On this page, we have uploaded the Gauhati University Micro-finance B.COM 4th Semester, Unit 4 "Management of MFIs" Notes, Which can Be Useful for B.com Final Exams.
Also useful for Dibrugarh University, Rabindranath Tagore University, Hojai B.Com 4th Sem Students.
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UNIT-4
MANAGEMENT OF MFIs
Short Question Answer :
1. What is Fund Management?
Ans: Fund Management is the process in which a company that takes the financial assets of a person, company or another fund management company (generally this will be high net worth individuals) and use the funds to invest in companies that use those as an operational investment, financial investment or any other investment in order to grow the fund; post which, the returns will be returned to the actual investor and a small amount of the returns are held back as a profit for the fund. Fund management is associated with managing the cash flows of a financial institution. The responsibility of the fund manager is to assess the maturity schedules of the deposits received and loans given to maintain the asset-liability framework. Since the flow of money is continuous and dynamic, it is of critical importance that asset-liability mismatch can be prevented. It is essential for the financial health of the entire banking industry is dependent, which in turn has an impact on the overall economy of the country.
2. Mention the Types of Fund Management?
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3. Who is a Fund Manager?
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4. Give two Responsibilities of the Fund Manager?
Ans: The fund manager is the heart of the entire investment management industry responsible for investing and divesting of the investments of the client. The responsibilities of the fund manager are as below:
I-Asset Allocation: The class of asset allocations can be debated, but the standard divisions are Bonds, Stocks, Real estates, and Commodities. The type of assets exhibits market dynamics and a variety of interaction effects, which allocate money amongst various asset classes leading to a significant impact on the targeted performance of the fund.
II- Long-term Returns: It is essential to study the proofs of the long-term returns against various assets and holding period returns (returns accruing on average over multiple lengths of investment). For example, investments spread across a very long maturity period (more than ten years) have observed equities generating higher returns than bonds and bonds, generating greater returns than cash. This is due to equities being more risky and volatile than bonds, which are more dangerous than money.
5. Give two Fund Management Styles?
Ans: I-Growth Style: The managers using this style have a lot of emphasis on the current and future Corporate Earnings. They are even prepared to pay a premium on securities having strong growth potential. The growth stocks are generally the cash-cows and are expected to be sold at prices in the northern direction.
I- Growth at Reasonable Price: The Growth at Reasonable Price style will use a blend of Growth and Value investing for constructing the portfolio. This portfolio will usually include a restricted number of aid from investors in a similar position. Generally, the investor will permit a fund manager to handle a limited fund for a specified period to assess and measure the success in proportion to the growth of the investment property. Fund management uses its means of making decisions with 'Portfolio Theory' applicable to various investment situations. A fund manager can also use multiple such theories for managing a fund, especially if the fund includes multiple types of investments. The managers are paid a fee for their work, which is a percentage of the overall 'Assets under Management.'
4. Give two Responsibilities of the Fund Manager?
Ans: The fund manager is the heart of the entire investment management industry responsible for investing and divesting of the investments of the client. The responsibilities of the fund manager are as below:
I-Asset Allocation: The class of asset allocations can be debated, but the standard divisions are Bonds, Stocks, Real estates, and Commodities. The type of assets exhibits market dynamics and a variety of interaction effects, which allocate money amongst various asset classes leading to a significant impact on the targeted performance of the fund.
II-Long-term Returns: It is essential to study the proofs of the long-term returns against various assets and holding period returns (returns accruing on average over multiple lengths of investment). For example, investments spread across a very long maturity period (more than ten years) have observed equities generating higher returns than bonds and bonds, generating greater returns than cash. This is due to equities being more risky and volatile than bonds, which are more dangerous than money.
5. Give two Fund Management Styles?
Ans: I-Growth Style: The managers using this style have a lot of emphasis on the current and future Corporate Earnings. They are even prepared to pay a premium on securities having strong growth potential. The growth stocks are generally the cash-cows and are expected to be sold at prices in the northern direction.
I - Growth at Reasonable Price: The Growth at Reasonable Price style will use a blend of Growth and Value investing for constructing the portfolio. This portfolio will usually include a restricted number of securities that are showing consistent performance. The sector constituents of such portfolios could be slightly different from that of the benchmark index to take advantage of growth prospects from these selected sectors since their ability can be maximized under specific conditions.
