Investment alternative

Investment Alternatives

PROJECT ON

INVESTMENT ALTERNATIVES

IN PARTIAL FULFILLMENT

OF BANKING & INSURANCE COURSE

FOR ACADEMIC YEAR

2006 – 2007

SUBMITTED BY

DIVYESH. B. RATHOD

T.Y.B.B.I

SHRI. CHINAI COLLEGE OF COMMERCE & ECONOMICS

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What is Investment?

Investment is the employment of funds with the aim of achieving

additional income or growth in value. The essential quality of an

investment is that it involves “waiting” for a reward . It involves the

commitment of resources, which have been saved or put away from

current consumption in the hope that some benefits will accrue in future.

The term ‘Investment’ does not appear to be simple, as it has been

defined. Financial experts and economists have further categorized

investment. It has also often confused with the term speculation.

The following discussion will give an explanation of the various ways in

which investment is related or differentiated from the financial and

economic sense and how speculation differs from investment. However,

it must be clearly established that investment involves long-term

commitment.

Financial and Economic Meaning of Investment

Investment is the allocation of monetary resources to assets that are

expected to yield some gain or positive return over a given period of time.

These assets range from safe investments to risky investments.

Investments in this form are also called ‘Financial investments’

From the point of view of people who invest their funds, they are the

suppliers of ‘capital’ and in their view, investment is a commitment of a

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person’s funds to derive future income in the form of interest, dividends,

rent premiums, pension benefits or the appreciation of the value of their

principal capital. To the financial investor, it is not important whether

money is invested for a productive use or for the purchase of second-hand

instruments such as existing shares and stocks listed on the stock

exchanges. Most instruments are considered to be transfers of financial

assets from one person to another.

The nature of Investment in the financial sense differs from its use in the

economic sense. To the economists, ‘Investment’ means the net additions

to the economy’s capital stock, which consists of goods, and services that

are used in the production of other goods and services. In this context, the

term investment therefore implies the formation of new and productive

capital in the form of new construction, new producer’s durable

equipment such as plant and equipment. Inventories and human capital

are included in the economists definition of investment.

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WHY INVESTMENTS ARE IMPORTANT?

Investments are important and useful in the context of present- day

conditions. Some factors that have been made investment decisions

increasingly important are:

a) Longer Life Expectancy or Planning for Retirement,

b) Increasing Rates of Taxation,

c) Higher Interest Rates,

d) Higher Rate of Inflation,

e) Larger Incomes, and

f) Availability of a complex number of investment outlets.

a) Longer Life Expectancy or Planning for Retirement:-

Investment decisions have become significant as most people in India

retire between the ages 55 and 60. Also, the trend shows longer life

expectancy. The earnings from employment should, therefore be

calculated in such a manner that a portion should be put away as

savings. Savings by themselves so not increase wealth; these must be

invested in such a way that the principle and income will be adequate

for a greater number of retirement years.

Increase in working population, proper planning for life span and

longevity have ensured the need for balanced investments.

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b) Increasingly Rates of Taxation:

Taxation is one of crucial factors in any country which introduces an

element of compulation in a person’s savings. There are various forms

of saving outlets in our country in the form of Investments which

helps in bringing down the tax level by offering deductions in personal

income. Benefits in tax accrue out of investment in Unit Trust

Certificates, Unit Linked Insurance Plan, Life Insurance, National

Savings Certificate, etc.

c) Interest Rates:-

Another aspect which is necessary for a sound investment plan is the

level of interest rates. Interest rates vary between on investment and

another. These may vary between risky and safe investments: they

may also differ due to different benefits schemes offered by the

investments. These aspects must be considered before actually

allocating any amount. A high rate of interest may not be the only

factor favouring the outlet for investments. Stability of interest is as

important as receiving a high rate of interest.

d) Inflation:-

Inflation has become a continous problem since the last decade. In

these years of rising prices, several problem are associated coupled

with a failing standard of living. Before funds are invested, erosion pf

the resources will have to be carefully considered in order to make the

right choice of investments. The investor will try and search an outlet

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which will give him a high rate of return in the form of interest to

cover any decrease due to inflation. He will also have to judge

whether the interest or return will be continuous or there is likelihood

or irregularity.

e) Income:-

Another reason why investment decisions are assumed importance is

the general increase in employment opportunities in India. After

independence, with the stages at development in the country, a

number of new organisations and services were formed. These

employment opportunities gave rise in both male and female working

force. More incomes and more avenues of investment have led to the

ability and willingness of working people to save and invest their

funds.

f) Investment Channels:-

The growth and development of the country leading to greater

economic activity has lead to the introduction of a vast arrays of

investment outlets. Apart from putting aside savings banks where

interest is low, investors have the choice of a variety of instruments.

The investors in his choice of investment will have to try and achieve

a proper mix between high rate of return to reap the benefits of both.

Some of the instruments available are corporate stock, provident fund,

life insurance, fixed deposits in the corporate sector, and so on.

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FACTORS FAVOURABLE FOR INVESTMENT

The investment market should have a favourable environment to be

able to function effectively. In India where all business activities are

marked by social, economic and political considerations, it is

important that the political and economic institutions are favourable.

Generally, there are basic considerations which foster growth and

bring opportunities for investment. These are

a) Legal Safeguards,

b) Stable Currency,

c) Existence of Financial Institutions to aid savings, and

d) Form of Business Organisation.

a) Legal Safeguards:-

A stable government which frames adequate legal safeguards

encourages accumulation of savings and investments. Investors will be

willing to invest their funds if they have the assurance of protection of

their contractual and property rights.

In India, the Investors have the dual advantage of free enterprises and

government control. Freedom, efficiency and growth are ensured form

the competitive forces of private enterprise. On the other hand, being a

mixed economy, government control exerts discipline and curtails

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some element of freedom. A combination of the public sector

controlled by the government and private sector left free to operate,

hopes to achieve benefits of both socialistic and capitalist forms of

government without their disadvantages.

