Final Summer Interns Project

1 Spectrum of Investment Avenues in India

Summer Training Project On

“Spectrum of Investment Avenues in India”

Submitted To

ANJUMAN I ISLAM’s ALLANA INSTITUTE OF MANAGEMENT STUDIES

Required For Partial Fulfilment of MMS Program

By

Shaikh Mohd. Jahir Munna Alli - 47

Under The Guidance Of

AHMAR BALBALE

(Channel Partner)

AM INVESTMENT

For The Academic Year

2009 – 2010


Declaration

I Mr. Shaikh Mohd. Jahir Munna Alli, student of

MMS (Specialization – Finance, Semester III) of

Anjuman-I-Islam‟s Allana Institute of Management

Studies hereby declare that I have completed this

Summer Internship project on “Spectrum of

Investment Avenues in India” in the academic year

2009 - 2010. The information submitted is true and

original to the best of my knowledge.

I further certify that I have no objection and grant the

rights to Anjuman-I-Islam‟s Allana Institute of

Management Studies or Mumbai University to publish

any chapter / Projects if they deem fit in journals or

magazines or newspapers without any permission.

Place : Mumbai

Date :

Name : Shaikh Mohd. Jahir Munna Alli.

Class : MMS – II, Sem – III

Roll No. : 47

Signature :


ACKNOWLEDGEMENT

If words are considered as a symbol of approval and token

of appreciation then let the words play the heralding role

expressing my gratitude.

I am indebted to the reviewer of the project Mr. Ahmer

Balbale, my project guide for his support and guidance. I

would sincerely like to thank him for all his efforts.

I am also grateful to Mr. Pradeep (Senior Manager – AM

Investment Ltd), Mr. Shamsher and Mr. Mahmood Balbale for

helping me understand the concept of various investment

and for providing their insights in the making of this project.

I would like to thank the University of Mumbai, for giving its

student a platform to stay abreast with changing business

scenario, with the help of theory as a base and practical as

a solution.

Last but not least, I would like to express my sincere thanks to

Dr. Vidya Hattangadi (Director, Allana Institute of

Management Studies, Mumbai) for her indirect help and all

other staff members of Allana Institute of Management

Studies for their co-operation and also my parents for giving

the best education.


INDEX

Sr.no Topic Page No.

1 Executive Summary 5

2 Company Profile 7

3 Introduction 8

3.1 Types of Investors

3.2 Why One Should Invest their Money?

3.3 Points to consider before making any investment

3.4 Why portfolio is given so much importance

4 What is Investment Analysis? 15

5 Importance of Decision Making 20

6 Risk and Return 22

7 Investment Avenues in India 26

7.1 Investment in Shares

7.2 Investment in Derivative

7.3 Investment in Commodity Market

7.4 Mutual Fund Scheme

7.5 Investment in Gold And Silver (BULLION)

7.6 Deposit With Banks

7.8 Postal Saving Scheme/ Postal Office Saving

Scheme

7.9 Public Provident Scheme

7.10 LIC Scheme

7.11 Investment in Money Market Securities

7.12 investment in Real Estate Properties

8 Recommendation 69

9 Billiography 70


Executive Summary

There has been a phenomenal growth in the Indian capital

market in recent year. The number of investor has grown up to 30

millions. The Government of India has initiated a change in the

economic and financial policies of the country. The liberalised schemes

were announced with a view to overcome the foreign exchange crisis

due to adverse Balance of Payment in 1991.

The abolition of controller of capital issue and establishment of

Securities and Exchange Board of India (SEBI) which have significantly

contributed in changing investment scenario.

The need for investment arise not only for the institution but also

for the individual with surplus fund which they desire to invest for short

or long period with safety and fair return. For investors, various

alternative avenues of investment are available with specific features,

advantages and limitation and is suitability under certain

circumstances.

It‟s for the investor to find out the best alternative means of

Investment Avenue which is suitable for his needs and requirements.

Some investment avenues provide maximum safety but low return

while some investment avenues offers attractive return but limited

margin on safety, some avenues offer Tax benefit. One particular

avenue may be suitable for one investor while same may not be

suitable for other. Similarly some investor give more importance to

profitability i.e. Return on investment while other give more importance

to safety and security of the fund invested. In brief, every investor has

to find out one or more avenues for investment and act accordingly.

Every investment decision has become increasingly important in

recent days. Sound decisions are made on the basis of knowledge and

skills. There are several point needs to considers for investment decision.

There is no readymade formula which will always work. Investor should

realise that investment are made under condition of uncertainty. A

sound decision can be made if the investor is familiar with the various

alternatives investment available. An investment decision at any point

of time depends upon the individual‟s needs and preferences on one

hand and outlook for various types of securities and real property on

the other hand.

Most of Indian investor are still unaware of various investment

avenues available their features, advantages and disadvantages.


So, the problem definition of this project is as under:

a. Different types Investment Avenue in India

b. Risk and Return


Company Profile:

AM Investments is basically a small firm which deals in all types of small

and big business activities which can start form opening of an account

of a person who is interested in investing in shares giving them proper

guidance how to invest in shares and what are the terms and

conditions to it .It also deals in exports of soap products to the Gulf

countries mainly Dubai and supply semi-ripped mangoes to Akbar

allays in Mumbai.

It mainly concern with the deal of purchase and sale of shares with

Angel Broking connected with BSE On-Line trading System (BOLT).The

Angel Group is a member of the Bombay Stock Exchange (BSE),

National Stock Exchange (NSE) and the two leading Commodity

Exchanges in the country: NCDEX & MCX. Angel is also registered as a

Depository Participant with CDSL. AM Investment Business

would deal in Equity Trading Commodities, Portfolio Management

Services, Mutual Funds, Life Insurance, Personal Loans, Depository

Services, and Investment Advisory.

Angel Group mainly deals in the below:

Angel Broking Ltd,Angel Commodities Broking Ltd.,Angel Securities Ltd.

AM investment would deal in above of the investment in whole. But I

was mainly been associated with the Angel Broking Securities in the

firm and information regarding export and supply of mangoes to Akbar

allays. But the manager would give us all the information regarding the

investments as he used to suggest the investors those who felt that

shares are risky and the can lose money and he used to convince

them that they should not panic in such a situation but remain still. Even

when they are not been convinced by this he would suggest them to

invest in other government policies were no much risk is involved in it.

He would mainly insist us to sit on the BOLT and see how a change

takes place on the BOLT and to determine now further changes will

take place in it.


Introduction: Investors include individuals and institutional with surplus funds for short

and long run term investments. For all types of investors, alternative

investment avenues are easily available. Every avenue has certain

special features, advantages, limitations and suitability. It is for the

investors to select the best avenues for safe and profitable investment

of their savings/surplus funds. Some investment avenues provide

maximum safety but low return (e.g. GOI saving bonds or government

securities) while some others offer attractive return but limited safety

(e.g. Corporate Securities). Some more avenues offer tax benefits. One

particular avenue may be suitable/convenient to one investor while

the investors give importance to attractive return while others may give

priority to safety and security of the funds invested. In brief, every

investor has to find out one or more avenues for investment as per his

expectation and invest accordingly. One avenue may not necessarily

be convenient to all categories of investors.

Sometimes, an ordinary investor gets confused due to the availability of

varied investment avenues. He finds it difficult to select an avenue

which is most convenient to him. Moreover, the avenues for investment

are increasing rapidly in India. For example, mutual funds bring

availability of varieties of avenues; an investor actually enters in the

wonderland of investment. He keeps on moving in this wonderland in

order to find out the most convenient avenue for his investment. For this

he has to the relative merits and limitation of alternative avenues and

select one or two avenues to achieve his investment objective. An

investor can prepare a sound investment plan provided he is familiar

with various investment avenues. At present investment consultant (e.g.

M/S Blue-chip Corporate Investment Centre, Ltd.) are available. They

guide investors in the selection of most appropriate investment

avenues. In addition, door to door investment service is provided.

Hundreds of investors across India take benefits of such services free of

charge. Even investment agents provide detailed information on

different investment avenues and help the client in the selection of

appropriate avenues suitable to their specific requirements.

In addition, there are investment counsellors who undertake investment

counselling. They study the specific problems of individual investor and

guide him in his investment decisions. The counsellor knows details of

investment avenues and can suggest the avenues which will be most

suitable to a particular investor. This investment counselling service is

necessary in the present period when investment avenues are

increasing and an investor is not aware of details of investment


avenues. Faulty investment is always harmful to the investor as his

income from such investment may be low or he may not be able to

convert his investment into cash when urgently required. Here.

Investment counselling is useful. The investment counsellor is competent

to help and guide his clients in the right direction so as to avoid undue

risk in the investment. Even suitable changes in the investment avenues

can be suggested by the investment counsellor. He acts as a friend

and guide to his clients and offer them timely guidance. The relation

between the investor and his counsellor should be always cordial. In

India, there is urgent need of investment counselling particularly in

urban areas and big cities. The income of the people is increasing

rapidly so as the inflation. They have excess funds for profitable

investment. Here investment counselling is required. This suggests that

there is an ample scope of investment counselling in India.


Types of Investors:

Avenues for investment are the outlet or agencies useful for investment

of funds. Such investments are many but varied in character. Similarly,

investor are also quite large in number broadly classified into Individual

Investor and Institutional Investor.

o Individual Investor:

Individual investor are individual with surplus money (saving) to invest in

order to have some return on the investment made. This return may be

in the form of interest, dividend, bonus, shares or capital appreciation

of the investment made (short/long term Capital Gain). individual

investor include salaried people, retired employee, businessmen.

Housewives, Professional and so on. in India, an individual

in the 25-35 years age group may plan for purchase of a house and

vehicle, an individual belonging to the age group of 35-45 years may

plan for children‟s education and children‟s marriage, an individual in

his or her fifties would be planning for post-retirement life.

o Institutional Investor

Institutional investor include, financial agencies and other institutions

which desire to invest their surplus funds. Charitable/religious trust,

banks, insurance companies, cultural and educational institutions, etc.

can be treated as an institutional investor.

Moreover, all categories of investors are equally interested in safety,

liquidity and reasonable return on the fund invested.

In India, the avenues for investment are many and their numbers is

continuously increasing along with new development in the capital

market. In the olden days, people used to keep their saving in post

offices and in government securities. They used to purchase gold and

silver generally for occasion purpose. At present , these avenues have

lost their traditional importance as money can be invested more

profitably in the corporate securities, Public Provident Fund (PPF), UTI,

Mutual Funds and so on. The ample avenue give investor more choices

and benefit to the investor provided they have necessary knowledge ,

skill and experience for the selection of best avenues


Why one should invest their money? The answer to this question is very simple; one should invest their money

to get some income over it. Nowadays people also invest in some

securities for tax exemption under income tax act, people also invest

their money in order to compensate future expenses e.g child

education, children wedding, retirement, sickness, construction of

house – etc, which is nothing but personal objective of investor.