6. Give two Importance of Fund Management?
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7. How to Choose a Reliable Fund Manager?
Ans: Fund Management is a complex process involving a lot of financial knowledge and research. This is why you should choose a reliable and experienced fund manager while selecting a mutual fund. Some factor to look into while looking at a fund manager are:
• Experience in the industry
• Rankings of the managers by credible bodies
• Past track-records of the funds they are actively managing.
8. What Is Investment Management?
Ans: Investment management refers to the handling of financial assets and other investments-not only buying and selling them. Management includes devising a short- or long-term strategy for acquiring and disposing of portfolio holdings. It can also include banking, budgeting, and tax services and duties, as well. The term most often refers to managing the holdings within an investment portfolio, and the trading of them to achieve a specific investment objective. Investment management is also known as money management, portfolio management, or wealth management.
9. Define The Basics of Investment Management?
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10. How to run an Investment Management Firm?
Ans: Running an investment management business involves many responsibilities. The firm must hire professional managers to deal, market, settle, and prepare reports for clients. Other duties include conducting internal audits and researching individual assets-or asset classes and industrial sectors. Aside from hiring marketers and training managers who direct the flow of investments, those who head investment management firms must ensure they move within legislative and regulatory constraints, examine internal systems and controls, account for cash flow and properly track record transactions and fund valuations.
11. Give an Example of Investment Management?
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12. What Is a Money Manager?
Ans: A money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor. Typically, a money manager employs people with various expertise ranging from research and selection of investment options to monitoring the assets and deciding when to sell them. In return for a fee, the money manager has the fiduciary duty to choose and manage investments prudently for clients, including developing an appropriate investment strategy and buying and selling securities to meet those goals. A money manager may also be known as a "portfolio manager," "asset manager," or "investment manager."
13. Give the Reasons to Use a Money Manager?
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14. Define Fiduciary?
Ans: A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interests. A fiduciary may be responsible for general well-being of another (e.g. a child's legal guardian), but often the task involves finances managing the assets of another person, or of a group of people, for example. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility.
15. Discuss the Relationship Between Trustee & Beneficiary?
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16. Give the duties of Board Members & Shareholders?
Ans: (a) The Duty of Care: Duty of care applies to the way the board makes decisions that affect the future of the business. The board has the duty to fully investigate all possible decisions and how they may impact the business; If the board is voting to elect a new CEO, for example, the decision should not be made based solely on the board's knowledge or opinion of one possible candidate; it is the board's responsibility to investigate all viable applicants to ensure the best person for the job is chosen.
(b) The Duty to Act in Good Faith: Even after it reasonably investigates all the options before it, the board has the responsibility to choose the option it believes best serves the interests of the business and its shareholders.
17. Define the Fiduciary Relationship Between Executor & Legatee?
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18. Define the Fiduciary Relationship Between Guardian & Ward?
Ans: Under a guardian/ward relationship, legal guardianship of a minor is transferred to an appointed adult. As the fiduciary, the guardian is tasked with ensuring the minor child or ward has appropriate care, which can include deciding where the minor attends school, that the minor has suitable medical care, that they are disciplined in a reasonable manner, and that their daily welfare remains intact. A guardian is appointed by the state court when the natural guardian of a minor child is not able to care for the child any longer. In most states, a guardian/ward relationship remains intact until the minor child reaches the age of majority.
19. Define the Risks of Being a Fiduciary?
Ans: The possibility of a trustee/agent who is not optimally performing in the beneficiary's best interests is referred to as "fiduciary risk." This does not necessarily mean that the trustee is using the beneficiary's resources for his/her own benefit; this could be the risk that the trustee is not achieving the best value for the beneficiary. For example, a situation where a fund manager (agent) is making more trades than necessary for a client's portfolio is a source of fiduciary risk because the fund manager is slowly eroding the client's gains by incurring higher transaction costs than are needed. In contrast, a situation in which an individual or entity who is legally appointed to manage another party's assets uses their power in an unethical or illegal fashion to benefit financially, or serve their self-interest in some other way, is called "fiduciary abuse" or "fiduciary fraud.”
