the Reserve Bank of India on behalf of the Central
Government for raising money. They have short term maturities with highest up to one year.
Currently, T- Bills are issued with 3 different maturity periods, which are, 91 days T-Bills, 182
days T- Bills, 1 year T – Bills.

T-Bills are issued at a discount to the face value. At maturity, the investor gets the face value
amount. This difference between the initial value and face value is the return earned by the
investor. They are the safest short term fixed income investments as they are backed by the
Government of India.

2. Commercial Papers

Large companies and businesses issue promissory notes to raise capital to meet short term
business needs, known as Commercial Papers (CPs). These firms have a high credit rating,
owing to which commercial papers are unsecured, with company’s credibility acting as security
for the financial instrument. Corporates, primary dealers (PDs) and All-India Financial
Institutions (FIs) can issue CPs.

CPs have a fixed maturity period ranging from 7 days to 270 days. However, investors can
trade this instrument in the secondary market. They offer relatively higher returns compared to
that from treasury bills.

3. Certificates of Deposits (CD)

CDs are financial assets that are issued by banks and financial institutions. They offer fixed
interest rate on the invested amount. The primary difference between a CD and a Fixed Deposit
is that of the value of principal amount that can be invested. The former is issued for large sums
of money ( 1 lakh or in multiples of 1 lakh thereafter).

Because of the restriction on minimum investment amount, CDs are more popular amongst
organizations than individuals who are looking to park their surplus for short term, and earn
interest on the same.

14
The maturity period of Certificates of Deposits ranges from 7 days to 1 year, if issued by banks.
Other financial institutions can issue a CD with maturity ranging from 1 year to 3 years.

4. Repurchase Agreements

Also known as repos or buybacks, Repurchase Agreements are a formal agreement between
two parties, where one party sells a security to another, with the promise of buying it back at a
later date from the buyer. It is also called a Sell-Buy transaction.

The seller buys the security at a predetermined time and amount which also includes the interest
rate at which the buyer agreed to buy the security. The interest rate charged by the buyer for
agreeing to buy the security is called Repo rate. Repos come-in handy when the seller needs
funds for short-term, s/he can just sell the securities and get the funds to dispose. The buyer
gets an opportunity to earn decent returns on the invested money.

5. Banker’s Acceptance

A financial instrument produced by an individual or a corporation, in the name of the bank is

known as Banker’s Acceptance. It requires the issuer to pay the instrument holder a specified
amount on a predetermined date, which ranges from 30 to 180 days, starting from the date of
issue of the instrument. It is a secure financial instrument as the payment is guaranteed by a
commercial bank.

Banker’s Acceptance is issued at a discounted price, and the actual price is paid to the holder
at maturity. The difference between the two is the profit made by the investor.

>> Capital Markets

Capital market is referred to as a place where saving and investments are done between capital
suppliers and those who are in need of capital. It is, therefore, a place where various entities
trade different financial instruments.

There are two types of capital market:

• Primary Market

15
 • Secondary Market

• Primary Markets

In a primary market, securities are created for the first time for investors to purchase. New
securities are issued in this market through a stock exchange, enabling the government as
well as companies to raise capital.

- Types of Primary Market Issuance

After the issuance of securities, investors can purchase such securities in various ways. There
are 5 types of primary market issues.

o Public issue

Public issue is the most common method of issuing securities of a company to the public at
large. It is mainly done via Initial Public Offering (IPO) resulting in companies raising funds
from the capital market. These securities are listed in the stock exchanges for trading.

16
A privately held company converts into a publicly-traded company when its shares are offered
to the public initially through IPO. Such public offer allows a company to raise funds for
expansion of business, improving infrastructure, and repay its debts, among others. Trading in
an open market also increases a company’s liquidity and provides a scope for issuance of more
shares in raising further capital for business.

The Securities and Exchange Board of India is the regulatory body that monitors IPO. As per
its guidelines, a requisite due enquiry is conducted for a company’s authenticity, and the
company is required to mention its necessary details in the prospectus for a public issue.

o Private placement

When a company offers its securities to a small group of investors, it is called private
placement. Such securities may be bonds, stocks or other securities, and the investors can be
both individual and institutional.

Private placements are easier to issue than initial public offerings as the regulatory stipulations
are significantly less. It also incurs reduced cost and time, and the company can remain private.
Such issuance is suitable for start-ups or companies which are in their early stages. The
company may place this issuance to an investment bank or a hedge fund or place before ultra-
high net worth individuals (HNIs) to raise capital.

o Preferential issue

A preferential issue is one of the quickest methods available to companies for raising capital.
Both listed and unlisted companies can issue shares or convertible securities to a select group
of investors. However, the preferential issue is neither a public issue nor a rights issue. The
shareholders in possession of preference shares stand to receive the dividend before the
ordinary shareholders are paid.

o Qualified institutional placement

Qualified institutional placement is another kind of private placement where a listed company
issues securities in the form of equity shares or partly or wholly convertible debentures apart
from such warrants convertible to equity shares and purchased by a Qualified Institutional
Buyer (QIB).

17
QIBs are primarily such investors who have the requisite financial knowledge and expertise to
invest in the capital market. Some QIBs are –

§ Foreign Institutional Investors registered with the Securities and Exchange Board of
India.

§ Foreign Venture Capital Investors.

§ Alternate Investment Funds.

§ Mutual Funds.

§ Public Financial Institutions.

§ Insurers.

§ Scheduled Commercial Banks.

§ Pension Funds.

Issuance of qualified institutional placement is simpler than preferential allotment as the former
does not attract standard procedural regulations like submitting pre-issue filings to SEBI. The
process thus becomes much easier and less time-consuming.

o Rights and bonus issues

Another issuance in the primary market is rights and bonus issue, in which the company issues
securities to existing investors by offering them to purchase more securities at a predetermined
price (in case of rights issue) or avail allotment of additional free shares (in case of bonus
issue).

For rights issues, investors retain the choice of buying stocks at discounted prices within a
stipulated period. Rights issue enhances control of existing shareholders of the company, and
also there are no costs involved in the issuance of these kinds of shares. For bonus issues, stocks
are issued by a company as a gift to its existing shareholders. However, the issuance of bonus
shares does not infuse fresh capital.

- Advantages of Primary Market

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§ Companies can raise capital at relatively low cost, and the securities so issued in the
primary market provide high liquidity as the same can be sold in the secondary market
almost immediately.

§ The primary market is an important source for mobilisation of savings in an economy.

Funds are mobilised from commoners for investing in other channels. It leads to
monetary resources being put into investment options.