Points to consider before making any investment

o Investment Objective:

Before making any investment an investor should first set up his

personal objective than financial objective. Financial objective include

safety and security of the money invested (principal amount),

profitability (through interest and capital appreciation).Financial

objective should be given importance in the lights of personal

objective, because it is personal objective that is going to decide the

size of investment, type of investment and period of investment. Such

objective may be monetary/financial or personal in character. The

objective include safety and security of the funds invested (principal

amount), profitability (through interest, dividend and capital

appreciation) and liquidity (convertibility into cash as and when

required). These objective are universal in character as every investor

will like to have a fair balance of these three financial objectives. An

investor will not like to take undue risk about his principal amount even

when the interest is high and attractive.

o Period of Investment:

Period of investment relates to liquidity, therefore Period of investment

is one major consideration while selecting suitable avenue for

investment. Such period may be short (up to one year), medium (one

to three years) or long (more than three years). Return is more on

longer investment then shorter or medium investment. Example, LIC

policy is an investment for a very period as the investment id made for

the old age hence liquidity is low, whereas balance in the saving bank

account is a short term investment therefore liquidity is higher because

withdrawal is possible at any time as per need. People also invest in

share market on intra-day basis, that is the shortest period of investment

people can take exit from the market any time he want and vice

versa.


o Risk in investment:

It is the third factor that needs to be given importance before any

investment decision. Risk needs careful consideration while selecting

the avenue for investment. Risk is a normal feature in every investment,

as it is said “higher the risk, higher the return and lower the risk lower the

return”, the degree of risk and uncertainty may be more in some

investment avenues while it may be less in case of other avenues. In

addition, Liquidity risk, Inflation risk, Market Risk, Business Risk, Political

Risk, etc also connected with the investment made. Example – risk is

more, if the period of maturity of loan is longer. Similarly, the risk is less in

case of debt instrument (e.g. Debenture) and more in case of

ownership instrument (Equity Share). Certain type of risk is unavoidable

while some other can be estimated to some extent.

The objective of an investor should be to minimise the risk involved in

the investment and maximise the return out of the investment made.

There has to be proper balance between the risk involve and the return

available.

o Return on Investment:

An investor would like to have at least reasonable return on his

investment in terms of dividend, interest and capital appreciation. The

return is a reward of the risk undertaken and also for parting with

liquidity. Return on investment includes current income which is in the

form of interest or dividend earned on a yearly basis. The return on

investment is in the form of capital gains which may in the form of

increase in the market price of the investment. For example, a share of

Rs.10 may be available for Rs.25 at time of purchase. However, after 10

years, the market price of the same share mat reach to Rs.100, here,

Rs.75 (Rs.100 – Rs. 25) is the capital gain for the investor. He gets

dividend for a period of ten years and also capital gain at rate of Rs.75

per share.

o Miscellaneous Factors:

An investor has to consider some more factors while selecting a

suitable avenue for investment. Such factors are:

(i) Tax benefit available.

(ii) Availability of loan facility.

(iii) Initial investment amount and future marketability of

investment.

(iv) Capital appreciation.

(v) Availability of funds for investment and post retirement benefit

available.


(vi) Market standing of market borrowing agency.

(vii) Nomination facility and transfer of investment on the name of

close relative.

In short, selection of suitable avenue for investment depends on various

factors. An integrated approach on part of investor is necessary in this

regard. An investor also needs proper education, training and

guidance for the selection of most convenient avenues for his

investment. It is delicate decision which needs proper knowledge,

judgement and vision.


Why Portfolio Management is given so much

Importance?

Portfolio management means selection of securities and constant

shifting of the portfolio in the light of varying attractiveness of being a

part of a whole portfolio. It is a choice of selecting and revising the

range of securities to it in with the characteristics of an investor.

Expected rate of return on portfolio is directly to the expected return on

the component securities, it is not possible to deduce portfolio riskiness

simply by knowing the riskiness of individual securities. The riskiness of

portfolio depends upon the attributes of individual securities as well as

the interrelationships among the securities.

A professional, who manages other people‟s or institution‟s

investment portfolio with the object of profitability, growth and risk

minimization, is known as a portfolio manager. He is expected to

manage the investor‟s assets by showing thought for the future and

choose particular investment avenues appropriate for particular time

aiming at maximization of profit. The skill in portfolio management lies in

achieving a sound balance between the objective of safety, liquidity

and profitability

PortfolioGold and Silver

Bonds

Derivatives

Shares

Commodity

Mutual Funds

Others


What is Investment Analysis?

An investor has to analyse the securities available for investment.

Investment Analysis means to make a comparative study of the type of

industry, kind of security, fixed or variable securities. This helps to form

beliefs regarding future behaviour of price and stocks, the expected

return and risk associated with it. It helps investors regarding various

features such as liquidity, safety, income stability, capital appreciation,

tax incentive and legality. All investment decisions are to be made on

scientific analysis.

o FUNDAMENTAL ANALYSIS:

The primary purpose of any investment is to gain profit; it may be for

short or longer period. Therefore, fundamental analysis is a method of

finding out the future price of a security which an investor wants to buy.

The method of forecasting the future behaviour of investment, the rate

of return etc. is based on an analysis of the broad economic

environment in order to operates, a kind of industry to which it belongs

and the analysis of the internal working of the company through the

financial statement of the company which must be able to find out the

price movement of the shares and help to understand where to invest

their money effectively. The economy and industry would be necessary

to decide when, where and how much to invest. Thus, a look into the

monetary fiscal and demographic factors can give basic idea into the

trends in the economy.

Fundamental Analysis includes:

a) Economic Analysis

b) Industry Analysis

c) Company Analysi

a) Economic Analysis:

A study of economics forces which would give an idea about

future corporate earnings, payment of dividend, an interest to

investor is known as economic analysis. Some of the important

forces for economics analysis are: population, research and

technological developments, capital formation, natural

resources and raw material.

Population gives an idea of the kind of labour form available in

the country. Investor can invest on those industries amount of


share in the funds of the development of the country. Another

consideration of the investor is to invest in the company which

makes investment in capital goods or modernisation and

replacement of asset. The natural resources of the country are

responsible for its economic development. It is advisable to invest

in a company which utilises available natural resources of the

country.

Almost every piece of national legislation, substantial changes in

appropriation of funds by the government to specific

programme. Any changes in interest rate will have stimulating

impact on some companies. Investors should also get

knowledge of the present investment environment, the national

income figure, the wholesale price index, the agriculture and

industrial price indexes and the monetary policy and tax policy

for making economic analysis for making investment more

profitable.

b) Industry Analysis:

Industry analysis is the study of industries which are on the

upswing or growing. The ideal investment is the investment in

growing industry. There are certain industries which have been

growing in India. The recent examples are of entertainment and

computer software, petrochemical, bio-technology and capital

goods industries etc. Investment in these industries will definitely

gain in future.

Industry analysis should analyse and study of the following

factors.

1) Product line

2) Raw material and input

3) Capacity installed and utilised

4) Industry characteristics

5) Demand and market

6) Government policy with regards to industry

7) Labour and other industrial problems.

The investor should know the industry classification used in the

economy. It is also necessary to know the characteristics,

problems and practices in different industries. There is also need

to study the present and future development, operating

features, seasonal variation and competitiveness in order to

establish the proper perspective. In recent times the growth of

industries has been affected due to technological changes,

competitive pressure, population, etc


An investor should select few industries that are in the expansion

stages. Investment should not be made in the industries which

are in the pioneering stage. Similarly, industries that are in the

stagnation stage or declining stage its economic importance

should be avoided. Investor should select that company that

have developed a strong competitive position. It is difficult to

identify a good industry for investment. However an attempt to

analyze all the above factors should made by an investor.

An investor should measure the growth of the industry in terms of

Gross National Product. Those industries which are growing faster

than the growth if national income are useful for investment

purpose, and its growth rate is also useful for the investor to

analyse the prosperity and period between expansion and

growth. The economic and industry analysis is made in order to

have a broad idea of the forces affecting the investment.

c) Company Analysis:

The industry analysis helps to select few industries for investment

in securities. There are many companies in an industry. For

example \, is an investor want to invest in computer software

industry, then he has to select few companies from that industry.

There are thousands of listed companies from computer software

industry. Company analysis is the method to find out the worth of

the company. It is based on the analysis if the financial

statement of the company, it is the study of the variables which

influence the future price of a company‟s share. It is an

assessment of the company‟s competitive position, earning

capacity and profitability. It is a method of finding out the

intrinsic value of a company‟s share. This requires both internal as

well as external information.

The basic financial statements which are used as tools of

company analysis are the income statement, the balance sheet

and the statement of changes in financial position. While making

company analysis, investors should carefully judge that these

statements are correct, complete, consistent and comparable.

The most frequently used tools for company analysis are as

follows:

1) Ratio Analysis

2) Trend Analysis

3) Fund Flow Analysis

4) Common size Statement Analysis

5) Technical Analysis.


o TECHNICAL ANALYSIS:

Technical analysis is a study of market data in terms of factors affecting

supply and demand schedules, such as prices, volume of trading etc. it

is simple and quick method of forecasting behaviour of share prices.

The financial data and past behaviour of a company are presented on

charts and graphs in order to find out the history of price movement.

Technical analysis provides a simplified picture of price behaviour of

share. The analyst believe that the price of a share depends on

demand and supply in the stock market. They get the important

information about price and volume of a share in the stock market.

Investors, who use technical analysis, start checking the market action

of the share if it is favourable. They also examine the fundamental

factor and make sure that the company is sound and profitable.

Technical Analysis is based on certain assumption. These are

as follows:

1) The price of a security is related to demand and supply factor

operating in the market.

2) There are rational as well as irrational factors which affect the

supply and demand factors of a security.

3) The prices of securities behave in a manner that their movement

is continuous in a particular direction for some length of time.

4) Trend in the prices of securities have been seen to change when

there is shift in the demand and supply factors.

5) Whenever there are shifts in demand and supply, they can be

detected through charts prepared specially to show the action

of the market.

There are several way that technician think and act. At any given time,

many investor gain and many make loss. Technical analyst believe that

their method is simple and gives an investor a bird‟s eye view on the

future of security prices by measuring the past movement. They predict

the price behaviour through line chart, point charts, bar charts and

figure charts. There are large numbers of patterns which predict the

upward and downward swing in the market. This is not an accurate

method but it gives the general indication of the behaviour of prices in

the stock market.


Investment Decision

In order to enhance future wealth by generating income, each

individual has to make to separate decision. The first is saving decision.

It is concerned with the choice of how much of one‟s wealth consume

now and how much to consume later. The second is investment

decision, which relates the choice of portfolio or collection of assets

(instrument) for investment in which saving can be invested. Thus there

is a need for investment decision. The saving decision determine how

much to invest in securities, whereas, investment decision determine in

which securities or assets we can invest.

