Avenues Assignment

8/8/2019 Avenues Assignment

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INVESTMENT

The word originates in the Latin "vestis", meaning garment, and refers to the act of putting

things (money or other claims to resources) into others' pockets.[4]. The basic meaning of the

term being an asset held to have some recurring or capital gains.

Investment is the commitment of money or capital to purchase financial instruments or

other assets in order to gain profitable returns in the form of interest, income, or appreciation

of the value of the instrument. [1] It is related to saving or deferring consumption. Investment

is involved in many areas of the economy, such as business management and finance no

matter for households, firms, or governments.

In finance, investment is the commitment of funds by buying securities or other monetary or

paper (financial) assets in the money markets or capital markets, or in fairly liquid real

assets, such asgold or collectibles

An investment programme should consist of safety of principal, liquidity, income stability,adequate income, purchasing power stability, appreciation, legality and transferability

Classification of investments

Different methods of classification of the investment avenues are available. Some of the

methods with examples are given hereunder:

A Physical investments They are tangible items like motorcars, aeroplanes, ships, buildings,plant and equipment, machinery etc. Another sub-classification in this is of physical assets

which are useful for further production and creation of income, like machinery equipmentetc. mentioned above and those which are not useful for further production like gold andsilver ornaments.

b. Financial investments Financial assets are those which are used for consumption or for production of goods and services or for further creation of assets.

c. Marketable and non marketable investments Examples of marketable investments are

shares, bonds and other instruments issued by government or companies which are listed inthe stock exchanges are easily marketable and can be converted into cash in a short time.Non-marketable investments are bank deposits, provident and pension funds. Insurance

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certificates, post office deposits, National savings certificates, company deposits, privatelimited companies shares etc.

d. Transferable non-transferable investments Instruments like shares, bonds can betransferred in the name of others or can be sold or exchanged for cash or kind whereas some

instruments like insurance certificates, post office deposits, and national savings certificatescannot be transferred.

Driviing forces of investment

a.retirement plan

b. avoidance of taxation

c .tempting high rates of interest

d. high inflation and resultant expectation of increase in the monetary return

e. Hike in incomes

f. Availability of a large number of investment avenues

g. Legal safeguards

h. Existence of financial institutions to encourage savings etc.


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INVESTMENT AVENUES

There are many investment avenues in which one can invest :1 PROVIDENT FUND..

2. .COMMODITIES

3.BULLION

4 MUTUAL FUND.

5. SAVING A/C

6. NATIONAL SAVING CERTIFICATES

7. SHARES

8. REAL ESTATE

9. DERIVATIVES

10.GOVERNMENT SECURITIES

11 FIXED DEPOSITS

12.INSURANCE

13.ANTIQUE

14.ART AND PAINTING


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1.provident fund

Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It

also serves as a retirement planning tool for many of those who do not have any structured

pension plan covering them. The balances in PPF account cannot be attached by any

authority normally.

This is covered under the Employees Provident Fund and Miscellaneous Provisions Act of

1952.

Types of Provident Fund :

Statutory provident fund

Recognized provident fund

Unrecognized provident fund

Public provident fund

Applicability

All the establishments employing 20 or more persons (5 or more incase of Cinema Theatres)

have to provide for contributions to the above mentioned Provident Funds or one can opt for

it voluntarily also.

Provident fund as an investment option

It is an investment option that can be very useful in the long run.


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Benefits :

Since the amount is automatically deducted from salary, it is a sort of forced saving

imposed on employees. The employees automatically save money which will come in

handy for them in times of need.

It is a simple and sturdy investment. Many people use this money to set up a life after

retirement. The EPF scheme also takes care of housing, education of children,

financing of insurance policies and medical care.

Decent return of 8 to 12% on investment is another advantage and also the risk

involved is quite minimum.

EPF & PPF schemes offer the highest risk-adjusted returns among all fixed-income

instruments.

It is gilt-edged, meaning it is backed by the government, hence the money invested is

safe.

Disadvantages

The rate of return is not as high as what you would get from high-risk investments

such as shares and mutual funds

Withdrawals in PPF are allowed only after the completion of four years of the account.

However, liquidity in this instrument is poor as it is difficult to get the withdrawals

done


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The biggest drawback is that individuals get the option of withdrawing the whole

amount in EPF account ontermination of or resignation from a job.

In an era when highly-skilled employees like to hop, this can turn out to be a disaster.

Withdrawals at each job switch may not allow a corpus to be built and the power of

compounding to work.

Taxability

The withdrawals are exempt from tax if the concerned employee has rendered continuous

service of more than 5 years. Otherwise, it would be taxable at the applicable slab rates.

Tabs on Investment

Minimum deposit required in a PPF account is Rs. 500 in a financial year. Maximum deposit

limit is Rs. 70,000 in a financial year. Maximum number of deposits is twelve in a financial

year.

Maturity

The maturity period of the account is 15 years.

Rate of interest is 8% compounded annually.

One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.

The amount of deposit can be varied to suit the convenience of the account holders.

The account holder can retain the account after maturity for any period without making any

further deposits. In this case the account will continue to earn interest at normal rate as

admissible till the account is closed.

The account holder also has an option to extend the PPF account for any period in a block of

5 years at each time, after the maturity period of 15 years.


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Lapse in Deposits

If deposits are not made in a PPF account in any financial year, the account will be treated as

discontinued. The discontinued account can be activated by payment of the minimum deposit

of Rs.500/- with default fee of Rs.50/- for each defaulted year.

Premature Closure or Withdrawal

Premature closure of a PPF Account is not permissible except in case of death.

Nominee/legal heir of PPF Account holder cannot continue the account after the death.

Premature withdrawal is permissible in the 7th year of the account subject, to a limit of 50%of the amount at credit preceding three year balance. Thereafter one withdrawal in every year

is permissible.

Account Transfer

The Account is transferable from one post Office / bank to another and from post Office to

bank or from a bank to a post office.

Tax Benefits

Deposits in PPF are eligible for rebate under section 80-C of Income Tax Act.

The interest on deposits is totally tax free. Deposits are exempt from wealth tax.


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2.COMMODITIES

A commodity is a normal physical product used by everyday people during the course of

their lives, or metals that are used in production or as a traditional store of wealth and a

hedge against inflation. For example, these commodities include grains such as wheat, corn

and rice or metals such as copper, gold and silver. The full list of commodity markets isnumerous and too detailed. The best way to trade the commodity markets is by buying and

selling futures contracts on local and international exchanges.

Trading futures is easy, and can be accessed by using the services of any full or on-line

futures brokerage service. Traditionally, there is an expectation when trading commodity

futures of achieving higher returns compared to shares or real estate, so successful investors

can expect much higher returns compared to more conventional investment products.

The process of trading commodities, as mentioned above, must be facilitated by the use of

trading liquid, exchangeable, and standardized futures contracts, as it is not practical to trade

the physical commodities.

Futures contracts give the investor ease of use and the ability to buy or sell without delay. A

futures contract is used to buy or sell a fixed quantity and quality of an underlying

commodity, at a fixed date and price in the future. Futures contracts can be broken by simply

offsetting the transaction. For example, if you buy one futures contract to open then you sell

one futures contract to close that market position. The execution method of trading futures

contracts is similar to trading physical shares, but futures

contracts have an expiry date and are deliverable.Futures contracts have an expiry date and

need to be occasionally rolled over from the current contract month to the following contract

month. The reason is because the biggest advantage to trading commodity futures, for the

private investor is the opportunity to legally short-sell these markets. Short-selling is the

ability to sell commodity futures creating an open position in the expectation to buy-back at a

later time to profit from a fall in the market. If you wish to trade the up-side of commodity


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futures, then it will simply be a buy-to-open and sell-to close set of transactions similar to

share trading.

