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Understanding ETFs Uses, Returns and Comparison with Mutual Funds and Stocks

 Exchange-Traded Funds (ETFs) have gained popularity among investors for their unique features and benefits. In this blog, we'll explore the uses of ETFs, their potential returns, how they differ from mutual funds and stock investments, and their safety profile. What is an ETF? An ETF is a type of investment fund that trades on stock exchanges, much like individual stocks. It holds a collection of assets, such as stocks, bonds, or commodities, and aims to track the performance of a specific index, sector, or asset class. Uses of ETFs Diversification : ETFs allow investors to gain exposure to a wide range of assets without having to purchase each individually. For instance, an ETF tracking the S&P 500 gives you exposure to 500 different stocks, reducing the risk associated with individual stock investments. Cost Efficiency : ETFs often have lower expense ratios compared to mutual funds. They typically pass on lower management costs to investors since they are often passively man
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RISK IN BANKING - PART 2


Risk in Banking - Part 1

 Types of Interest Rate Risk - 


 Gap or Mismatch Risks - Mismatch in amounts, maturities, repricing dates.

 Basis Risk - Due to Interest Rate changes by different magnitudes on assets and liabilities.

 Yield Curve Risk - Due to non parallel movement of interest rates.

 Embedded Option Risk - Due to premature withdrawal and prepayment of loans.

 Reinvestment Risks - Due to mismatch in future cash flows.

 Net Interest Position Risk - Due to position in different in repricing buckets.

 Liquidity Risk - Inability to meet cash outflow.

  • Funding Risk - Net outflows due to unanticipated withdrawals
  • Time Risk - Non receipt of expected inflows (NPA)
  • Call Risk - Crystallization of contingent liabilities
BASEL  III-(Aimed to control risk)

BASEL I - 1988 - An agreement to foster international convergence of capital measurement and capital standard.
BASEL II - 2004 - Accommodate diversified global banking practices. It covers credit risk operational risk along with Basel I - creditors market risk

International financial organizations such as IMF(International Monitory Fund) and world bank group use Basel standard as a benchmark of good banking regulation.

Why Basel III ?
  • Financial crisis due to inadequate bank  regulation.
  • Improvement of capital standard.
  • New global minimum liquidity stands.  
Components of Basel III
  • Common Equity Tier 1(CE Tier 1) capital must be at least 8.5% RWAs for credit risk and market risk and operational risk on an ongoing basis.
  • Tier 1 capital must be at least 7 % of RWAs on an ongoing basis.
  • Total capital (Tier 1 capital plus Tier 2 capital) must be at least 9% of RWAs on an ongoing basis. Thus within the minimum CRAR of 9%, tier 2 capital can be admitted maximum up to    2%  .
  • In Basel 3, The Tier 1 is divided into common equity Tier 1 and additional Tier 1 and such a distinction is not made in Basel II.
  • Introduced Capital Conservation Buffer - when buffer have been drawn down , one way banks should look to rebuild them is through reducing discretionary distributions of earnings. This could include not paying dividend payments, staff bonus, incentives and increase in salary structure.
  • Basel I comes under RBI
  • Basel II comes under RBI
  • Basel III comes under SEBI
  • IRRBB - Interest Rate Risk in the banking book.
  • Credit Concentration Risk - If banks advance is concentrated say on Iron and Steel sector.
  • Liquidity Risk  - Pillar do not talk about it.
  • Settlement Risk - Failure of counter party bank.
  • Reputation Risk - If affects the bank indirectly through credit, market and/or operational risk.
  • Strategic Risk - Failure of strategies in making profit.


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