EXECUTIVE SUMMARY

Asset liability

management (ALM)

is

an

overall risk

management technique

for pension funds. ALM requires the board to formulate guidelines for its strategy on contribution and indexing levels, and its attitude to risk. ALM is based on stochastic simulation and is used as a basis for decisions on the distribution of future contributions, funding, and indexing levels. Practicing ALM requires an assets and liabilities committee (ALCO). An ALCO consists of senior pension

fund management, with the chief risk officer as chairman. The committee converts the guidelines into formal proposals on the investment strategy and the contributions and indexing policies. ALM does not predict the future, but it gives insight into the possible risks a pension fund is exposed to and how to handle them. An ALM model should be as parsimonious and uncomplicated as possible. The purpose of such models is to act as a tool to help management understand what is really going on, and how to reach responsible and internally consistent decisions

INTRODUCTION TO INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with adeficit.A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

Financial System; The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation.

INTRODUCTION TO FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market The money market ifs a wholesale debt market for low-risk, highly-liquid, shortterm instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

INTRODUCTION TO FINANCIAL INSTRUMENTS

A financial instrument is a trad-able asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument. According to IAS 32 and 39, it is defined as 'any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity'. Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchange-traded

derivatives and over-the-counter (OTC) derivatives. Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorized into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

INTRODUCTION TO FINANCIAL SERVICES

The financial services sector in India has witnessed a fundamental transformation since the country was liberalized. India, in the last few years, has emerged as the one of the most rapidly growing economies across the globe. The financial services market is growing rapidly, and there is significant potential for further growth. The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market Financial Services in India - Key Drivers Indias high savings rate offers significant opportunity to put resources into the financial markets. The country has a favourable demographic profile with a large segment of the population under 30 years. The Census 2011 shows that 56.9 per cent of Indias total population comes in the age group 15 -59 years. The country will witness a sharp decline in the dependency ratio over the next thirty years which will be a great dividend. As the dividend begins to pay off, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further, according to Mr Pranab Mukherjee, Union Finance Minister

A large, untapped domestic market, with a huge growth potential Presence of financial and capital market mechanisms A large and continuously growing intellectual capital Healthy rate of economic growth