An individual may purchase a share of Rs. 1000 today in hopes of being

able to have Rs 1200 available for consuming a year from now with the

purpose in mind, think of an investment anything which is expected to

alter the owner‟s claim to consumption in present and future period.

The individual‟s purchase of share (investment) does this by reducing

consumption in the current period by Rs 1000 and by increasing

expected consumption by Rs 1200 in the future. In other words, there

are investment alternatives as well as investor‟s needs for which the

investment decision are necessary.

Investments are important as well as useful in the dynamic world. The

following factors provide investors to make investment decision:

(a) Increase in Income

(b) Retirement Benefit

(c) Contingency Arrangement

(d) Reduce Tax Liability

(e) If Basic Family Commitment such as Housing, Education,

Insurance, Marriage, Medical etc.

Individual have to decide from time to time about their saving and

investment on the basis of above factors. Basically, in making such

decisions, four things must be taken into account, which are as under

1) Available opportunities,

2) Preferences,

3) Market prices

4) Wealth.


Importance of Decision Making:

Investment is important in the context of present day conditions. The

following factors are responsible for making investment decision

increasingly important:

(a) Planning for retirement:

People retire at the age of 60. Individual have plan for their post

retirement life. Therefore, the earning from the employment should

be calculated and same portion of the earning should be saved.

The saving should be invested in such a manner that the investment

will appreciate sufficiently to provide stable income after retirement.

Thus, the investment decision is very important for an individual in

this respect.

(b) Tax saving:

Taxation is an important factor which influences the people to

invest. Individual manage to save and invest in such a manner

that their income tax is saved or minimised. Salaried people,

particularly, have to manage their investment in such a way that

their income tax will be saved or minimised. Investment in UIT,

ULIP, LIC NSC, post office deposits, PPF, mutual funds are eligible

for income tax relief to the investors. However, they have to take

investment decision in such a way that the investment will be

profitable, safe and the tax will be minimised.

(c) Interest rates:

Investors have to consider interest rates while making investment

decisions. As the objective of the investor is to maximise the

return on investment he will normally, select the investment which

will give the higher rate of interest. Thus, stability of interest is

important. However, a high rate of interest may not be the only

factor for selection of investment. The investor has to consider

other factor such as safety, liquidity, risk and legality of the

investment media. Interest rates may differ due to different

benefits offered by the investments. The investor has to take

proper decision on the basis of interest rates.


(d) Inflation:

In order to make the right choice of investments, investors have

to consider carefully the effect of inflation on their investment.

The investor has to consider an investment alternative which will

give a high rate of return in the form of interest to cover any

decrease in return due to inflation. Inflation has become a

continuous problem in India and hence, it is important for

investment decision making.

(e) Income:

Income level of investor goes on increasing due to inflation,

general increase in employment and other benefits and services.

If more income is generated investors find more revenues for

investment, however, investment decisions have become

important due to constant increase in income of the investors.

(f) Investment channels:

The growth and development of the country leads to greater

economic activities which provide large number of investment

channels. In India, investment opportunities and avenues have

increased due to liberalisation and free economy since 1991. This

has provided variety of investment opportunities. Thus, the

investors have the choice of variety of instruments. The investor

will have to try and achieve a proper investment mix between

high rate of return and stability of return to reap the benefit of

both. Therefore, investments decisions are important in modern

days.

An investor in order to fulfil his goals operates under certain constraints,

which are as follows:

Liquidity,

Age.

Need for regular income,

Time horizon,

Risk tolerance,

Tax liability.

The challenge in investment management lies in choosing the

appropriate investment which will meet the investment objectives of

the investor, subject to his constraints. Therefore, investment decision is

important from this point of view


Risk Return Analysis

Risk is a chance of loss. Investment risk exists where there is more than

one possible future return associated with an investment. If more than

one possible return exits and the investor has no idea of the

probabilities associated with the occurrence of any of the possible

future returns the situation is of complete investment uncertanity.

Investment certainly exists where there is only one possible return. The

investor is certain of the investment‟s return. Between the two extremes

of investment certainty and investment uncertainty lies the area of

investment risk. Under conditions of risk, investors realize that there is a

range of possible return and can associate some probability to each

possible return. This dispersion of possible returns represents risk. The

greater the dispersion of possible returns, on an investment, the greater

the risk.

The risks that equity shares can carry are:

Loss of dividend when no dividend is declared.

Low dividend i.e. dividend lower than bank‟s fixed deposit rates

of interest.

Stagnation or depreciation in the prices of shares and

Insolvency of the company.

o Types of Risk:

The various types of risks in investment may be classified as follows:

Default risk:

It is the risk of issuer of investment going bankrupt. An investor who

purchases shares or debentures will have to face the possibility of

default and bankruptcy of the company. In the case of fixed income

securities such as debentures or fixed deposits of companies, the

investor may take the care to see that the credit rating given to the

company, so that the risk can be minimized.

Business risk:

Business risk means the risk of a particular business failing thereby your

investment is lost. It is identifiable as the variation in the firm‟s earning

due to it‟s business or product line. The principle determinants of a firms

business risk are the variability of sales and it‟s operating leverage.


Operating leverage represents the firm‟s ability to translate increased

sales into increased profit. Business risk can be divided into two broad

categories, external and internal. External business risk is the result of

operating conditions imposed upon the firm by circumstances beyond

its control. Internal business risk is associated with the efficiency with

which a firm conducts its operations.

Financial risk:

The financial risk is function of the companies‟ capital structure or

financial leverage. The company may fall on financial grounds, if its

capital structure tends to make earnings unstable. Financial leverage

is the percent change in net earnings for a given result from the use of

debt financing in the capital structure. If a company uses a large

amount of debt, then it has contracted to pay a relatively large fixed

amount for its sources of capital. When the operating profits fall, the

company will have to pay large interest payments and the net profits

will fall even more. This is example of financial leverage. The like hood

of a company defaulting on its debt-servicing obligation is known as

financial risk.

Purchasing power risk:

The purchasing power risk of a security is the variation of real returns on

the security caused by inflation. Inflation reduces the purchasing

power of money over time. As price risk, the purchasing power of a

rupee falls and the real return on an investment may fall even though

the nominal return in current rupee rise. The impact of inflation is felt

greater in case of fixed income investments. On the other hand, in

case of fluctuating incomes like shares dividends, there is possibility of

the dividend rate being higher than the inflation rate. Thus, unless the

returns on your investments are higher than the inflation rate, your

investments are not profitable. The return on your investments after

adjusting for inflation is known as real rate of return.

Interest rate risk:

The earnings of companies and the performance of their shares are

sensitive to interest rates changes. Therefore, potential variability of

investment returns due to interest rate fluctuations is interest rate risk.

The prices of debt securities and all other securities with fixed payout

are dependent upon the level market interest rates. When interest rates

rise, bond values will generally fall. The degree of sensitivity to interest

rate changes will naturally differ from company to company.


Recently, companies have started issuing „floating rate bonds‟. The

rates of interest on these bonds are linked to some floating rate such as

„prime rate‟ or the banks minimum lending rate. When market interest

rate rise, the bond rate rises and when it fall, the bond rate also falls.

This is a good way of circumventing interest rate risk when interest

rates are on the rise. But in a situation where inflation is under control

and interest rates are on the decline, it is bond to be disadvantageous

to the investors.

Market risk:

The market risk means the variability in the rates of caused by the

market up swings or market down swings. It is caused by investor

reactions to tangible as well as intangible events in the market. Most

investors are quick to note about the security markets that returns on

securities tend to move together. That is, on a good day, the fact that

some stocks in the markets are rising seems to fuel enthusiasm, and

other sto7cks tend to rise also. On the other hand, when some stocks

begin to fall, others will also tend to fall as a mood of pessimism

pervades the market. This market psychology is the explanation of the

existence of market risk, while is the volatility of a security‟s return

attributable to changes in the level of market and have a high degree

of market risk, while others fluctuate very little as the market changes.

When a relatively small increase in the market usually accompanies a

relatively larger increase in the price of stock, the stock has a high

degree of market risk.

Liquidity risk:

Liquidity risk arises from the inability to convert an investment quickly

into cash. It refers to the ease with which a stock may be sold. If a stock

is highly liquid, it can be sold very quickly at a price which is more or

less equal to its previous market price. In a security market, liquidity risk

is function of the marketability of the security.

When an investor wants to sell a stock he is connected with its liquidity.

On the other hand, when an investor wants to buy a stock, he is

interested in its availability. A stock may be deemed to be easily, if it

can purchased quickly at a price more or less equal to its previous

price. A stock may be regarded as not easily available, if the purchaser

has to wait for quite sometimes to buy it at a price which is more or less

equal to the previous price. Alternatively, the purchaser, may, have to

offer a substantial premium in order to buy the stock quickly. Thus, the

lower marketability of stock gives a degree of liquidity risk that makes

the price of the stock a bit more uncertain.


Systematic and Unsystematic risk:

The fluctuation in an investment‟s return attribute to changes in broad

economic social or political factors which influence the return on

investment is systematic risk. It is that portion of total risk of security

which is caused by the influence of certain economic-wide factor like

money supply, inflation, level of government spending and monsoon

which have a bearing on the fortune of every company. Systematic risk

is undiversifiable risk and investors cannot avoid the risk arising from the

above factors.

Unsystematic risk is the variation in returns due to factors related to

the individual firm or security. It is that portion of the total risk which

arises from factors specific to particular firm such as plant breakdown,

labor strikes, sources of materials etc. It is possible to reduce

unsystematic risk by adding more securities the investor‟s portfolio. All

risky securities have some degree of unsystematic risk but combining

securities into diversified portfolios reduces unsystematic risk from the

portfolio. Therefore, unsystematic risk is often referred to as diversified

risk. The sum of systematic and unsystematic risks is equal to the total

risk of a security.


Investment avenues in India:

Avenues for investment are the outlet or agencies for useful for

investment of funds.

Such avenues are many and varied in character. Similarly, investor are

also quite large in number, they broadly include individual investor or

institutional investor as stated earlier. The avenues for investment are

same for all the investors and both categories of investor select suitable

avenues for the purpose of investment. Moreover, all categories of

investors are equally interested in safety, liquidity and reasonable rate

of return.

In India, avenues are many for investment and their number is

continuously increasing along with new developments in the capital

market. In olden days people used to keep their savings in post offices

and government securities. They also used to purchased gold or silver

in order to invest their surplus money. At present, these avenues have

lost its traditional importance as money can, now, be invested more

profitably in the corporate securities, public provident fund, UTI, mutual

fund and so on.