§ Chances of price manipulation in the primary market are considerably less when
compared to the secondary market. Such manipulation usually occurs by deflating or
inflating a security price, thereby deliberately interfering with fair and free operations
of the market.

§ The primary market acts as a potential avenue for diversification to cut down on risk.
It enables an investor to allocate his/her investment across different categories
involving multiple financial instruments and industries.

§ It is not subject to any market fluctuations. The prices of stocks are determined before
an initial public offering, and investors know the actual amount they will have to invest.

- Disadvantages of Primary Market

§ There may be limited information for an investor to access before investment in an IPO
since unlisted companies do not fall under the purview of regulatory and disclosure
requirements of the Securities and Exchange Board of India.

§ Each stock is exposed to varying degrees of risk, but there is no historical trading data
in a primary market for analysing IPO shares because the company is offering its shares
to the public for the first time through an initial public offering.

§ In some cases, it may not be favourable for small investors. If a share is oversubscribed,
small investors may not receive share allocation.

- Secondary Market

A secondary market is a platform wherein the shares of companies are traded among
investors. It means that investors can freely buy and sell shares without the intervention
of the issuing company. In these transactions among investors, the issuing company

19
 does not participate in income generation, and share valuation is rather based on its
performance in the market. Income in this market is thus generated via the sale of the
shares from one investor to another.

- Functions of Secondary Market

§ A stock exchange provides a platform to investors to enter into a trading transaction of

bonds, shares, debentures and such other financial instruments.

§ Transactions can be entered into at any time, and the market allows for active trading
so that there can be immediate purchase or selling with little variation in price among
different transactions. Also, there is continuity in trading, which increases the liquidity
of assets that are traded in this market.

§ Investors find a proper platform, such as an organised exchange to liquidate the

holdings. The securities that they hold can be sold in various stock exchanges.

§ A secondary market acts as a medium of determining the pricing of assets in a

transaction consistent with the demand and supply. The information about transactions
price is within the public domain that enables investors to decide accordingly.

§ It is indicative of a nation’s economy as well, and also serves as a link between savings
and investment. As in, savings are mobilised via investments by way of securities.

- Types of Secondary Market

Secondary markets are primarily of two types – Stock exchanges and over-the-
counter markets.

§ Stock exchange

Stock exchanges are centralised platforms where securities trading take place, sans any
contact between the buyer and the seller. National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE) are examples of such platforms.

Transactions in stock exchanges are subjected to stringent regulations in securities

trading. A stock exchange itself acts as a guarantor, and the counterparty risk is almost

20
 non-existent. Such a safety net is obtained via a higher transaction cost being levied on
investments in the form of commission and exchange fees.

§ Over-the-counter (OTC) market

Over-the-counter markets are decentralised, comprising participants engaging in

trading among themselves. OTC markets retain higher counterparty risks in the absence
of regulatory oversight, with the parties directly dealing with each other. Foreign
exchange market (FOREX) is an example of an over-the-counter market.

In an OTC market, there exists tremendous competition in acquiring higher volume.

Due to this factor, the securities’ price differs from one seller to another.

Apart from the stock exchange and OTC market, other types of secondary
market include auction market and dealer market.

The former is essentially a platform for buyers and sellers to arrive at an understanding
of the rate at which the securities are to be traded. The information related to pricing is
put out in the public domain, including the bidding price of the offer.

Dealer market is another type of secondary market in which various dealers indicate
prices of specific securities for a transaction. Foreign exchange trade and bonds are
traded primarily in a dealer market.

- Advantages of Secondary Market

§ Investors can ease their liquidity problems in a secondary market conveniently. Like,
an investor in need of liquid cash can sell the shares held quite easily as a large number
of buyers are present in the secondary market.

§ The secondary market indicates a benchmark for fair valuation of a particular company.

§ Price adjustments of securities in a secondary market takes place within a short span in
tune with the availability of new information about the company.

§ Investor’s funds remain relatively safe due to heavy regulations governing a secondary
stock market. The regulations are stringent as the market is a source of liquidity and
capital formation for both investors and companies.

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 § Mobilisation of savings becomes easier as investors’ money is held in the form of
securities.

- Disadvantages of Secondary Market

§ Prices of securities in a secondary market are subject to high volatility, and such price
fluctuation may lead to sudden and unpredictable loss to investors.

§ Before buying or selling in a secondary market, investors have to duly complete the
procedures involved, which are usually a time-consuming process.

§ Investors’ profit margin may experience a dent due to brokerage commissions levied
on each transaction of buying or selling of securities.

§ Investments in a secondary capital market are subject to high risk due to the influence
of multiple external factors, and the existing valuation may alter within a span of a few
minutes.

Ø Participants in Financial Markets

Banks

In the capital Market, (which is a market for financial investments that are direct or indirect
claims to capital. It is wider than the Securities Market and embraces all forms of lending and
borrowing, whether or not evidenced by the creation of a negotiable financial instrument) banks
are participating. banks take an active part in bond markets. They may invest in equity and
mutual funds as a part of their fund management.

Insurance Companies

The principal aims of the participants are to show the causes of institutional growth, the nature
of institutional investors and the implications of their activities and growth. The participants
draw on material from interviews with fund managers, econometric and statistical analysis, and
studies of the individual countries’ financial sectors.

Primary Dealers (PDs)

22
They are a firm that buys government securities directly from a government, with the intention
of reselling them to others, thus acting as a market maker of government securities. The
government may regulate the behaviour and number of its primary dealers and impose
conditions of entry. Their basic responsibility is to provide two-way quotes and act as market
makers for government securities and strengthen the government securities market.

Stock Exchanges

They are a series of exchanges where successful corporations go to raise large amounts of cash
to expand. Stocks are shares of ownership of a public corporation that are sold to investors
through broker-dealers. The investor’s profit when companies increase their earnings. It is
essential that stock exchanges are corporatized and de-mutualised so that there can be greater
transparency in the trades and better governance in markets.

Custodians

They are a specialized financial institution responsible for safeguarding a firm’s or

individual’s financial assets and is not engaged in “traditional” commercial or consumer/retail
banking such as a mortgage or personal lending, branch banking, personal accounts, and
Automated Teller.

Brokers

They usually arrange loans for a fee. They deal with the lenders for you and arranges a
loan. They help build up order book, price discovery and are responsible for a contract being
honoured. For their services, brokers earn a fee known as brokerage.

Financial Institutions

Organizations and institutions in the public and private sectors also often sell securities on
the capital markets in order to raise funds. They provide/lend long term funds for industry and
agriculture. FIs raise their resources through long-term bonds from the financial system and
borrowings from international financial institutions like International Finance Corporation.

