Documente Academic
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DECLARATION
__________________________
Signature of Student
[Bhumi G. Vaghani]
CERTIFICATE
I, Mr. NAVEEN ROHATGI, hereby certify that Ms. BHUMI VAGHANI of Mithibai
College of TYBMS [Semester V] has completed his project, titled Investment Options in
India in the academic year 2012-2013. The information submitted herein is true and original
to the best of my knowledge.
_______________________
___________________
______________________
Signature of External Examiner
ACKNOWLEDGEMENT
Preservation, inspiration and motivation have always played a key role in the success of any
venture. In the present world of cutthroat competition project is likely a bridge between
theoretical and practical working. I feel highly delighted with the way project on topic
Investment Options In India has been completed. Any accomplishment requires the efforts of
many people and this work is not difficult.
This project would not have been a success without the guidance and motivation of my
mentor. I am thankful to all the persons behind this project.
I would like to express my gratefulness to my Prof. Naveen Rohatgi, who acted as a mentor
throughout my project for providing me valuable information and guidance.
Last but not the least; I would like to thank my parents and friends for motivating me all the
time throughout this project.
EXECUTIVE SUMMARY
4
Investment refers to the concept of deferred consumption which may involve purchasing an
asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns. Today the spectrum of investment is indeed wide. An investment is confronted with
array of investment avenues. Various investment options available in india are cash
investment, debt securities, stocks, mutual funds, derivatives, commodities, real estate etc.
Considering the importance of investment at each and every stage of life, I have therefore,
selected the topic Investment Options in India to be placed before the esteemed educational
institution. My deep interest in indian financial markets, insurance, etc. has encouraged me to
choose this project.
Here I have made my best possible efforts to place the several investments options available
in india in a easy and most understandable manner. The study has been undertaken to analyze
investors preferences and as well as the different factors that affect investors decision on the
different investment avenues.
Table of Content
INTRODUCTION....................................................................................................................11
Definition of Investment.......................................................................................................11
What is investing?................................................................................................................12
Need for Investment.............................................................................................................12
Investment v/s Speculation...................................................................................................14
Investment v/s Gambling......................................................................................................14
Types of Investment..............................................................................................................15
SMALL SAVING SCHEMES & FIXED INCOME INSTRUMENTS...................................16
CAPITAL MARKET...............................................................................................................25
Definition of a Stock................................................................................................................25
Investment in equities...........................................................................................................28
Types of Investors in Equity Market....................................................................................29
Investment Approach............................................................................................................31
Tools for Equity Analysis.....................................................................................................31
Taxation................................................................................................................................32
DERIVATIVES........................................................................................................................33
Types of Derivatives.............................................................................................................34
Types of Derivative Contracts..............................................................................................35
Participants in a Derivative Market......................................................................................38
Introduction to Futures.........................................................................................................40
Options Contracts.................................................................................................................43
Taxation of Derivative Transaction in Securities.................................................................48
MUTUAL FUNDS...................................................................................................................49
Concept of Mutual Fund.......................................................................................................49
How do Mutual Fund Schemes Operate?.............................................................................50
Advantages of Mutual Funds................................................................................................52
Limitations of a Mutual Fund...............................................................................................55
Open-Ended Funds, Close-Ended Funds and Interval Funds...............................................56
6
INTRODUCTION
Definition of Investment
Investment is the commitment of money or capital to purchase financial instruments or other
assets in order to gain profitable returns in the form of interest, income, or appreciation of the
value of the instrument. Investment is related to saving or deferring consumption.
An investment involves the choice by an individual or an organization such as a pension
fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset,
such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or
the foreign asset denominated in foreign currency, that has certain level of risk and provides
the possibility of generating returns over a period of time. When an asset is bought or a given
amount of money is invested in the bank, there is anticipation that some return will be
received from the investment in the future.
Investment is a term frequently used in the fields of economics, business management and
finance.
ImnvsCawhtrlucLioed
Investment in Terms of Finance:
In finance, investment refers to the purchasing of securities or other financial assets from the
capital market. It also means buying money market or real properties with high market
liquidity. Some examples are gold, silver, real properties, and precious items.
What is investing?
By making an investment, an individual uses the money that would otherwise have been
consumed by spending on buying groceries, car, taking a vacations or building a house. An
individual is sacrificing these pleasures by making an investment. There ought to be some
reward for this sacrifice. The reward is that he expects to get back more than what he has put
in. He can then consume the increased amount at a later date. In economic terms, in making
investments an individual trades current consumption with future consumption.
Thus the basic theory driving investment as acceptable is that an individual believes that the
pleasure derived from future consumption will be more than pleasure foregone today. It refers
to commitment of funds to one or more assets that will be held over a certain time period.
Anything not consumed today and saved for future use with some risk can be considered as
an investment.
Thus all three: - investment, wealth and consumption are interrelated. This is an investment
consumption cycle.
Inflation decreases the value of money. If you have Rs.1000 today and the rate of inflation is
8% then Rs.1000 will Rs.926 next year and if inflation continues at the rate of 9% every year
Rs.1000 will be Rs.501 after 9 years. This will be happened to your money if you are not
investing your money in any investment scheme. Investing your money in any investment
schemes can help you to save your money from inflation.
10
Investment
Speculation
Risk
Leverage
Capital Gain
fund
Price appreciation from an asset is a Fast price changes are basis for
consideration along with periodic getting capital appreciation
Basis
income
Investment decisions are based on Decisions are mostly based on
some fundamental analysis and on tips,
technical
analysis
and
Time Period
instrument
Investments are time defined and Speculation is seeking a short
usually for a longer term
term advantage
Investment
Risk
Funds
wherein
Gambling
committed
risk
is
to
low
an
with
Element
excitement
Basis
decision
Examples
instrument
very short time.
Funds invested in shares, bonds and Horse race, lotteries, card games,
financial securities
etc.
It becomes clear that speculating and gambling are not similar things and can be
differentiated on simple fact that the speculation tries to take advantage of short term
anomalies that can exist in market for speculators to exploit, while gambling is purely betting
on odds without any reasoning and scientific law.
Types of Investment
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a) Small saving schemes: They are designed to provide safe and attractive investment
options to the public and at the same time to mobilize resources for development of
economy.
b) Other saving scheme: These are all other schemes, which are not covered by small saving
schemes like bank fixed deposit, company fixed deposits, etc.
13
Deposits
Maturity period
Withdrawal
Interest
Nomination
Pass Book
Silent Account
Deposits
Transferability
Maturity period
offices.
Minimum of Rs. 200. Maximum no limit
Transferable from one person to another
The deposited amount is repayable after expiry of the period
14
Interest
1year- 8.2%
2year- 8.3%
3year- 8.4%
Nomination
Pass book
Income Tax benefit
Premature withdrawal
5year- 8.5%
Nomination facility is available
Depositor is provided with a pass book
Tax exemption u/s 80C for 5 year term deposit
Withdrawn within 6 months- No interest
After 6 months- 4%
After 1 year- 1% less rate specified for the period
Maturity
Deposits
A minor who has attained the age of 10 years in his own name
Period of maturity of an account is 5 years
60 equal monthly deposits in multiple of Rs.5 subject to
Defaults in deposit
minimum of Rs.10
Accounts with not more than 4 defaults can be regularized
within a period of two months on payment of default fee.
Rate of interest
Repayment on maturity
Nomination
Pass book
Loan facility
Premature closure
Deposit limits
Interest rate
Maturity value
10 years - 8.9% pa
Interest accrued on the certificates every year is liable to
Premature encashment
Place of encashment
deposit limits
At any post office
5 years
Only one deposit
Minimum Rs.1500 and maximum Rs.450000 in case of single
Interest
Bonus
Premature closure
After 3 years
Nomination
Closure of account
Income tax benefit
deduction of 1% deposit
amount
Nomination facility is available
Account shall be closed after expiry of 5 years
No TDS is deducted. Interest received is taxable.
Nomination
Deposit limits
Loans
Withdrawal
Transferability
Interest
Bankruptcy
verse.
8.8% pa
Courts in case of bankruptcy or default on any loan payment
Wealth tax
Who has attained 55 years of age or more but less than 60 years
and has retired under VRS
No age limit for retired personnel of Defense service
Point of sale
Deposit limit
Maturity
Premature closure
Interest
Nomination
Income tax benefit
Wealth tax
Interest
Issue price
India
8% pa
Bonds are issued at par and have face value of Rs.1000. No
Maturity
Nomination
TDS
Wealth tax
Resident Individuals
Non Resident Indians
Minor through guardians
Hindu Undivided Family
Sole Proprietorship firm
Partnership firm
Limited Companies
Interest rate
Maturity
TDS
Trust
Interest rate differs from bank to bank
From 7 days to 5 years
TDS is deducted if interest exceeds Rs.10000 in any financial
year. Individuals can file form 15H or 15G to claim exemption
Manufacturing Companies
Housing Finance Companies
19
Government Companies
Resident Individuals
Non Resident Indians
Minor through guardians
Hindu Undivided Family
Sole Proprietorship firm
Partnership firm
Limited Companies
Nomination
Maturity
Trust
Nomination facility is available
Manufacturing Company
- 6 months to 3 years
Housing Finance Company
- 1 to 7 years
KYC Compliance
Income tax benefit
CAPITAL MARKET
Definition of a Stock
Stock is a share in the ownership of a company. Stock represents a claim on the company's
assets and earnings. As you acquire more stock, your ownership stake in the company
becomes greater. Whether you say shares, equity, or stock, it all means the same thing. Over
the last few decades, the average person's interest in the stock market has grown
exponentially. What was once a toy of the rich has now turned into the vehicle of choice for
20
growing wealth? This demand coupled with advances in trading technology has opened up
the markets so that nowadays nearly anybody can own stocks.