Investment Avenues

Shares and Debenture

Mutual Funds

Bank Deposit

Postal Saving Scheme

Public Provident

Fund

Money Market

Securities

Gold and Silver

Real Estate

LIC Scheme

Government Bonds

Commodity


Investment in share:

Joint stock companies collect their long term money/ fixed capital by

issuing share (equity/preference). This is called Stock Financing, share

are very popular amongst the investor class. Investment in share, are

risky as well as profitable. Transaction in share takes place in primary

and secondary markets. Large majority of investor prefer to invest their

money in shares through broker and other dealer operating on

commission basis. Purchasing of share is now easy and quick due to the

extensive use of computer and screen based trading based trading

system (STB‟s). Order can be registered on computers.

The shares are available for investment is classified into different

categories such as blue chip share, growth share, speculative share,

income share and so on. For proper investment in share the company

must be properly selected after studying the balance sheets and other

details of various companies. SHARE CERTIFICATE in physical form is no

more popular in India due to demat facility. It gives convenient in

handling and transfer of shares. For this, demat account can be

opened in the bank which provide depository service (e.g. ICICI

Demat).

o Advantage of investment in shares:

1) Equity shareholders get income in the form of dividend.

Companies offer attractive dividend to shareholder even when

the rate of dividend is flexible. Profitable and stable companies

offer good reward to their investors in the form of high rate of

dividend.

2) The liability of Equity shareholder is limited only to the extent of

their investment. Naturally, shareholder are not required to pay

anything more than the face value of the share purchased,

3) Shares are easily transferable and this facilitates easy transfer of

ownership at the option of shareholder. The transfer facility also

brings liquidity to the investment in shares.

4) The equity shareholders get an opportunity to participate in the

profitability of the company in the course of time. The profitable

companies also issue bonus share and rights shares from time to

time. Even the new shares issued by the companies are first

offered to existing shareholders. This pre-emptive right enables


existing shareholders to maintain their proportional ownership in

the additional share capital issued.

5) Listed equity share are actively quoted and traded on stock

exchanges. This marketability of equity shares brings liquidity to

the investment in share and also convenient to investors.

6) Equity shares carry Tax benefit. At present, dividend on the share

of Indian companies has been made tax free. However the

position may change as per the government policy.

7) Equity shareholders are the owner of the company with certain

power and voting rights. This enables them (collectively) to

exercise some control over the policies of the company.

8) Capital gain in equity investor is possible in the case of shares as

the price of the shares fluctuate along with the future prospect

of the company. Due to rise in the share price, there is a capital

appreciation and this offer extra benefit to the shareholders.

o Limitation of Investment in Shares:

1) Uncertainty of income/return: The return as regards investment in

shares is uncertain as it is linked with the profitability of the

company. The investment in share may prove to be the

unremunerative if the profit earn by the company is less.

2) Risky Investment: In the case of share, there is an element of

regards changing market values. The share price may go down

due to various reasons. This is bound to affect the investor

seriously. Secondly, selling at a low price bound to bring financial

loss. This suggests that investment is always risky.

3) Speculative activities are harmful: Speculative activities are quite

common as regards shares. However, such speculative deals

affect genuine investor and they may suffer loss even when they

are not directly involves in such speculative activities.

4) Future linked with company: In the case of shares, the future of

the shareholders is linked with the future of the company. The

return on investment will be attractive if the company makes

good profit. However, a shareholder may not get any return on

his investment if his company fails to get reasonably high profit.


Investment in Derivative: Derivative is a product whose value is derived from the value of one or

more basic variables, called bases (underlying asset, index, or

reference rate), in a contractual manner. The underlying asset can be

equity, FOREX, commodity or any other asset. According to Securities

Contracts (Regulation) Act, 1956 {SC(R)A}, derivatives is

A security derived from a debt instrument, share, loan, whether

secured or unsecured, risk instrument or contract for differences or any

other form of security. A contract which derives its value from the

prices, or index of prices, of underlying securities.

Derivatives are securities under the Securities Contract (Regulation) Act

and hence the trading of derivatives is governed by the regulatory

framework under the Securities Contract (Regulation) Act.

o Types of Derivative

There are mainly four types of derivatives i.e. Forwards, Futures, Options

and swaps.

Derivative

Forward

Future

Option

Calls

Puts

Swaps

Interest Rate Swap

Currency Swap


Forwards:

A forward contract is a customized contract between two entities,

where settlement 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

an asset at a certain time in the future at a certain price. Futures

contracts are special types of forward contracts in the sense that the

former are standardized exchange -

traded contacts.

Options:

Options are of two types - calls and puts. Calls give the buyer the right

but not the obligation to buy a given quantity of the underlying asset,

at a given price on or before a given future date. Puts give the buyer

the right, but not the obligation to sell a given quantity of the

underlying asset at a given price on or before a given date.

Swaps:

Swaps are private agreements between two parties to exchange cash

flows in 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 cash flows between the parties in the same currency.

Currency swaps: These entail swapping both principal and

interest between the parties, with the cash flows in one direction

being in a different currency than those in the opposite direction.

Warrants:

Options generally have lives of upto one year, the majority of options

traded on options exchanges having a maximum maturity of nine

months. Longer-dated options are called warrants and are generally

traded over-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. The

underlying asset is usually a moving average or a basket of assets.

Equity index options are a form of basket options.

Swaptions:

Swaptions are options to buy or sell a swap that will become operative

at the expiry of the options. Thus a swaption is an option on a forward

swap. Rather than have calls and puts, the swaptions market has

receiver swaptions 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.

o Trading Participant in Derivative;

1) HEDGERS :

The process of managing the risk or risk management is called as

hedging. Hedgers are those individuals or firms who manage

their risk with the help of derivative products. Hedging does not

mean maximising of return. The main purpose for hedging is to

reduce the volatility of a portfolio by reducing the risk.

2) SPECULATORS :

Speculators do not have any position on which they enter into

futures and options Market i.e., they take the positions in the

futures market without having position in the underlying cash

market. They only have a particular view about future price of a

commodity, shares, stock index, interest rates or currency. They

consider various factors like demand and supply, market

positions, open interests, economic fundamentals, international

events, etc. to make predictions. They take risk in turn from high

returns. Speculators are essential in all markets – commodities,

equity, interest rates and currency. They help in providing the

market the much desired volume and liquidity.


3) ARBITRAGEURS :

Arbitrage is the simultaneous purchase and sale of the same

underlying in two different markets in an attempt to make profit

from price discrepancies between the two markets. Arbitrage

involves activity on several different instruments or assets

simultaneously to take advantage of price distortions judged to

be only temporary.

Arbitrage occupies a prominent position in the futures world. It is

the mechanism that keeps prices of futures contracts aligned

properly with prices of underlying assets. The objective is simply to

make profits without risk, but the complexity of arbitrage activity

is such that it is reserved to particularly well-informed and

experienced professional traders, equipped with powerful

calculating and data processing tools. Arbitrage may not be as

easy and costless as presumed.

o Advantages for investment in derivative;

1) Flexibility:

Derivatives can be used with respect to commodity price, interest and

exchange rates and equity price. They can be used in many ways.

2) Risk Reduction:

Derivatives can protect your business from huge losses. In fact,

derivatives allow you to cut down on non-essential risks.

3) Stable Economy:

Derivatives have a stabilizing effect on the economy by reducing the

number of businesses that go under due to volatile market forces.

o Disadvantages of Derivatives:

If derivatives are misused, they can boomerang on the company.

1) Credit Risk:

While derivatives cut down on the risks caused by a fluctuating market,

they increase credit risk. Even after minimizing the credit risk through

collateral, you still face some risk from credit protection agencies.


2) Crimes:

Derivatives have a high potential for misuse. They have been the

caused the downfall of many companies that used trade malpractices

and fraud.

3) Interest Rates:

Wrong forecasts can result in losses amounting to millions of dollars for

large companies; it can wipe out small businesses. You need to

accurately forecast the long term and short term interest rates,

something that many businesses cannot do.

o Minimizing Risks with Derivatives:

1) Future Exchanges:

Arrange the derivatives through future exchanges. You may need to

put in a lot of work here; you must keep track of all adjustments in the

market worth of the underlying asset.

2) Asset and Liability driven Transactions:

The transactions should be driven by asset and liability management.

You should not speculate based on future forecasts.

3) Derivative Policy:

A good derivative policy focuses more on cost management and less

on forecasting. It should aim for cutting down expenses and costs.

While dabbling in derivatives is risky if you choose to speculate,

derivatives can be an important tool for financial structuring and cost

management if you use them correctly. If you do not know how to start

investing in derivatives, you can consult a small business advisor or

financial consultant. Remember, if you do go for derivatives, always

play by the book and never try anything illegal.


Investment in Commodity Market

You may have your debt and equity funds in place, but investing in

commodities could just be the one element to improve your portfolio.

Commodity trading provides an ideal asset allocation, also helps you

hedge against inflation and buy a piece of global demand growth.

In 2003, the ban on commodity trading was lifted after 40 years in India.

Now, more and more people are interested in investing in this new

asset class. While price fluctuations in the sector could get rather

volatile depending on the category, returns are relatively higher.

However, as this is not a primary area of investment for most, there is a

lot of apprehension about when and how to invest.

o Why invest in commodities?

Commodities allow a portfolio to improve overall return at the same

level of risk. Ibbotson Associates, a leading US-based authority on asset

allocation estimates that commodities increased returns between 133

and 188 basis points, at no extra risk.

o Who should invest?

Any investor who wants to take advantage of price movements and

wishes to diversify his portfolio can invest in commodities. However,

retail and small investors should be careful while investing in

commodities as the swings are volatile and lack of knowledge may

result in loss of wealth.

Investors must understand the demand cycles that commodities go

through and should have a view on what factors may affect this.

Ideally, you should invest in select commodities that you can analyse

rather than speculate across products you have no idea about.

Investing in commodities should be undertaken as a kicker in your

portfolio and not as the first destination for your money.


o What is commodity trading?

It's an age-old phenomenon. Modern markets came up in the late 18th

century, when farming began to be modernised. Though the trade's

mechanisms have changed, the basics are still the same.

In common parlance, commodities means all types of products.

However, the Foreign Currency Regulation Act (FCRA) defines them as

'every kind of movable property other than actionable claims, money

and securities.'

Commodity trading is nothing but trading in commodity spot and

derivatives (futures). If you are keen on taking a buy or sell position

based on the future performance of agricultural commodities or

commodities like gold, silver, metals, or crude, then you could do so by

trading in commodity derivatives.

Commodity derivatives are traded on the National Commodity and

Derivative Exchange (NCDEX) and the Multi-Commodity Exchange

(MCX). Gold, silver, agri-commodities including grains, pulses, spices,

oils and oilseeds, mentha oil, metals and crude are some of the

commodities that these exchanges deal in.

Trading in commodities futures is quite similar to equity futures trading.

You could take a long position (where you buy a contract) or a short

position (where you sell it). Simply speaking, like in equity and other

markets, if you think prices are on their way up, you take a long position

and when prices are headed south you opt for a short position.

o What do you need to start trading?