The commodity markets will always produce rising of falling trends, and with the abundance

of information and trading opportunities available there is no reason for any investor to

exclusively trade the share market when there is potential profits from trading commodity

futures.

The increased use of commodity trading vehicles in investment management has led

practitioners to create investable commodity indices and products that offer unique

performance opportunities for investors in physical commodities. As is true for stock and

bond performance, as well as investment in managed futures and hedge fund products,

commodity-based products have a variety of uses. Besides being a source of information on

cash commodity and futures commodity market trends, they are used as performance

benchmarks for evaluation of commodity trading advisors and provide a historical track

record useful in developing asset allocation strategies. However, the investor benefits of

commodity or commodity-based products lie primarily in their ability to offer risk and return

trade-offs that cannot be easily replicated through other investment alternatives. Previous

research that direct stock and bond investment offers little evidence of providing returns

consistent with direct commodity investment. commodity-based firms may not be exposed to

the risk of commodity price movement. Thus for investors, direct commodity investment

may be the principal means by which one can obtain exposure to commodity price

movements.

The commodities that are traded in the market.

Gold

Copper

Silver

Sugar

Wheat

Zeera

Guar


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3.Bullion

Bullion refers to any precious metal in a form in which its primary value comes from the

worth of the metal, not from an artificial currency value. Bullion is most often traded in the

form of coins minted by national governments, or in bulk ingots.

While government issued coins have a nominal value assigned to them upon minting, this

value is virtually always overshadowed by the commodity value of the metal itself. As an

example, most government issued gold coins have a currency value of between US$10 and

US$100, but usually contain at least one troy ounce of gold. Given that the exchange rate of

gold consistently rises, and from the beginning of the twenty-first century on was worth atleast US$350 a troy ounce, one can see that the government-assigned currency value of a

bullion coin is essentially meaningless.

The value of bullion is affected by three factors: metal, weight and purity. The metal the

bullion consists of is obviously important in determining its overall value: gold is worth

more than silver, whileplatinum is worth more than gold. The weight of bullion is usually

measured in troy ounces, where one troy ounce is equal to approximately 31g. Purity also

varies widely in bullion, though many countries release coins with 99.99% purity, which is

as close as one can practically get to pure.

The average minting of a bullion coin is less than 10,000, one of the reasons they are so

popular with collectors. Extremely limited presses are also relatively frequent, with countries

sometimes releasing as few as 20 to 50 of a certain bullion coin. Silver coins, particularly,are popular with collectors; because of the relatively low worth of their metal, they are
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cheaper in general. For this reason, silver bullion coins, more than gold or platinum, are often

valued substantially above the market value of silver.

At this point, most major countries offer at least one type of bullion coin. Usually these coins

will have one main symbol they use each year, though some nations choose to keep the same

theme but alter the image yearly.

Examples of bullion coins include:

U.S. Eagles: Minted in platinum (since 1997), gold and silver, these coins are

embossed with the image of a bald eagle. Gold Eagles are 91.67% pure.

Canadian Maple Leafs: These coins are minted in platinum, gold and silver, with the

Canadian maple leaf embossed. Gold Maple Leafs were the first 99.99% pure gold

coins to be released. A very limited platinum coin is also released by Canada,

depicting wildlife.

Chinese Pandas: These come in platinum, gold, silver,palladium, copperandbrass.

The depict a panda bear, the image of which changes each year. China also had a

short-lived series ofunicorn gold and silver coins, and a limited run of twenty bullion

coins in excess of 260 troy ounces (8kg).

South African Krugerrands: These were the first bullion coins ever released by a

nation, and are made of gold.

A bullion coin is a coin struck from precious metal and kept as a store of value or an

investment, rather than used in day-to-day commerce. Investment coins are generally coins

that have been minted after 1800, have a purity of not less than 900 thousandths and is or has

been a legal tender in its country of origin. [1] Bullion coins are usually available in gold and

silver, with the exception of the Krugerrand and the Swiss Vreneli which are only available

in gold. The American Eagle series is available in gold, silver and platinum, and the

Canadian Maple Leafseries is available in gold, silver, platinum and also palladium.

Bullion coins are also typically available in various weights. These are usually multiples or

fractions of 1 troy ounce, but some bullion coins are produced in very limited quantities in

kilograms and even heavier.
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Bullion coins sell for a premium over the market price of the metal on the commodities

exchanges. This is due to their comparative small size and the costs associated with

manufacture, storage and distribution. The margin that is paid varies depending on what type

of coin it is, the weight of the coin, and theprecious metal. The premium also is affected by

prevailing demand. The ISO currency code of goldbullion is XAU. ISO 4217 includes codes

not only for currencies, but also for precious metals (gold, silver,palladium andplatinum; by

definition expressed per onetroy ounce, as compared to "1 USD") and certain other entities

used in international finance, e.g. Special Drawing Rights.

ADVANTAGES

Bullion is the basic commodity traded in the precious metals market. By adding preciousmetals in general to a portfolio of stocks, bonds and mutual funds, an investor is introducing

a tangible asset to the mix. This increases the degree of diversification and protects the

portfolio against fluctuations in value of any one asset type.

ECONOMIC FORCES

The economic forces that affect the price of precious metals are different from, and often are

opposed to the forces which determine the price of most common financial assets. This

independent movement of precious metals to the other financial assets can reduce overall

portfolio volatility and contributes balance.

PRESERVATION OF PURCHASING POWER

Precious metals have traditionally performed well as a long-term store of wealth and

purchasing power. Over long periods of time precious metals have purchased a constant

basket of basic goods and services.

THE DECLINING DOLLAR

The purchasing power of the U.S. dollar has steadily declined over time and is expected to

continue to do so; precious metals can often provide a "hedge against inflation." For

example, between 1971 and 1981 the U.S. dollar lost more than half its value while Gold

prices rose nearly five times. Economies fluctuate between inflation, recession and

expansion, precious metal investments help diversify and lower overall risk.
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ASSET ALLOCATION

Whether you are conservative or aggressive in your investment approach, precious metals

can represent an important part of your asset allocation. Some experts suggest that 10 to 15-

percent of portfolio assets should be precious metals. No matter what level of risk an investor

wishes to take, every portfolio needs a secure foundation.

EASE OF OWNERSHIP

For investors who wish to take possession or direct control of their assets, buying physical

bullion has appeal. Owning bullion is easy and convenient. Thousands of dealers nationwide

buy and sell bullion daily over the counter, by phone, by fax and at auctions. It is

internationally recognized for its value based on its current market price. Bullion is one of

the most liquid investments available anywhere.

FINANCIAL PRIVACY

Bullion is one of the best forms of legally private wealth. No one needs to know how much

bullion you own, or where it is stored. Some forms of bullion, such as coins, can easily andquietly be passed on to your heirs as a gift. Most of our clients feel that they would like to

keep a certain portion of their wealth from the prying eyes of those who have access to all

assets listed under their social security number. Legally, we are not required to report the

purchase or sale of bullion. In fact, it is classified like fine art and crystal. Bullion has been

regarded as hard currency for over 5,000 years, and is not subject to reportability and

confiscation.