Depositories

They serve multiple purposes for the general public. As banks and other financial institutions,
they give consumers a place to come in order to make deposits both time or demand deposits.

23
Deposits can also come in the form of securities such as stocks or bonds. On instructions of
stock exchange clearing house, supported by documentation, a depository transfers securities
from buyers to sellers’ accounts in electronic form.

Merchant Banks

It a bank dealing in commercial loans and investment. Merchant banks were the first modern
banks and evolved from medieval merchants who traded in commodities, particularly cloth
merchants.

• Types Of Transactions In Financial Markets

>> IPO

An initial public offering (IPO), or stock market launch, is a type of public offering where
shares of stock in a company are sold to the general public, on a securities exchange, for the
first time. Through this process, a private company transforms into a public company. Initial
public offerings are used by companies to raise expansion capital, monetize the investments of
early private investors, and become publicly traded enterprises.

A company selling shares is never required to repay the capital to its public investors. After the
IPO, when shares are traded freely in the open market, money passes between public investors.

When a company lists its securities on a public exchange, the money paid by the investing
public for the newly issued shares goes directly to the company (primary offering) as well as
to any early private investors who opt to sell all or a portion of their holdings (secondary
offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool
of potential investors to provide itself with capital for future growth, repayment of debt,
or working capital.

Although an IPO offers many advantages, there are also significant disadvantages. Chief
among these are the costs associated with the process, and the requirement to disclose certain
information that could prove helpful to competitors, or create difficulties with vendors. Details
of the proposed offering are disclosed to potential purchasers in the form of a lengthy document
known as a prospectus.

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Most companies undertaking an IPO do so with the assistance of an investment banking firm
acting in the capacity of an underwriter. Underwriters provide a valuable service, which
includes help with correctly assessing the value of shares (share price), and establishing a
public market for shares (initial sale).

>> Secondary market offering

A secondary market offering, is a registered offering of a large block of a security that has been
previously issued to the public. The blocks being offered may have been held by large investors
or institutions, and proceeds of the sale go to those holders, not the issuing company. This is
also sometimes called secondary distribution.

A secondary offering is not dilutive to existing shareholders, since no new shares are created.
The proceeds from the sale of the securities do not benefit the issuing company in any way.
The offered shares are privately held by shareholders of the issuing company, which may be
directors or other insiders (such as venture capitalists) who may be looking to diversify their
holdings. Usually, however, the increase in available shares allows more institutions to take
non-trivial positions in the issuing company which may benefit the trading liquidity of the
issuing company's shares.

- Transactions on Secondary Market

After the initial issuance, investors can purchase from other investors in the secondary market.
In the secondary market, securities are sold by and transferred from one investor or speculator
to another. It is therefore important that the secondary market be highly liquid. As a general
rule, the greater the number of investors that participate in a given marketplace, and the greater
the centralization of that marketplace, the more liquid the market.

>> Private placement

Private placement (or non-public offering) is a funding round of securities which are sold not
through a public offering, but rather through a private offering, mostly to a small number of
chosen investors. "Private placement" usually refers to the non-public offering of shares in a
public company (since, of course, any offering of shares in a private company is and can only
be a private offering).

25
>> Stock repurchase

Stock repurchase (or share buyback) is the reacquisition by a company of its own stock. In
some countries, a corporation can repurchase its own stock by distributing cash to existing
shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is
exchanged for a reduction in the number of shares outstanding. The company either retires the
repurchased shares or keeps them as treasury stock, available for re-issuance.

Companies making profits typically have two uses for those profits. Firstly, some part of profits
can be distributed to shareholders in the form of dividends or stock repurchases. The
remainder, termed stockholder’s equity, are kept inside the company and used for investing in
the future of the company. If companies can reinvest most of their retained earnings profitably,
then they may do so. However, sometimes companies may find that some or all of their retained
earnings cannot be reinvested to produce acceptable returns.

Ø Types of Investment Styles

1. Active Investing

An active investing style might be right for you if you have a higher tolerance for risk and keep
a close eye on market trends and movements. Active investing is generally used by investors
who aren’t as concerned with the long-term horizon as they are with the present. With this
strategy, you select specific stocks and use market timing to try to outperform the market to
seek short-term profits.

2. Passive Investing

If you are more risk-averse and don’t want to stare at the market screens on your computer all
day, a passive investing style may be more up your alley. Passive investors are those who invest
their money with a long-term time horizon. Instead of trying to time the market like an active
investor, passive investors create portfolios that track a market-weighted index or portfolio.
Tracking an index will generally result in reduced risk due to diversification as well as lower
transaction costs due to low turnover.

3. Growth

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The growth style of investing is one that focuses on stocks of companies whose earnings are
growing faster than most other stocks and are expected to continue to grow. These stocks are
often referred to as being overvalued and have a high price-to-earnings ratio. It is important to
note that these stocks generally pay either a low or no dividend but have the potential to make
up for that with strong return performance.

4. Value

Unlike growth investors who seek out overvalued securities, value investors look for those
stocks that are out-of-favour or undervalued. Value investors expect that these securities will
rise and seek to buy them before they do. This investing style has been popularized by hedge
fund manager Warren Buffett, who argues the merits of purchasing stocks that sell for less than
their intrinsic value based on the premise that they'll deliver consistent returns in the future.

5. Market Capitalization

Those investors who select stocks based on the size of the company are using a market
capitalization investing style. Market capitalization, or market cap, is computed as the number
of shares outstanding multiplied by earnings per share. There are three broad market cap
categories to incorporate in your investing style: small-cap, mid-cap, and large-cap.

Small-cap companies have a market capitalization of less than 500 crores INR, mid-cap
companies have a market capitalization of 500 to 10,000 crores INR, and large-cap companies
have a market capitalization of over 10,000 crores INR. Microcaps fall under the $300 million
mark, while mega-caps are the largest companies by market capitalization.

Small-cap stocks are generally riskier investments than large-cap stocks. While their returns
may be higher, their volatility is also higher. On the other hand, large-cap companies are those
that have been around a much longer time and tend to be more stable. Many people use large-
cap stocks in their portfolios because of their dividends and stability.

6. Buy and Hold

A buy and hold investing style falls under the umbrella of passive investing. An investor who
is engaged in buy and hold investing will trade in their portfolio infrequently. They are mostly
concerned with long-term growth. The idea behind buy and hold is that you buy into a stock
while its price is still low to benefit from price appreciation over time.