20. Explain two Investment Fiduciary Guidelines.
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21. Mention two Types of risks faced by Microfinance Institutions?
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22. Mention two reasons for delinquencies observed in MFIs ?
Ans: (a) Poor MIS: MIS on loan outstanding, collection, etc plays a critical role in generating reports and making them available in minimum time to the right people. If an MFI does not have a good MIS, it may not know how much to collect, it may not know its overdue or age-wise overdue. A weak reporting system on overdue will result in delayed input on overdue to the top management and consequently result in delayed action by the top management. Sometimes weak MIS also results in the generation of the inaccurate reports. If the correct and timely information is not generated and report the problem cannot be dealt with resulting in delinquencies getting aggravated.
(b) Poor screening of borrowers: Poor choice of clients results in delinquencies. If a client with a bad reputation or history of defaults are selected then it can result in delinquencies.
23. Give two Impact of Delinquencies?
Ans: Delinquencies adversely affect MFI in many ways. We will see how delinquencies can result in a multi-dimensional effect for an MFI.
(a) Loss of portfolio for the MFI - the major impact of delinquency is the loss of portfolio. The money given to a client by the MFI is lost if the client defaults. MFI lends to clients and interests along with the principal. However, default by the client can result in even the principal getting lost.
(b) Loss of interest income if a client does not repay its loan then the MFI loses interest income as well. Interest is the main source of income for an MFI and loss of it directly impacts its profitability and sustainability.
24. Define Impact Assessment?
Ans: Impact assessment (IA) is a structured a process for considering the implications, for people and their environment, of proposed actions while there is still an opportunity to modify (or even,if appropriate, abandon) the proposals. It is applied at all levels of decision-making, from policies to specific projects. The process of IA benefits proponents, stakeholders and local communities, and decision- makers. Although impact assessment has been criticised since its introduction for being a technocratic tool, based on rational decision- making models, contemporary guidelines and principles for IA practice tend to emphasise a participatory, inclusive approach, which recognises different types of knowledge, and the importance of representing the views of different groups in society, regardless of their economic and political status. Environmental and social justice, and distributional considerations, are important guiding principles of impact assessment.
25. Define Microeconometric-level econometrics?
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Long Question Answer :
1. Explain the Responsibilities of the Fund Manager?
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2. Explain the Fund Management Styles?
Ans: I-Growth Style: The managers using this style have a lot of emphasis on the current and future Corporate Earnings. They are even prepared to pay a premium on securities having strong growth potential. The growth stocks are generally the cash-cows and are expected to be sold at prices in the northern direction. Growth managers select companies having a strong competitive edge in their respective sectors. A high level of retained earnings is the expectation for such scripts to be successful as it makes the Balance Sheet of the firm very strong to attract investors. This can be coupled with a limited dividend distributed and low debt on the books, making it a definite pick by the managers. The scripts which are part of such a style will have a relatively high turnover rate since as they are frequently traded in large quantities. The returns on the portfolio are made up of Capital gains resulting from stock trades.
II- Growth at Reasonable Price: The Growth at Reasonable Price style will use a blend of Growth and Value investing for constructing the portfolio. This portfolio will usually include a restricted number of securities that are showing consistent performance. The sector constituents of such portfolios could be slightly different from that of the benchmark index to take advantage of growth prospects from these selected sectors since their ability can be maximized under specific conditions.
III- Value Style: Managers following such a response will thrive on bargaining situations and offers. They are on the hunt for securities that are undervalued about their expected returns. Securities could be undervalued even because they do not hold preference with the investors for multiple reasons. The managers generally purchase the equities at low prices and tend to hold them till they reach their peak, depending on the time frame expected, and hence the portfolio mix will also stay stable. The value system performs at its peak during the bearish situation, although managers do take the benefits in conditions of a bullish market. The objective is to extract the maximum benefit before it reaches its peak.
IV - Fundamental Style: This is the basic and one of the most defensive styles which aim to match the returns of the benchmark index by replicating its sector breakdown and capitalization. The managers will strive to add value to the existing portfolio. Such styles are generally adopted by mutual funds to maintain a cautious approach since many retail investors with limited investments expect a necessary return on their overall investment. Portfolios managed according to this style are highly diversified and contains a large number of securities. Capital gains are made by underweighting or overweighting specific securities or sectors, with the differences being regularly monitored.