Disadvantages

A gold standard leads to deflation whenever an economy using the gold standard

grows faster than the gold supply. When an economy grows faster than its money

supply, the same money must be used to execute a larger volume of transactions. The

only ways of achieving this are for the money to circulate faster or to lower the cost of

the transactions. If deflation drives costs down, the real value of each unit of money

goes up. This increases the value of cash, and decreases the monetary value of real


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assets, since the same asset can be purchased with less money. This in turn tends to

increase the ratio of debts to assets . For example, assuming interest rates remain

unchanged, the monthly cost of a fixed-rate home mortgage stays the same, but the

value of the house goes down, and the value of the money required to pay the

mortgage goes up. Thus deflation rewards cash savings.

Deflation rewards savers and punishes debtors. Real debt burdens therefore rise,

causing borrowers to cut spending to service their debts or to default. Lenders become

wealthier, but may choose to save some of their additional wealth rather than spending

it all. The overall amount of expenditure is therefore likely to fall. Deflation also robs

a central bank of its ability to stimulate spending. Deflation is considered to be

difficult to control, and to be a serious economic risk. However in practice it has

always been possible for governments to control deflation by leaving the gold standard

or by artificial expenditure.

The total amount of gold that has ever been mined has been estimated at around

142,000 metric tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per

kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This

is less than the value of circulating money in the U.S. alone, where more than $8.3

trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if

also combined with a mandated end to fractional reserve banking, would result in a

significant increase in the current value of gold, which may limit its use in current

applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can

be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion.

However, this is specifically a disadvantage of return to the gold standard and not the

efficacy of the gold standard itself. Some gold standard advocates consider this to be

both acceptable and necessary whilst others who are not opposed to fractional reserve

banking argue that only base currency and not deposits would need to be replaced. The

amount of such base currency (M0) is only about one tenth as much as the figure (M2)

listed above.

Many economists believe that economic recessions can be largely mitigated by

increasing money supply during economic downturns. Following a gold standard

would mean that the amount of money would be determined by the supply of gold, and

hence monetary policy could no longer be used to stabilize the economy in times of
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economic recession. Such reason is often employed to partially blame the gold

standard for the Great Depression, citing that the Federal Reserve couldn't expand

credit enough to offset the deflationary forces at work in the market. Opponents of this

viewpoint have argued that gold stocks were available to the Federal Reserve for credit

expansion in the early 1930s, but Fed operatives failed to utilize them.

Monetary policy would essentially be determined by the rate of gold production.

Fluctuations in the amount of gold that is mined could cause inflation if there is an

increase, or deflation if there is a decrease. Some hold the view that this contributed to

the severity and length of the Great Depression as the gold standard forced the central

banks to keep monetary policy too tight, creating deflation. Milton Friedman however

argued that the main cause of the severity of the Great Depression in the United States

was the Federal Reserve, and not the gold standard, as they willfully kept monetary

policy tighter than was required by the gold standard. Additionally three increases by

the Federal Reserve in bank reserve requirements in 1936 and 1937, which doubled

bank reserve requirements lead to yet another contraction of the money supply.

Although the gold standard gives long term price stability, it does in the short term

bring high price volatility. In the United States from 1879 to 1913 the coefficient of

variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it

was only 0.88. It has been argued by among others Anna Schwartz that this kind of

instability in short term price levels can lead to financial instability as lenders and

borrowers become uncertain about the value of debt.

Some have contended that the gold standard may be susceptible to speculative attacks

when a government's financial position appears weak, although others contend that

this very threat discourages governments' engaging in risky policy (see Moral Hazard).

For example, some believe the United States was forced to raise its interest rates in the

middle of the Great Depression to defend the credibility of its currency after unusually

easy credit policies in the 1920s. This disadvantage however is shared by all fixed

exchange rate regimes and not just limited to gold money. All fixed currencies that

appear weak are subject to speculative attack.

If a country wanted to devalue its currency it would generally produce sharper changes

than the smooth declines seen in fiat currencies, depending on the method of

devaluation.
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4.MUTUAL FUND: What is a mutual fund?

its an collective scheme which collect from small investors and on behalf of them invest indifferent security to minimize risk and maximize profit. A mutual fund is a pool of money

that is managed on behalf of investors by a professional money manager. The manager

uses the money to buy stocks, bonds or other securities according to specific investment

objectives that have been established for the fund. In return for putting money into the

fund, youll receive either units or shares that represent your proportionate share of the pool

of fund assets. In return for administering the fund and managing its investment portfolio,

the fund manager charges fees based on the value of the funds assets.

CHARACTERSTIC

Investors purchase mutual fund shares from the fund itself.

The price that investors pay for mutual fund shares is the fund's per share net asset

value (NAV).

Mutual fund shares are redeemable

There is an opportunity to create and sell new shares to accommodate new investors.

mutual funds typically are managed by separate entities known as "investment

advisers"

HOW A FUND DETERMINES ITS SHARE VALUE :


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Market value of funds asset minus funds liability divided by no of outstanding shares is

equal to net asset value or fund share price.

TYPES OF MUTUAL FUND

1)Open ended mutual fund :

Mutual funds are open-ended investment funds, meaning that new investors can

contribute money to the fund at anytime and existing investors can return there units or

shares to the fund for redemption at any time when you redeem your units or shres of a

mutual fund you will receive a cheque based on the current market value of the funds

portfolio.

2) Close ended mutual fund:

These have a fixed number of units and a fixed tenure, after which their units are

redeemed or they are made open ended. These funds have various objective :

generating steady income by investing in debt instruments, capital appreciation by

investing in equities, or both by making an equal allocation of the corpus in debt and

equity instruments .such funds with there conservative investment approach are best

suited for income . these funds declare dividend annually or semi annually.

There is fixed lockin period for withdrawing and if you withdraw before that lockin

period you will be charged with exit load.

3) SYSTEMATIC INVESTMENT PLAN

A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help you

save regularly. It is just like a recurring deposit with thepost office orbankwhere you

put in a small amount everymonth. The difference here is that the amount is invested

in a mutual fund. The minimum amount to be invested can be as small as Rs 100 and

the frequency of investment is usually monthly or quarterly.

4)Money Market Funds:
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Invest in short-term (less than one year to maturity) corporate and government debt

securities such as treasury bills, bankers acceptances and corporate notes. Some money

market funds specialize in Canadian or US money market instruments or

invest only in treasury bills. These are generally very low-risk funds offering low

returns.

5) Fixed Income Funds:

Invest in debt securities like bonds, debentures and mortgages that pay regular interest,

or in corporate preferred shares that pay regular dividends. The goal, typically, is to

provide investors with a regular income stream with low risk. Fund values will go up

and down to some extent, particularly in response to changes in prevailing interest

rates.

6) Growth or Equity Funds:

Invest primarily in common shares (equities) of Canadian or foreign companies, but

may hold other assets as well. The goal is typically long-term growth because the

value of the assets held increases over time. Some growth funds focus on large blue-

chip companies, while others invest in smaller or riskier companies. Performance will

be affected by the success or failure of specific investments and by the

performance of the stock markets generally.

7) Balanced Funds:

Invest in a balanced portfolio of equities, debt securities and money marketinstruments with the objective of providing reasonable returns with low to moderate

risk.

8) Global and Foreign Funds:

May be fixed income, growth or balanced funds that invest in foreign securities. Thesefunds can offer investors international diversification and exposure to foreigncompanies, but are subject to risks associated with investing in foreign countries andforeign currencies.

9) Specialty Funds:

May invest primarily in a specific geographical area (e.g., Asia) or a specific industry(e.g., high technology companies).