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7. Indexing

Another popular form of passive investing is indexing. With this style of investing, an investor
creates a portfolio that mirrors the companies of a particular stock index. The portfolio
generally will perform in line with the index. This kind of investing is good for people that are
more risk-averse because of the diversification of the index. The costs, including transaction
costs and taxes, related to managing these kinds of the portfolio are relatively low in large part
due to less turnover.

8. Diversification

There are two kinds of risk that every investor must be concerned about: systematic risk and
unsystematic risk. Systematic risk is a market risk that cannot be diversified away. But
unsystematic risk, or the risk that comes from investing in one particular company or sector,
can be diversified away. For example, if you were to invest only in technology companies, you
would have a high level of risk due to owning stocks in only one sector. By diversifying your
portfolio and adding in or replacing some of the technology companies with consumer goods
companies, your risk level would be reduced.

Ø What is Active Investing

Active management of investments (active investing) includes relentless selling and buying of
securities. The main intention of extensive activity of buying and selling of assets or securities
is to outdo the markets collectively. Active management of investments is targeted at making
the most out of the market situation, especially when the markets are on the upward movement.
Active management of mutual funds involves fund managers juggling across various debt or
equity instruments in pursuit of making good profits. However, this is beneficial when the
markets are fluctuating. This needs an immense understanding of the markets and its advisable
that new investors with minimal to no market knowledge stay away from actively managing
their investments. Fund managers are used to actively managing investments, and they have a
team of experts whose work is to forecast and suggest the possible actions that may benefit the
investors. The team of experts and fund managers will forecast and take decisions accordingly.

>>> ADVANTAGES OF ACTIVE INVESTING

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 - Potential to obtain better than average market performance
o A good fund manager may be able to achieve better than the market returns over a medium to
long period of time. This could be due to the fund management team’s skill and experience in
their investment sector.
o An active fund manager can make changes to the fund’s investments to manage market events,
such as a market crash.

- Good for niche or complex markets and sectors

If you wish to invest into complex investments or sectors (for example, Latin America),
accessing an active fund manager may be prudent. This is particularly useful in under-
researched markets where on the ground presence and understanding of the market will give
clear advantages over a passive counterpart.

- Research into the underlying investments

An active fund will have a team of people working to obtain research and data regarding the
fund’s holdings. They will also be analysing new companies to invest in as well as monitoring
existing investments to ensure they remain suitable. For example, they may speak with the
directors of a company before investing, which could give them more insight than a typical
investor.

Ø WHAT IS PASSIVE INVESTING

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The essence of passive investing is a long-term approach in which investors don't trade much.

The idea is to not incur massive trading costs as they kill investment returns. The idea to copy
an index or some other portfolio and earn the same return as that and incur minimum tracking
errors.

- Rationale for Passive Investment

a) The first boost for this approach came during the late 60’s and early 70’s when numerous
papers were written on the subject of market efficiency. One rationale that emerged was that
no market participant in an efficient market can have consistent information edge which could
produce more returns for the investor and hence consistently beating the market is not possible.

b) In the long run the average investor will have average returns before costs equal to the market
average so it makes sense to minimize the costs which is best done through passive investing.

c) A buy and hold strategy is also tax-efficient meaning that long term gains are taxed at a
lower rate than short term gains. This is true in most countries including India where long term
gains attract a lower tax rate.

d) Lastly, passive funds are much cheaper in that they attract less management fees as for the
most part there is no manager actively managing the fund and also very less research costs are
incurred for this type of investment.

- Main Types of Products/Strategies

The two main types of passive investing strategies in India (and elsewhere) are Index funds
and Exchange traded funds.

Let us have a look at both:

• INDEX FUNDS

As the name suggests, index funds refer to funds or portfolios made up of an index. It is
essentially a mutual fund which is made up of stocks similar to that of a popular index.
Not only the stocks but weightage of fund in a specific stock is similar to that of the index.

For better understanding consider the example of SBI NIFTY INDEX FUND. It was launched
in 2002 and replicates the popular Indian benchmark NIFTY50. It is in essence a mutual fund
30
 made up of NIFTY50. This is what index funds mean. Index funds offer diversification benefits
at low cost.

IDBI Principal was the first AMC to launch an index mutual fund tracking Nifty in India. The
scheme later became the Principal Nifty 100 Equal-Weight fund. Benchmark AMC was the
first to launch Nifty bees – an index exchange-traded fund (ETF) tracking the Nifty 50.
Benchmark was later acquired by Goldman Sachs India which was acquired by Reliance
mutual fund which was acquired by Nippon.

• Exchange Traded Funds(ETFs)

Exchange traded Funds or ETFs can be thought of as a hybrid of mutual funds and stocks. Like
mutual funds they also represent ownership in pooled assets. Like stocks ETFs can be traded
on exchanges just like a stock during market hours and it’s price fluctuate based on supply and
demand. ETFs like index funds are also made up of indexes but ETFs have added
advantages because they can be traded like stocks. ETFs can be lent, shorted, margined just
like stocks and hence ETFs provide greater liquidity. Thus, overall ETFs are more flexible and
more preferred by investors for these above listed reason

- Main Differences between Index funds and ETFs

Index funds Exchange-traded funds

End of the day NAV. Real-time pricing. Can be bought and sold anytime.

No issue of spreads because execution happens at the end You might see wide spreads in certain ETFs and during
of the day. market volatility.

31
 Certain ETFs don’t trade much, and underlying liquidity
Liquidity isn’t an issue and can be managed.
of stocks can impact APs and market-making

Can create SIPs. Can be possible with some brokers.

You have to pay a brokerage & other charges & taxes

Expense ratio is all-inclusive—no additional charges.
separately.

Not possible to have tactical strategies. Less flexible With ETFs since you can buy & sell anytime, you can
compared to ETFs. express tactical views. ETFs are much more flexible.

Index funds tend to hold more cash and hence have a ETFs don’t hold much cash and hence have a lower
slightly higher tracking error. tracking error.

Lesser choice at-least as of now. But AMCs are Pretty much all of the smart-beta products are ETFs. You
launching a fund of funds for ETFs. have a wider choice.

Ø Growth trend of assets under management (AUM) for passive investing schemes
in India

As per the latest available data i.e., as of March 2021 passive funds make up 9.84% of the
total asset under management in India which was less than 4% in 2016 as per data available
from SEBI and other data providing sites.

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 SOURCE – Association of Mutual Funds in India (AMFI)

The graph shows the stellar growth of investments in passive funds from just 23,047 crores
INR in 2016 to 3.09 lakh crores INR in 2021. This shows interest towards passive funds in
India.