Being an owner
Holding a company's stock means that you are one of the many owners (shareholders) of a
company and, as such, you have a claim to everything the company owns. As an owner, you
are entitled to your share of the company's earnings as well as any voting rights attached to
the stock.
A stock is represented by a share certificate. This is a fancy piece of paper that is proof of
your ownership. In today's computer age, you won't actually get to see this document because
your broker or DP keeps these records electronically, which is also known as holding shares
"in street name".
The importance of being a shareholder is that you are entitled to a portion of the companys
profits and have a claim on assets. Profits are sometimes paid out in the form of dividends.
The more shares you own, the larger the portion of the profits you get. Your claim on assets is
only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left
after all the creditors have been paid.
Another extremely important feature of stock is its limited liability, which means that, as an
owner of a stock, you are not personally liable if the company is not able to pay its debts.
Owning stock means that, no matter what, the maximum value you can lose is the value of
your investment. Even if a company of which you are a shareholder goes bankrupt, you can
never lose your personal assets.
neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This
means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any
money until the banks, bondholders and other creditors have been paid out; we call this
absolute priority. Shareholders earn a lot if a company is successful, but they also stand to
lose their entire investment if the company isn't successful.
Investment in equities
1. Through the primary market
2. Through the secondary market
Primary market
Primary market provides an opportunity to the issuers of securities, both Government and
corporations, to raise resources to meet their requirements of investment. It's in this market
that firms sell new stocks to the public for the first time. For our purposes, you can think of
the primary market as being synonymous with an initial public offering (IPO). An IPO occurs
when a private company sells stocks to the public for the first time.
Securities, in the form of equity can be issued in domestic /international markets at face value
with discount or premium. The primary market issuance is done either through public issues
or private placement. Under Companies Act, 1956, an issue is referred as public if it results in
allotment of securities to 50 investors or more. However, when the issuer makes an issue of
securities to a select group of persons not exceeding 49 and which is neither a right issue nor
a public issue, it is called a private placement.
The important thing to understand about the primary market is that securities are purchased
directly from an issuing company.
23
Secondary Market
Secondary market refers to a market where securities are traded after being offered to the
public in the primary market or listed on the Stock Exchange. Secondary market comprises of
equity, derivatives and the debt markets. The secondary market is operated through two
mediums, namely, the Over-the-Counter (OTC) market and the Exchange-Traded Market.
OTC markets are informal markets where trades are negotiated.
The secondary market is what people are talking about when they refer to the "stock market".
This includes the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and other
major exchanges around the world. That is, in the secondary market, investors trade
previously issued securities without the involvement of the issuing companies.
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Investment Styles
Different investor invests differently. Two most common ways of investment style in equity
area. Value Investing- Value investing is wherein fund managers or investors tend to look for
companies trading below their intrinsic value, but whose true worth they believe will
eventually be recognized. These securities typically have low prices relative to earnings
or book value and a higher dividend yield.
b. Growth Investing- Growth investing is wherein fun managers or investors look for
companies with above average earnings growth and profits, which they believe will be
even more valuable in the future. They also look for companies that are well position to
capitalize on long term growth trends that may drive earnings higher. Because these
companies tend to grow earnings at a fast pace, they typically have higher prices relative
to earnings.
Investment Approach
25
a. Top down approach- Under this investment approach, fund managers or investors start
from big horizon in the economy and the financial world and then go on breaking these
into smaller parts to find a good company to invest in. After looking at the bigger horizon,
the different industrial sectors are analyzed and indentified in order to select those that are
expected to outperform market. After deciding on the industry and sector, the stock of
specific companies within the sector or industry is further analyzed and those that are
believed to be worth investing are chosen as investments.
b. Bottom up approach- This is opposite of top down approach, instead of looking at big
horizon and then at industry and then at companies with the industry, this approach
focuses on identifying the stock directly and believes that an individual company in any
industry can do well even if the sector is not performing.
a. Technical Analysis
Technical analysis is a method of evaluating securities by analyzing the statistics generated
by market activity, such as past prices and volume. Technical analysts do not attempt to
measure a security's intrinsic value, but instead use charts and other tools to identify patterns
that can suggest future activity.
The behavior of price movement of a stock is studied to predict its future movement. The
theory being that by plotting the price movements over the time, they can discern certain
patterns which will help them to predict the future price movement of the stocks. Technical
studies are based on prices and do not include balance sheets, profit and loss accounts.
b. Fundamental Analysis
A method of evaluating a security that entails attempting to measure its intrinsic value by
examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts attempt to study everything that can affect the security's value,
including
macroeconomic
factors
(like
the
overall
economy
and
26
industry
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price, with the aim of figuring out what sort of position to
take with that security (underpriced = buy, overpriced = sell or short).
This method of security analysis is considered to be the opposite of technical analysis.
One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren
Buffett, who is well known for successfully employing fundamental analysis to pick
securities. His abilities have turned him into a billionaire.
Taxation
Transactions in recognized stock exchange in India.
Purchase of
Sale of equity
Sale of equity
Sale of
Sale of unit of
equity shares,
shares
shares (Day
derivative
an equity
units of
Trading)
oriented fund
equity
to the mutual
oriented MF
fund
(delivery
based)
Yes
Yes
Yes
Yes
Yes
applicable?
Who has to
Purchases
Seller
Seller
Seller
Seller
pay STT?
Rate of STT
Tax treatment
0.10%
NA
0.10%
Exempt from
0.025%
Income is
0.017%
Income is
0.25%
Exempt from
generally
generally
capital gain in
treated as
treated as
hands of
business
business
seller
Tax treatment
Taxable at the
income
Income is
income
Income is
Taxable at the
of short term
rate of 15%
generally
generally
rate of 15%
capital gain in
plus
treated as
treated as
plus
hands of
surcharge
business
business
surcharge
Whether
Securities
Transaction
Tax (STT) is
of long term
NA
27
seller
plus
income
income
plus
education
education
cess.
cess.
Who will
Stock
Stock
Stock
Stock
collect STT?
exchange
exchange
exchange
exchange
Mutual fund
DERIVATIVES
Derivatives Defined as
The term Derivative stands for a contract whose price is derived from or is dependent upon
an underlying asset. The underlying asset could be a financial asset such as currency, stock
and market index, an interest bearing security or a physical commodity. Today, around the
world, derivative contracts are traded on electricity, weather, temperature and even volatility.
According to the Securities Contract Regulation Act, (1956) the term derivative includes:
i. 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;
ii. A contract which derives its value from the prices, or index of prices, of underlying
securities.
28
Derivatives Markets
Derivatives markets can broadly be classified as commodity derivatives market and financial
derivatives markets. As the name suggest, commodity derivatives markets trade contracts are
those for which the underlying asset is a commodity. It can be an agricultural commodity like
wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy
products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade
contracts have a financial asset or variable as the underlying. The more popular financial
derivatives are those which have equity, interest rates and exchange rates as the underlying.
Types of Derivatives
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Commodity Derivatives
29
A commodity derivative is defined as derivatives whose value derives from the price of an
underlying commodity. The underlying asset includes Precious metals (gold, silver, platinum
etc.), other metals (tin, copper, lead, steel, nickel, etc), Argo products (coffee, wheat, rice
pepper, cotton, etc) and Energy products (crude oil, heating oil, natural gas, etc)
Equity derivatives
A derivative instrument with underlying assets based on equity securities. An equity
derivative's value will fluctuate with changes in its underlying asset's equity, which is usually
measured by share price.
Investors can use equity derivatives to hedge the risk associated with taking a position in
stock by setting limits to the losses incurred by either a short or long position in a company's
shares. If an investor purchases a stock, he or she can protect against a loss in share value by
purchasing a put option. On the other hand, if the investor has shorted shares, he or she can
hedge against a gain in share price by purchasing a call option.
Currency derivatives
Currency derivatives can be described as contracts between the sellers and the buyers whose
value are derived from the underlying exchange rate. They are mostly designed for hedging
purposes, although they are also used as instruments for speculation.
Derivatives comprise four basic contracts namely Forwards, Futures, Options and Swaps.
Over the past couple of decades several exotic contracts have also emerged but these are
largely the variants of these basic contracts. Let us briefly define some of the contracts.
1. Forward Contracts
These are promises to deliver an asset at a pre- determined date in future at a predetermined
price. Forwards are highly popular on currencies and interest rates. The contracts are traded
over the counter (i.e. outside the stock exchanges, directly between the two parties) and are
customized according to the needs of the parties. Since these contracts do not fall under the
purview of rules and regulations of an exchange, they generally suffer from counterparty risk
i.e. the risk that one of the parties to the contract may not fulfill his or her obligation.
2. Futures Contracts
A futures contract is an agreement between two parties to buy or sell an asset at a certain
time in future at a certain price. These are basically exchange traded, standardized contracts.