10) Index Funds:


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Invest in a portfolio of securities selected to represent a specified target index orbenchmark such as the S&P/TSX Composite Index.

Several parties are involved in the organization and

operation of a mutual fund, including:

1.Mutual Fund Manager: Establishes one or more mutual funds, markets them and

oversees their general administration.

2.Portfolio Adviser: The professional money manager appointed by the Mutual Fund

Manager to direct the Mutual funds investments. The Mutual Fund Manager also often acts

as the Portfolio Adviser.

3.Principal Distributor: Coordinates the sale of the fund to investors, either directly or

through a network of registered dealers.

4.Custodian: The bank or trust company appointed by the Mutual Fund Manager to hold all

of the securities owned by the fund.

5.Transfer Agent and Registrar: The group responsible for maintaining a list of all

investors in the fund.

6.Auditor: The independent accountants retained by the Mutual Fund Manager to audit each

year, and report on the financial statements of the fund.

7.Trustee: The entity that has title to the securities owned by the fund (when the fund is

organized as a trust, instead of as a corporation) on behalf of the unitholders.

Returns to investors is in the form of :

1. Dividends/ coupon payments

2. Capital gains from sale of securities within the fund.

3. Mutual Fund share price appreciation.


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TAX TREATMENT:

You should understand how you will be taxed on your mutual fund investment. Generally, amutual fund will distribute enough income and capital gains each year so that themutual fund itself will not have to pay any income tax. This means that you will have to payincome tax on the distributions you receive, unless you hold your investment in a RegisteredRetirement Savings Plan (RRSP) or other registered plan for which the fund is a qualifyinginvestment. If you hold your investment in a registered plan, you will generally not betaxed on distributions of income or capital gains, as long as the distribution stays in the plan.However, when you withdraw money or investments from the registered plan, itis taxed as income at your going tax rate. When you redeem your mutual fund holdings youmust report any capital gains.You may wish to ask your tax adviser about the tax implications of holding a mutual fundinvestment and you should read carefully any tax information provided by the mutual fund.

Advantages :

There are many reasons why people invest in mutual funds:

Diversification: Investing in a number of different securities helps reduce the risk ofinvesting. When you buy a mutual fund, you are buying an interest ina portfolio of dozens of different securities, giving you instant diversification, at least withinthe type of securities held in the fund.7

Affordability: With many mutual funds, you can begin buying units with a relativelysmall amount of money (e.g., $500 for the initial purchase). Some mutual funds

also let you buy more units on a regular basis with even smaller installments (e.g., $50 permonth). Professional Management: Mutual funds are managed by professionals who areexperienced in investing money and who have the skills and resources toresearch many different investment opportunities. Liquidity: Units or shares of mutual funds can be redeemed at any time. Flexibility: Many mutual fund companies administer several different mutual funds (e.g.,money market, fixed-income, growth, balanced and international funds) and allow you toswitch between funds within their fund family at little or no charge. This can enable

you to change the balance of your portfolio as your personal needs or market conditionschange. Performance Monitoring: The value of most mutual funds is reported daily in thefinancial press and on many internet sites, allowing you to continually monitor the

performance of your investment.


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What aresome of the potential disadvantages?

When you invest in a mutual fund you place your money in the hands of a professionalmanager. The return on your investment will depend heavily on that managers skilland judgement. Even the best portfolio advisers are wrong sometimes, and studies haveshown that few portfolio advisers are able to consistently out-perform the market.Check the fund managers track record over a period of time when choosing a fund.As a mutual fund investor, you will also be paying, through management expenses andcommissions, for management services and for various administrative and sales costs.Those fees and commissions reduce the return on your investment and are charged, in almostall cases, whether the fund performs well or not. Sales commissions andredemption fees can have a very significant impact on your return if you decide to redeemyour mutual fund investment in the short-term.


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5.SAVING A/C

A savings account typically refers to an account in which one places money to earn a small

amount of interest. the savings account funds are usually easily accessible, though some

banks do charge for withdrawing money early. In most cases, people can withdraw money

from a savings account at any time, at least at any time the bank is open, or one has access tothe banks ATM. The term "bank" is used here loosely. In addition to earning interest on

your deposits, the savings account also provides a safe place to put your money, far better

than stowing it in the mattress or the cookie jar.

Savings accounts may be opened at a number of different financial institutions. These

include:

Commercial banks Credit unions Mutual savings banks Savings and loan associations

Each of these institutions offers interest payments to the account holder based on the amount

of money held in the account.

If the bank declaresbankruptcy, is the target ofembezzlement or mismanagement of funds,

the Federal Deposit InsuranceCorporation (FDIC) insures your account, up to 100,000 US

dollars (USD). In fact, a requirement when shopping for a savings account is to look for one

that is FDIC insured. If your savings account isnt FDIC insured, you might have difficulty if

the bank encounters financial problems. Most banks, credit unions and money markets funds

do offer this insurance
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Benefit of Saving Accounts

-Free Passbook facility available at home branch for account holders.

-Free unlimited transactions: Cash withdrawal and balance enquiry, at all bank ATMs & onany other Bank's ATM using your Debit Card.

-Free Debit Card for primary account holder for lifetime of the account.

-Free cheque book, without any usage charges.

-Free Demand Drafts on particular Bank locations upto Rs. 50000

-Self/Third Party Cash Deposit/Withdrawal at non-home branches

-Free National Electronic Funds Transfer facility, Net Banking, Phone Banking & MobileBanking.

Disadvantages of a Savings Account

1.Low Interest Rate

1. Savings accounts offer relatively low interest rates. For example, Bank of America'sregular savings account offers 0.10 percent APY, typically far below the yields onCDs, IRAs, commodities, stocks and bonds.

Minimum Balance Requirement

2. Often there's a minimum balance that has to be kept with the bank. For example, if asavings account balance falls below $100 at Iowa-Nebraska State Bank, a $5 charge islevied.

FDIC Insured Limit

3. Up to $250,000 per bank is federally insured by the FDIC through 2013, so if youwanted to deposit more than that, you would have to use two banks to get it all

insured.

Transaction Time Delay


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4. If transferring money, there may be a transaction time delay. Hasty banking moves canincur a penalty because an account may be technically overdrawn for a brief time.Transaction time delay is one to several business days, depending on the bank.

Numbers of Transfers Limit

5. To use Bank of America again, "You are limited to six withdrawals ... including bill

payments." If transfers in a billing cycle exceed the stated limit, a fee is levied even ifminimum balance is maintained.

6.

Post Office Savings Account

This scheme helps individuals, house-wives, minors and others in inculcating a habit of thriftin themselves. The salient features of Post Offices Savings accounts are as under:

Who can open?

Any resident adult individual singly or jointly with one or two other adults. Minor's accountscan be opened through guardians. A minor, who has attained 10 years age, can also open theaccount.

Minimum amount

Rs. 50/- in case of account without cheque book facility.

Rs. 500/- in case of account with cheque book facility.

Maximum amount

Rs. 1,00,000/- in case of a single account. Rs. 2,00,000/- in case of joint accounts

Interest Rate

Current Interest Rate for the Post Office Savings Bank Account is 3.5 per cent.

The interest for a month is calculated on the lowest balance at credit of an account between

the close of the tenth day and end of the month. Such interest is calculated and credited in theaccount at the end of each year.

Nomination facility

There is nomination facility available.

Transferability

Transferablity is possible.


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Interest Taxability

The interest earned is exempt under section 10(15)(i).

Other Features :Only one single and one joint account can be opened at one post office.