V - Quantitative Style: The managers using such a style rely on computer-based models that track the trends of price and profitability for identification of securities offering higher than market returns. Only necessary data and objective criteria of protection are taken into consideration, and no quantitative analysis of the issuer companies or its sectors are carried out.
3. Write a Short Notes on:
(i) Credit Risk: DOWNLOAD PDF FOR COMPLETE SOLUTION
(ii) Operational Risk: Operational risk relates to the risks emanating from the failure of internal systems, processes, technology and humans or from external factors such as natural disasters, fires, etc. Basel Committee on Banking Supervision defines operational risk as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events". Earlier, any risk, which was not categorized, as credit risk or market risk was considered to be operational. However, this was a vague definition of operational risk. As per the new definition strategic risk is not considered under Operational risk. Operational risk has gained a lot of importance over the years with the increased use of technology and also recognition of the importance of human resources in the success or failure of enterprises. Another facet of operational risk is that it cuts across all departments, as human resources and technology are central to all departments. Technological interventions are now something very perceptible in all walks of our life including in banking and finance. Today financial markets and banking have changed dramatically with a lot of reliance on technologies such as ATM, e- banking, telebanking, credit cards, etc. Secondly, over the years industries across the world have recognized the importance of human resources. Human Resource departments within enterprises have gained a lot of importance. Companies now believe in investing g in employees, their capacity building, employee retention, benefits and perks. Salaries and other benefits in India have risen dramatically in the last decade. This clearly shows that human resource is getting due recognition and importance that it commands. To this larger change, the micro-finance industry is no exception. Micro-finance has seen its own share of technological advancement. From the use of computers for simple desk jobs to the use of advanced software, the introduction of swipe cards and biometric MFIs have witnessed changes in IT usage. Strong internal processes, systems, good human resources and preparedness against external events are needed for managing the operational risk. Operational risk is enhanced by increased dependence on technology, low human and business ethics, competition, weak internal systems, in particular weak internal controls.
(iii) Liquidity Risk: DOWNLOAD PDF FOR COMPLETE SOLUTION
(iv) Interest Rate Risk: DOWNLOAD PDF FOR COMPLETE SOLUTION
vi) Strategic Risks: DOWNLOAD PDF FOR COMPLETE SOLUTION
4. Explain the features in a organisation according to A good risk management framework?
Ans: According to it a good risk management framework in an organization should have the following features:
• MFI should have processes in its regular operations to identify measure and monitor different types of risks that an MFI is exposed to.
• Should have continuous feedback loop between identification, measure, risk and processes to manage them. In simple terms, there should be processes to identify risk and the report on this should be provided to departments managing them. Based on this feedback management will improve the process to manage risk.
• Management should consider different risk scenarios and be prepared with some solution, if the risk comes true.
• Should encourage cost-effective decision-making and more efficient use of resources
• Create an internal culture of "self-supervision" that can identify and manage risks long before they are visible to outside stakeholders or regulators.
5. Explain Some of the major reasons for delinquencies observed in MFIs?
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6. Explain some of the Impact of Delinquencies?
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8. Explain the Types of Risks faced by Microfinance Institutions?
Ans: (a) Credit Risk: Credit risk is directly related to the portfolio of the organization and is one of the most significant risks from an MFI perspective. Whenever an MFI lends to a client there is an inherent risk of money not coming back, i.e. the client turning into a defaulter, this risk is called the Credit risk. Credit risk is simply the possibility of the adverse condition in which the clients do not pay back the loan amount. Credit risk is the most common risk for MFI. The risk is of greater significance for MFIs as it has to deal with a large number of clients with limited literacy. Further, MFI provides unsecured loans, i.e. loans without any collateral. In case a client default the MFI does not have any asset to meet its loss, which makes the credit even riskier. MFIs fund their portfolio through external borrowings, through their own capital and through client savings that the MFI has mobilized. By giving a loan, an MFI also attracts risk to these sources of funds. It is therefore said that an MFI deals in public funds, acquired through banks,clients' savings, or through donors who trust the MFI to carry out its activities effectively. If an MFI loses money it may not be in a position to meet its own financial obligations to its depositors or lenders thereby becoming a defaulter itself. This results in loss of confidence of the funders and the direct financial loss for the MFI as the organization loses not only interest but also its principal amount.