Like equity markets, you have to fulfil the 'know your customer' norms

with a commodity broker. A photo identification, PAN and proof of

address are essential for registration. You will also have to sign the

necessary agreements with the broker.

o Is there a regulator for the commodity trading

market?

The Forward Markets Commission is the regulatory body for the

commodity market in India. It is the equivalent of the Securities and

Exchange Board of India (Sebi), which protects the interests of investors

in securities.


o What kind of products can be listed on the

commodity market?

All commodities produced in the agriculture, mineral and fossil sectors

have been sanctioned for futures trading. These include cereals, pulses,

ginned cotton, un-ginned

cotton, oilseeds, oils, jute, jute products, sugar, gur, potatoes, onions,

coffee, tea, petrochemicals, and bullion, among others.

o What are the risk factors?

Commodity trading is done in the form of futures and that throws up a

huge potential for profit and loss as it involves predictions of the future

and hence uncertainty and risk. Risk factors in commodity trading are

similar to futures trading in equity markets.

A major difference is that the information availability on supply and

demand cycles in commodity markets is not as robust and controlled

as the equity market.

o What are the factors that influence the commodity

prices in the market?

The commodity market is driven by demand and supply factors and

inventory, when it comes to perishable commodities such as

agricultural products and high demand products such as crude oil. Like

any market, the demand-supply equation influences the prices.

Variables like weather, social changes, government policies and global

factors influence the balance.

o What is the difference between directional trading

and day trading?

The key difference between commodity markets and stock markets is

the nature of products traded. Agricultural produce is unpredictable

and seasonal. During harvesting season, the prices of these

commodities is low as supply goes up. There are traders who use these

patterns to trade in the commodity market, and this is termed

directional trading.


Day trading in commodity markets is no different from day trading in

the equity market, where positions are bought in the morning and

squared off by the end of the day.

o How to keep updated?

Most commodity trading firms have a research team in place that

prepares commodity charts and conducts detailed study on the trends

of the commodity in question.

Investing strategies based on this research are usually provided to

clients.

They usually provide daily market reports before the market opens and

intra-day calls during trading hours, along with monthly and weekly

research reports.


Mutual Fund Scheme

“A mutual fund is formed by the coming together of a number of

investors who hand over surplus funds to a professional organisation to

manage their funds”.

UTI had virtual monopoly in the field of Mutual fund from 1964 to 1987.

After 1987, SBI (State Bank of India), Bank of India and other banks

financial institutions start their mutual funds (e.g. Kothari Pioneer Fund,

CRB Capital market and so on). They are given with recognition by

RBI/SEBI. Mutual funds, in general, are popular among the investing

class. Moreover, practically all mutual fund organisations are successful

in collecting crores of rupees from the investing class.

The main function of mutual fund is to mobilise the saving of the

general public and invest them in stock market securities. At present,

there is diversion of saving of the middle class investors from bank to

mutual funds. The government has thrown the field open to the private

sector and joint sector mutual funds.

More than 63 mutual funds are operating in India. The popular mutual

funds in India are as noted below:

1) HDFC Mutual Fund,

2) Birla Sun Life Mutual Fund,

3) Alliance Capital Mutual Fund,

4) Canbank Mutual Fund,

5) Pioneer ITI Mutual Fund,

6) Standard Chartered Mutual Fund,

7) Templetion India Income Fund,

8) Tata Mutual Fund,

9) Sundaram Mutual Fund,

10) Kotak Mutual Fund.

It may be noted that the investment scheme of Mutual fund are open-

ended or close-ended. In the open-ended scheme, there is no fixed

maturity period. Secondly, the investment can be encashed at any

time. The rate of conversion into cash will be the market rate available

on the day. The open-ended schemes of mutual fund are popular due

to these advantages. HDFC Prudence Fund is an example of an open-

ended and balanced fund.

In the close-ended scheme, the investment is for a fixed maturity

period. Encashment of the investment till maturity is not possible. This

means there is no liquidity to the investment as in the case of open-


ended schemes. The investors are paid back their invested money as

per the term agreed at the time of issue. The close-ended schemes of

mutual fund are no more popular with the mutual fund as well as with

the investors.

Mutual fund is a financial intermediary which collect saving of the

people for secured and profitable investment. The entire

income/profits of mutual fund are distributed among the investor in

proportion to their investment. Expenses of managing the fund are

charged to the fund. The mutual funds in India are registered as trusts

under the Indian Trust Act. The trustees are appointed and they look

after the management of the trust. They decide the investment policy

and give the benefit of professional investment through such mutual

fund. These funds are managed by financial and professional experts.

Naturally the saving collected from small investors is invested in a safe,

secured and profitable manner. This gives good income to the fund

and the investors are made party for sharing such income.

In brief, small investors get many benefits (and that to without any

botheration) due to the formation of mutual funds in India. Mutual fund

such as SBI mutual fund, LIC mutual fund, Indian Bank Mutual Fund, 20th

Century Mutual Fund, Shriram Mutual Fund, Tata Mutual fund, ICICI

Mutual Fund, BOI Mutual Fund are popular as they offer various service

and benefit to the investing class. Moreover, ordinary investor does not

have time, expertise and patience to take independent investment

decision on their own. Even the mutual funds starts by the public sector

banks (e.g. Canara Bank) are equally popular among the investor.

Mutual funds give wide publicity to their activities through press

advertisement in leading newspapers. UTI publishes such information on

monthly basis in the form of full page advertisement in the press.

o Benefit of Mutual Funds:

(1) Benefit of diversified and profitable investment:

Mutual Fund collects small saving of millions of people and pools

such savings for profitable investment. The funds collected are

invested in sound and profitable companies from different

industries. As a result the benefits are diversified and profitable

investments are available to small investors. Investment in mutual

funds is treated as liquid, reasonably safe and profitable

investment.

(2) Benefit of professional management:


Mutual fund is managed by trustees who are professional expert

in the field of finance, business and management. They frame

the investment policy for mutual fund. Naturally, carefully and

planned and sound investment decision are taken. The

investment made is safe as well as profitable. The benefit of such

professional management is passed on to every investor with the

mutual fund.

(3) Liquidity to the investment;

Mutual fund provides liquidity to the investment due to open-

ended investment schemes. The investor can sell his shares or

units in the market and recover his investment. Even repurchase

facility is also provided by mutual funds (e.g. UTI). This gives the

benefit of liquidity to the investors. The liquidity is not available in

the case of close-ended scheme of mutual funds. Here, the

investor has to wait till the maturity date. As a result, the

popularity of close-ended scheme is fast declining. However,

liquidity benefit is available in the open-ended scheme.

(4) Tax Benefit:

Tax benefits are given by the government to the investors of

mutual funds. This tax benefit relates to payment of income tax

on the income earned through such investment. The Tax relief

under 80L is one additional benefit available to investors of

mutual funds. In addition, investors can take tax benefit on the

amount invested in the scheme.

(5) Assured Allotment:

All application made to mutual funds for purchase of units are

normally honoured. This give the benefit of assured allotment to

the investors. Assured allotment avoids tension on part of the

investors. Loss of interest on application money is also avoided.

(6) Effective Regulation:

Mutual fund fund in India have to operate as per the guidelines

given by SEBI and also by the government or RBI from time to

time. There is supervision and control functioning of the mutual

funds. This is necessary for the protection of investors.


(7) Spread of Risk:

Mutual funds invest their funds in securities from different

industries. As a result, the risk in the portfolio management is

spread over a wider area. Some companies may incur losses but

such loss will be compensated by more profit of other companies

in which funds are invested.

(8) No Tension:

An investor gives his saving/surplus money to the mutual fund

and the fund looks after the investment of money collected from

such investors. The whole botheration of profitable and

diversified investment is given to the fund. In short, the investor

gets benefits without botheration and tension.

o Limitation of Investment in Mutual Funds:

(1) The investor are likely to come in difficulties If the Mutual funds (in

which funds are invested) is not managed efficiently. The rate of

return will go down and the investment may become risky.

(2) The investor has no direct control on their investment as the

investment policies are decided by the trustees.

(3) Investors of mutual funds are not given adequate information

about the functioning of their mutual funds. They gat the

information about irregularities, etc. when it is to late to introduce

remedial measures.

(4) The future of mutual fund investors is link with the future of mutual

funds. An investors may suffer because of mismanagement of

the mutual funds.

(5) The expectation (as regards return on investment) of investors

are fast growing in the case of mutual fund but the manager of

mutual funds find it hard to meet such high expectation of

investor.


o Scheme of Mutual Funds

Mutual funds have introduce many scheme for attracting investor and

also for collecting their saving. Such scheme include the following:

a) Open-Ended Scheme: Regular income scheme,

recurring investment scheme and cumulative growth

scheme.

b) Close-Ended Scheme: Dhanashree 1989, (LIC Mutual

Fund), IndJyoti, (Indian Bank Mutual Fund) and

Magnum Regular Income Scheme 1987 (SBI Mutual

Fund).

It may also be noted that basically there are 4 schemes by which

mutual fund collect money from the investor. Such schemes are:

a) Growth Scheme,

b) Income Scheme,

c) Balance Scheme

d) Money market scheme and

e) Tax Saving Scheme.

a) Growth Scheme:

Aim to provide capital appreciation over the medium to long

term. These schemes normally invest a majority of their funds in

equities and are willing to bear short-term decline in value for

possible future appreciation.

These Schemes are not for investors seeking regular income or

needing their money back in the short-term

Ideal for :

Investors in their prime earning years.

Investors seeking growth over the long-term.

b) Income Scheme:

Aim to provide regular and steady income to investors. These

schemes generally invest in fixed income securities such as bonds

and corporate debentures.

Ideal for : Capital appreciation in such schemes may be limited.


Retired people and others with a need for capital stability and

regular income.

Investors who need some income to supplement their earnings

c) Balanced Scheme: Aim to provide both growth and income by

periodically distributing a part of the income and capital gains

they earn. They invest in both shares and fixed income securities

in the proportion indicated in their offer documents. In a rising

stock market, the NAV of these schemes may not normally keep

pace, or fall equally when the market falls.

Ideal for :

Investors looking for a combination of income and moderate

growth.

d) Money Market Schemes:

Aim to provide easy liquidity, preservation of capital and

moderate income. These schemes generally invest in safer, short-

term instruments, such as treasury bills certificates of deposit,

commercial paper and inter bank call money. Return on these

schemes may fluctuate, depending upon the interest rates

prevailing in the market.

Ideal for :

Corporate and individual investors as a means to park their

surplus funds for short periods or awaiting a more favourable

investment alternative.

e) Tax Saving Schemes :

These Schemes offer tax rebates to the investors under tax laws

as prescribed from time to time. This is made possible because

the Government offers tax incentives for investment in specified

avenues. For example, Equity Linked Savings Schemes (ELSS) and

Pension Schemes.

Recent amendments to the Income Tax Act provide further

opportunities to investors to save capital gains by investing in

Mutual Funds. The details of such tax savings are provided in the

relevant offer documents.