No interest is payable for the balance less than Rs.50 in any particular month and for thebalance more than Rs.1,00,000/- in a single account and Rs.200,000 in a joint account in ayear.

Post Office Recurring Deposit Scheme

Post Office Recurring Deposit Scheme provides the facility of saving small sums of money

every month to meet future financial goals and earn relatively higher risk free returns.

The salient features of the scheme are :

Who can open?

Any resident adult individual singly or jointly with one or two other adults. Minor's accountscan be opened through guardians. A minor, who has attained 10 years age, can also open theaccount.

Minimum amount

Monthly Rs. 10/-

Maximum amount

Any amount in multiples of Rs. 5/-

Interest Rate:

The interest paid varies as declared by the Directorate, Small Savings from time to time.

Interest Taxability

The interest received is taxable.

Other Features :

The amount of deposit made at the time of opening of the account cannot be varied.

The Recurring Deposit Account matures on the date on which it is opened after the end ofthe term. In case the date of maturity falls on Sunday or postal holiday, the payment becomesdue on the business day immediately preceding the date of maturity.


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The holder of an account may prematurely close the account after 3 years of date of openingof the account. Interest at the rate applicable from time to time to Post Office SavingsAccount shall be payable on such premature closure of account.

Post Office Senior Citizens Savings Scheme

Post Office Senior Citizens Savings Scheme has been notified with effect from August 2,2004. The Scheme is for the benefit of senior citizens. The salient features of the scheme areas under:

Who can open?

Any citizen, whose age is 60 years or above. A depositor may open the account in hisindividual capacity or jointly with spouse.Citizens who have retired under a voluntary or a

special voluntary retirement scheme and have attained the age of 55 years are also eligible,subject to specified conditions.Non-residents and HUFs are ineligible to open the accountunder the scheme.

Minimum amount

Rs. 1,000/-

Maximum amount

Rs. 15,00,000/- (Rs. fifteen lacs)

Interest Rate:

9% per annum.Interest is payable quarterly on 31st March, 30th June, 30th September and 31st December

If the interest payable every quarter is not claimed by a depositor, such interest do not earn

additional interest.

Premature withdrawal

In case the account is closed after expiry of one year but before expiry of two years from thedate of opening of the account, an amount equal to 1.5% of the deposit shall be deducted andthe balance paid to the depositor.

In case the account is closed on or after the expiry of two years from the date of opening ofthe account, an amount equal to 1% of the deposit shall be deducted and the balance paid tothe depositor.

No deduction shall be made in case of premature closure of an account at any time due to

death of a depositor.


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Deduction u/s 80C

Available w.e.f. Financial Year 2007-08 i.e. Assessment Year 2008-09

Post Office Time Deposit Scheme

Post Office Time Deposit Scheme offers the facility of investing surplus funds at relativelyhigher rates of interest. The deposits made under this scheme for a period of 5 years are alsoeligible for tax bebefits under section 80C of Income Tax Act.

The salient features of the scheme are as under:

Who can open?

Any individual singly or jointly with another adult. An adult individual on behalf of a minor.

Maximum amount

In multiples of Rs. 50/-. No upper limit.

Minimum amount

Rs. 200/-

Interest Rate:

One Year 6.25%

Two years 6.5%Three years 7.25%

Five Years 7.5%

The interest on deposits is calculated on quarterly compounding basis and is payable

annually.

Premature withdrawalNo interest is paid for the deposit withdrawn prematurely after six months but before theexpiry of one year.

In case of deposits for two, three or five years withdrawn prematurely after the expiry of one

year from the date of deposit, interest is payable for the completed years and months at 2%

lower rate than specified for the completed period.


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Post Office Monthly Income Scheme

Post Office Monthly Income Scheme (MIS) is meant for investors who want to invest a sumamount initially and earn interest on a monthly basis for their livelihood. The scheme is,therefore, more beneficial for retired persons. The salient features of the scheme are as under:

Who can open?

Any individual singly or jointly with other one or two adults. A guardian on behalf of minoror a person of unsound mind.A minor who has attained the age of 10 years.

Interest Rate: 8 per cent per annum payable monthly. Additionally bonus of 10 per cent ofthe deposit amount on maturity after six years.

Premature withdrawal

An amount equal to 5 per cent of the initial investment amount is deducted from thepayment, if the account is closed before three years from the date of the opening of theaccount.

No amount is deducted for the withdrawal after three years. However, no bonus is applicable

to any premature closure of the Account

Other features

Deposits are exempt from Wealth Tax. Non-Resident Indians and HUFs are ineligible toopen the account.Facility of automatic credit of monthly interest to saving account ifaccounts are at the same post office.Interest not withdrawn do not earn any interest.

Minors have a separate limit of investment of Rs. 3 lakhs and the same is not clubbed with

the limit of guardian.

6.National Savings Certificate (NSC) (VIII Issue)


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National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument

that combines adequate returns with high safety. NSCs are an instrument for facilitating

long-term savings. A large chunk of middle class families use NSCs for saving on their tax,

getting double benefits. They not only save tax on their hard-earned income but also make an

investment which are sure to give good and safe returns.

Denominations and Limit

National Savings Certificates are available in the denominations of Rs. 100 Rs 500, Rs.

1000, Rs. 5000, & Rs. 10,000. There is no maximum limit on the purchase of the certificates.

So it is for you to decide how much you want to put in the NSCs. This is of course a huge

benefit for you can decide as much as your budget allows.

Maturity

Period of maturity of a certificate is six years. Presently interest paid is 8 % per annum half

yearly compounded. Maturity value of a certificate of any other denomination is at

proportionate rate. Premature encashment of the certificate is not permissible except at a

discount in the case of death of the holder(s), forfeiture by a pledge and when ordered by a

court of law.

Tax Benefits

Interest accrued on the certificates every year is liable to income tax but deemed to have

been reinvested. Income Tax rebate is available on the amount invested and interest accruing

under Section 88 of Income Tax Act, as amended from time to time.

Income tax relief is also available on the interest earned as per limits fixed vide section 80L

of Income Tax, as amended from time to time.


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SHARES

shares are best investment avenue available from a long period of time. share is a unit ofaccount forvarious financial instruments including stocks, mutual funds, limited

partnerships, and REIT's. In British English, the usage of the word share alone to refer solelyto stocks is so common that it almost replaces the word stock itself.

In simple Words, a share or stockis a document issued by a company, which entitles itsholder to be one of the owners of the company. A share is issued by a company or can be

purchased from the stock market.

RETURN YOU GET ON SHARES:

By owning a share you can earn a portion and selling shares you get capital gain. So, yourreturn is the dividend plus the capital gain. However, you also run a risk of making a capitalloss if you have sold the share at a price below your buying price.

Characterstic :

Owning a stock or a share means you are a partial owner of the company, and you getvoting rights in certain company issues

Over the long run, stocks have historically averaged about 10% annual returnsHowever, stocks offer no guarantee of any returns and can lose value, even in the longrun

Investments in stocks can generate returns through dividends,


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How does one trade in shares ?

Every transaction in the stock exchange is carried out through licensed members calledbrokers.

To trade in shares, you have to approach a broker However, since most stock exchangebrokers deal in very high volumes, they generally do not entertain small investors.

These brokers have a network of sub-brokers who provide them with orders.

The general investors should identify a sub-broker for regular trading in shares and palcehis order for purchase and sale through the sub-broker. The sub/broker willtransmit the order to his broker who will then execute it .

