Chapter 2

INVESTMENT ALTERNATIVES Choices Galore

Major Trends in the Investment Environment

Globalisation Information and Computer Networks Financial Engineering Securitisation

Outline
Deposits
Government Savings Schemes

Money Market Instruments

Bonds or Debentures Equity Shares

Mutual Fund Schemes

Insurance Products Retirement Products Precious Objects Financial Derivatives

Deposits
Bank Deposits
Post Office Savings Account Post Office Time Deposits Post Office Monthly Income Scheme Company Fixed Deposits

Government Savings Schemes

Public Provident Fund Schemes Senior Citizens Saving Scheme National Savings Certificate

Money Market Instruments

Treasury Bills
Commercial Paper Certificate of Deposit Call Money Market Repos Collateralised Borrowing and Lending Obligations

Bonds or Debentures
Central Government Securities

State Development Loans

Public Sector Undertaking Bonds

Private Sector Debentures

Preference Shares

Equity Shares
Terminology Rights of Equity Shareholders Stock Market Classification Peter Lynchs Classification Nature of Equity Shares

Stock Market Classification

Blue-chip Shares
Growth Shares Income Shares Cyclical Shares

Peter Lynchs Classification

Slow Growers
Stalwarts Fast Growers Cyclicals Turnarounds Asset Plays

Mutual Fund Schemes

Schemes Galore
I.

Equity Schemes Diversified equity schemes Index schemes Sectoral schemes Tax planning schemes Hybrid (Balanced) Schemes Equity-oriented schemes Debt-oriented schemes Variable asset allocation schemes Debt Schemes Gilt schemes Mixed schemes Floating rate debt schemes Cash (liquid) schemes

II.

III.

Mutual Fund Regulation

Filing of Offer Document with SEBI

No Guaranteed Returns

NAV Published Regularly

Investment Are Subject to Restrictions

Costs Are Subject to Certain Ceilings

Pros and Cons of Mutual Funds

Pros
Diversification Professional management Liquidity Tax advantages Comprehensive regulation Transparency

Cons
Expenses Lack of thrill

Insurance Products
Term Assurance Plans
Traditional Investment- Oriented Plans

Money Back Plan

Endowment Plan Whole Life Plan Childrens Plan Unit Linked Insurance Plans

Riders
Tax Breaks Considerations in Choosing a Policy

Retirement Products

Mandatory Retirement Schemes

Employees Provident Fund Scheme, 1952

Employees Pension Scheme, 1995 New Pension Scheme

Voluntary Retirement Schemes

Immediate Annuity
Deferred Annuity

Real Estate
For the bulk of the investors, the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate. Semi-urban land A second house Commercial property Agricultural land Time share in a holiday resort

Historically, real estate in India has been financially the most rewarding asset class. The pros and cons of investing in real estate are as follows:

Pros and Cons of Real Estate

Pros
Rental yield (or saving) Attractive capital appreciation

Cons
Large ticket size Legal disputes

Psychic pleasure
Low risk Tax benefits

Illiquid markets
High spread and commissions Maintenance effort

Precious Objects
Gold and Silver
Precious Stones

Art Objects

Financial Derivatives
A derivative is an instruments whose value depends on the value of some underlying asset.

Futures A futures contract is an agreement between two parties to exchange an asset for cash at a predetermined future date for a price that is specified today. Options An option gives its owner the right to buy or sell an underlying asset on or before a given date at a predetermined price.