The exchange stands guarantee to all transactions and counterparty risk is largely eliminated.
The buyers of futures contracts are considered having a long position whereas the sellers are
considered to be having a short position. It should be noted that this is similar to any asset
market where anybody who buys is long and the one who sells in short.
Futures contracts are available on variety of commodities, currencies, interest rates, stocks
and other tradable assets. They are highly popular on stock indices, interest rates and foreign
exchange.
3. Options Contracts
Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future.
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
31
underlying asset at a given price on or before a given date. One can buy and sell each of the
contracts. When one buys an option he is said to be having a long position and when one sells
he is said to be having a short position.
It should be noted that, in the first two types of derivative contracts (forwards and futures)
both the parties (buyer and seller) have an obligation; i.e. the buyer needs to pay for the asset
to the seller and the seller needs to deliver the asset to the buyer on the settlement date. In
case of options only the seller (also called option writer) is under an obligation and not the
buyer (also called option purchaser). The buyer has a right to buy (call options) or sell (put
options) the asset from / to the seller of the option but he may or may not exercise this right.
In case the buyer of the option does exercise his right, the seller of the option must fulfill
whatever is his obligation (for a call option the seller has to deliver the asset to the buyer of
the option and for a put option the seller has to receive the asset from the buyer of the option).
An option can be exercised at the expiry of the contract period (which is known as European
option contract) or anytime up to the expiry of the contract period (termed as American
option contract).
4. 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:
a. Interest rate swaps: These entail swapping only the interest related cash flows between the
parties in the same currency.
b. 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.
5. Warrants
32
Options generally have lives of up to 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.
6. LEAPS
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options
having a maturity of up to three years.
7. 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.
8. 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.
1. Hedgers
These are investors with a present or anticipated exposure to the underlying asset which is
subject to price risks. Hedgers use the derivatives markets primarily for price risk
management of assets and portfolios.
2. Speculators
33
These are individuals who take a view on the future direction of the markets. They take a
view whether prices would rise or fall in future and accordingly buy or sell futures and
options to try and make a profit from the future price movements of the underlying asset.
3. Arbitrageurs
They take positions in financial markets to earn riskless profits. The arbitrageurs take short
and long positions in the same or different contracts at the same time to create a position
which can generate a riskless profit.
Forward Contracts
A forward contract is an agreement to buy or sell an asset on a specified date for a specified
price. One of the parties to the contract assumes a long position and agrees to buy the
underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded outside the exchanges.
The salient features of forward contracts are as given below:
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract size, expiration
date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.
Limitations of forward markets
Lack of centralization of trading
Illiquidity and
Counterparty risk
34
In the first two of these, the basic problem is that of too much flexibility and generality. The
forward market is like a real estate market, in which any two consenting adults can form
contracts against each other. This often makes them design the terms of the deal which are
convenient in that specific situation, but makes the contracts non-tradable.
Counterparty risk arises from the possibility of default by any one party to the transaction.
When one of the two sides to the transaction declares bankruptcy, the other suffers. When
forward markets trade standardized contracts, though it avoids the problem of illiquidity, still
the counterparty risk remains a very serious issue.
Introduction to 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. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange
specifies certain standard features of the contract. It is a standardized contract with standard
underlying instrument, a standard quantity and quality of the underlying instrument that can
be delivered, (or which can be used for reference purposes in settlement) and a standard
timing of such settlement. A futures contract may be offset prior to maturity by entering into
an equal and opposite transaction. The standardized items in a futures contract are:
35
of future price uncertainty. However futures are a significant improvement over the forward
contracts as they eliminate counterparty risk and offer more liquidity.
FUTURES
FORWARDS
OTC in nature
More liquid
Less liquid
No margin payment
Exchange.
counter party.
Futures Payoffs
Futures contracts have linear or symmetrical payoffs. It implies that the losses as well as
profits for the buyer and the seller of a futures contract are unlimited. These linear payoffs are
fascinating as they can be combined with options and the underlying to generate various
complex payoffs.
The above figure shows the profits/losses for a long futures position. The investor bought
futures when the index was at 2220. If
the index goes up, his futures position
starts making profit. If the index falls,
his futures position starts showing
losses.
37
The above figure shows the profits/losses for a short futures position. The investor sold
futures when the index was at 2220. If the index goes down, his futures position starts making
profit. If the index rises, his futures position starts showing losses.
Options Contracts
Options are the most recent and evolved derivative contracts. They have non linear or
asymmetrical profit profiles making them fundamentally very different from futures and
forward contracts. Option contracts help a hedger reduce his risk with a much wider variety
of strategies.
An option gives the holder of the option the right to do something in future. The holder does
not have to exercise this right. In contrast, in a forward or futures contract, the two parties
have committed themselves or are obligated to meet their commitments as specified in the
contract. Whereas it costs nothing (except margin requirements) to enter into a futures
contract, the purchase of an option requires an up-front payment. This chapter first introduces
key terms which will enable the reader understand option terminology. Afterwards futures
have been compared with options and then payoff profiles of option contracts have been
defined diagrammatically.
Options are different from futures in several interesting senses. At a practical level, the option
buyer faces an interesting situation. He pays for the option in full at the time it is purchased.
After this, he only has an upside. There is no possibility of the options position generating
any further losses to him (other than the funds already paid for the option). This is different
from futures, which is free to enter into, but can generate very large losses. This characteristic
makes options attractive to many occasional market participants, who cannot put in the time
to closely monitor their futures positions.
FUTURES
OPTIONS
Exchange traded
Exchange defines the product
Price is zero, strike price moves
Price is zero
Linear payoff
Both long and short at risk
Same as futures.
Same as futures.
Strike price is fixed, price moves.
Price is always positive.
Nonlinear payoff.
Only short at risk.
Options Payoffs
The
optionality
characteristic of options results in a non-linear payoff for options. It means that the losses for
the buyer of an option are limited; however the profits are potentially unlimited. For a writer,
the payoff is exactly the opposite. Profits are limited to the option premium; and losses are
potentially unlimited. These non-linear payoffs are fascinating as they lend themselves to be
used to generate various payoffs by using combinations of options and the underlying.
39
The figure above shows the profits/losses for the buyer of a three-month Nifty 2250 call
option. As can be seen, as the spot Nifty rises, the call option is in-the-money. If upon
expiration, Nifty closes above the strike of 2250, the buyer would exercise his option and
profit to the extent of the difference between the Nifty-close and the strike price. The profits
possible on this option are potentially unlimited. However if Nifty falls below the strike of
2250, he lets the option expire. The losses are limited to the extent of the premium paid for
buying the option.
40
The figure above shows the profits/losses for the seller of a three-month Nifty 2250 call
option. As the spot Nifty rises, the call option is in-the-money and the writer starts making
losses. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise his
option on the writer who would suffer a loss to the extent of the difference between the Niftyclose and the strike price. The loss that can be incurred by the writer of the option is
potentially unlimited, whereas the maximum profit is limited to the extent of the up-front
option premium of Rs.86.60 charged by him.
41
The above figure shows the profits/losses for the buyer of a three-month Nifty 2250 put
option. As can be seen, as the spot Nifty falls, the put option is in-the-money. If upon
expiration, Nifty closes below the strike of 2250, the buyer would exercise his option and
profit to the extent of the difference between the strike price and Nifty-close. The profits
possible on this option can be as high as the strike price. However if Nifty rises above the
strike of 2250, the option expires worthless. The losses are limited to the extent of the
premium paid for buying the option.
42
The above figure shows the profits/losses for the seller of a three-month Nifty 2250 put
option. As the spot Nifty falls, the put option is in-the-money and the writer starts making
losses. If upon expiration, Nifty closes below the strike of 2250, the buyer would exercise his
option on the writer who would suffer a loss to the extent of the difference between the strike
price and Nifty-close. The loss that can be incurred by the writer of the option is a maximum
extent of the strike price (Since the worst that can happen is that the asset price can fall to
zero) whereas the maximum profit is limited to the extent of the up-front option premium of
Rs.61.70 charged by him.
43
forward to subsequent assessment year and set off against any other income of the subsequent
year. Such losses can be carried forward for a period of 8 assessment years.
Sl. No.
1.
2.
3.
Rate
0.017%
Payable by
Seller
Purchaser
0.125%
0.017%
MUTUAL FUNDS
Concept of Mutual Fund
44
Seller
Mutual funds are a vehicle to mobilize moneys from investors, to invest in different markets
and securities, in line with the investment objectives agreed upon, between the mutual fund
and the investors.
Mutual fund schemes announce their investment objective and seek investments from the
public. Depending on how the scheme is structured, it may be open to accept money from
investors, either during a limited period only or at any time.
The investment that an investor makes in a scheme is translated into a certain number of
Units in the scheme. Thus, an investor in a scheme is issued units of the scheme.
Under the law, every unit has a face value of Rs10. The face value is relevant from an
accounting perspective. The number of units multiplied by its face value (Rs10) is the
capital of the scheme its Unit Capital.
When the investment activity is profitable, the true worth of a unit goes up; when there
are losses, the true worth of a unit goes down. The true worth of a unit of the scheme is
otherwise called Net Asset Value (NAV) of the scheme.
When a scheme is first made available for investment, it is called a New Fund Offer
(NFO). During the NFO, investors may have the chance of buying the units at their face
value. Post-NFO, when they buy into a scheme, they need to pay a price that is linked to
its NAV.