There are two type of shares:

There are two main types of stocks: common stock and preferred stock. Common Stock

Common stock is, well, common Types:

EQUITY OR COMMON STOCK

PREFERRED STOCK OR PREFERENCE SHARES

Equity Capital:

. When people talk about stocks they are usually referring to this type. In fact, the majority of

stock is issued is in this form. We basically went over features of common stock in the last

section. Common shares represent ownership in a company and a claim (dividends) on a

portion of profits. Investors get one vote per share to elect the board members, who oversee

the major decisions made by management. Over the long term, common stock, by means of

capital growth, yields higher

Risk: Since the investor has ownership rights; the risk faced by the investors is

obviously high. No preferential rights: At the time of winding up of the company, the equity share

holders are not given preferential rights for repayment of funds.

Voting rights : They have voting rights. All major company decisions cannot be taken

without the consent of the equity share holders.


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Tax treatment:

Dividends are tax free in the hands of shareholders

After October 1, 2004 equity share sold through a recognized stock exchange

would be entitled for an exemption from the Long Term Capital Gains provided

STT (Securities Transaction Tax)has been paid

OPTIONS RELATED TO EQUITY SHARES

1. LIMITED PARTNERSHIP

A limited partnership (LP) consists of two or more persons, with at least onegeneral partner and one limited partner.

It is a separate entity and files taxes as a separate entity.

Created by statute (Revised Uniform Limited Partnership Act) General Partners pay the Limited Partners a return on their investment.

Tax treatment:

LPs and general partnerships have been accorded the same tax treatment. Taxation is in the hands of the entity, profit accruing is exempt from tax Remuneration of partners, taxed under income from business and

profession Conversion from general to LLP- no tax obligation provided the rights &

obligations remain same.

2. PRIVATE PLACEMENT

Issue of shares or of convertible securities by a company to a select group ofpersons under Section 81 of the Companies Act, 1956

Types: Preferential allotment

Qualified institutional placement

3. DIVIDEND REINVESTMENT PLAN (DRIP)

Equity investment option offered directly from the underlying company.

Returns from dividends immediately invested for the purpose of priceappreciation

No brokerage fees

Tax treatment :

No tax deductions or rebates given.


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ADR, GDR and IDR :

Negotiable certificates or financial instruments that provide investors ownership rightsto stocks or bonds in a foreign country

Foreign Venture Capital Investors (FVCIs) and Venture Capital funds (VCFs) wouldnot be eligible to invest in IDRs.

No tax exemption or rebate available for these instruments

PREFERRED STOCK

returns than almost every other investment. This higher return comes at a cost since commonstocks entail the most risk. If a company goes bankrupt and liquidates, the commonshareholders will not receive money until the creditors, bondholders and preferredshareholders are paid. Preferred StockPreferred stock represents some degree of ownershipin a company but usually doesn't come with the same voting rights. (This may varydepending on the company.) With preferred shares, investors are usually guaranteed a fixed

dividend forever. This is different than common stock, which has variable dividends that arenever guaranteed. Another advantage is that in the event of liquidation, preferredshareholders are paid off before the common shareholder (but still after debt holders).Preferred stock may also be callable, meaning that the company has the option to purchasethe shares from shareholders at anytime for any reason (usually for a premium). Some peopleconsider preferred stock to be more like debt than equity. A good way to think of these kindsof shares is to see them as being in between bonds and common shares

They have a prior claim on the assets of the company in the event of liquidation

Less risky

Types:

Cumulative or non- cumulative : The dividend if not paid in case of acumulative preference shares accumulates and is paid at a later date.

Redeemable or non- redeemable : irredeemable preference shares are no longerin existence.

Participating or non-participating : this implies having voting right and nothaving them

Convertible & Non convertible : into equity shares

Tax treatment:

Classified as franked investment income No standard rate tax to be paid on the income


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HYBRID SECURITIES

Combines the elements of the two broader groups of securities DEBT and EQUITY Predictable return until certain date Options available at maturity

Examples:

Preference shares Convertible/ exchangeable bond Warrants Options

Tax treatment:

Based on the different hybrid securities used


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8.Real Estate Investments

The most basic definition real estate is "an interest in land". Broadening that definition

somewhat, the word "interest" can mean either an ownership interest (also known as a fee-

simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the

full rights of ownership of the land (for example, to legally use and transfer the title of the

land/property), and must also assume the risks and responsibilities of a landowner (for

example, any losses as a result of natural disasters and the obligation to pay property taxes).

On the other side of the relationship, a leasehold interest only exists when a landowner

agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If you rent

an apartment, you have a leasehold interest in real estate. If you own a home, you have an

ownership interest in that home.

Real estate investments fall into one of the four following categories: private equity, publicequity, private debt and public debt. Your choice of which one to invest in depends on thetype of exposure you are seeking for your portfolio.The first type of market you could participate in is theprivate market. In the private market,

you would be purchasing a direct interest in one or more real estate properties. You would

own and operate the piece of real estate yourself (or through a property manager), and you

would receive the rent payments and value changes from that investment.

Alternatively, you could choose to invest in the public real estate market. You would be

participating in the public market if you purchased a share or unit in a publicly traded real

estate company, such as a real estate investment trust (REIT).

When you invest in debt, you are lending funds to an owner or purchaser of real estate. You

receive periodic interest payments from the owner and a security charge against the property

in the form of a mortgage. At the end of the mortgage term, you get back the balance of yourmortgage principal. This type of real estate investing is quite like that of bonds.


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An equity investment, on the other hand, represents a residual interest in the property. When

you are an equity investor, you are essentially the owner of the property. You stand to gain a

lot when the property value increases or if you are able to get more rent for your building.

Income-Producing and Non-Income-Producing Investments There are four broad types

of income-producing real estate: offices, retail, industrial and leased residential. There are

many other less common types as well, such as hotels, mini-storage, parking lots and seniors

care housing. The key criteria in these investments that we are focusing on is that they are

income producing. Non-income-producing investments, such as houses, vacation properties

or vacant commercial buildings, are as sound as income-producing investments. Just keep in

mind that if you invest equity in a non-income producing property you will not receive any

rent, so all of your return must be through capital appreciation. If you invest in debt secured

by non-income-producing real estate, remember that the borrower's personal income must be

sufficient to cover the mortgage payments, because there is no tenant income to secure the

payments

Characterstic of real state investment:

1. Capital appreciation

Real estate appreciates in capital - particularly land and property.A key aspect of the capital

appreciation is that, it can be realised only when it is sold. This has to be factored in before

making an investment decision. The capital appreciation of the house can favorably be used

in the form of a mortgage loan for business purpose or in the form of a reverse mortgage post

retirement.

2. Risk

The risk with real estate is that it can go down sharply too. The current worldwide economic

turmoil is because of real estate prices dropping more than the expectation. The other risk is

related to its liquidity itself. Real estate prices in India do not have a formal/scientific basis

for quoting. Brokers are the key pins holding the structure together.


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3. Liquidity

Real estate is probably the most illiquid of all common investment avenues. If there is an

urgency to sell a property the value could drop drastically. Selling at 'Market Price' is

counted in number of months not days.

4.No fixed maturity

Unlike a bond which has a fixed maturity date, an equity real estate investment does notnormally mature . An exception to this characteristic is an investment in fixed-term debt; bydefinition a mortgage would have a fixed maturity.

5.Tangible

Real estate is, well, real! You can visit your investment, speak with your tenants, and showit off to your family and friends. You can see it and touch it.