In India, the political climate is conducive to investment as

government control lends stability to the capital market.

b) A Stable Currency:-

A well organised monetary system with definite planning and proper

policies is a necessary pre – requisites to an investment market. Most

of the investments such as bank deposits, life insurance and shares are

payable in a fixed amount of the currency of the country. A proper

monetary policy will give direction to the investment outlets.

Price inflation destroys the purchasing power of investments. Inflation

occurs generally in unstable conditions like war or floods but in the

last decade, it is also discernible in peace conditions especially in

developing countries because of huge government defecit financed by

bank credit.

A reasonable stable price level which is produced by wise monetary

and fiscal management contributes towards proper control, good

government, economic well-being and a well disciplined growth –

oriented investment market and protection to investors.

c) Existence of Financial Institutions to Encourage Savings:-

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The presence of financial institutions which encourage savings and

direct them to productive uses helps the investment market to grow.

The financial institutions generally in existence in most countries are

commercial banks, life insurance companies and investment

companies.

In India, the presence of large number of financial institutions under

Central Government and State Government and rural bodies have

encouraged the growth of savings and investment. To maintain a few,

there are the life Insurance Corporation and Unit Trust of India. They

offer a wide variety of schemes for savings and give tax benefits also.

Apart from these, there is well organised network of development

banks such as the Industrial Development Bank of India (IDBI),

Industrial Credit Investment Corporation of India (ICICI). At the state

level, there are State Financial Corporations, for rural areas and

agriculture, the National bank of agriculture and Rural Development

(NABARD). These Financial institutions and development banks offer

a wide variety of policies for encouraging savings and investment.

d) Form of Business Organisation:-

The form of business organisation which is permanent in existence

aides savings and investment. The public limited companies has been

said to be the best form of organisation. The three characteristics of

the corporations which have been very useful for investors are limited

liability of shareholders, perpetual life and transferability and

divisibility of stocks and shares. The public limited company with the

ability to continue its business irrespective of member’s comprising it,

gives longevity and soundness to its business activity.

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In contrast to a public limited company whose shareholders have

limited liability, the sole proprietor or a partner in a partnership firm is

liable for all the debts of the firm to the full extent of his personal

wealth. In these conditions, investors are hesitant to risk their savings

in these forms of organisation. Besides unlimited liability, the

partnership and proprietor also suffer from short life of organisation.

With the death or retirement of any partners, a partnership firm is

dissolved. Similarly, a sole proprietor carries on business only during

his lifetime. In these unstable and unsure conditions, investors would

not like to make their investments. The public limited company,

therefore, is a popular form of investment as the investors benefit from

liquidity, convenience and longevity.

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FEATURES OF INVESTMENT PROGRAMME

The features of an investment programme consist of safety of principal,

liquidity, income stability, adequate income, purchasing power stability,

and appreciation, freedom from management of investments, legality and

transferability.

1. Safety of Principal:-

The investor, to be certain of the safety of principal, should carefully

review the economic and industry trends before choosing the types of

investment. Errors are unavoidable and, therefore, to ensure safety of

principal, the investor should consider diversification involves mixing

investment commitments by industry, geographically by management, by

financial type and by maturities. A proper combination of these factors

would reduce losses. Diversification to a great extent helps in proper

investment programmes but it must be reasonably accomplished and

should not be carried out to extremes.

2. Liquidity:-

Every Investor requires a minimum liquidity in his investments to meet

emergencies. Liquidity will be ensured if the investor buys a proportion

of readily saleable securities out of his total portfolio. He may, therefore,

keep a small proportion of cash, fixed deposits and units which can be

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immediately made liquid. Investment like stocks and property or real

estate cannot ensure immediate liquidity.

3. Income Stability:

Regularly of income at a consistent rate is necessary in any investment

pattern. Not only stability, it is also important to see that income is

adequate after taxes. It is possible to find out some good securities which

pay practically all their earnings in dividends.

4. Appreciation and Purchasing Power Stability:-

Investors should balance their portfolios to fight against any purchasing

power instability. Investors should judge level inflation, explore the

possibility of gain and loss in the investments available to them,

limitations of personal and family considerations. The investors should

also try and forecast which securities will possible appreciate. A purchase

of property at the right time will lead to appreciation in time. Growth

stock will also appreciate over time. These, however, should be done

thoughtfully and not in a manner of speculation or gamble.

5. Legality and Freedom from Care:-

All Investments should be approved by law. Law relating to minors,

estates, trusts, shares and insurance should be studied. Illegal securities

will bring out many problems for the investor. One way of being free

from care is to invest in securities like Unit Trust of India, Life Insurance

Corporation or Savings Certificates. The management of securities is then

left to the care of the Trust who diversifies the investments according to

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safety, stability and liquidity with the consideration of their investment

policy. The identity of legal securities and investments in such securities

will also help the investor in avoiding many problems.

6. Tangibility:-

Intangibility securities have many times lost their value due to price level

inflation, confiscatory laws or social collapse. Some investors prefer to

keep a part of their wealth invested in tangible properties like building,

machinery, and land. It may, however, be considered that tangible

property does not yield an income apart from the direct satisfaction of

possession or property.

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THE INVESTMENT PROCESS – STAGES IN

INVESTMENT

The Investment process is generally described in four stages. These

stages are:-

1. Investment policy

2. Investment Analysis,

3. Valuation of securities, and

4. Portfolio Construction

1. Investment Policy:-

The first stage determines and involves personal financial affairs and

objectives before making investment. It may also be called preparation of

the investment policy stage. The investor has to see that he should be able

to create an emergency fund, an element of liquidity and quick

convertibility of securities into cash. This stage, may therefore, be

considered appropriate for identifying investment assets and considering

the various features of investments.

2. Investment Analysis:-

When an individual has arranged a logical order of the types of

investments that he requires on his portfolio, the next step is to analyse

the securities available for investment. He must make a comparative

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analysis of the type of industry, kind of security and fixed v/s Variable

securities. The primary concern at this stage would be from beliefs

regarding future behaviour or prices and stocks, he expected returns and

associated risk.