The money mobilized from investors is invested by the scheme as per the investment
objective committed. Profits or losses, as the case might be, belong to the investors. The
investor does not however bear a loss higher than the amount invested by them.
The relative size of mutual fund companies is assessed by their assets under management
(AUM). When a scheme is first launched, assets under management would be the amount
46
mobilized from investors. Thereafter, if the scheme has a positive profitability metric, its
AUM goes up; a negative profitability metric will pull it down.
Further, if the scheme is open to receiving money from investors even post-NFO, then
such contributions from investors boost the AUM. Conversely, if the scheme pays any
money to the investors, either as dividend or as consideration for buying back the units of
investors, the AUM falls.
The AUM thus captures the impact of the profitability metric and the flow of unit-holder
money to or from the scheme.
47
3. Economies of Scale
The pooling of large sums of money from so many investors makes it possible for the mutual
fund to engage professional managers to manage the investment. Individual investors with
small amounts to invest, cannot, by themselves afford to engage such professional
management.
Large investment corpus leads to various other economies of scale. For instance, costs related
to investment research and office space get spread across investors. Further, the higher
transaction volume makes it possible to negotiate better terms with brokers, bankers and other
service providers.
4. Liquidity
At times, investors in financial markets are stuck with a security for which they cant find a
buyer worse; at times they cant find the company they invested in! Such investments,
whose value the investor cannot easily realise in the market, are technically called illiquid
investments and may result in losses for the investors.
Investors in a mutual fund scheme can recover the value of the moneys invested, from the
mutual fund itself. Depending on the structure of the mutual fund scheme, this would be
possible, either at any time, or during specific intervals, or only on closure of the scheme.
Schemes where the money can be recovered from the mutual fund only on closure of the
scheme are listed in a stock exchange. In such schemes, the investor can sell the units in the
stock exchange to recover the prevailing value of the investment.
5. Tax Deferral
Mutual funds are not liable to pay tax on the income they earn. If the same income were to be
earned by the investor directly, then tax may have to be paid for the same financial year.
Mutual funds offer options, whereby the investor can let the moneys grow in the scheme for
several years. By selecting such options, it is possible for the investor to defer the tax
48
liability. This helps investors to legally build their wealth faster than would have been the
case, if they were to pay tax on the income each year.
6. Tax benefits
Specific schemes of mutual funds (Equity Linked Savings Schemes) gives investors the
benefit of deduction of the amount invested, from their income that is liable to tax. This
reduces their taxable income, and therefore the tax liability. Further, the dividend that the
investor receives from the scheme is tax-free in their hands.
7. Convenient Options
The options offered under a scheme allow investors to structure their investments in line with
their liquidity preference and tax position.
8. Investment Comfort
Once an investment is made with a mutual fund, they make it convenient for the investor to
make further purchases with very little documentation. This simplifies subsequent investment
activity.
9. Regulatory Comfort
The regulator, Securities & Exchange Board of India (SEBI) has mandated strict checks and
balances in the structure of mutual funds and their activities. Mutual fund investors benefits
from such protection.
49
2. Choice overload
Over 800 mutual fund schemes offered by 38 mutual funds and multiple options within
those schemes make it difficult for investors to choose between them. Greater
dissemination of industry information through various media and availability of professional
advisors in the market should help investors handle this overload.
SEBI has however imposed certain limits on the expenses that can be charged to any scheme.
These limits vary with the size of assets and the nature of the scheme.
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme,
from the fund, only during its NFO. The fund makes arrangements for the units to be traded,
post-NFO in a stock exchange. This is done through a listing of the scheme in a stock
exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO,
investors who want to buy Units will have to find a seller for those units in the Stock
Exchange. Similarly, investors who want to sell Units will have to find a buyer for those units
in the stock exchange.
Interval funds combine features of both open-ended and close ended schemes. They are
largely close-ended, but become open ended at pre-specified intervals. For instance, an
interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each
year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not
completely dependent on the stock exchange to be able to buy or sell units of the interval
fund.
51
Passive funds invest on the basis of a specified index, whose performance it seeks to track.
Thus, a passive fund tracking the BSE Sensex would buy only the shares that are part of the
composition of the BSE Sensex. The proportion of each share in the schemes portfolio
would also be the same as the weightage assigned to the share in the computation of the BSE
Sensex. Thus, the performance of these funds tends to mirror the concerned index. They are
not designed to perform better than the market. Such schemes are also called index schemes.
Since the portfolio is determined by the index itself, the fund manager has no role in deciding
on investments. Therefore, these schemes have low running costs.
Diversified debt funds on the other hand, invest in a mix of government and nongovernment debt securities.
Junk bond schemes or high yield bond schemes invest in companies that are of poor credit
quality. Such schemes operate on the premise that the attractive returns offered by the
investee companies makes up for the losses arising out of a few companies defaulting.
Fixed maturity plans are a kind of debt fund where the investment portfolio is closely
aligned to the maturity of the scheme. AMCs tend to structure the scheme around preidentified investments. Further, like close-ended schemes, they do not accept moneys postNFO. Thanks to these characteristics, the fund manager has little ongoing role in deciding on
the investment options. Such a portfolio construction gives more clarity to investors on the
likely returns if they stay invested in the scheme until its maturity. This helps them compare
the returns with alternative investments like bank deposits.
Floating rate funds invest largely in floating rate debt securities i.e. debt securities where
the interest rate payable by the issuer changes in line with the market. For example, a debt
security where interest payable is described as 5-year Government Security yield plus 1%,
will pay interest rate of 7%, when the 5- year Government Security yield is 6%; if 5-year
Government Security yield goes down to 3%, then only 4% interest will be payable on that
debt security. The NAVs of such schemes fluctuate lesser than debt funds that invest more in
debt securities offering a fixed rate of interest.
Liquid schemes or money market schemes are a variant of debt schemes that invest only in
debt securities where the moneys will be repaid within 91-days. These are widely recognized
to be the lowest in risk among all kinds of mutual fund schemes.
53
Sector funds however invest in only a specific sector. For example, a banking sector fund
will invest in only shares of banking companies. Gold sector fund will invest in only shares
of gold-related companies.
Thematic funds invest in line with an investment theme. For example, an infrastructure
thematic fund might invest in shares of companies that are into infrastructure construction,
infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus more
broad-based than a sector fund; but narrower than a diversified equity fund.
Equity Linked Savings Schemes (ELSS), offer tax benefits to investors. However, the
investor is expected to retain the Units for at least 3 years.
Equity Income / Dividend Yield Schemes invest in securities whose shares fluctuate
less, and therefore, dividend represents a larger proportion of the returns on those shares. The
NAV of such equity schemes are expected to fluctuate lesser than other categories of equity
schemes.
Arbitrage Funds take contrary positions in different markets / securities, such that the risk
is neutralized, but a return is earned. For instance, by buying a share in BSE, and
simultaneously selling the same share in the NSE at a higher price. Most arbitrage funds take
contrary positions between the equity market and the futures and options market.
Capital Protected Schemes are close-ended schemes, which are structured to ensure that
investors get their principal back, irrespective of what happens to the market. This is ideally
done by investing in Zero Coupon Government Securities whose maturity is aligned to the
schemes maturity. The investment is structured, such that the principal amount invested in
the zero-coupon security together with the interest that accumulates during the period of the
scheme would grow to the amount that the investor invested at the start.
Suppose an investor invested Rs 10,000 in a capital protected scheme of 5 years. If 5-year
government securities yield 7% at that time, then an amount of Rs 7,129.86 invested in 5-year
zero coupon government securities would mature to Rs 10,000 in 5 years. Thus, by investing
Rs. 7,129.86 in the 5-year zero-coupon government security, the scheme ensures that it will
have Rs 10,000 to repay to the investor in 5 years. After investing in the government security,
Rs 2,870.14 is left over (Rs 10,000 invested by the investor, less Rs 7129.86 invested in
government securities). This amount is invested in riskier securities like equities. Even if the
risky investment becomes completely worthless (a rare possibility), the investor is assured of
getting back the principal invested, out of the maturity moneys received on the government
security.
Gold Funds
These funds invest in gold and gold-related securities in either of the following formats:
Gold Exchange Traded Fund, which is like an index fund that invests in gold. The NAV
of such funds moves in line with gold prices in the market.
Gold Sector Funds i.e. the fund will invest in shares of companies engaged in gold mining
and processing. Though gold prices influence these shares, the prices of these shares are more
closely linked to the profitability and gold reserves of the companies. Therefore, NAV of
these funds do not closely mirror gold prices.
55
They take exposure to real estate. Such funds make it possible for small investors to take
exposure to real estate as an asset class. Although permitted by law, real estate mutual funds
are yet to hit the market in India.
Commodity Funds
Commodities, as an asset class, include:
Food crops like wheat and chana
Spices like pepper and turmeric
Precious metals (bullion) like gold and silver
The investment objective of commodity funds would specify which of these commodities it
proposes to invest in. As with gold, such funds can be structured as Commodity ETF or
Commodity Sector Funds. In India, mutual fund schemes are not permitted to invest in
commodities. Therefore, the commodity funds in the market are in the nature of Commodity
Sector Funds, i.e. funds that invest in shares of companies that are into commodities. Like
Gold Sector Funds, Commodity Sector Funds too are a kind of equity fund.