• Share of various Passive products in Assets under Management

One more fact to observe is the dominance of exchange traded funds over index funds. Out of
the 3.09 lakh crores asset under management approximately 2.92 lakh crores are invested in
ETFs and just the remaining fund of 19,000 crores is invested in index funds.

SOURCE – AMFI

33
The above graph shows that almost the entire passive investing market is investments
made in Exchange traded funds (94% share). The simple reason behind this is the benefit
provided by exchange traded funds (ETFs) over index funds. Exchange traded funds are
similar to index funds in all aspects except that exchange traded funds can be traded on stock
exchanges during market hours just like stocks and their prices fluctuate based on that which
provides more liquidity and better price discovery. Index funds are nothing but mutual funds
made up of some combination of stocks such that they contain similar stock to that of some
popular index like NIFTY50. Index funds cannot be traded during market hours.

As a result, Exchange traded funds dominate the passive funds market.

• Types of ETFs and its share of total ETFs

Within ETFs there are mainly two types in India: GOLD ETFs and Equity ETFs.

- GOLD ETFs

It is a commodity based mutual fund product that invests in assets like gold. It can be traded
on exchanges like a stock. The price of gold ETFs is based on the price of actual gold in the
market. When one sells these assets, the price of gold on that day is realized in cash. Thus, it
can be thought of gold in dematerialized or paper form rather than holding physical gold
though its price is just the same as physical gold.

- Equity ETFs

Equity ETFs like equity mutual funds are pooled investments in equity of companies. Equity
ETFs differ from equity mutual funds in that they can be traded like a stock exchange which
is not possible with an equity mutual fund. Thus, equity ETFs are a hybrid of stocks and
mutual funds.

These funds are made up of stocks similar to that of indexes like BSE SENSEX, BANK
NIFTY, etc. This is what make ETFs passive because in most cases there is no fund manager
selecting stocks based on his/her skills (which happens in active investing), the only job here
is to copy the index so it is a type of passive investing.

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 >> Gold Vs Equity ETFs Total Assets Under Management for ETFs over the years

SOURCE – SEBI HANDBOOK OF STATISTICS AND AMFI

The graph shows that while in the past it looked like gold ETFs were dominating the trend,
the trend started to change around 2015 when Equity ETFs took off big time. Gold ETFs in
2012 amounted to 9886 crore INR and went to 14,122 crore INR in 2021(March 2021).
While in 2012 equity ETFs asset under management were 1607 crores which went to
2,75,930 crores in 2021(March 2021). This shows that investors in India are invested
predominantly in Equity ETFs rather than gold ETFs.

One reason for this trend can be the preference of gold investors for physical gold. Whatever
might be the reason Gold ETFs does not seem to be much popular in India yet.

• Types of Investors in Passive Products

- Investors in Index Funds by Category Type

35
 SOURCE - AMFI

The graph shows bifurcation of investors in index funds by category they belong to. High Net
Worth Individuals (HNIs) are the predominant class of investors at 43% of the total
investment while retail followed by corporates at 30%, followed by retail investors at 27%.
The lowest was of banks and financial institutions at 0.48%.

- Investors in Equity ETFs by Category

SOURCE – AMFI

36
The largest investors in Equity ETFs as of 2021 were corporates accounting for a share of
92% of the aggregate, followed by High-Net-Worth Individuals at 5%, followed by banks
and retail investors at an equal share of 1.5% respectively.

- Investors in Gold ETFs by Category

SOURCE – AMFI

NOTE – HIGH NET WORTH ARE INDIVIDUALS WITH INVESTMENTS OF MORE THAN 2 LAKH INR

The predominant class in GOLD ETFs is the same as that of Equity ETFs that is corporates at
54%, followed by High-Net-Worth Individuals at 33%, followed by the retail segment at
13%.

- Analyzing all the above graphs it becomes clear that the major participants in the passive
investing space in India are corporate investors and High Net Worth Individuals (HNIs).
HNIs are individuals with more than 2 lakh INR of investments. One reason for their
dominance might be the better availability of information and market awareness. Investors
investing more than 2 lakh INR in a product probably have more awareness about the market
and will probably have more better financial knowledge than small retail investors many of
whom rely on financial advisors. Retail investors as a group are a much smaller part of the
population investing in passive funds.

37
> Graph showing % of Indian Large Cap Equities underperforming the S&P BSE 100
INDEX

SOURCE – S&P INDICES VS ACTIVE FUNDS INDIA REPORT CARD 2020

The graph above shows that on a five year performance basis 87.95% of Indian Equity Large
Cap Funds gave less return than the index S&P BSE 100.This means that the investors would
have got better returns if they had just invested in the index rather than investing in these
mutual fund schemes. Such underperformance of many active funds is one reason for the rise
of passive investing.

- All these factors working together are bringing more awareness to more investors about the
passive fund projects and thus more investments into passive funds flow as a result of that.
The growth is so robust that the largest mutual fund scheme in the Indian market is a passive
fund scheme. It is the SBI SENSEX ETF and it tracks the BSE SENSEX index. The
investments in the fund is equal to 42,827.15 crore INR as of APRIL,2021.

Thus, looking at all the data it is clear that passive funds as an investment category is
growing in India.

38
ABOUT TOPIC

In this research the aim is to look at the growth of passive investing strategy with specific
reference to India. Passive Investing is a strategy where the aim is to earn a return equal to that
of the overall market or equal a national index return like that of NIFTY50. This is in contrast
to active investing strategy where aim is to earn more return than the overall market. Active
investing strategy provides potential for higher return than the market but it has much greater
risk. The choice between active and passive depends on an investor’s awareness of the market,
risk tolerance ,experience and goal of the investor.

Passive investing is based on the rationale that one cannot have better information over other
investors in the market consistently and one cannot earn more return than the market each year.
Passive investing tries to incur minimum transaction costs and provide a consistent return year
on year.

The aim of this research is to identify growth trends in the passive investing space. The research
also tries to identify the level of awareness among investors of Surat regarding passive
investing products and their perception towards the same.

39
CHAPTER 2

LITERATURE REVIEW

40
Sivananth Ramachandran & Nilesh Saha (2020)

In their research they conclude that the Indian ETF industry has grown and matured
considerably in the past 18 years, in terms of assets, product launches, or adoption by
institutional and high net-worth investors and that the industry has also benefited from
tailwinds from the market and regulations.

Yet in other aspects they conclude that investor awareness, liquidity, and market structures,
and the industry is still nascent. Given the advantages offered by ETFs (low-cost, transparency,
and liquidity), there is considerable scope for deepening the market, increase awareness, and
improving allocations in retail portfolios.