3. Valuation of Securities:-

The third step is perhaps the most important consideration of the

valuation of investment. Investment value, in general, is taken to be the

present worth to the owners of future benefits from investments. The

investor has to bear in mind the value of these investments. An

appropriate set of weights have to be applied with the use of forecasted

benefits to estimate the value of the investment assets. Comparision of

the value with the current market price of the asset allows a determination

of the relative attractiveness of the asset. Each asset must be valued on its

individual merit. Finally, the portfolio should be constructed.

4. Portfolio Construction:-

As discussed earlier under features of an investment programme,

portfolio construction requires knowledge of the different aspects of

securities. These are briefly recapitulated here, consisting of safety and

growth of principal, liquidity of assets after taking account the stage

involving investment timing, selection of investment, allocation of

savings to different investments and feedback of portfolio.

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INVESTMENT ALTERNATIVES

Investment avenues are the outlets of funds. There are varieties of

investment avenues or alternatives. The investors are free to select any

one or more alternative avenues depending upon their needs. All

categories of investors are equally interested in safety, liquidity, and

reasonable return on the funds invested by them. In India, investment

alternatives are continuously increasing along with the new corporate

securities, public provident fund, mutual fund etc. thus, wide variety of

investment avenues are now available to the investors. However,

investors should be very careful about their hard money. An investor can

select the best avenues after studying the merits and demerits of different

avenues. Even financial advertising, newspaper supplements on financial

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matters and investment journals offers guidance to investors in the

selection of suitable investment avenues.

The following investment avenues are popular and used extensively in

India:-

1. Investment in shares, debentures and bonds of different types

issued by companies and Public Sector Organisations.

2. Postal Savings Schemes

3. Public Fund (PF), Public Provident Fund (PPF), and Other Tax

sheltered savings schemes such as National Savings Schemes,

National Saving Certificates and Tax Saving Schemes of LIC,

ICICI, Infrastructure Bonds and so on.

4. Investment in investment intermediaries such as UTI and Mutual

funds run by LIC, Banks and HDFC, etc.

5. Deposits in Companies, (public Deposit) or deposits in Public

Sector Organisations and Banks.

6. Life Insurance Investment i.e. Investment in different life policies

such as Whole Life Policy, Endowment Policy, and so on.

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7. Investment in Real Estate.

8. Investment in Gold, Silver, Precious Metals and Antiques.

9. Investment on GILT – edged Securities and securities of

government and semi – government organisations (e.g. Relief

Bonds, Bonds of Port Trusts, Treasury bills, etc.

It may be noted that there are some avenues / investment schemes where

tax benefits are available. Such schemes are called Tax Savings Schemes

of Investment. The tax liability reduces when investment is made in such

schemes. The schemes are decided by the government and announced

along with the annual budget. A tax payer can take the benefit of such

schemes and bring down his total tax liability. The basic purpose of such

schemes is to encourage investment in certain investment avenues, in

some schemes, the entire investment is made tax free i.e. it is deducted

from yearly taxable income.

Popular Tax Saving Investment are noted as below:

1. Public Provident Fund (PPF)

2. Tax Sheltered saving schemes of post office such as NSC, NSS,

etc.

3. Investment in Infrastructure Bonds of IDBI, ICICI.

4. Life Insurance Schemes where insurance premium is given tax

benefits.

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5. Investment in mutual funds. Here, the tax benefits relates to

income earned through such investment.

6. Investment in Residential House. Principal as well as Interest

Provide tax benefits.

7. Investment in Pension Plan of insurance Companies.

8. Medi-claim i.e. Health Insurance.

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NON – MARKETABLE FINANCIAL INSTRUMENTS

The Financial Instruments which are not transferable are known as non –

marketable Financial assets. The investors can invest in these financial

assets but they cannot sale these financial instruments in the capital

market like shares and debentures. These investments include the

following:

1. Post Office Savings Schemes.

2. Public Provident Fund.

3. Deposits with Banks.

1. Post office Savings Schemes

Post office operates as a financial institution. It collects small savings

of the people through savings bank account facility. In addition time

deposits and government loans are also collected through post offices.

Certain government securities such as Kisan Vikas Patras, National

Saving certificates, etc. are sold through post offices. New schemes

are regularly introduced by the postal Department in order to collect

savings of the people. This includes recurring deposits, monthly

income schemes, PPF, and so on

Postal savings bank schemes were popular in India for a long period

as banking facilities were limited and were available mainly in the

urban areas upto 1950’s. The popu8larity of postal savings schemes is

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reducing due to the growth of banking and other investment facilities

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

postal savings facilities for investing their savings / surplus money for

short term / long term due to certain benefits like stable return,

security and safety of investment and loss facility against postal

deposits. Even tax benefits is one attraction for investment in post

office. Investment in postal office is as good as giving money to the

government for economic development along with reasonable

return and tax benefits.

Post Office Savings Bank (POSB) has a customer base of 11 crores

account holders with annual deposits exceeding Rs.70,000 crores and

a network of 1,55,000 branches. The outstanding balance under all

national savings schemes in post offices stood at Rs. 2,18,695.15

crores by march 2001.

Post Office Saving Schemes includes the following:

i. Kisan Vikas Patras

ii. National Savings Certificate

iii. Post Office Saving Account.

iv. Post Office Monthly Income Account.

v. Post Office Monthly Recurring Account.

vi. Post Office Time Deposit Account.

a) Kisan Vikas Patras

Kisan Vikas Patras (KVP) doubles your money in 7 years and 3

months with the advantage of premature withdrawal. KVP is sold

through all Head Post Offices and Other authorised post offices

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throughout India. The rate of returns is 9.75%, compounded

annually. KVP scheme doubles in seven years and three months.

KVP accumulates money at a fixed rate, and your money doubles

in 7 years and 3 months. But KVP is not meant for regular income.