International Funds
These are funds that invest outside the country. For instance, a mutual fund may offer a
scheme to investors in India, with an investment objective to invest abroad.
One way for the fund to manage the investment is to hire the requisite people who will
manage the fund. Since their salaries would add to the fixed costs of managing the fund, it
can be justified only if a large corpus of funds is available for such investment.
An alternative route would be to tie up with a foreign fund (called the host fund). If an Indian
mutual fund sees potential in China, it will tie up with a Chinese fund. In India, it will launch
what is called a feeder fund. Investors in India will invest in the feeder fund. The moneys
collected in the feeder fund would be invested in the Chinese host fund. Thus, when the
Chinese market does well, the Chinese host fund would do well, and the feeder fund in India
will follow suit.
56
Such feeder funds can be used for any kind of international investment. The investment could
be specific to a country (like the China fund) or diversified across countries. A feeder fund
can be aligned to any host fund with any investment objective in any part of the world,
subject to legal restrictions of India and the other country.
In such schemes, the local investors invest in rupees for buying the Units. The rupees are
converted into foreign currency for investing abroad. They need to be re-converted into
rupees when the moneys are to be paid back to the local investors. Since the future foreign
currency rates cannot be predicted today, there is an element of foreign currency risk.
Investor's total return in such schemes will depend on how the international investment
performs, as well as how the foreign currency performs. Weakness in the foreign currency
can pull down the investors' overall return.
Fund of Funds
The feeder fund was an example of a fund that invests in another fund. Similarly, funds can
be structured to invest in various other funds, whether in India or abroad. Such funds are
called fund of funds. These fund of funds pre specify the mutual funds whose schemes they
will buy and / or the kind of schemes they will invest in. They are designed to help investors
get over the trouble of choosing between multiple schemes and their variants in the market.
Thus, an investor invests in a fund of funds, which in turn will manage the investments in
various schemes and options in the market.
Other investors will have to buy and sell units of the ETF in the stock exchange. In order to
facilitate such transactions in the stock market, the mutual fund appoints some intermediaries
as market makers, whose job is to offer a price quote for buying and selling units at all times.
If more investors in the stock exchange want to buy units of the ETF, then their moneys
would be due to the market maker. The market maker would use the moneys to buy a basket
of securities that is in line with the investment objective of the scheme, and exchange the
same for chapters of the scheme from the mutual fund. Thus, the market maker can offer the
units to the investors.
If there is more selling interest in the stock exchange, then the market maker will end up with
units, against which he needs to make payment to the investors. When these units are offered
to the mutual fund for extinguishment, corresponding securities will be released from the
investment portfolio of the scheme. Sale of the released securities will generate the liquidity
to pay the unit holders for the units sold by them.
In a regular open-ended mutual fund, all the purchases of units by investors on a day happen
at a single price. Similarly, all the sales of units by investors on a day happen at a single price.
The market however keeps fluctuating during the day. A key benefit of an ETF is that
investors can buy and sell their units in the stock exchange, at various prices during the day
that closely track the market at that time. Further, the unique structure of ETFs, make them
more cost-effective than normal index funds, although the investor would bear a brokerage
cost when he transacts with the market maker
holder, and therefore, the Unit-holders taxability, number of units held and value of those
units.
In a dividend payout option, the fund declares a dividend from time to time. When a dividend
is paid, the NAV of the units falls to that extent. Debt schemes need to pay an income
distribution tax on the dividend distributed. This tax payment too reduces the NAV. The
reduced NAV, after a dividend payout is called ex-Dividend NAV. After a dividend is
announced, and until it is paid out, it is referred to as cum-Dividend NAV. In a dividend
payout option, the investor receives the dividend in his bank account. However, the dividend
payout does not change the number of units held by the investor. The dividend received in the
hands of the investor does not bear any tax.
In a dividend re-investment option, as in the case of dividend payout option, NAV declines to
the extent of dividend and income distribution tax. The resulting NAV is called ex-dividend
NAV. However, the investor does not receive the dividend in his bank account; the amount is
re-invested in the same scheme.
Dividend is not declared in a growth option. Therefore, nothing is received in the bank
account (unlike dividend payout option) and there is nothing to re-invest (unlike dividend reinvestment option). In the absence of dividend, there is no question of income distribution
tax. The NAV would therefore capture the full value of portfolio gains.
Thus, the investor acquires his Units closer to the average of the NAV on the 6 transaction
dates during the 6 month period a reason why this approach is also called Rupee Cost
Averaging.
Through an SIP, the investor does not end up in the unfortunate position of acquiring all the
units in a market peak. Mutual funds make it convenient for investors to lock into SIPs by
investing through Post-Dated Cheques (PDCs), ECS or standing instructions.
60
This is a variation of SWP. While in a SWP the constant amount is paid to the investor at the
pre-specified frequency, in a STP, the amount which is withdrawn from a scheme is reinvested in some other scheme of the same mutual fund. Thus, it operates as a SWP from the
first scheme, and a SIP into the second scheme.
Since the investor is effectively switching between schemes, it is also called switch. If the
unit-holder were to do this SWP and SIP as separate transactions
The Unit-holder ends up waiting for funds during the time period that it takes to receive the
re-purchase proceeds, and has idle funds, during the time it takes to re-invest in the second
scheme. During this period, the market movements can be adverse for the unit-holder.
The Unit-holder has do two sets of paper work (Sale and Repurchase) for every period.
Rate
0.125%
0.125%
0.017%
Rate
0.125%
0.125%
0.250%
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This additional tax on income distributed (referred to in the market as dividend distribution
tax) is not payable on dividend distributed by equity-oriented mutual fund schemes. Dividend
Distribution Tax (DDT) on dividends distributed to corporate investors by all categories of
debt funds have been increased to 30%, w.e.f. June 1, 2011.
63
Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of
inflation. The government comes out with an index number for every financial year to
facilitate this calculation.
For example, if the investor bought units of a debt-oriented mutual fund scheme at Rs 10 and
sold them at Rs 15, after a period of over a year. Assume the governments inflation index
number was 400 for the year in which the units were bought; and 440 for the year in which
the units were sold. The investor would need to pay tax on the lower of the following:
10%, without indexation viz. 10% X (Rs 15 minus Rs 10) i.e. Rs 0.50 per unit
20%, with indexation.
Indexed cost of acquisition is Rs 10 X 440 400 i.e. Rs11. The capital gains post indexation
is Rs 15 minus Rs 11 i.e. Rs 4 per unit. 20% tax on this would mean a tax of Rs 0.80 per unit.
The investor would pay the lower of the two taxes i.e. Rs0.50 per unit.
Wealth Tax
Investments in mutual fund units are exempt from Wealth Tax.
INSURANCE
Introduction
It is the wish of most individuals to have enough assets, so that one can meet lifes necessities
and luxuries. Individual save to provide for these necessities and luxuries. The earning power
of an individual is reduced in retirement or by unforeseen disability or for any unexpected
happening. Many individuals also love to leave enough assets to assure continuation of these
necessities and luxuries to their dependents. Insurance takes care of these risks. Insurance
allows a person to join a large group of people to share losses. The group guarantees to pay a
sum of money to the person, to his family or to other beneficiaries as intended by the insured
64
upon the happening of an uncertain specified event like death, fire, etc. In return, the person
pays an agreed risk premium, also called premium to the insurance company. Japanese ranks
first in life insurance ownership in the world, while USA and Canada are second and third.
What is Insurance?
Insurance is risk transfer mechanism wherein insured transfers the risk of unexpected
financial loss to insurers by paying premium.
Types of Insurance
Insurance can be broadly classified into two categories:
65
Advantages
1. Mental peace
66
The most important benefit of life insurance is that it assures mental peace. When a person
goes for life insurance, he and his family are relieved from worries of future. Thus, it ensures
mental peace.
2. Financial Security
The policy of life insurance provides economical security to the family of the policy holder in
case of death of the breadwinner. On occurrence of this unfortunate event, the family is
forced with a cash crunch. But by availing a life insurance policy, this problem of cash crunch
is solved by a lump sum amount paid by the insurer.
3. Loan in case of need
There are circumstances in life when the individual needs funds but is unable to get from
various sources. The life insurance policy also provides a solution to this problem as loan can
be taken against the policy and need not be repaid as the loan amount is deducted from the
police value on maturity.
4. Cover for whole life
The life insurance policy provides coverage for the whole life of the policyholder. It also
provides protection in cases of serious illness.
8. Enhanced coverage
The policy provides enhanced coverage by providing for medical benefits.
Disadvantages
1. Expensive
The life insurance can prove to be a costly affair, particularly when suffering from illness and
regarded by insurers as High Risk due to some reasons like old age etc.
3. Increasing premiums
The premium payable increases with the increase in age. But the income gradually decreases
which makes it difficult to strike a balance.
General Insurance
Any insurance other than Life Insurance falls under the classification of General Insurance.
It comprises of: Insurance of property against fire, theft, burglary, terrorism, natural disasters etc
Personal insurance such as Accident Policy, Health Insurance and liability insurance which
covers legal liabilities.
Errors and Omissions Insurance for professionals, credit insurance etc.
Policy covers such as coverage of machinery against breakdown or loss or damage during
68
the transit.