Ideal for:

Investors seeking tax rebates.


Investment in Gold and Silver

(BULLION)

In India, there is attraction for gold and silver since the early historical

period. Our faith in God and gold dates back to the Vedic times. We

worship both. In India it is not wrong to say that gold is an obsession,

deep-rooted on mythology, religious rites and its very psyche. These

two precious metals are used to make ornaments and also for

investment of surplus funds over a long period. In every family, at least

a little quantity of gold is available. There is also a general tendency to

purchase gold or silver or gold ornaments as and when surplus money is

available. The price pf both the metal are continuously increasing.

Moreover, it is easily saleable at market price i.e. it has good liquidity.

This bring safety, profitability and liquidity to the investment in gold or

silver. As result, the investment in gold and silver is popular in India.

India‟s gold consumption for the year 2009 was around 840 tonnes. The

import of gold is now made free.

o Investment in gold and silver is attractive due to

following advantages/merits:

(1) Gold and silver are useful as store of wealth. They even act

as a secret asset.

(2) Both the metals are highly liquid. This facilitates easy

convertibility into cash at anytime without incurring any

loss.

(3) The market price of both the metals is continuously rising.

This makes investment abnormally profitable. Investment in

gold and silver act as a hedge against inflation.

(4) Investment in gold and silver provide a sense of security to

the investors as it has immediate liquidity.

(5) There is a high degree of prestige value for gold and silver

in the society. The benefit of capital appreciation is also

available.

(6) Investment in gold and silver is quite safe and secured.

(gold is also scam-free). The possibility of loss in the

investment is practically nil in the case of these metals.


Along with gold and silver precious stones such as diamonds, rubies

and pearls are also appealing for long term investment particularly

among the rich people. Even art object (Antiques) are used for

investment purpose. Art object include painting, sculptures, antiques,

old coins and stamps, etc. the value of such articles increases with the

passage of time.

o Limitation of Investment in gold/silver:

Investment in gold and silver has certain limitations. For example,

1) Such investment are risky due to theft, etc. at present, using gold

ornaments is risky and dangerous,

2) It is a dead type of investment as profit is available only when it is

sold out and people rarely sell gold.

3) Regular income from the investment is not available

4) Huge amount of money is required to invest in gold and silver.

5) Investment in gold and silver is not useful for capital formation

and economic growth. Even the traditional attraction for gold

and silver is gradually reducing in India.

6) Import of gold is now free as a result, investing funds in gold and

silver is no more safe and profitable.

o Options for investing in gold

Not too long ago, buying physical gold was the only option for

investing in gold. However, the launch of Gold ETFs threw open another

option for investors. Gold ETFs are open-ended funds which track prices

of gold. They are listed and traded on a stock exchange; hence, they

can be bought and sold like stocks on a real-time basis. These funds

are passively managed and they mirror domestic gold prices. By

enabling investors to invest in gold without holding it in physical form,

Gold ETFs offer a rather unique investment opportunity to investors.

o Advantages of Gold ETFs

Although the mode chosen for investing in gold would entirely depend

on investors, Gold ETFs do offer some distinct advantages vis-à-vis

investing in physical gold.


1. Convenience:

Gold ETFs are a convenient means of investing in gold. Since there is

no delivery involved, investors do not have to worry about the storage

and security aspects that are typically associated with investing in

physical gold.

2. Quality:

As per SEBI regulations, the purity of underlying gold in Gold ETFs should

be 0.995 fineness and above. This spares investors the trouble of finding

a reliable source to buy gold.

3. No premium:

Jewellers and banks generally sell gold at a premium. The premium

can be in the range of 5%-10% (inclusive of making charges) in case of

jewellers and upto 15% in case of banks. Since Gold ETFs are traded on

the stock exchange, they can be bought at the prevailing market rate

without paying any premium.

4. Low cost:

To store physical gold, one would typically need a locker. This expense

is over and above the premium paid at the time of buying physical

gold. As for Gold ETFs, a pre-requisite is to have demat and trading

accounts with a broker. To maintain these accounts, investors are

required to pay annual charges, which vary from broker to broker.

Investors also have to pay the brokerage on each trade. Finally, there

are annual recurring charges which are charged to the fund.

Considering the premium and other charges borne while buying

physical gold, investing via Gold ETFs can turn out to be a more cost-

effective option.

5. Transparent pricing:

The pricing of physical gold varies depending on the vendor.

Conversely, Gold ETFs have a transparent pricing mechanism.

International gold prices are converted to Indian landed price using

the applicable exchange rate. Various duties and taxes are also

added to arrive at the landed price of gold.

6. Tax efficiency:

In Gold ETFs, long-term capital gains tax is applicable after twelve

months from the date of purchase vis-à-vis three years in the case of


physical gold. Also, unlike physical gold, investments in Gold ETFs are

not subject to Wealth Tax.

7. Resale value:

Gold ETFs can be easily sold in the secondary market on a real-time

basis (i.e. at the prevailing market price). Whereas, while selling

physical gold, the jeweller will deduct making charges (the charge that

is added while buying gold). As regards banks, they refuse to buy back

gold.

8. Tax implication:

Tax implications on Gold ETFs are same as those on debt mutual funds.

A unit of a Gold ETF that is held for less than twelve months is treated as

a short-term capital asset. Gains on the same are taxed at the

investor‟s marginal rate of tax. Units held for more than twelve months

are treated as long-term capital assets. Long-term capital gains are

taxed at 20% (after allowing for indexation benefit) or 10% (without

indexation benefit), whichever is less.


Deposit with Banks:

Investment of surplus money in bank deposit is quite popular among

the investors (particularly among salaried people), bank (co-

operative & Commercial) collect working capital for their business

through deposit called bank deposit. The business and profitability of

banks depends on deposit collection. For depositing money in the

bank, and investor/depositor has to open an account in a bank.

Different types of deposit accounts are :

1) Current Account,

2) Saving Bank Account,

3) Fixed Deposit Account and

4) Recurring Deposit Account.

NRI‟s and NRE‟s can keep money in nationalised and other banks as

savings or fixed deposits, in case of NRI & NRE accounts, the bank

interest is not taxable. Some banks offer 1% higher in interest rate on

NRI/NRE account.

Important Features of Bank Deposits accounts

are as noted below:

1) Any individual (of major age) can open a bank account by

following simple procedure. An account holder is treated as

bank customer and all normal banking facilities are offered to

him. A bank account may be single or joint. Nomination facility is

also given to account holder.

2) Deposit in the bank are safe and secured. They can withdrawn

as per the term and condition of the bank account. The benefit

of deposit insurance is also available to depositor.

3) Money can be deposited at any time in the case of current and

savings bank account. In the case of fixed deposit account, it is

deposited only once and money is every month in the case of

recurring deposit account.

4) Interest is paid on bank deposit (except Current deposit). The

interest rate is decide by the RBI from time to time as per the

money market situation. The co-operative offer nearly 1% higher

interest rate as compared to commercial banks. Even senior

citizen are offer a little higher interest rate.


5) Interest is paid on quarterly of sixth monthly basis. However, if the

deposit period is less than 90 days, the interest is paid on

maturity.

6) Bank deposits have high liquidity. Banks even give loan on the

security of fixed deposit receipt.

7) Interest on bank deposit is exempted from the tax liability upto

certain limit under section 80L of Income Tax Act.

Advantages of Bank Deposits:

1) Investment is reasonably safe and secure with adequate

liquidity.

2) Banks offer reasonable return on the investment made and that

too in a regular manner.

3) Banks offer loan facility against the investment made.

4) Procedures and formalities involved in bank investment are

limited, simple and quick.

5) Banks offer various services ans facilities to their customers.

Limitation of Bank Deposits:

1) The rate of return in the case of bank investment is low as

compare to other avenues of investment.

2) The return on investment is not adequate even to give protection

against the present inflation rate in the country.

3) Capital appreciation is not possible in bank investment.

Tax benefits offered in the case of bank investment are not attractive

as compared to other investment avenues


GOVERNMENT OF INDIA SAVINGS

BONDS:

A) Government of India 8.0% savings (taxable)

bonds: The Government of India (GOI) introduced this 8% savings (taxable)

bonds. These bonds are convenient for charitable trusts. It is the best

option for investment of surplus funds. There is no maximum limit for

investment in the bonds, 8% interest payable is taxable.

o Important Features of 8.0% Savings Bonds:

a) Who can but: Resident Individual (Not NRI), Minor, HUF, Charitable

Institution and Universities

b) Interest : 8.0% p.a. payable half yearly or Rs.1000/- becomes

Rs,1,601/- after 6 years. Half yearly or cumulative interest payment

option available.

c) Period: 6 years.

d) Investment: any amount i.e. no limit on the amount of investment

(minimum amount is Rs.1000/- and multiples thereof).

e) Tax Benefit: Interest is taxable but wealth exempted. Effective yield

is 8.32%.

f) Transferability: Bonds are not transferable and pledgable. They are

not tradable in secondary market.

g) No TDS will be deducted on interest.

h) Nomination facility is available.

i) The bonds shall not be eligible as collateral for loans from banks

and financial institutions,

j) No interest will be paid after the maturity.

k) The NRIs are not allowed to invest their funds in these savings bonds.


B) 9.00% GOI Senior Citizens Savings Scheme 2004:

It is special investment scheme introduced for the benefit of senior

citizens. It gives attractive return to senior citizens and is popular among

them. The features of this scheme are:

a) Resident Indians aged 60 years and above can invest in this

scheme. VRS people age of 55 years can also invest in this

scheme.

b) Interest rate is 9% per annum and is payable quarterly. The

interest (9% p.a.) is taxable.

c) Period of scheme is 5 years. The maturity period can be

extended by another 3 years.

d) Ceiling for maximum permissible deposit per person is Rs.15 lac

(Minimum deposit amount is Rs. 5000/- and in multiples of Rs.

1000/-.

e) Account can be opened jointly with spouse only. Account can

be opened in the SBI, BOI, and BOB.

f) No TDS will be deducted but interest is taxable.

g) Premature withdrawal facility is available after one year.

However, premature penalty is charged.

1) After one year and before two years – 1.50% of

deposit.

2) After two years – 1.00% deposi shall be deducted.

h) Nomination facility is available.

i) NRI and HUF are nor eligible for depositing money under this

scheme.

j) PAN card, age proof and residence proof are required for joining

the scheme.


C) Government of India 6.50% savings (Tax

free) Bonds:

Recently, the government has started issuing 6.50% (Tax Free) bonds

which are reasonably attractive and sewcured investment for

individual and institutions.

Important Features of 6.50% Savings (Tax Free) Bonds:

(a) Resident individual (Not NRI), HUF, minor theough guardian can

invest in these bonds.

(b) No maximum limit on amount of investment in these bonds.