(b) Operational Risk: Operational risk relates to the risks emanating from the failure of internal systems, processes, technology and humans or from external factors such as natural disasters, fires, etc. Basel Committee on Banking Supervision defines operational risk as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events". Earlier, any risk, which was not categorized, as credit risk or market risk was considered to be operational. However, this was a vague definition of operational risk. As per the new definition strategic risk is not considered under Operational risk. Operational risk has gained a lot of importance over the years with the increased use of technology and also recognition of the importance of human resources in the success or failure of enterprises. Another facet of operational risk is that it cuts across all departments, as human resources and technology are central to all departments. Technological interventions are now something very perceptible in all walks of our life including in banking and finance.
(c) Market Risk: Market risks are risks of financial nature, which occur due to fluctuations in the financial market or due to mismatch in assets and liabilities of an organization. As the MFIs become bigger in size and complex in terms of their asset and liability composition market risks become more pertinent. The assets and liabilities composition of MFIs, expose them to various kinds of market volatilities. As a result changes in market conditions, through external to MFIs, impact them either favorably or unfavorably and are therefore risks.
(d) Strategic Risks: Strategic risks are risks related to weak governance, weak leadership, poor strategic decisions as well as risks due to regulatory and administrative reasons. These are high impact risks and can adversely affect the organization for the long-term. Providing governance is the job of the Board of Directors.
Long Question Answer :
1. Explain Fund Management? Explain Briefly the types of Fund Management?
Ans: Fund Management is the process in which a company that takes the financial assets of a person, company or another fund management company (generally this will be high net worth individuals) and use the funds to invest in companies that use those as an operational investment, financial investment or any other investment in order to grow the fund; post which, the returns will be returned to the actual investor and a small amount of the returns are held back as a profit for the fund. Fund management is associated with managing the cash flows of a financial institution. The responsibility of the fund manager is to assess the maturity schedules of the deposits received and loans given to maintain the asset-liability framework. Since the flow of money is continuous and dynamic, it is of critical importance that asset-liability mismatch can be prevented. It is essential for the financial health of the entire banking industry is dependent, which in turn has an impact on the overall economy of the country.
Types of Fund Management: The kinds of Fund Management can be classified by the Investment type, Client type, or the method used for management. The various types of investments managed by fund management professionals include:
(a) Mutual Fund: A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund-derived by the aggregating performance of the underlying investments. Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.
(b) Trust Fund :- A trust fund is an estate planning tool that establishes a legal entity to hold property or assets for a person or organization. A neutral third party, called a trustee, is tasked with managing the assets. Trust funds can hold a variety of assets, such as money, real property, stocks and bonds, a business, or a combination of many different types of properties or assets. Trusts can be formed under a variety of forms and stipulations. There are three key parties that comprise a trust fund-a grantor (sets up a trust and populates it with their assets), a beneficiary (a person chosen to receive the trust fund assets), and a trustee (charged with managing the assets in the trust). The primary motivation for establishing a trust fund is for an individual-or entity to create a vehicle that sets terms for the way assets are to be held, gathered, or distributed in the future. This is the key feature that differentiates trust funds from other estate planning tools. Generally, the grantor is creating an arrangement that, for a variety of reasons, is carried out after they are no longer mentally competent or alive. The creation of a trust fund establishes a relationship where an appointed fiduciary-the trustee-acts in the sole interest of the grantor. A trust is created for a beneficiary who receives the benefits, such as assets and income, from the trust. The fund can contain nearly any asset imaginable, such as cash, stocks, bonds, property, or other types of financial assets. A single trustee this can be a person or entity, such as a trust bank-manages the fund in a manner according to the trust fund's stipulations. This usually includes some allowance for living expenses and perhaps educational expenses, such as private school or college expenses.
(c) Pension Fund:- A pension Fund is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement. In addition to an employer's required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of his current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker's annual contributions, up to a specific percentage.
2. Who is a Fund Manager? Explain the Responsibilities of the Fund Manager? Explain the Working Styles of a Fund Manager?
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3. Define Mutual Fund? Explain the Benefits of Mutual Fund? Explain the Structures of Mutual Funds?
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