It is for those looking for a safe avenue of investment without the

pressing need for a regular source of income.

The minimum investment in KVP is Rs. 100. certificates are

available in denominations of Rs. 100, Rs.500, Rs.1000, Rs.5000,

Rs.10000 and Rs.50000. the denomination of Rs. 50,000 is sold

through head post offices only. There is no limit on holding of

these certificates. Any number of certificates can be purchased. A

KVP is sold at a face value, the maturity value is printed on the

certificate .

It is a good option if you are looking for hassle free investment as

it assures a certain sum of money at the expiry of the duration of

your investment.

Income is assured at the prescribed rate of interest. As mentioned,

this is a risk-free investment channel as the KVP comes with the

backing of the government of India. Since the KVP has the backing

of the Government of India and is, therefore, extremely safe, it

does not require any commercial rating.

KVP is not a bearer certificate, and is not easily transferable.

Permission of the post-master is required for any transfer for any

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transfer. KVP cannot be traded in the secondary market and hence,

the question of its market value does not arise.

Although no TDS is applicable on the interest income from KVP,

there are no tax incentives as per the provisions of the Income Tax

Act, 1961.

b) National Savings Certificate

National Savings Certificates (NSC) is certificates issued by

Department of post, Government of India and is available at all

post office counters in the country. It is a long-term safe savings

option for the investor. The scheme combines growth in money

with reductions in tax liability as per the provisions of the Income

Tax act, 1961. The duration of a NSC Scheme is 6 years.

National Savings Certificate can be Purchased by the following:

An Adult in his own name or on behalf of a minor,

A minor,

A trust

Two adults jointly,

Hindu Undivided family

National Savings certificates are available in the denominations of

Rs. 100, Rs.500, Rs.1000, Rs.5000, Rs.10000. there is no

maximum limit on the purchase of the certificates. It is having a

high interest rate at 8 % compounded half yearly. Post maturity

interest will be paid for a maximum period of 24 months at the rate

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applicable to individual savings account. A 1000 Rs. Denomination

certificate will increase to Rs. 1601 on completion of 6 years.

Maturity value of a certificate of any other denomination is at

proportionate rate. Premature encashment of the certificate is not

permissible except at a discount in the case of death of the

holder(s) forfeiture by a pledgee and when ordered by a court of

law.

Interest accrued on the certificates every year is liable to income

tax but deemed to have reinvested. Income Tax rebate is available

on the amount invested and interest accruing under Section 88 of

Income Tax Act, as amended from time to time. Income tax relief

is also available on the interest earned as per limits fixed vide

section 80L of Income Tax, as amended from time to time.

c) Post Office Saving Account

Post office saving account is similar to a savings account in a bank.

It is a safe instrument to park those funds, which you might need to

liquidate fully or partially at very short notice. Post office savings

accounts are especially suited for those living in rural and semi-

rural areas where the reach of banks is very limited.

The account can be opened at any post office with a minimum

balance of Rs. 20. Maximum of Rs. One lakh for a single account

holder and Rs. Two lakhs for joint account holders can be

deposited. There is no lock-in or maturity period. The amount can

be withdrawn anytime subject to keeping a minimum balance of

Rs. 50 in simple account and Rs. 500 for cheque facility accounts.

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Rate of interest is decided by the central Government from time to

time. Interest is calculated on l monthly balances and credited

annually. Income tax relief is available on the amount of interest

under the provisions of section 80L of Income Tax Act.

d) Post Office Monthly Income Account

Post Office Monthly Income Account is meant for those investors

who want to invest a lump sum and earn interest on monthly basis

for their livelihood. The scheme is therefore, a boon for retired

persons.

The account can be opened by a single adult or 2-3 adults jointly.

Period of maturity of an account is six years. Only one deposit can

be made in an account. Minimum deposit limit is Rs. 1000.

Maximum deposit limit is Rs. 3 lakhs in case of single account and

Rs. 6 lakhs in case of joint account.

Interest @ 8%per annum is payable monthly. In addition, bonus

equal to 10%of the deposited amount is payable at the time of

repayment on maturity. Premature closure facility is available on

the interest earned as per limits fixed vide section 80L of income

Tax, as amended from time to time.

Advantages

Premature closure of the account is permitted any time after the

expiry of a period of one year of opening the account. Deduction of

an amount equal to 5 per cent of the deposit is to be made when the

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account is prematurely closed. Investors can withdraw money

before three years, but a discount of 5%.

Closing of account after three years will not have any deductions.

Monthly interest can be automatically credited to savings account

provided both the accounts standing at the same post office.

The interest income accruing from a post office MIS is exempt

from tax under Section 80L of the Income Tax Act, 1961.

Moreover, no TDS is deductible on the interest income. The

balance is exempt from Wealth Tax.

e) Post office Recurring Deposit Account

A Post – Office Recurring Deposit Account (RDA) is a banking

service offered by Department of post. Government of India at all

post office counters in the country. The scheme is meant for

investors who want to deposit a fixed amount every month, in

order to get a lump sum after five years. The scheme, a systematic

way for long term savings, is one of the best investment option for

the low income groups. The Post- Office recurring deposits offer a

fixed rate of interest, currently at 7.5 per cent per annum

compounded quarterly.

The recurring deposit account can be opened at any post office.

Period of maturity of account is 5 years. Sixty equal monthly

deposits shall be made in an account in multiplies of Rs. Five

subject to a minimum of ten rupees.

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Premature closure of accounts is permissible after expiry of three

years. In case of premature closure of account, the interest at the

rate applicable to post office savings account shall be payable.

Advantages

The post office offers a fixed rate of interest unlike banks which

constantly change their recurring deposit interest rates depending

on their demand supply position.