Anu Ganti & Akash Jain (November 2018)

In their research they identify that India is beginning to awaken to the benefits of passive
investing, analogous to the U.S. markets in the 1970s. In their research they conclude that the
Indian market has the potential to mirror the impressive growth seen in the U.S of passive
investing products, as the market dynamics are similar to those observed in the U.S., along with
additional tailwinds unique to India bolstering passive growth.

Investors in India can benefit from the lessons in passive investing from developed markets
and can build wealth through transparent, systematic, and low-cost, index-linked products.

Kurian(2017)

The research concludes that growth in ETFs is very robust in India and the efforts made by
regulatory authorities is helping to increase the share of Passive investing products in the
market. Identifying limitations it concludes that Indian Investors are not very keen on ETFs
because of lack of product variability, liquidity and most importantly product awareness. As a
result of lower liquidity the bid-ask spread is higher.

Vijaya Manda & Aruna Polisetty (February 2019)

The gap in assets managed by active and passive investing styles is narrowing down with
passive funds getting ready to dominate. Penetration of ETFs is low in India because of lack of
product understanding and lengthy and uncomfortable transaction process – something which
needs to be simplified. Indians are still largely comfortable with traditional savings products

41
over investing and within the investing universe, active fund management dominates passive.
Product awareness is critical to get more investors to ETFs so as to increase liquidity and
trading volumes. Investor camps, simplified products, lower tax treatment and lower expenses
would encourage more investors to try ETFs .

Indian ETF market is too young and hardly has seen completed market cycles and hence will
take a lot of time to understand Smart Beta ETF and Active Factor ETFs. ETF regulations
will get strengthen over time as experience comes in.

Kuriyan , Chakraborty & Harin(2018)

The asset management industry in India is poised to go through much change in the coming
years. India is one of the fastest growing economies today and rising levels of wealth and
income will see people looking for newer avenues of investment, away from traditional fixed-
tenure bank deposits. Asset management companies will come up with innovative product
bundles that cater to the varied needs of customers and the demand for higher returns.

With the alignment of multiple factors in its favour and numerous opportunities for growth
ahead, India’s asset management industry is poised for exceptional growth.

Goyal Alok, Joshi Amit (2011)

The paper was based on performance of Gold ETFs in India. The aim of the study was to study
the financial performance, variations and analyse the risk behaviour of the selected Gold ETFs
in comparison of ETFs. The result indicated that trading in gold ETFs is increasing over the
time as the gold prices are touching new high.

It is also evident from the study that the process of ETFs has less variation than the Index of
NSE hence the investments in Gold ETFs is increasing over the time period.

Tiwari Madhu (2013)

The study concludes that ETFs are a better option as compared to traditional mutual funds
because of low cost, passive management, diversification etc. The main reason of the
popularity of ETFs can be attributed to its lower fees. Further she stated that ETFs allow long
term investors to diversify their portfolio easily.

42
The study also highlights the slower pace of growth in passive products as compared to the US
and attributes it in part to distributors not getting commissions to promote passive strategy
products.

Tandon Kamini & Malhotra Nidhi (2013)

The study states that even after two decades of the launch of passive fund products ,India is
still at a nascent stage as far as growth in passive funds is concerned. But with the liberalization
of pension funds and banking sector, allowing them to invest a portion of their assets in equity
market, passive funds may prove to be a good avenue for such investments.

In their study the researchers compared the performance of private sector and public sector
Index mutual funds in India. The results indicated that there is not much significant difference
in performance of public sector and private sector Index mutual funds.

Joelle & Miffer (2006)

In their study Joelle and Miffer show that country-specific exchange traded funds enhance
global asset allocation strategies. Because ETFs can be sold short even on a downtick, global
strategies that diversify risk across country-specific ETFs generate efficiency gains that cannot
be achieved by simply investing in a global index open or closed-end fund.

Besides, the benefits of international diversification can be achieved with country-specific

ETFs at a low cost, with a low tracking error and in a tax-efficient way. For all these reasons,
country specific ETFs may be considered as serious competitors to traditional country open
and closed-end funds.

Goyal MM (2014)

The study was based on Gold ETFs as a way of investing rather than holding physical gold.
The research stated gold as one of the best way to diversify the portfolio and to protect the
wealth of the investors. While there are many ways to invest in gold the focus of the study was
with specific reference to Gold Exchange Traded Funds(Gold ETFs).

In the paper the researcher examined the performance of Gold ETFs in India as compared to
the market indices (NSE 500), saving bank deposits, fixed deposits, PPF. The results of the

43
study showed that the return of Gold ETF was higher at a lower risk as compared to all other
investment for that period.

44
CHAPTER – 3

Research Methodology

45
NEED OF THE STUDY

• Passive investing as an investing option has 31% (as of 2020) of all the global assets
under management and it is still growing.

SOURCE – STATISTA

The given graph highlights the epic growth of passively managed funds from just 14% in 2011
to 31% as of 2020 as a share of global assets under management (AUM).

• The trend is also starting to show in India so the study will help in understanding the
growth pattern more properly.
• While growth is seen in India, awareness regarding passive products is limited so the
study can also help in creating more awareness.
• The study will help to identify investors perception towards passive investing which
will provide more insights into future potential.
• The study will also help in providing knowledge of Passive Investing to investors and
potential investors.

46
OBJECTIVES OF THE RESEARCH

• To get an idea about investor’s perception towards Passive Investing products in Surat
city.
• To get an idea about awareness of investors regarding Passive Investing in Surat city.
• To understand the trend of Passive Investing in India.

RESEARCH DESIGN

A research design is a framework or blueprint for conducting a research project. It provides

framework of research methods and techniques chosen by a researcher.

The research design used in this study is descriptive in nature. Descriptive research is a theory-
based design method which is used to describe the given data. It provides data about a particular
thing rather than providing the causes of the same. It is based on collection of data.

METHODS OF DATA COLLECTION

Data can be collected through two methods:

• Primary Method

• Secondary Method

> Primary method uses first-hand data i.e. it is data that the researcher himself/herself collects
for the purpose of the study. Examples are telephonic interview, survey questionnaire, etc.

> Secondary data is data that has already been collected by someone else earlier and hence the
researcher can directly use the data for his/her study. Examples are research paper data, data
available on sites likes SEBI, etc.

This study makes use of both primary and secondary data.

SAMPLING PLAN

i. Population : People living in Surat city

ii. Sample Frame : Investors and Potential investors living in Surat city.