6.Requires Management

Because real estate is tangible, it needs to be managed in a hands-on manner. Tenantcomplaints must be addressed. Landscaping must be handled. And, when the building startsto age, it needs to be renovated.

7.Inefficient Markets

An inefficient market is not necessarily a bad thing. It just means that informationasymmetry exists among participants in the market, allowing greater profits to be made bythose with special information, expertise or resources. In contrast, public stock markets aremuch more efficient - information is efficiently disseminated among market participants, andthose with material non-public information are not permitted to trade upon the information.In the real estate markets, information is king, and can allow an investor to see profitopportunities that might otherwise not have presented themselves.

8. High Transaction Costs

Private market real estate has high purchase costs and sale costs. On purchases, there arereal-estate-agent-related commissions, lawyers' fees, engineers' fees and many other coststhat can raise the effective purchase price well beyond the price the seller will actuallyreceive. On sales, a substantial brokerage fee is usually required for the property to be

properly exposed to the market. Because of the high costs of trading real estate, longerholding periods are common and speculative trading is rarer than for stocks.

9.Lower LiquidityWith the exception of real estate securities, no public exchange exists forthe trading of real estate. This makes real estate more difficult to sell because deals must be


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privately brokered. There can be a substantial lag between the time you decide to sell aproperty and when it actually is sold - usually a couple months at least.

10. Underlying Tenant QualityWhen assessing an income-producing property, an importantconsideration is the quality of the underlying tenancy. This is important because when you

purchase the property, you're buying two things: the physical real estate, and the income

stream from the tenants. If the tenants are likely to default on their monthly obligation, therisk of the investment is greater.

11. Variability among Regions While it sounds clich, location is one of the importantaspects of real estate investments; a piece of real estate can perform very differently amongcountries, regions, cities and even within the same city. These regional differences need to beconsidered when making an investment, because your selection of which market to invest inhas as large an impact on your eventual returns as your choice of property within the market.

IV. Tax treatment

Real estate attracts capital gains tax. The advantage is that we can use indexation benefits to

our advantage. The indexation index is announced every year by the income tax department.

This is a number, which links the inflation to property values. By using indexation, we can

estimate the true appreciation of the real estate after adjusting for inflation.

The tax on the sale of the only house or agricultural property can be brought down to zero by

reinvesting the sale proceeds in a new house or agricultural property. The capital gains can

also be invested in low interest yielding Capital Gains Bonds.

Benefits Some of the benefits of having real estate in your portfolio are as follows:

1.Diversification Value - The positive aspects of diversifying your portfolio in termsof asset allocation are well documented. Real estate returns have relatively low correlations

with other asset classes (traditional investment vehicles such as stocks and bonds), whichadds to the diversification of your portfolio.

2.Yield Enhancement- As part of a portfolio, real estate allows you to achieve higherreturns for a given level of portfolio risk. Similarly, by adding real estate to a portfolioyou could maintain your portfolio returns while decreasing risk.

3. Inflation Hedge - Real estate returns are directly linked to the rents that are receivedfrom tenants. Some leases contain provisions for rent increases to be indexed to

inflation. In other cases, rental rates are increased whenever a lease term expires andthe tenant is renewed. Either way, real estate income tends to increase faster ininflationary environments, allowing an investor to maintain its real returns.


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4. Ability to Influence Performance Examples of such activities include: replacing aleaky roof, improving the exterior and re-tenanting the building with higher qualitytenants. An investor has a greater degree of control over the performance of a realestate investment than other types of investments.

Disadvantages:

Costly to Buy, Sell and Operate - For transactions in the private real estate market,transaction costs are significant when compared to other investment classes

Real estate is also costly to operate because it is tangible and requires ongoing maintenance.

Requires Management- With some exceptions, real estate requires ongoing management attwo levels. First, you require property management to deal with the day-to-day operation ofthe property. Second, you need strategic management of the property to consider the longerterm market position of the investment.

Difficult to Acquire - It can be a challenge to build a meaningful, diversified real estateportfolio. Purchases need to be made in a variety of geographical locations and across assetclasses, which can be out of reach for many investors.

Performance Measurement :Risk and return are easy to determine in the stock market but measuring real estateperformance is much more challenging.


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9.DERIVATIVES

Derivative is a product whose value is derived from the value of one or morebasic variables, called bases (underlying asset, index, or reference rate), in acontractual manner. The underlying asset can be equity, forex, commodity orany other asset. For example, wheat farmers may wish to sell their harvest ata future date to eliminate the risk of a change in prices by that date. Such atransaction is an example of a derivative. The price of this derivative is driven

by the spot price of wheat which is the "underlying".

In the Indian context the Securities Contracts (Regulation) Act, 1956(SC(R)A) defines "derivative" to include-

1. A security derived from a debt instrument, share, loan whether secured orunsecured, risk instrument or contract for differences or any other formof security.

2. A contract which derives its value from the prices, or index of prices, ofunderlying securities.

DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants areforwards, futures, options and swaps.

Forwards: A forward contract is a customized contract between two entities, wheresettlement takes place on a specific date in the future at today's pre-agreed

price.

Futures: A futures contract is an agreement between two parties to buy or sell anasset at a certain time in the future at a certain price. Futures contracts are specialtypes of forward contracts in the sense that the former are standardizedexchange-traded contracts..

Options: Options are of two types - calls and puts. Calls give the buyer theright but not the obligation to buy a given quantity of the underlying asset, ata given price on or before a given future date. Puts give the buyer the right,


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but not the obligation to sell a given quantity of the underlying asset at a givenprice on or before a given date.

Warrants: Options generally have lives of upto one year, the majority ofoptions traded on options exchanges having a maximum maturity of ninemonths. Longer-dated options are called warrants and are generally tradedover-the-counter.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities.These are options having a maturity of upto three years.

Baskets: Basket options are options on portfolios of underlying assets. Theunderlying asset is usually a moving average of a basket of assets. Equityindex options are a form of basket options.

Swaps: Swaps are private agreements between two parties to exchange cash flowsin the future according to a prearranged formula. They can be regarded as

portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps:These entail swapping only the interest related cashflows between the parties in the same currency.

Currency swaps:These entail swapping both principal and interestbetween the parties, with the cash flows in one direction being in a

different currency than those in the opposite direction.

Swaptions: Swaptions are options to buy or sell a swap that will becomeoperative at the expiry of the options. Thus a swaption is an option on a forwardswap. Rather than have calls and puts, the swaptions market has receiverswaptions and payer swaptions. A receiver swaption is an option to receive fixed and

pay floating. A payer swaption is an option to pay fixed and receive floating.

PARTICIPANTS IN THE DERIVATIVES MARKETS

The following three broad categories of participants - hedgers, speculators,and arbitrageurs trade in the derivatives market.

1. Hedgers face risk associatedwith the price of an asset. They use futures or options markets to reduce oreliminate this risk.

2. Speculators wish to bet on future movements in the price

of an asset. Futures and options contracts can give them an extra leverage;that is, they can increase both the potential gains and potential losses in aspeculative venture.


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3. Arbitrageurs are in business to take advantage of adiscrepancy between prices in two different markets. If, for example, theysee the futures price of an asset getting out of line with the cash price, theywill take offsetting positions in the two markets to lock in a profit.

Advantages:

Investors typically use derivatives for three reasons:

1.To hedge a position: Hedging a position is usually done to protect against or insure the riskof an asset. For example if you own shares of a stock and you want to protect against thechance that the stock's price will fall, then you may buy aput option. In this case, if the stock

price rises you gain because you own the shares and if the stock price falls, you gain because

you own the put option. The potential loss from holding the security is hedged with theoptions position.