As the post office is a department of the government of India, it is a

safe investment. The principal amount in the Recurring Deposit

Account is assured. Moreover Interest earned on this account is

exempted from tax as per Section 80L of Income Tax Act.

f) Post Office Time Deposit Account

A Post - Office Time Deposit Account (RDA) is a banking service

similar to a bank Fixed Deposit offered by Department of post,

Government of India at all post office counters in the country. The

scheme is meant for those investors who want to deposit a lump

sum of money for a fixed period; say for a minimum period of one

year to two years, three years and a maximum period of five years.

Investor gets a lump sum (principal + interest) at the maturity of

the deposit. Time Deposits scheme return a lower, but safer,

growth in Investment.

The amount can be deposited for 1 year, 2 year, 3year,and 5years.

The deposited amount is repayable after expiry of the period for

which it is made viz; 1 year, 2 years, 3 years or 5 years.

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This investment option pays annual interest rates between 6.25

and 7.5 per cent, compounded quarterly. Time deposit for 1

year offers a coupon rate of 6.25%, 2-year deposit offers an

interest of 6.5%, and 3 years is 7.25% while a 5- year Time

Deposit offers 7.5% return.

Interest is calculated on quarterly compounding basis, and is

payable annually. Rate of interest varies according to the period of

the deposit and is decided by the Central Government from time to

time. Income tax relief is available on the amount of interest under

the provisions of section 80L of Income Tax Act.

Premature withdrawals from all types of post office time deposit

accounts are permissible after expiry of 6 months with certain

conditions.

2. Public Provident Fund

Public Provident Fund, popularly known as PPF, is a savings cum

tax saving investment for middle class and salaried persons. It is

even useful to businessmen and higher income earning people. It

was introduced in 1969. the PPF scheme is very popular among the

marginal income tax payers. It also serves as a retirement planning

tool for many of those who do not have any structured pension plan

covering them.

The features of PPF scheme

Public Provident Fund account can be opened at designated post

offices throughout the country and at designated branches of Public

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Sector Banks throughout the country. The account can be opened

by an individual in his own name, on behalf of a minor of whom he

is a guardian, or by a Hindu Undivided Family.

Minimum deposit required in a PPF account is Rs.500 in a

financial year. Maximum deposit limit is Rs. 70,000 in a financial

year.

The account matures for closures after 15 years. Account can be

continued with or without subscriptions after maturity for block

periods of five years. Premature withdrawal is permissible every

year after completion of 5 years from the end of the year of

opening the account.

The PPF account is not transferable, but nominee facility is

available.

Loans from the amount at credit in PPF amount can be taken after

completion of one year from the end of the financial year of

opening the account and before completion of the 5TH year

Interest at the rate notified by the central Government from time to

time, is calculated and credited to the accounts at the end of each

financial year. Presently, the rate of interest is 8% per annum.

Income Tax rebate is available “on the deposits made” under

section 80C of Income Tax Act, as amended from, time to time.

Interest credited every year is Tax – Free.

Limitations of PPF Account

Low Liquidity as one withdrawal is allowed in a year.

The PPF account is for a period of 15 years which is very long

period.

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In spite of limitations, PPF is an attractive avenue for investment

in the case of tax payers/salaried class / businessmen / professionals.

3. Deposits with Banks

Investment of surplus money in bank deposits is quite

popular among the investors (particularly among salaried persons).

Banks (co – operative and commercial) collect working capital for

their business through deposits called bank deposits. The deposits are

given by thje customers for specific period and the bank pays interest

on them. The deposits can be accepted from the individuals,

institutions and even business enterprises. The business and

profitability of banks depend on deposit collection. For depositing

money in the bank, an investor / depositor has to open an account in

the bank.

Different types of deposits accounts are:

a) Savings Bank Account

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A Saving Bank account (SB Account) is meant to

promote the habit of saving among the people. It also facilitates

safekeeping of money. In this scheme fund is allowed to be withdrawn

whenever required, without any condition. Hence a savings account is

a safe, convenient and affordable way to save your money. Bank

deposits are fairly safe because banks are subject to control of the

reserve bank of India with regard to several to several policy and

operational parameters. Bank also pays you a minimal interest for

keeping your money with them. The Interest Rate of Savings bank

account in India varies between 2.5%and 4%. In Savings Bank

account, bank follows the simple interest method. The rate of interest

may change from time to time according to the rules of Reserve Bank

of India.

b) Fixed Deposits Account:

A fixed deposits is meant for those investors who want to

deposit a lump sum of money for a fixed period, say for a minimum

period of 15 days to five years and above, thereby earning a higher

rate of interest in return. Investor gets a lump sum (principal +

Interest) at the maturity of the deposit.

Bank fixed deposits are one of the most common savings scheme open

to an average investor. Fixed deposits also give a higher rate of

interest than a saving bank account . the facilities vary from bank to

bank. Some of the facilities offered by banks are overdraft (loan)

facility on the amount deposited, premature withdrawal before

maturity period (which involves a loss of interest) etc. bank deposits

32


are fairly safer because banks are subject to control of the Reserve

Bank of India.

The rate of interest for Bank Fixed Deposits varies between 4 and 11

percent, depending on the maturity period (duration) of the FD and the

amount invested. Interest rate also varies between each bank. A bank

FD does not provide regular interest income, but a lump-sum amount

on its maturity.

c) Recurring Deposit Account

The Recurring deposit in bank is meant for someone who

wants to invest a specific sum of money on a monthly basis for a fixed

rate of return. At the end, you will get the principal sum as well as the

interest earned during that period. The scheme, a systematic way for

long term savings, is one of the best investment option for the low

income groups. The rate of interest varies between 7 and 11 percent

depending on the maturity period and amount invested.

The interest is calculated quarterly or as specified by the bank

Advantages of Bank Deposits

Investment is reasonably safe and secured with adequate

liquidity.

Banks offer reasonable rate of return on the investment made

and that too in a regular manner.

Banks offer loan facility against the investment made.

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Procedures and formalities involved in a bank investment are

limited, simple and quick.

Banks offer various services and facilities to their customers.

Limitations/Demerits of Bank Deposits

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

compared to other avenues of investment.