47
 iii. Sampling Size : The data from 113 investors and potential investors was
collected randomly.

iv. Sampling Technique : The data was collected with the help of a questionnaire
survey through the method of simple random sampling.

v. Sampling Area : Surat City

LIMITATIONS OF THE STUDY

a) Just collecting data from few investors might not give an idea about the whole
population correctly.

b) Proper awareness regarding markets might not be there in the respondents which can
make the data results biased.

c) At the national level the findings might not hold as investors in Surat are just a small
subset when compared to all the investors in the country.

RESEARCH GAP

§ No research is done regarding the perception of investors in Surat towards Passive

Investing.

§ Lack of awareness regarding passive investing even as a topic is very high, maybe due
to less financial awareness and knowledge in many investors.

FUTURE SCOPE OF THE STUDY

§ Further study comparing both active and passive investing growth trends in India can
be carried out.

§ Study identifying investor awareness towards various types of investment products

available in the market can be carried out.

§ Study covering a larger time frame and a greater geographical area can also be carried
out.

48
CHAPTER 4

DATA ANALYSIS

49
* Analysing perception and awareness of investors and potential investors
in Surat City towards Passive Investing Products

- Age of the Respondents

Interpretation :

50% of the respondents had age between 25 and 45,30% had age between 16-25 while 20%
of the respondents were above 45.

- Gender of the Respondents

50
Interpretation:

68% of the respondents were male while 32% were female.

- Level of Education of the Respondents

68% of the respondents were graduate , 18% were post graduates while 14% had only higher
secondary education.

- Question :

Have you ever heard of Passive Investing or Passive Funds before?

51
Interpretation:

55% of the respondents answered yes that they have heard of passive Investing before.37% of
the respondents say that they have never heard of passive funds or investing before and 8%
say they may have heard about it but are not sure.

- Question :

Are you aware or have you ever heard about any of the products listed below?

Interpretation:

32% of the respondents said that they do not have any awareness about the given products
while 31% said they know what are index funds. 25% respondents knew about both index
funds and ETFs while 12% knew about only Exchange traded funds. Majority of the
respondents say they do not have awareness about any of the two products.

- Question:

Are you aware that you can invest in gold in India directly through one of passive
investment product and can trade it just like stocks on exchanges?

52
Interpretation:

40% say they are already aware that one can buy and trade gold directly on exchanges, while
35% say they were not aware about it but like that option and 25% say they knew about it but
prefer to buy physical gold from shop.

- Question:

Do you invest in mutual funds or have a financial advisor for selecting portfolio or
stocks ?

53
Interpretation:

70% of the respondents answered they invest in Mutual Funds and/or have a financial advisor
for selecting portfolio or stocks for them,while30% said they do not invest in mutual funds or
do not have a financial advisor.

- Question:

If you answered yes then, how much attention do you pay to the fees charged by the
mutual fund manager or your advisor?

54
Interpretation:

40% of the respondents say they sometimes check how much fees their mutual fund
distributor or their financial advisor charge,36% say they don’t care much about fees, while
24% say they always keep an eye on it. The majority of the investors say they do check the
fees charged at least sometimes.

- Question :

If you do not invest through an then, would fees charged by the mutual fund manager
or the financial advisor impact your decision to invest or where to invest (if you were to
invest in the future)?

55
Interpretation:

Out of those who did not have a fund advisor or did not invest in mutual funds,43% the fees
charged will affect their decision to invest or where to invest, while 34% said may be it will
affect their decision, while 23% said the fees will not affect their decision in any way. The
majority of the investor will take the fees charged as a factor or they say so.

- Question :

Are you aware that passive fund Managers charge less than half of the fees charged by
active fund managers?

Interpretation:

59% of the respondents say they are unaware that passive fund managers charge less than
half of the fees charged by active fund managers, while 41% say they are aware about it. The
majority of the respondents were unaware of the difference between passive and active
mutual fund managers fees.

- Question:

How important it is to you that your portfolio earn higher returns than the Benchmark
or the overall market (e.g. Nifty) or at least earn returns equal to the market?

56
65% say it is important that their individual portfolio earn more than the market return or at
least earn return according to the market return while 31% said it is the main reason they
invest while only 4% said it is not much important. The majority of the respondents want to
earn more or at least equal to the market return with their portfolio.

Question:

Do you think one can earn more returns than the market(e.g. Nifty) consistently on a
risk adjusted basis(i.e. at the same level of risk to that of Nifty or some other
benchmark)?

57
56% of the respondents believe that one can earn more returns than the overall market
consistently each year at the same level of risk as that of the market, while 44% say it is not
possible to earn more return than the market consistently. The majority think that more return
than the market can be earned consistently.

- Question:

Would you agree that it is better to just invest in Nifty or some other benchmark rather
than investing in active funds?

Interpretation:

36% of the respondents say rather than investing in some broad market index, they will earn
more return if they invest in active funds or select their stock through stock selection
skills,35% say it is better to invest in some passive index rather than investing in active funds
while 25% say that it depends on the market. Majority of the respondents believe it is better
to invest actively through which they believe they can earn more returns.

- Question

Do you know that 87.95% of Indian large cap funds earned less return the S&P BSE
100 index on a risk adjusted basis (5-year return performance)? *Data as of Dec
31,2020?

58
Interpretation:

70% of the respondents say that they are not aware that 87.95% of the large cap funds in
India earned return less than the BSE 100 index in 2020.It means that they would have earned
more if they had invested in the BSE 100 index rather than investing in these active large cap
funds, while 30% said they were aware of this data.

- Question :

Given you are provided more data would you in the future invest in passive funds or
allocate a portion of your portfolio to passive funds?

Interpretation:

59
35% of the respondents say that given they are provided more data maybe they will allocate a
portion of their portfolio to passive funds while 33% say yes they will do it as it seems like a
good option while 32% say no they will not allocate a portion their portfolio to passive funds
as they believe they can earn more return by investing solely in active funds. Thus ,the
majority are not sure whether they will allocate a portion to passive funds or not.

Question:

Overall, how would you rate passive investing as an investment option on a scale of 1 to
5(1 being an extremely good option and 5 being not at all preferable) ?

Interpretation:

Majority of the respondents say that will give it a rating of 3 on a scale of 1 to 5 where ,1 is
the highest rating while 5 being the lowest.11 respondents gave it a rating of 1 meaning most
preferable while 6 gave it a rating of 5 meaning not preferable at all.19 gave it a rating of 4.It
seems that majority of the respondents do not prefer passive investing much but would
probably consider investing in it given they are provided more data about passive investing
products.