(c) Interest 6.50%. interest payable half yearly or cumulative. Interest

payment is exempted from income tax- No wealth tax.

(d) Maturity period is of 5 years.

(e) Pledge and transfer are not allowed. However, the bonds can

be transferable only by the way of gifts.

(f) Cumulative facilty available, Rs.1000/- become RS. 1,377.- after 5

years.

(g) Non-cumulative facility is also available. This means 6.5% interest

p.a.(payable half yearly). This 6.5% tax free interest is equal to

9.82 p.a. taxable (for 30% tax payer).

(h) Redemption (premature encashment) after 3 year only.

(i) Nomination facility is available.

It may be noted that 6.50% savings bonds offers more

benefits/concession as compared to 8% saving (taxable) bonds. Both

the bonds are popular and used extensively as a safe and secured

investment avenue by large number of rich investors. Both the avenues

are not available to NRIs. The new savings bonds of GOI are similar to

Relief Bonds which RBI was issuing previously on behalf of Government

of India. RBI Relief bonds are discounted till further notice. The

application for both categories of bonds may be submitted to SBI or

HDFC Bank. They issue bond certificates of GOI.


o Investments benefits in Infrastructure Bonds

By investing in infrastructure bonds in India, an investor can save on

taxes as provided under Section 88 of the Income Tax Act, 1961. The

two significant economic factors playing vital role in the investment

decisions in the infrastructure bonds are Inflation and interest rate

movements. For instance, price of a bond will fall if interest rates rise

and vice-versa.

Tax Rate Investments in Infrastructure

Slab Tax

Savings Returns

After 3

years

After 5

years

30% 6,000 2,000 32,139

20% 4,000 27,485 30,139

10% 2,000 25,485 28,139

Obligatory Returns to

defy Inflation Effect 25,194 29,387

Tax

Rate

Tax fortified in lieu of investing in Infrastructure

Bonds

Slab Yields on investments from Market after Tax

After 3 years After 5 years

30% 21,292 28,159

20% 24,334 32,182

10% 27,376 36,204

o How to invest in infrastructure bonds?

Infrastructure Bonds are available through issues of ICICI and IDBI, in the

name of ICICI Safety Bonds and IDBI Flexibonds. They can reduce tax

liability by upto Rs 16,000 per annum. Both the bonds provide

investors the option of purchasing and holding the instruments either as

physical certificates or in the demat form. The Tax-Saving Bond from

ICICI for the month of July 2001 provides two options:


Face value of Rs 5,000 for 3 years at the rate of 9.00% interest

payable annually.

Deep Discount Bonds with a face value of Rs 6,600. These bonds

are available for Rs 5,000, and are issued for 3 years and 4

months, after which they are redeemed at their face value.

These infrastructure bonds are suitable for an increase in the

investment. The terms for the IDBI Bonds are similar too.

Apart from the above Infrastructure Bonds , Rural Electrification

Corporation (REC) has come out with an issue of tax-saving

infrastructure bonds for investors seeking to utilize the additional

Rs 30,000 qualifying limit for investments in Infrastructure Bonds.

Points to remember before investing in

infrastructure bonds

Infrastructure Bonds do not offer any protection against high

inflation since the rate of interest they offer is pre-determined.

Against the pledging of the infrastructure Bonds with a bank, one

can borrow money from banks. The amount depends on the

market value of the bond and the credit quality of the

instrument.

Moreover, it should be noted that although Infrastructure Bonds

are considered to be safe, there is no assurance of getting the full investment back.


Postal Saving Schemes / Post Office

Saving Scheme: Indian Postal network is the largest postal network in the world. The

postal network has grown almost seven folds since 1950. Post office is

the service organisation and also operates as a financial institution. It

collect small saving through saving bank accounts facility. In addition,

time deposits and government loans are also collected through post

offices. Certain government securities such as Kisan Vikas Patras,

National Saving Certificates, etc are sold through offices. New schemes

are also introduces by postal department in order to collect saving of

the people. This include recurring deposits, mothly income scheme, PPF

ans so on.

Postal Saving bank scheme was popular in India for a long period as

banking facilities were limited and were available mainly in the urban

areas upto 1950s. the popularity of postal saving schemes is now

reducing due to growth of banking and other investment facilities

throughout the country. However, even at present , small investors used

postal saving facilities for investing their savings due to certain benefits

like stable return, security and safety of investment and loan facilities

against postal deposit. Even tax benefits is one attraction for

investment in post office. Moreover, investment in postal schemes is as

good as giving money to the government for economic development

alongwith reasonable return and tax benefits. Postal savings schemes

include the following:

a) Saving Bank Account : No fixed period : Simple Interest rate of

3.5% with effect from March 1, 2003. Maximum deposit upto Rs.

50000/- in individual and Rs. 100000/- in joint account is allowed.

b) Monthly Income Scheme: Period : 6 years : Interest rate is 8.0%

per annum payable monthly. There will be no tax deduction at

source.

c) Recurring Deposit: Period : 5 years: Interest rate 7.5% with effect

from March 1, 2003. The interest is compounded on quarterly

basis. Maturity is notified and paid accordingly. Minimum amount

payable is Rs. 10/- and there is no limit to maximum amount. Tax

is not deducted at source.

d) Time Deposit: Period: 1 year to 5 years: Maximum amount is Rs.

200/- . No limit maximum deposit in an amount – Interest earned

is exempted under section 80L of the Income Tax Act. The


interest rates on time deposit with effect from March1, 2003 are

as noted below;

Period Interest Rate

1 year Time Deposit 6.25 %

2 years Time Deposit 6.50 %



e) Investment in government securities is possible through post

offices. Here, the terms and condition are fixed by the

government. Let us, now, consider the details of some postal

savings schemes:

i) Post Office Time Deposits (POTDs):

Broad Features:

1) Such deposits can be make in multiples of Rs. 50/- by submitting

a prescribed application form. No upper limit to such deposits.

2) Interest is paid regularly on such deposits, depending on the

period. The I interest rates are as noted above.

3) Withdrawal is permitted before 6 months.

4) The interest is calculated half-yearly and paid annually.

5) POTD account can be pledged.

6) The interest on POTD account is exempted from Tax liability within

certain limits under section 80L of the Income Tax Act.

ii) 6 years Post Office Monthly Income

Scheme:

The monthly income scheme is now popular and use extensively

particularly by those who do not get regular salary income or

pensions. Here, monthly interest can be use for meeting various

expenses. It is suitable to middle people and also to those who take

the benefit of voluntary retirement.

Under this scheme, the post office is providing the facility of monthly

income (interest payment) to depositors. This schemes provides

regular monthly income (like pension) to depositor against fixed

deposited in the post office for 6 years period.


o The Features of monthly income scheme are as

noted below:

1) The period of deposit is 6 years (lock in: 6 years). The minimum

amount to be deposited is Rs. 6000/- and in multiples of Rs. 6000/-

, and the maximum is Rs.300000/- for single holder and

Rs.600000/- for joint holders. PAN is compulsory when amount

invested is more than Rs.50000/-.

2) The rate of interest offered is 8% with effect from March 1, 2003

payable on monthly basis. In addition, as an incentive, a bonus

of 10% is paid to the depositor at the end of 6 years i.e. on the

maturity of the deposit. This benefit of bonus payment is now

withdrawn. However, the accounts that have already opened

will not be effected by this change. (Source: The Times of India.

Feb 11, 2006).

3) The interest amount is taxable at your respective tax slab.

4) Monthly income scheme is attractive to middle class investors

due to safety, regular and reasonable return and tax exemption.

5) Nomination facility is available. No tax on principal on maturity.

6) Premature closure of account is permitted at any time after one

year and before three years with 3.50% deduction. No deduction

of penal interest after 3 years. No bonus payment on premature

closure of accounts. The government has also decided to

reduce the penalty on premature withdrawal from the monthly

income accounts.

It may be noted that withdrawal of 10% bonus on monthly income

scheme is a move that will take sheen off the post office monthly

income accounts. It will reduce the effective returns on the monthly

deposit schemes that have a tenure of 6 years from around 9.5% to 8%.

As a result, the popularity of monthly income scheme is reducing.

In addition, post office acts as an avenue of investment by other

methods. For example, post office recurring deposit account for 5 years

period can be opened with Rs. 5 and multiples of Rs.5 subject to a

maximum amount of Rs.1000/- per month. The entire amount (with

simple interest at 7.50%) is paid to the depositor on maturity. Two

withdrawal are also allowed during this period. This scheme is similar to

recurring deposit account with a co-operative or public sector bank.


iii) National Saving Scheme (NSC)

National savings scheme (NSC) is operated by the post offices. The

national saving certificates are available in the denomination of

Rs.500/-, Rs. 5,000/- and Rs. 10,000/-. The interest on NSC is at 8% p.a.

cumulative. The investment in these certificates qualifies for tax

redemption under section 80C of the Income Tax Act. The certificate of

Rs. 10,000/- will have a maturity value of Rs. 16,010/- after 6 years. There

is no TDS on maturity amount. The investment is qualified for deduction

under section 80C. PAN No. is compulsory for amount Rs.50,000/- and

above. Certificates are transferable from one person to another person

before maturity and Certificates are also transferable from one Post

office to any Post office. Certificate can be pledged as security

against a loan to banks/ Govt. Institutions.

iv) Kisan Vikas Patras

Kisan Vikas Patras are also sold out through post offices throughout

India. Kisan Vikas Patras are certificates available in the denomination

of Rs. 500/-, Rs.1,000/-, Rs.5,000/- and Rs. 10,000/- which will be double

in eight years and seven months (103 months) with effect from 1st

March 2003 (RS. 10,000/- becomes Rs.20,000/- after 8 years and 7

months) i.e. the rate of interest is 8.40% compounded annually. These

certificate known as patras are not transferable but nomination facility

is available. These patras is issued to an individual singly or jointly and

Companies, Trusts, Societies and any other Institution not eligible to

purchase.. There is no upper limit to investment in these patras. They

can be encashed before maturity. Such premature encashment is

possible after 2 ½ years. There is no Tax deduction at source in case of

Kisan Vikas Patra. There is no Tac benefits to these patras. PAN is

compulsory for amount invested more than Rs.50,000/-. Patras are

transferable to any Post office in India.