The return on the investment is not adequate even to

protection against the present inflation rate in the country.

Capital appreciation is not possible in bank investment.

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MONEY MARKET INSTRUMENTS

Money market is a market for borrowing and lending for short periods. It

is one constituent of capital market. However, it is basically concerned

with short-term investment. Money market securities are fixed income

securities similar to gilt-edged securities, preference shares and

debentures. Normally individual investors are not interested in money

market securities as the return on the investment is not attractive.

However, institutional investors with huge surplus funds purchase money

market securities for short term investments. A money market security is

a debt instrument of short period maturity. Money market securities in

India are as explained below:

1. Treasury bills

2. GILT – Edged securities

3. Commercial paper

4. Certificate of Deposits.

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1. Treasury Bills

Treasury bill is a short-term money market instrumental used by

the Central Government for short term borrowing from the market

for meeting urgent needs. Treasury Investors in T-bills generally

include banks and other institutional investors.

Features of Treasury Bills

It is GILT – Edged securities. Being issued by the government they

are considered to be risk free as they are issued by the Government.

As such, they are highly marketable.

Investors prefer treasury bills because of high liquidity, assured

returns, eligibility for statutory requirements, no default risk, on

capital depreciation etc.

Investors prefer treasury bills because of high liquidity, assured

returns, eligibility for statutory requirements, no default risk, no

capital depreciation etc.

The T – bills are issued for a minimum amount of Rs. 25,000/- and

in multiples of Rs. 25,000. T-bills are issued at a discount and

redeemed at par. Though the yield on treasury bills is less when

compared to other money market instruments, the risk adverse

investors and banks prefer to invest in these securities. At present,

The Government of India (GOI) issues 4 types of T-Bills i.e. 14

day, 91 day, 182 day and 364 day.

Thus, RBI raises on behalf of the Government of India by acting as

an issuing agent to meet the latter’s short term funds requirement.

2. GILT – Edged Securities

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Government (Central and States) securities and securities issued by

financial institutions such as IDBI,ICICI, etc are called GILT –

Edged securities. These are debt securities issued by the central

government, state government, and Semi – government’s agencies.

The market for such securities is called gilt – edged market.

Securities are also gilt – securities. Such securities are in the form

of bonds and credit notes. Institutional agencies such as banks,

insurance companies, employee’s provident funds are the buyers of

such securities. Such securities are fully secured as they have

government backing. The maturity period is varying generally upto

10 to 20 years. Gilt – edged securities market constitutes the largest

segment of the Indian Capital Market. This market is expanding

rapidly in recent years. Gilt – edged security is highly liquid asset

as it can be sold easily. Tax benefits are available to gilt – edged

securities.

3. Commercial Paper

CPs as a source of short – term finance is used by corporates as an

alternative to bank Finance for working capital. Generally,

corporates prefer to raise funds through this route when the interest

rate on working capital charged by banks is higher than the rate at

which funds can be raised through CP.

CP is a short-term, unsecured usuance promissory note issued at a

discount to face value by well known or reputed companies who

carry a high credit rating and have a strong financial background.

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Any private sector company, public sector unit, non – banking

company can raise funds through commercial paper. CPs are

generally open to all the investors – individuals, banks, corporates

and also non-resident Indians (NRIs).

CPs are backed by the liquidity and earning power of the issuer,

but are not backed by any assets. Hence they are unsecured.

Investors prefer to invest in CPs due to high liquidity, varied

maturity and high yield when compared to bank deposits.

Moreover, the liquidity is high because it can be transferred by

endorsement and delivery.

CPs are issued in multipies of Rs. 5 lakhs and the minimum size of

each issue is Rs. 5 lakhs. Also CPs have a minimum maturity

period of 15 days and a maximum of 1 year. Unlike Certificate of

Deposits, the issuer can Buy-Back its Own CP.

The company needs to get the commercial paper credit rated

by one of the approved credit rating agencies like

CRISIL/ICRA/DCR, as prescribed by RBI.

4. Certificate of Deposits

Certificate of deposits (CDs are issued by banks in the form of

usuance promissory notes. Due to their negotiable nature, these are

also known as negotiable certificate of deposits (NCDs).

CDs are issued by commercial banks and six financial institutions

– IFCI, IDBI, ICICI, EXIM Bank, IIB, and SIDBI etc.

38


CDs are considered as virtually risk less instruments as the defaults

risk is almost nil and investors are sure of receiving the invested

amount with interest. CDs are freely transferable by endorsement

and delivery, immediately after the date of issue and can be traded

in secondary market from the date of issue, unlike conventional

deposits.

CDs are issued at a discount to face value. The discount rate is

freely determined by the issuing bank considering the prevailing

call money rates, treasury bills rate, maturity of the CD and its

relation with the customer, etc.

Banks can issue CDs for a minimum period of 15 days to a

maximum of one year whereas a financial institution can issue CDs

for a minimum of 1 year and a maximum of 3 years.

The minimum size for the issue of CDs is Rs. 5 lakhs (face value)

and thereafter in multiplies of Rs. 1 lakh. It should be taken into

consideration that there is no ceiling on the maximum amount that

can be raised by them.

39


INVESTMENT IN EQUITY AND PREFERENCE

SHARES

These are ownership securities. Shares bestow certain advantages

to both the listing companies and the investors. Investment in this

financial instrument is of long-term nature. This, however, does not mean

loss of liquidity for the investor. Depending upon availability of investors

interest in the company, shares can be easily converted into cash in the

secondary market. Joint stock companies collect their long term/fixed

capital by issuing shares (equity and preference). This is called “Stock

Financing”. Shares constitute the ownership securities and are popular

among the investing class. Investment in shares is risky as well as

profitable. Transactions in shares take place in the primary and secondary

markets.

A shareholders bears the highest risk in the company’s operations.