60
CHAPTER 5

DISCUSSION

61
SUMMARY OF RESEARCH FINDINGS

• The data showed that passive fund investing is growing very rapidly in India and the
pace was even faster in the past year.

• Passive investing share of global assets under management worldwide grew to 31%
in 2020.

• Out of the 3.10 lakh crore asset under management allotted to passive funds most of
it is invested in equity side funds rather than gold funds.

• The largest group of investors in passive fund products are institutional investors and
retail participation is not very high in these funds.

• The research shows that most of the actively managed large cap funds
underperformed i.e., earned less return than the S&P BSE 100 INDEX.

• Most of the respondents said that they do not have any awareness about passive
investing products.

• The respondents were not aware that passive fund managers charge less than half of
the fees charged by active fund managers.

• The respondents also said that they only checked the fees charged by their fund
manager or advisor only sometimes and some said they do not care much about the
fees charged.

• 65% of the respondents say it is important for them that their fund manager earn
more return than the overall market.

• Most of the respondents think that it is possible to earn more return at the same level
of risk than the overall market on a consistent basis.

• Most respondents say that it is better to invest in active funds or to invest in the
market actively rather than investing in passive fund products as they believe they
can earn more return this way through stock selection skills.

62
 • 70% of the respondents were unaware that most active funds failed to earn more
returns than the Indian INDEX BSE 100.

• 35% of the respondents say that they will consider investing in passive funds given
they are provided more dta,33% say that they will invest in passive funds as it is a
good option while 32% say that they will not invest in passive funds and prefer
investment in active funds such as active mutual funds.

CONCLUSION

The aim of this study was to study “PASSIVE INVESTING IN INDIA”. The study shows
that during the past few years passive fund investments in India grew rapidly and continues to
grow. While the growth is robust it seems that retail participation here is less and major
players are institutional investors. One clear conclusion that can be reached is that while
growth in these funds is good, awareness among common investors in these products is less.
From the survey it seems that awareness in investors of Surat city is also less regarding these
products. Investors who invest in mutual funds or take the help of a financial advisor do not
pay much attention to the fees they charge for managing the funds and hence have less
awareness about the fee structure. The passive investing market will grow rapidly in the
coming years and along with it, it can be expected that more investors will become aware and
acquire knowledge of these funds.

63
BIBLIOGRAPHY

WEBSITES:

https://www.investopedia.com

https://www.wikipedia.org

https://economictimes.indiatimes.com

https://www.spglobal.com/spdji/en/spiva/#/

https://www.nseindia.com

REFRENCES FOR LITERATURE REVIEW

• Goyal Alok & Joshi Amit (2011), “Performance appraisal of gold ETFs
in India”.

• Joelle, Miffer (2006), “Country-Specific ETFs: An Efficient Approach to

Global Asset Allocation”, working paper, Cass Business School, City
University.

• Goyal MM (2014), “Accelerating Growth of Gold ETFs in India”,

Journal of research in Commerce, Economics, and Management.

• Tandon Kamini, Malhotra Nidhi “Relative performance of Index funds:

Empirical evidence from India “, Edge Academic Review.

64
• Tiwari Madhu (2013), “A study on Exchange Traded Funds (ETF):
Gaining Popularity in Indian Capital Market”, Journal of Financial
Management.

• Sivanath Ramachandra and Nilesh Saha (2020),” “A report on the Indian

Exchange Traded Funds (ETFs) Industry”, CFA Institute India Working
Paper.

• Kurian Chakraborty and Harin (2018), “Overview of Asset Management

Industry in India”, Standalone Paper.

• Vijay Manda and Aruna Polisetty (2019)’ “Growth and Development of

Exchange Traded Funds in India”, Conference Paper, International
Journal of Advance and Innovative Research.

• Kurian, B. C. (2017, June). Performance of Exchange Traded Funds in

India. International Journal of Scientific Engineering and Research
(IJSER), 24-31.

• Bessler, W., & Hockmann, H. (2016). The Growth and Changing Role of
Passive Investments: A Critical Perspective on Index.

65
 APPENDICES

1. Name

2. Age

3. Gender

Female

Male

Prefer not

4. Level of Education

Higher
Secondary

Graduate/Diploma Equivalent

Post- Graduate

5. Occupation

Business

Job/Service

Student

Retired

Other

6. Have you ever heard of Passive Investing option before?

66
 Yes

No

Maybe

7. Are you aware or have you ever heard about any of the Passive products listed below?

Exchange Traded Funds

Index Funds

None of the products

Both

8. Are you aware that you can invest in gold in India directly through one of passive
investment product and can trade it just like stocks on exchanges?

Yes, it is a very good way to invest in gold

Yes, but I prefer to buy physical gold from shops

No I was not aware ,but I like that option

No I was not aware, but don't like the option

9. Do you invest in mutual funds or have a financial advisor for selecting portfolio or
stocks ?

10. If you answered yes then, how much attention do you pay to the fees charged by the
mutual fund manager or your advisor?

I always keep an eye on it

Don't care much

I check it sometimes

67
11. If you do not invest through an then, would fees charged by the mutual fund manager
or the financial advisor impact your decision to invest (if you were to invest in the
future)?

Yes

No

Maybe

12. Are you aware that passive fund Managers charge less than half of the fees charged by
active fund managers?

Yes

No

13. How important it is to you that your portfolio earn higher returns than the Benchmark
or t overall market (e.g. Nifty) or at least earn returns equal to the market?

Main reason to invest

Important

Not much important

14. Do you think one can earn more returns than the market(e.g. Nifty) consistently on a
risk adjusted basis(i.e. at the same level of risk to that of Nifty or some other
benchmark)?

15. Would you agree that the market share price of a company always reflects it's fair
value ?

Strongly disagree

Disagree

Neutral

68
 Agree

Strongly agree

16. Would you agree that it is better to just invest in Nifty or some other benchmark rather
the investing in active funds?

Yes, it is better

No, one can earn more returns than the overall market consistently

Maybe ,depends on the market condition

17. Do you know that 84.34% of Indian large cap funds earned less return than their
benchmark that is the S&P BSE 100 on a risk adjusted basis (5-year return
performance)? *Data as of Dec 31,2020

Yes

No

18. Given you are provided more data would you in the future invest in passive funds or
allocate a portion of your portfolio to passive funds?

Yes, I think it is a good option

No, I think an active portfolio can earn more return through selection skills

Maybe

19. Overall, how would you rate passive investing as an investment option on a scale of 1
to 5( being an extremely good option and 5 being not at all preferable)?

1 2 3 4 5

Extremely Good Option Not at all Preferable

69