Post Office provides various schemes for safe investment of surplus

funds. There is full safety to the post office investment. However, the

return on investment is rather low. At present 8.00% compounded

quarterly. Such trend is applicable to all saving scheme in India. The

Postal rules and procedure are lengthy. Moreover, quick service and

personal attention are normally not given due to inadequate staff


Public Provident Fund (PPF):

Public Provident Fund (PPF) is one attractive tax sheltered investment

scheme for middle class and salaried persons. It is even useful to

businessmen and higher income earning people. The PPF scheme is

very popular among the marginal income tax payers. The scheme was

introduce in 1969.

o Features of PPF:

i. PPF account may be opened at any branch of the SBI or its

subsidiaries or at specified branches of nationalised banks like

the Bank of Maharashtra, Bank of Baroda etc. PPF account can

be opened even in a post office on the same terms and

conditions. Such account can be opened by any individual or

by HUF. Even NRI can be opened PPF account.

ii. The PPF account is for a period of 15 years but can be extended

for more years (five years at a time) at the desire of the

depositor.

iii. The depositor is expected to make a minimum deposit of Rs.100/-

every year. In addition, money can be deposited once In every

month. The maximum permissible deposit per year is Rs.70,000/-.

iv. The PPF account is not transferable, but nomination facility is

available.

v. The deposit in a PPF account are qualified for tax rebate under

the income tax Act (section 80C deduction). The PPF account is

fully exempted from the Wealth Tax. It is also exempted from

attachment from the court.

vi. A compound interest at 8% per annum is paid in the case of PPf

account with effect from 1-3-2003. The interest accumulated in

the PPF account is also tax free.

vii. PPF account holder is eligible for one withdrawal per financial

year after five years from the end of the year in which the

subscription is made. It is limited to 50% of the balance at the

end of the fourth year.

viii. On maturity, the credit balance in the PPF account can be

withdrawn or the subscriber can extend account for five years

or more


o Special Advantages of PPF:

(1) Reasonably attractive interest rate even it is reduced by one per

cent from 1-3-2003.

(2) Income from PPF account (interest payment) is exempted from

income tax and wealth tax.

(3) At present, PPF investment plus other investment (i.e. investment

under savings schemes) upto Rs. One lakh is exempted from the

total taxable income.

(4) Withdrawal facility at certain intervals.

(5) It is useful as a provision for old age, or as provision for certain

expenses of a son/daughter, purchase of flat, etc.

(6) PPF account can be extended even after the completion of 15

years. Extension is given easily for a period of 5 years at a time.

This gives benefits of PPF account over a long period.

o Limitation of PPF Account:

(1) Low liquidity as withdrawal are not easily allowed.

(2) The PPF account is for a period of 15 years which is a very long

period.

Inspite of limitations, PPF is an attractive avenue for investment in the

case of tax payers/salaried class/businessman/professionals. The

benefit of PPF scheme are given continuation over years by the

government. This is perhaps the reason for its growing popularity.


LIC Scheme

Life insurance business was nationalised in India since long (1956) and

is run by the Life Insurance Corporation of India. In addition, we have

also Postal Life insurance scheme run by the Postal department. LIC is

responsible for the expansion of life insurance business in India. In

addition, it plays an important role in collecting the savings of the

people. It gives protection and acts as a method of compulsory

savings. LIC is one avenue for investment of money out of regular

income. It also gives protection to the family members of the

policyholder. Life insurance business is no more monopoly of LIC.

Private sector is now allowed to participate in the insurance business.

Investment in the insurance schemes offers the following advantages

to investors:

(1) Protection to family members through financial support in the

case of death of policy holder.

(2) Investment in life insurance scheme serves as a provision for old

age (maintenance, medical expenses, etc).

(3) It acts as a method of compulsory saving over a long period out

of regular income.

(4) Investment in life insurance provides loan facility from banks.

(5) LIC now gives bonus to policy holders on yearly basis. This adds

to the maturity value of policy taken.

(6) Investment in life insurance scheme give tax benefit (15% of

premium paid). This tax benefit is available even when the

policy is taken on the name of investor‟s wife, son or daughter.

(7) Investment in life insurance scheme gives mental peace to

investor in this age when our life exposed to various risks,

uncertainties and danger.

(8) Investment in life insurance provides comfortable and

financially independent life after retirement. This is a special

benefit during the old age in life insurance policyholders.

LIC issues different life policies such as whole life policy, etc.

An investor can select policy considering age, monthly income

and capacity to save. Investment in LIC has wide significance. It is not


merely for monetary benefit but for security of investor and his family

members. In addition following tax benefits are given to policyholders:

(i) Premium paid are eligible for tax deduction under section

80C

(ii) The maturity claim and death claim amount received is TAX

FREE under section 10 (10D).


Investment in Money Market

Securities: Money market is a market for borrowing and lending for short periods. It

is one constituent of capital market. However, it is basically concerned

with short term investment. Money market securities are fixed income

securities similar to gilt edges securities, preference share, debentures.

Normally, individual investor is not interested in money market securities

as the return on investment is not attractive. However, institutional

investors with surplus funds purchase money market securities for short

term investments. A money market security is a debt instrument of short

period maturity. Money market securities in India are as explained

below:

a) Treasury Bills:

Treasury bills are a short term money market instrument used by the

central government for short term borrowing from the market for

meeting urgent financial needs. Its features are:

a) The Maturity of a treasury bills is foor a period of six months.

b) It is issued at a discount and is repable at par.

c) It carries low rate of return due to short priod and hence it fails

to attract individual investors for profitable investment.

Institutional investors use this instrument for short term

investment of surplus funds.

d) It is gilt-edged security. It has highest safety as government is

responsible for the payment of interest and refund.

e) The RBI looks after the issue and sale of treasury bills on behalf

of the Central Government. The sale of treasury bills is by

auction.


b) Gilt-edged Securities:

Government (Central and States) securities and securities are issued by

financial institutions such as IDBI, ICICI, etc are called gilt-edged

securities. These are debt securities issued by the central government,

State government and semi-government agencies. The market for such

securities is called gilt-edged market. Securities issued by port trust,

public sector enterprises, electicity board are also called gilt-edged

securities. Such securities are in the form of bonds and credit notes.

Institutional agencies such as banks, insurance companies, etc are the

buyers of such securities. Such securities are fully secured as they have

government backing. The maturity period is varying generally upto 10

to 20 years. Gilt-edged securities market constitute the largest segment

of the Indian capial market. This market is expanding rapidly in recent

years. Gilt-edged security is highly liquid asset as it can be sold easily.

Tax benefits are abailable to gilt-edged securities.

c) Commercial Paper:

Commercial Paper is one money market security. It is a short term

unsecured promissory note issued by a firm for the loan taken. Such

commercial paper are issued by reputed companies for meeting their

urgent short term needs. A major benefit of commercial paper is that

it does not need to be registered with the Securities and Exchange

Commission (SEC) as long as it matures before nine months (270 days),

making it a very cost-effective means of financing. The proceeds from

this type of financing can only be used on current assets (inventories)

and are not allowed to be used on fixed assets, such as a new plant,

without SEC involvement. The features of commercial paper are as

follows:

(a) The usual period for the issue of commercial paper is 180 days

and not more than 270 days.

(b) It is sold at a discount and is redeemable at its face value .

(c) The denomination of commercial paper is normally high and is

bought by institutional investors and companies for short term

investment of surplus funds available with them. Commercial

paper is not popular with the individual investors as they do not

have capacity to purchase it due to high denomination.

Moreover, the return on the investment is also not attractive.


d) Certificate of Deposit:

A certified deposit is a time deposit with a commercial bank, thrift

institutions, and credit unions but can be negotiated. Such deposit

carries attractive interest rate. The denomination of the deposit is also

substantial. Institutional investors and companies take interest in this

avenue of investment


INVESTMENT IN REAL ESTATE PROPERTIES

Investment in real estate is popular due to high saleable value after

some years. Such properties include buildings, commercial premises,

industrial land, plantations farmhouses, and agricultural land near cities

and so on. Such properties attract the attention of affluent investor and

builders. They purchase such properties at low prices and do not sale

the same unless there is substantial increase in the market prices. The

property owners are willing to wait even for 20 to 30 years for attractive

return. During this period, it is a type of dead investment for the owners.

However, the resale price will be attractive in due course when they

can recover four times the price paid. This is how real estate is one

attractive as well as profitable avenue for investment provided the

property to be purchased is selected with proper care and foresight.

Liquidity in the case of such properties is limited as quick sale (like sale

of shares and debentures) is neither possible nor profitable. Similarly,

documentation formalities are also very lengthy and costly in the case

of purchase and sale or real estate properties.

A residential home/building represent the most attractive real estate

properties for large number of investors. Such investment are attractive

due to the following reasins:

(2) Ownership of the residential house provides owned

accommodation and satisfaction to the head as well as the

family members. It act as a useful family asset with saleable

value.

(3) There is capital appreciation of residential buildings particularly in

the urban areas.

(4) Loans are available from different agencies like banks etc for

buying, constructing or renovating owned residential building.

(5) Interest on such loan is deductible within certain limits.

,

(6) Wealth tax benefit is available on case of residential building as

the value is reckoned at its historical cost and not on the present

market value.


o Advantages of investment in Real Estate:

(1) Real estate like house is a necessity of life and provides pleasure

to all family members.

(2) Real estate acts as asset which can be used in case of a

necessity i.e. financial security. Moreover, the asset value

increases year after years.

(3) Profit in the real estate is substantial provided the owner willing

to wait till appropriate time.

(4) The chance fo capital appreciation are usually bright in the case of real estate.

(5) Real estate properties can be used as security for raising loan. In addition tax

benefit and protection against inflation are available.

o Disadvantages of investment in Real Estate:

(1) Investment in real estate properties is normally substantial. Due to huge

investment in one item, the benefits of diversification of investment are not

available.

(2) In real estate property, profitability is available at the cost of liquidity. Thus,

liquidity is low.

(3) The risk in the investment is more as compared to investment in banks, UTI,

etc.

(4) Tax burden in the form of stamp duty, capital gains tax, etc is heavy as and

when the property is sold out.

(5) Repairs, maintenance, etc constitute additional expenditure and botheration to

the owner.

(6) Government rules and regulation regarding buying and selling are troublesome

in the case of real estate properties.


Recommendation:

Investing is interesting and challenging. However, investing in a portfolio of carefully

selected stocks with an excellent track-record can be quite safe. Equity shares are not

safe for all the investors. The stock market are by nature volatile and unpredictable. A

prudent investor should never put all eggs in one basket. For young investors, who

can take some risk, the stock market can be quite interesting and rewarding. But an

old investor, who depends on his savings for a living, should not buy and hold equity

shares. The following are some tips that an investor should keep in mind before

making any investment decisions;

1) Do not invest all your money in one type of investment.

2) Limit the number of scripts (10-12) in your portfolio.

3) Invest in along run.

4) Do not speculate.

5) Invest in real value.

6) Set a limit to your greed.


BIBLIOGRAPHY

1. NSE Modules

2. Books on Investment by Angel Broking

3. Investment Analysis and Portfolio Management- by

N.G. Kale

4. Angel Broking Books

5. Investment Analysis and Portfolio Management – by

Prasanna Chandra

6. Web Addresses

7. www.angelbroking.com

a. www.nseindex.in

b. www.bseindex.com

c. www.angelbackoffice.com

http://www.angelbroking.com/

http://www.nseindex.in/

http://www.bseindex.com/

Documents

Final Summer Interns Project