2.To increase leverage:Leverage can be greatly enhanced by using derivatives. Derivatives,specifically options are most valuable in volatile markets. When the price of the underlyingasset moves significantly in a favorable direction, then the movement of the option ismagnified. Many investors watch the Chicago Board Options Exchange Volatility Index(VIX) which measures the volatility of the S&P 500 Index options. High volatility increasesthe value of both puts and calls.

3.To speculate on an asset's movement: Speculating is a technique when investors bet on thefuture price of the asset. Because options offer investors the ability to leverage their

positions, large speculative plays can be executed at a low cost

Trading

Derivatives can be bought or sold in two ways. Some are traded over-the-counter(OTC)while others are traded on an exchange. OTC derivatives are contracts that are made

privately between parties such as swap agreements. This market is the larger of the twomarkets and is not regulated. Derivatives that trade on an exchange are standardizedcontracts. The largest difference between the two markets is that with OTC contracts, there iscounterparty risk since the contracts are made privately between the parties and areunregulated, while the exchange derivatives are not subject to this risk due to the clearinghouse acting as the intermediary.
http://www.investopedia.com/terms/h/hedge.asphttp://www.investopedia.com/terms/p/putoption.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/v/vix.asphttp://www.investopedia.com/terms/o/otc.asphttp://www.simulater.investopedia.com/terms/c/clearinghouse.asphttp://www.simulater.investopedia.com/terms/c/clearinghouse.asphttp://www.investopedia.com/terms/h/hedge.asphttp://www.investopedia.com/terms/p/putoption.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/v/vix.asphttp://www.investopedia.com/terms/o/otc.asphttp://www.simulater.investopedia.com/terms/c/clearinghouse.asphttp://www.simulater.investopedia.com/terms/c/clearinghouse.asp


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10.GOVERNMENT SECURITIES

Government securities(G-secs) are sovereign securities which are issued by the Reserve

Bank of India on behalf of Government of India,in lieu of the Central Government's market

borrowing programe.

The term Government Securities includes:

Central Government Securities.

Central Government Securities.

State Government Securities

Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit'.The market borrowing of

the Central Government is raised through the issue of dated securities and 364 days treasury

bills either by auction or by floatation of loans.

In addition to the above, treasury bills of 91 days are issued for managing the temporary cash

mismatches of the Government. These do not form part of the borrowing programme of the

Central Government.

Types of Government Securities

Government Securities are of the following types: -

Dated Securities : They are generally fixed maturity and fixed coupon securities usuallycarrying semiannual coupon. These are called dated securities because these are identified by

their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Governmentsecurity maturing in 2012, which carries a coupon of 11.03% payable half yearly. The keyfeatures of these securities are:They are issued at face value.Coupon or interest rate is fixed at the time of issuance, and remains constant till

redemption of the security.The tenor of the security is also fixed.Interest /Coupon payment is made on a half yearly basis on its face value.The security is redeemed at par (face value) on its maturity date.


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Zero Coupon bonds: These are bonds issued at discount to face value and redeemed at par.

These were issued first on January 19, 1994 and were followed by two subsequent issues in

1994-95 and 1995-96 respectively. The key features of these securities are:

They are issued at a discount to the face value.

The tenor of the security is fixed.

The securities do not carry any coupon or interest rate. The difference between the

issue price (discounted price) and face value is the return on this security.

The security is redeemed at par (face value) on its maturity date.

Partly Paid Stock: This is stock where payment of principal amount is made in installments

over a given time frame. It meets the needs of investors with regular flow of funds and the

need of Government when it does not need funds immediately. The first issue of such stock

of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have

been issued a few more times thereafter. The key features of these securities are:

They are issued at face value, but this amount is paid in installments over a specified

period.

Coupon or interest rate is fixed at the time of issuance, and remains constant till

redemption of the security.

The tenor of the security is also fixed.

Interest /Coupon payment is made on a half yearly basis on its face value.


Floating Rate Bonds: These are bonds with variable interest rate with a fixed percentage

over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a

maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity

were first issued on September 29, 1995, followed by another issue on December 5, 1995.

Recently RBI issued a floating rate bond, the coupon of which is benchmarked against

average yield on 364 Days Treasury Bills for last six months. The coupon is reset every

six months. The key features of these securities are:

They are issued at face value.

Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the

time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc.


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Though the benchmark does not change, the rate of interest may vary according to the

change in the benchmark rate till redemption of the security. The tenor of the security is also

fixed.



Bonds with Call/Put Option: First time in the history of Government Securities market RBI

issued a bond with call and put option this year. This bond is due for redemption in 2012 and

carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in

year 2007. In other words it means that holder of bond can sell back (put option) bond to

Government in 2007 or Government can buy back (call option) bond from holder in 2007.

This bond has been priced in line with 5 year bonds.

Capital indexed Bonds: Theseare bonds where interest rate is a fixed percentage over the

wholesale price index. These provide investors with an effective hedge against inflation.

These bonds were floated on December 29, 1997 on tap basis. They were of five year

maturity with a coupon rate of 6 per cent over the wholesale price index. The principal

redemption is linked to the Wholesale Price Index. The key features of these securities are:

They are issued at face value.

Coupon or interest rate is fixed as a percentage over the wholesale price index at the time

of issuance. Therefore the actual amount of interest paid varies according to the change in

the Wholesale Price Index.

The tenor of the security is fixed.


The principal redemption is linked to the Wholesale Price Index.

Features of Government Securities

Nomenclature

The coupon rate and year of maturity identifies the government security.

Example: 12.25% GOI 2008 indicates the following:


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12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, 2008 is

the year of maturity.

Eligibility

All entities registered in India like banks, financial institutions, Primary Dealers, firms,

companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign

Institutional Investors, State Governments, Provident Funds, trusts, research organizations,

Nepal Rashtra bank and even individuals are eligible to purchase Government Securities.

Availability

Government securities are highly liquid instruments available both in the primary and

secondary market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading

Primary Dealer in the government securities market, and is actively involved in the trading of

government securities.

Forms of Issuance of Government Securities

Banks, Primary Dealers and Financial Institutions have been allowed to hold these

securities with the Public Debt Office of Reserve Bank of India in dematerialized form in

accounts known as Subsidiary General Ledger (SGL) Accounts.

Entities having a Gilt Account with Banks or Primary Dealers can hold these securities

with them in dematerialized form.

In addition government securities can also be held in dematerialized form in demat

accounts maintained with the Depository Participants of NSDL.

Minimum Amount

In terms of RBI regulations, government dated securities can be purchased for a minimum

amount of Rs. 10,000/-only.Treasury bills can be purchased for a minimum amount of Rs

25000/- only and in multiples there of. State Government Securities can be purchased for a

minimum amount of Rs 1,000/- only.


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Repayment

Government securities are repaid at par on the expiry of their tenor. The different repayment

methods are as follows :

For SGL account holders, the maturity proceeds would be credited to their current

accounts with the Reserve Bank of India.For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity proceeds

and they would pay the Gilt Account Holders.

For entities having a demat account with NSDL,the maturity proceeds would be collected

by their DP's and they in turn would pay the demat Account Holders.

Day Count

For government dated securities and state government securities the day count is taken as

360 days for a year and 30 days for every completed month. However for Treasury bills it is

365 days for a year.

Benefits of Investing in Government Securities

No tax deducted at source

Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals

Qualifies

Documents

Avenues Assignment