Policies that provide marine insurance covering goods in transit by sea, air, railways,
waterways and road and cover the hull of ships.
Insurance of motor vehicles against damages or accidents and theft.
2. Insurance-cum-Investment Products
As the name goes, these are plans that provide insurance and along with it return on
investments.
Endowment Plans
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Endowment plans are policies wherein premium is paid by policyholder for defined term and
benefits are either payable on claim or maturity. In most endowment plans, premium payment
term is equal to term of the policy. A bonus is added to the base policy every year depending
upon the investment and mortality experience of Life Insurance Company. The policy owner
has no control over the investment pattern of the premiums paid by him. Majority of
investments are made in government securities and other debt products. This result is
conservative returns derived from such investments.
Policyholder on survival receives sum assured with total bonus declared under the policy
during the term of the policy. On death Nominees receive the sum assured along with
accumulated bonus up to date of the claim.
There are two types endowment policies are without-profit endowment plans and with-profit
endowment plans.
Money-back plans
Money-back plans are variants of endowment plans with one difference the payout can be
staggered through the policy term. Some part of the sum assured is returned to the
policyholder at periodic intervals through the policy tenure. In case of death, the full sum
assured is paid out irrespective of the payouts already made.
Bonus is also calculated on the full sum assured and not the balance money left. Because of
these two reasons, premiums on money-back plans are higher than endowment plans.
Whole-life plans
Term plans, endowment plans and money back plans offer insurance cover till a specified
age, generally 70 years. Whole-life plans provide cover throughout your life. Usually, the
policyholder is given an option to pay premiums till a certain age or a specified period (called
maturity age).
The primary advantages of whole life are guaranteed death benefit, guaranteed cash values,
fixed and known annual premiums, access to cash values and the fact that mortality and
expense charges will not reduce the cash value shown in the policy. The primary
disadvantage is premium inflexibility and internal rate of return in the policy may not be
competitive with other savings alternatives.
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On reaching the maturity age, the policyholder has the option to continue the cover till death
without paying any premium or encashing the sum assured and bonuses.
3. Investment Products
Pension Plans
Pension plans are investment options that let you set up an income stream in your post
retirement years by giving away your savings to an insurance company who invests it on your
behalf for a fee. The returns you get depends on a host of factors like how much you
contributed and when is it that you started, the number of years when you want the money to
come to you and at what age that starts.
When you buy the pension plan contract, if the payment to you (called annuity) starts
immediately it is called an immediate annuity contract. However, if the payout starts after
some years of deferment, it is called a deferred annuity.
Taxation
Benefit
U/S 80C
The premium paid towards pension plans qualifies for tax benefits u/s
80CCC. The maximum amount that can be invested under this section is
Rs.100000.
a) Surrender value received is taxable in the year of receipt in the
hands of the assessee or nominee.
b) If deduction is claimed under 80CCC, pension received will be
taxable in the hands of assessee of the nominee in the year of
receipt.
U/S 80D
U/S 80DD
U/S 10(10D)
72
ALTERNATIVE INVESTMENTS
Alternative investments can be defined as investments, which are not from the universe of
traditional investments. Traditional investments, are investments availed by masses for a long
period of time. For example: direct equity investment, bank savings, small savings scheme,
real estate, etc. Alternative investments are complex in nature and extremely difficult to
analyze.
The primary benefit that alternative investing offers to an otherwise traditional portfolio of
financial assets is diversification. Many alternative investment strategies have extremely low
correlations to price movements as compared to traditional financial securities. Maintaining a
portion of a portfolio in assets whose returns are somewhat independent of the financial
markets can be enticing from a risk control standpoint, especially when financial markets
become overvalued. While opportunity for high returns might exist within the alternative
73
investment arena, the primary reason to consider alternatives is for diversification and risk
control.
Real estate, Coins, Stamps & Books, Fine Art, Wine, Antiques, Precious Metals, Vehicles,
Private equity, etc are all example of alternative investments. However alternative investment
comes with some warranties:a) Alternative investment segment mainly comprises the products, which are unregulated
without any set of investment, buying selling module and thus is subject to risk in the
manner of fraud and theft.
b) Being an unregulated market, these investments suffer from transparency in disclosing the
style and the methodology of investment and in publishing the portfolio. They also lack in
legal reporting requirements.
c) Deciding and finding alternative investment is complicated and equally difficult is to
arrive at allocation, which can be marked for these investments. This is because historical
data, investment strategies and more details about them are not available and thus a
thorough research and understanding of investment is required to decide on these.
d) Being unregulated and the absence of historical data, it becomes very difficult to analyze
performance as also there can a widening gap of investment performance compared to
investment avenues which are regulated. Transparency bridges the gap between
performances.
e) Liquidity is a big issue in alternative investments. It may not be suitable for a retail
investor to get into these investments because of the fact of limited liquidity.
f) Being unregulated, issues like legal, tax and operational issues must be sorted out before
investment.
Art
Although the concept of investing in art is relatively new in India, art has always been a
viable investment option in the west. Art investment in India is gaining momentum with the
works of M.F Husain, Tyeb Mehta and F.N Souza being lapped up by international collectors.
FN Souzas work the Birth sold for $2.3 million, setting records in valuing Indian art. MF
Husain and SH Raza are currently valued anywhere from $200,000 to $1 million. The growth
74
in Indian contemporary art also reflects the same trend. The prices of works of several
famous artists like CF John, TM Azis, Yusuf Arakkal, Atul Dodiya have increased
considerably since Indian art reached the international stage.
Art and antiques are extremely vulnerable to fluctuations in public tastes and other factors, so
they are considered high-risk, speculative investments. Most investment consultants feel that
one should invest in art and antiques primarily because one likes them, and only secondarily
because they may return a profit. Also not more than 10-15 percent of the value of the
investment portfolio should not be kept into art and antiques.
Advantages
i.
ii.
The long term trend for art prices would tend to be upward simply because art is a scarce
product and not reproducible at will. Rising incomes over the long-term ensure a steady
rise in demand for works of art against falling supply.
iii.
Art and antiques popularity as an investment option arises due to its low correlation with
other financial assets.
Limitations
i.
Successful investment in art requires not only extensive know-how about the artistic
quality and authenticity but also the peculiar nuances of the art market. As each work of
art is different, the markets are everything but transparent. Evaluating quality and price
requires knowledge of the market inside out.
ii.
Investment horizons typically run for years or even decades, and the market is generally
illiquid, which significantly limits an investors' ability to convert a holding to cash.
75
iii.
Transaction costs (auction fees, appraisal fees, insurance, handling costs etc.) are by far
larger than in other markets. Though there has been increase in availability of and access
to data from art-research firms, websites dedicated to prices of art, indices of the art
market and art auctions, it is far from adequate.
iv.
The main trouble with investing in art is that it is almost impossible to identify an
intrinsic value. When evaluating individual purchases, there are few risks that may not
arise when investing in securities.
For example, there is no official registration office or certification authority that can
authenticate the ownership of individual artworks. Other transaction risks include absence
of clear title, forgery, mislabeling, and auction fraud.
v.
The increase in the market rate of an art piece is also quite subjective and unpredictable
two contemporary paintings of different style or similar style paintings done in different
periods by the same artist and of identical size and subject fetch drastically different
prices. Market price is not entirely a function of demand and supply, but is considerably
determined by what the critics and curators have to say about the value of the piece. And
until the piece is sold, there is no income the investor receives like dividend in equity or
interest in bonds. It is in the end an unregulated market.
vi.
The minimum investment needed to begin investing in art is quite high and therefore this
route is available to only very high net worth individuals.
Investing In Gold
Gold was in use as a form of money, in one form or another, at least from 100% BC until the
end of the Bretton Woods system in 1971. It was used as a store of value both by individuals
and countries for much of that period. However in recent times it is still considered as a store
of value, a safe haven, anti inflationary and as an insurance in crisis situations.
Considering its high density and high value per unit mass, storing and transporting gold is
very easy. Gold also does not corrode. Gold has the potential for appreciation (or
76
depreciation), but lacks the two other components of total return: interest and compound
interest. Besides physical gold now gold can be purchased through a gold exchange traded
fund or in the form of gold certificate.
Why own Gold?
There are six primary reasons why investors own gold:
a.
b.
c.
d.
e.
f.
Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar
and U.S. stocks, by currency-related crises, interest rate volatility and international tensions,
and by increases or decreases in the prices of other commodities.
The price of gold reacts to supply and demand changes and can be influenced by consumer
spending and overall levels of affluence. Gold is different from other precious metals such as
platinum, palladium and silver because the demand for these precious metals arises
principally from their industrial applications.
Gold is produced primarily for accumulation; other commodities are produced primarily for
consumption. Golds value does not arise from its usefulness in industrial or consumable
applications. It arises from its use and worldwide acceptance as a store of value. Gold is
money. In contrast to other commodities, gold does not perish, tarnish or corrode, nor does
gold have quality grades. Gold mined thousands of years ago is no different from gold mined
today.
Real Estate
The most basic definition real estate is "an interest in land". Broadening that definition
somewhat, the word "interest" can mean either an ownership interest leasehold interest. In an
ownership interest, the investor is entitled to the full rights of ownership of the land and must
also assume the risks and responsibilities of a landowner. On the other side of the
77
relationship, a leasehold interest only exists when a landowner agrees to pass some of his
rights on to a tenant in exchange for a payment of rent. If you rent an apartment, you have a
leasehold interest in real estate. If you own a home, you have an ownership interest in that
home.