Conversely, he is also entitled to participate in the earning and wealth of

the company without limit. Issue of shares is of advantage to the

company, as payment of dividend is discretionary. Equity is not required

to be refunded. This instruments is quite popular with individual investors

in India.

Face value of ordinary shares in India can be any amount from Re.

1 to Rs. 1,000 but the most common denomination of shares is Rs.10.

Large majority of investors (particularly small investors) prefer to

purchase shares through brokers and other dealers operating on

commission basis. The shares available for investment are classified into

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different categories such as blue chip shares, growth shares, speculative

shares, income shares, and so on. Shares certificates in physical form are

no more popular in India due to Demat facility.

Blue Chip Shares: Shares of known and financially sound companies are

called Blue Chip Shares. Such companies are also known as blue chip

companies as they are well established over a long period and are stable

and profitable. Blue Chip Companies are popular in the stock market and

they carry goodwill and market reputation. Investors prefer to invest in

Blue Chip Shares due to safety, security and attractive return. In India,

Reliance, Tata companies, L & T Companies relating to information

technology are regarded as bleu chip companies.

Preference Shares

A preference share (PS) is said to be a hybrid financial instrument.

Companies have issued preference shares with a large number of

innovations. PS, as its name suggests, is an ownership security, but unlike

an ordinary share where dividend is discretionary, PS carries a fixed rate

of return (dividend) like a debenture. In order of preference, PS holders

rank below the claims of creditors of the company, but above those of

ordinary shareholders.

Types of Preference Shares available in the market:

i. Cumulative and Non-cumulative.

ii. Convertible and Non – convertible

iii. Redeemable and Non – redeemable.

iv. Participating and Non – participating.

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In case of Cumulative Preference Shares, the dividend(s), if not paid in

any period(s) are accumulated as a liability of the company and has to be

paid subsequently.

Convertible Preference Shares can be converted into ordinary share on

terms and condition fixed at the time of issue of such shares.

Redeemable preference shares have fixed period of maturity and are

repayable at the end of that period. It is because of this property. Such

Preference Shares are regarded more as a debt instrument than an

ownership security.

Participating preference shareholders have the best of both the worlds in

as much as they are not only entitled to a fixed rate of dividend, but can

also expect to earn a higher dividend in case the company makes good

profits.

Advantages of Investment in Shares

Equity shareholders get income in the form of dividend. Profitable

and stable companies offer good reward to their investors in the

form of high rate of dividend.

Shares are easily transferable and this facilitates easy transfer of

ownership at the option of the shareholders (investor). It also

brings liquidity to the investment in shares.

The equity shareholders get an opportunity to participate in the

profitability of their company in the course of time.

Equity shares carry tax benefits. At present, dividend on shares of

Indian companies has been tax – free as per the government policy.

Capital gain to the equity investor is possible in the case of shares

as the prices of shares fluctuate along with the future prospects of

42


the company. Due to rise in the prices of the shares, there is capital

appreciation and this offers extra benefit to the shareholders.

Limitations of Investment in shares

1. Uncertainity of Income / Return:-

The return as regards investment in shares is uncertain as it is

linked with the profitability of the company.

2. Risky Investment:-

In the case of shares, there is an element of risk as regards

changing market values. The shares price may go down due to

various reasons. Secondly, selling at low price is bound to bring

financial loss. This suggests that investment in shares is always

risky.

3. Speculative activities are harmful:-

Speculative activates are quite common as regards shares.

However, such speculative deals affect genuine investors and they

may suffer loss even when they are not directly involved in such

speculative activities.

4. Future linked with the company:-

In the case of shares, the future of the shareholder is linked with

the future of the company. The return on investment will be

attractive, if the company makes good profit. However, a

shareholder may not get any return on his investment if his

company fails to get reasonably high profit.

43


MUTUAL FUND SCHEMES

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

After 1987, state bank of India, bank of India, and other banks started

their mutual funds. After 1991 (due to economic liberalisation) many

financial institutions started their mutual funds (e.g. Kothari Pioneer

Fund, CRB Capital Markets and so on). In brief, along with UTI, many

more mutual funds are now started for the benefits of small investors. A

mutual fund is formed by coming together of a number of investors

who hand over their surplus to a professional organisation to manage

their funds.

The main function of mutual fund is to mobilize the savings of the

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

there is diversion of savings of the middle class investors from banks

to mutual funds.

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

funds in India are as noted below:

1. HDFC Mutual Fund.

2. Birla Sun Life Mutual Fund.

3. Alliance Capital Mutual Fund.

4. Tata Mutual Fund.

5. Templetion India Income Fund.

6. Standard Chartered Mutual Fund.

7. Kotak Mutual Fund.

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Mutual fund is a financial intermediary which collects savings of the

people for secured and profitable investment. The mutual funds in India

are registered as trusts under the Indian Trust Act. These funds are

managed by financial and professional experts.

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

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

as SBI Mutual Fund, LIC Mutual Fund, Shriram Mutual Fund,

Tata Mutual Fund, and ICICI Mutual Fund are popular as they offer

various services and benefits to the investing class.

Advantages of Mutual Funds

Mutual funds are the best tools to counter volatility. It is more effective

for an investor as professional and experienced fund managers handle the

investor’s money.

Professional wealth management comes at a heavy price that is not

affordable for solo investor today. The choices before investor today are

enormous. There are so many funds with varying risks available and

returns available. Mutual funds plays a crucial role in channelling savings

of millions parts of the country into investment in both equity and debt

instruments. The other obvious advantages of investing in a Mutual Fund

are:

Diversification:-

The best mutual funds design their portfolios so individual

investments will react differently to the same economic conditions.

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For example, economic conditions like a rise in interest rates may

cause certain securities in a diversified portfolio to decrease in

value. Other securities in the portfolio will respond to the same

economic conditions by increasing in value. When a portfolio is

balanced in this way, the value of the overall portfolio should

gradually increase over time, even if some securities lose value.