As a real estate investor, you will most likely be purchasing ownership interests and then
earning a return on that investment by issuing leasehold interests to tenants, who will in turn
pay rent.
Real estate that generates income or is otherwise intended for investment purposes rather than
as a primary residence. It is common for investors to own multiple pieces of real estate, one
of which serves as a primary residence, while the others are used to generate rental income
and profits through price appreciation. The tax implications for investment real estate are
often different than those for residential real estate.
Other Characteristics
78
Some of the other characteristics that make real estate unique as compared to other
investment alternatives are as follows:
1. No fixed maturity
Unlike a bond which has a fixed maturity date, an equity real estate investment does not
normally mature. This attribute of real estate allows an owner to buy a property, execute a
business plan, then dispose of the property whenever appropriate. An exception to this
characteristic is an investment in fixed-term debt; by definition a mortgage would have a
fixed maturity.
2. Tangible
Real estate is tangible. You can visit your investment, speak with your tenants, and show it
off to your family and friends. You can see it and touch it. A result of this attribute is that you
have a certain degree of physical control over the investment - if something is wrong with it,
you can try fixing it. You can't do that with a stock or bond.
3. Requires Management
Because real estate is tangible, it needs to be managed in a hands-on manner. Tenant
complaints must be addressed. Landscaping must be handled. And, when the building starts
to age, it needs to be renovated.
4. Inefficient Markets
An inefficient market is not necessarily a bad thing. It just means that information asymmetry
exists among participants in the market, allowing greater profits to be made by those with
special information, expertise or resources. In contrast, public stock markets are much more
efficient - information is efficiently disseminated among market participants, and those with
material non-public information are not permitted to trade upon the information. In the real
estate markets, information is king, and can allow an investor to see profit opportunities that
might otherwise not have presented themselves.
Private market real estate has high purchase costs and sale costs. On purchases, there are realestate-agent-related commissions, lawyers' fees, engineers' fees and many other costs that can
raise the effective purchase price well beyond the price the seller will actually receive. On
sales, a substantial brokerage fee is usually required for the property to be properly exposed
to the market. Because of the high costs of trading real estate, longer holding periods are
common and speculative trading is rarer than for stocks.
6. Lower Liquidity
With the exception of real estate securities, no public exchange exists for the trading of real
estate. This makes real estate more difficult to sell because deals must be privately brokered.
There can be a substantial lag between the time you decide to sell a property and when it
actually is sold - usually a couple months at least.
80
(traditional investment vehicles such as stocks and bonds), which adds to the diversification
of your portfolio.
b) Yield Enhancement
As part of a portfolio, real estate allows you to achieve higher returns for a given level of
portfolio risk. Similarly, by adding real estate to a portfolio you could maintain your portfolio
returns while decreasing risk.
c) Inflation Hedge
Real estate returns are directly linked to the rents that are received from tenants. Some leases
contain provisions for rent increases to be indexed to inflation. In other cases, rental rates are
increased whenever a lease term expires and the tenant is renewed. Either way, real estate
income tends to increase faster in inflationary environments, allowing an investor to maintain
its real returns.
Taxation
House can be classified as a capital asset and as such any gains or loss on dealing of house
property is called as capital gains. Capital gains on sale of house property may be long term
or short term. Exemptions are available only in case of long term capital gains.
Asset
Short term
Long term
81
land, property.
Exemption under section 54
Conditions for exemption u/s 54
Only individuals and HUF assesses are eligible for this exemption.
The residential house property which is transferred should be held by the owner for more
If capital gains made on the sale of house property is invested in notifies bonds of
companies within six months from date of realization of capital gains, then the capital
gains tax is exempted to the extend investment made in bonds. I.e. Rural Electrification
Corporation, National Highway Authority of India (NHAI), etc.
82
PRIMARY RESEARCH
Introduction
Savings form an important part of the economy of any nation. With the savings invested in
various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents a plethora of avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has reasonable options for an
ordinary man to invest his savings.
One needs to invest and earn return on their idle resources and generate a specified sum of
money for a specific goal in life and make a provision for an uncertain future. One of the
important reasons why one needs to invest wisely is to meet the cost of inflation. Inflation is
the rate at which the cost of living increases.
The cost of living is simply what it cost to buy the goods and services you need to live.
Inflation causes money to lose value because it will not buy the same amount of a good or
service in the future as it does now or did in the past. The sooner one starts investing the
better. By investing early you allow your investments more time to grow, whereby the
concept of compounding increases your income, by accumulating the principal and the
interest or dividend earned on it, year after year.
The three golden rules for all investors are
i.
ii.
iii.
Invest early
Invest regularly
Invest for long term and not for short term
For this analysis, customer perception and awareness level will be measured in important
areas such as:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
iii.
business, etc.
The scope of the study is limited to different selecting investment avenues
Sample size, which we have taken, is very small, on the basis of which efficient decision
ii.
cant be taken
Respondents were biased in their responses because they were more in favor of the brand
iii.
iv.
v.
replies.
The population surveyed was not open to questions related to their personal income i.e.
either they fell hesitant in disclosing the facts about their incomes or they were simply not
vi.
interested.
Time factor
84
vii.
Cost factor
RESEARCH METHODOLOGY
Sampling technique initially, a rough draft will be prepared keeping in mind the objective of
the research. The final questionnaire will be arrived at only after certain important changes
85
are incorporated. Convenience sampling technique will be used for collecting the data from
different investors. The investors are selected by the convenience sampling method. The
selection of units from the population based on their easy availability and accessibility to the
researcher is known as convenience sampling. Convenience sampling is at its best in surveys
dealing with an exploratory purpose for generating ideas and hypothesis.
Sampling unit: The respondents who will be asked to fill out the questionnaires are the
sampling units. These comprise of employees of MNCCs, government employees, housewives,
self employed, professionals and other investors.
Sampling size: The sample size will be restricted to only 100, which comprised of mainly
people from different regions of Mumbai.
Sampling area: The area of the research is Mumbai.
Research design
This section carry out the topic such as research sector, research population and instrument
used for the research.
i.
Research Sector
Researcher is going to carry out the research on Investment Avenue available to
investor because the aim of the research is to study Investment pattern of the Investor.
ii.
Research Population
Research population comprises of the survey are Salaried, Professional, Business owner,
Retired & Pensioner, trader, share broker and others. This survey will be analyzed in terms of
factors like Safety, Liquidity, Diversification, Simplicity, Tax saving and Affordability.
iii.
Research instrument
The questionnaire is been carefully prepared to get the most of the required information from
the investors. A research design is simply the framework or plan for a study used as a guide in
collecting and analyzing data. It is the blue print that is followed in completing the study.
Research would be conducted in the context of this project report. I have utilized descriptive
research design.
Sources of information
86
Primary Data
Information is collected by conducting a survey by distributing a questionnaire to 100
investors in Mumbai. These 100 investors are of different age group, different occupation,
different income levels, and different qualifications. (A copy of the questionnaire is given in
the last as ANNEXURE 1).
Secondary Data
This data is collected by using the following means.
1. Articles in Financial Newspapers (Economic timesC and Business Standard)
2. Investment Magazines, Business Magazines, Financial chronicles.
3. Experts opinion published in various print media.
4. Books written by various authors on Investments.
5. Data available on internet through various websites.
Method of analysis
The analysis of data collection is completed and presented systematically with the used of
Microsoft Excel and MS- Word. The various tools used for presentation are:
i.
ii.
iii.
iv.
Bar graph
Pie chart
Column graph
Doughnut chart
The questionnaire contains various questions on the investors financial experience, based on
these experiences an analysis is made to find out a pattern in their investments.
Based on these investment experiences of the 100 sample investors an analysis is made and
interpretations are drawn. Interpretations are made on a rational basis, these interpretations
may be correct or may not be correct but care is taken to draw a valid and approvable
interpretation.
Analysis is made only from the information collected through questionnaires no other data or
information is taken in to consideration for purpose of the analysis.
88
ENT
LESS THAN
AVENUES
25
Respo
25-35
35-45
45-60
GREATER
THAN 60
ndents
Respo
ndents
Respo
ndents
Respo
Respo
ndents
ndents
Equity
32
27
25
22
13
Debentures
12
09
10
17
33
24
18
20
17
20
Insurance
20
23
15
22
13
Mutual
12
14
15
11
09
15
11
13
25
100
22
100
20
100
18
100
15
100
/ Bonds
Bank
Deposits
Fund
Gold &
Real Estate
Total
35
30
25
Equity
Debentures/ bonds
20
Bank Deposits
Insurance
15
Mutual Fund
10
5
0
Less than 25
25-35
35-45
45-60
Interpretation
89
Above 60
From above table we can conclude that, all the age groups are giving more preference on
investing in equity, except those who are more than sixty years. The age group, which is more
than sixty years, gives more preference to Debentures/ Bonds and Bank Deposits.
We conclude that as the age of individual increases, the risk tolerance decreases.
NT
LESS THAN
AVENUES
200000
Respond
200001-500000
500001-800000
GREATER
THAN 800000
ents
Respon
dents
Respon
dents
Respon
dents
Equity
16
21
29
31
Debentures/
11
12
37
29
17
13
Bonds
Bank
Deposits
90
Insurance
19
18
21
25
Mutual Fund
16
14
17
19
32
100
28
100
24
100
16
100
Estate
Total
40
35
30
25
20
15
10
5
0
Equity
Debentures/ Bonds
Bank Deposits
Insurance
Mutual Fund
Gold & Real estate
Interpretation
The above table reveals that higher income group gives more preference to investment in
equity where as lower income group gives more preference to investment in bank deposit. It
implies that the higher income levels can take more risk in investment rather than lower
income levels because the saving ratio of the higher income individuals is very high so that
they can afford to take higher risk by investing in equity and vice versa.
Risk Tolerance
91
Risk Tolerance
9
27
18
46
Interpretation
Table and Chart clearly shows that 46% i.e. majority of investor expect 15% to 30% risk on
annual basis, 27% investor expect less than 15%, 18% investor expect 30% to 45% and 9%
investor expect more than 45% risk.
OCCUPATION (%)
EMPLOYED
Less than
SELF- EMPLOYED
OTHERS
TOTAL
Respondents
Respondents
Respondent
Respon
15
55.50
18.50
s
7
26
dents
27
92
15%
15% to
22
48
14
30
10
22
46
30%
30% to
22
11
61
17
18
45%
Above
33
56
11
45%
Above 45%
30% to 45%
Employed
Self- Employed
15% to 30%
Others
10
20
30
40
50
60
70
Interpretation
Above graph shows that self employed individuals take more risk as compared to employed,
retired, housewife, etc. Self-employment status automatically leads to higher levels of risk
taking, and that, other things being equal, self-employed individuals will typically choose
riskier investments and accept increased investment volatility as compared to people who
work for others on a straight salary for higher returns.
93
90
78
80
67
70
59
60
50
40
57
43
41
Male
33
Female
30
22
20
10
0
Less than 15%
15% to 30%
30% to 45%
Above 45%
Ris
k Tolerance Based on Gender
Interpretation
Above graph shows that male takes more risk than female. Women tend to be less risk
tolerant than men. We can conclude that gender is also an important investor risk tolerance
classification factor.
56% of the investors are men and the rest 44% are females. Generally males bear the
financial responsibility in Indian Society and therefore they have to make investment decision
to fulfill financial obligations.
74
65
70
60
50
30
39
35
40
67
61
26
33
Married
20
10
0
Less than 15%
Single
15% to 30%
30% to 45%
Interpretation
94
Above 45%
Above graph shows that single individuals take more risk than married individuals. Marital
status is another important factor for risk tolerance. It is assumed that single individuals have
less to lose by accepting greater risk compared to married individuals who often have higher
social responsibility for themselves and dependents.
AGE
Less than 25
25-35
TOTAL
35-45
45-60
Above 60
No.
No
No.
No.
No.
.
5
19
26
22
26
27
15%
15% to
15
33
11
24
15
15
13
46
30%
30% to
33
28
17
11
11
18
45%
Above
45
33
11
11
Less
than
45%
45
40
35
30
Less than 25
25
25-35
35-45
20
45-60
15
Above 60
10
5
0
Less than 15%
15% to 30%
30% to 45%
Interpretation
95
Above 45%
From the above graph we can conclude that as age increases risk tolerance of individual
decreases. Older individuals have less time to recover losses than younger individuals and
thus older individuals have lower risk tolerance.
We can see a decreasing trend in the behavior of investors towards risk as their age increased.
We can conclude that there is a strong inverse or negative relationship between risk tolerance
and age group.
Qualification
Qualification
21
7
Under Graduates
Graduates
Post Graduates
33
Others
39
Interpretation
39% of the individual investors covered in the study are postgraduates; 33%investors are
graduates and 7%of the investors are under-graduates, and 21% investors are categorized as
96
others who are more qualified than post graduates. It is interesting to note that most investors
(covered in the study) can be said to possess higher education (Bachelor Degree and above).
Objective of Investment
Objective of Investment
40
35
30
25
20
15
10
5
0
36
21
14
12
15
2
Percentage
Interpretation
From the above table and chart, majority investors objective is future welfare and then
comes inflation protection, child career, high income and retirement protection. So we can
conclude that majority of investors are saving their future through long term objective.
97
Factors of Investment
7
Affordability
3
Diversification
11
Liquidity
Percentage
Simplicity
24
Tax Saving
50
Safety
0
10
15
20
25
30
35
40
45
50
Interpretation
Safety has got the highest rank so we can conclude now a day investors focus more on safety.
At present considering last several years inflation position in India, investors are preferring to
cover themselves against the rise in inflation by investing large portion of their investment in
a safely mode e.g. Bank Fixed Deposit, Insurance, etc.
Investors are also focusing on tax planning factor which is also more important now a days.
Simplicity, Diversification, Liquidity and Affordability are few other factors.
19
32
38
98
Interpretation
The above chart shows that 11% of investors invest above 50% of their income, 19% less
than 20%, 32% invest between 35-50% and majority of investors i.e. 38% invest between 2035%.
It was found that irrespective of annual income they earn all investors are interested in
investment since todays inflated cost of living is forcing everyone to save for their future
needs and invest those resources efficiently.
Types
of Research
6
Studying annual reports
of company
16
32
Others
25
Types of Research
99
Research
16
Yes
No
84
Interpretation
i.
According to above first graph we can see 84% investor doing Research work and 16% of
ii.
iii.
Types of Investment
100
Types of Investment
22
34
44
Interpretation
Among the total sample size highest % of investors prefer long term investment and 22%
prefer short term investment. Whereas 34% of investors prefer to invest in both long term and
short term avenues.
Frequency of Investment
101
Frequency of Investment
6
12
Weekly
Monthly
Quarterly
20
Half Yearly
36
Yearly
26
Interpretation
This graph reveals that 36% of investors are investing monthly. 26% of investors are
investing quarterly. 12% of investors are investing in a yearly basis where as 6% and 20% of
investors are investing in weekly (preferably in equities) and half yearly basis respectively.
Due to busy life schedule many of investors are not able to spend time in monitoring their
investment.
Return Expectation
Return Expectation
More than 30%
16
21%-30%
21
Percentage
11%-20%
48
15
0
10
20
30
40
102
50
60
Interpretation
Graph clearly shows that 40% investor expect 11-20% return on annual basis, 21% investor
expect 21-30%, 16% expect more than 30% and 15% investor expect less than 11% return on
annual basis. Majority of investor expect 11-20% return on annual basis on an average on
different alternatives of investment.
Basis Of Investment
Basis of Investment
Self Analysis
18
49
Financial/ Broker/ CA
Advice
Family/ Friends/
Relatives
33
Interpretation
From this we can conclude that most of the investors invest on the basis of self analysis and
remaining investors take advice from broker, friends, relatives or charted accountant for
investment decision.
Most of the investors investing on the basis on self analysis save the cost of investment or
payment of professional fees. Whereas those investors who do not have much knowledge
about investment strategy or time to study the investment strategy are opting for professionals
advice for their investment decision.
103
Very Limited
18
Basic Knowledge
Considerable
Knowledge
Extensive Knowledge
35
32
Interpretation
Apart from 18% of the investors having very limited knowledge, some of the investors
having considerable and extensive knowledge may opt for professional advice for deciding
their investment strategy due to lack of time required to be spent behind investment related
research.
104
CONCLUSION
As we now know various investment options are available in india i.e. small savings
schemes, insurance, mutual funds, equity, real estate, precious metals etc, but its selection
depends upon various factors. The investment decisions are driven by factors like Risk,
Reward, Age, Occupation, Gender, Marital status, Tax benefit, Income, Investment objective,
Period of investment etc.
The analysis and interpretations very clearly shows that the investors have different views
like investment pattern by market movement, factors influencing their decision, frequency of
investment, alternatives available and investment preferences truly influence their perception
towards different products and services of the company.
Thus, the study says that the Indian investment community have shown much interest in
investing in different financial products available in the market due to the spiraling growth of
Indian GDP, better performance by the companies, liberal rules and regulations by the
authority like SEBI to protect the investors interest and this process will grow much more
quicker in the future. There might be a chance that the perceptions of the investors of
different nature are varied due to diversity in social life, living pattern, income level etc that
needs to be studied further
The facts with regard to the several factors such as relationship between age and risk
tolerance level of individual investors etc. It has important implications for investment
managers as it came out with certain interesting facets of an individual investor. The
individual investor still prefers to invest in financial products which give risk free returns.
Hence it concludes that indian investors even if they are of high income, well educated,
salaried, independent are conservative investors & prefer to play safe.
105
ANNEXURE 1
Questionnaire
1. Name:2. Age:3. Occupation:o Self Employed
o Employed
o Other
4. Gender:o Male
o Female
5. Marital status:6. Your annual income:o Below 200000
o 200000-500000
o 500000-800000
o 800000 onwards
7. Education qualification:8. Your investment objective:o High Income
o Inflation Protection
o For Future Welfare
o Retirement Protection
o Child Career
o Others
9. Factors taken into consideration while selecting an investment option
o Safety
o Tax Saving
o Simplicity
o Liquidity
o Diversification
o Affordability
10. Investment portion of your income (in percentage):11. Do you make research before investment?
12. If yes what type of research do you make?
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o
o
o
o
o
BIBLIOGRAPHY
109
110
111