Professional Management:-

Professional fund manager’s who regular monitor market trends for

taking investment decisions manage mutual funds. The also

dedicated research professionals working with them who make an

in depth study of the investment option to ntake an informed

decision. Most mutual funds pay topflight professionals to manage

their investments. These managers decide what securities the fund

will buy and sell.

Regulatory Oversight:- mutual funds are subject to many

government regulations that protect investors from fraud.

Liquidity:-

One of the greatest advantages of mutual funds is liquidity. It’s

easy to get your money out of a mutual fund. Write a check, make

a call, and you’ve got the cash.

Convenience:-

With features like dematerialised account statements, easy

subscription and redemption processes, availablity of NAVs and

performance details through journals, newspaper and updates and

46


lot more; Mutual funds are sure a convenient way of investing. We

can usually buy Mutual fund shares by Mail, Phone, or over the

Internet.

Low Cost :-

Mutual Fund expenses are often no more than 1.5 percent of your

investment. Expenses for index funds are less than that , because

index funds are not actively managed. Instead, they automatically

buy stock in companies that are listed on a specific index.

Transparency:-

As funds have to make full disclosure of investments on a periodic

basis.

Flexibility:-

In term of needs based choices

1. Choices of schemes

2. Well regulated

Tax Benefits:- investment in Mutual Funds also enjoys several tax

benefits and advantages.

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Disadvantages of Mutual Funds

Unless an investor would like to venture into sector specific funds,

which are high risk in nature, he would generally be able to

optimise his risk-return quotient in fact mutual funds are gaining

acceptance all over India. We have also witnessed a shift from the

traditional to professional fund management houses even from

satellite towns. The factors affecting mutual fund growth are:

No Guarantees

No investment is risk free. If the entire stock market decline in

value, the value of mutual fund shares will go down as well, no

matter how balanced the portfolio. Investors encounter fewer risks

when they invest in mutual funds than when they buy and sell

stocks on their own. However, anyone who invests through a

mutual fund runs the risks of losing money.

Fees and Commissions:-

All funds charge administrative fees to cover their day-to-day

expenses. Some funds also charge sales commissions or “loads” to

compensate brokers, financial consultants, or financial planners.

Even if we don’t use a broker or other financial adviser, we will

pay a sales commission if we buy shares in a Loan fund.

Taxes:-

During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios.

If your fund makes a profit on its sales, you will pay taxes on the

income you receive, even if you reinvest the money you made.

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Management risks:-

When we invest in a mutual fund, we depend on the fund’s

manager to make the right decisions regarding the fund’s portfolio.

If the manager does not perform as well as you had hoped, we

might not make as such money on our investment as we expected.

Of course, if we invest in Index Funds, we forget management risk,

because these funds do not employ managers.

49


LIFE INSURANCE

Life insurance business was nationalised in India since long 1956 and is

run by Life Insurance Corporation of India. In addition, we have also

postal life insurance Scheme run by postal department. LIC is responsible

for the expansion of life insurance business in India. In addition, it plays

an important role in collecting the savings. LIC is one avenue for

investment of money out of regular income. It also gives protection to the

family members of the policyholders. Private is now allowed to

participate in the insurance business.

Advantages of Investment in Life Insurance Schemes

Protection to family members through financial support in the case

of death of policyholder.

Investment in life insurance schemes serves as a provision for old

age (maintenance, medical expenses, etc.)

It acts as a method of compulsory saving over a long period of

regular income.

Investment in life insurance schemes provides loan facility from

banks

LIC now gives bonus to the policyholders on yearly basis. This add

to the maturity value of policy.

Investment in life insurance schemes gives tax benefits.

Investment in life insurance provides comfortable and financially

independent life after retirement.

LIC issues different life policies such as whole life policy, endowment

policy, money back policy, etc. as investor can select any policy

50


considering his age, monthly / annual income and capacity to save.

Investment in LIC has a wider significance. It is not merely for

monetary benefit but for security of investor and his family members.

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Investment In Real Estate Properties

Investment in real estate is popular due to high saleable value after some years. Such properties include buildings, commercial premises, industrial land, plantations, farmhouses, agricultural land near cities, and so on. Such properties attract the attention of affluent investors and builders. The property owners are willing to wait even for 20 to 30 years for attractive return. During this period, it is a type of deal investment for the owners. However, the resale price will be attractive in due course when they can recover four times (or even more) the price paid. This is how real estate is one attractive as well as profitable avenue for investment provided the property to be purchased is selected with proper care and foresight.

A residential home/building represents the most attractive real estate property for large majority of investors. Such investment is attractive due to the following reasons:

Ownership of a residential house provides owned accommodation and gives satisfaction to the head as well as family members.

There is a capital appreciation of residential buildings particularly in the urban areas.

52


Loans are available from different agencies like banks, HDFC, and so on for buying, construction or renovation of owned residential building.

Interest on such loans is taxed deductible within certain limits.

Wealth tax benefits are available in the case of residential building as the value is reckoned at its historical cost and not at its present market price.

Advantages Of Investment In Real Estate

Real estate acts as an asset (financial security) which can be used in case of need. Moreover, the asset value increases year after year.

Profit in the real estate investment is substantial provided the owner is willing to wait till appropriate time.

The chances of capital appreciation are usually bright in the case of real estate properties.

Real estate properties can be used as security for raising loans. In addition tax benefit and protection against inflation are available.

Disadvantages Of Investment In Real Estate

Investment in real estate properties is normally substantial. Due to huge investment in one item, the benefits of diversification of investment are not available.

In real estate property, profitability is available at the cost of liquidity. Thus, liquidity is low.

The risk in the investment is more as compared to investment in banks, UTI, etc.

Tax burden in the form of stamp duty, capital gain tax, etc is heavy as and when the property is sold out.

53


Repairs, maintenance, etc constitute additional expenditure and botheration to the owner.

Government rules and regulations regarding buying and selling are troublesome in the case of real estate properties.

54


GET A GRIP ON GOLD

The yellow metal has more to it than just pretty jewellery. It can be a good form of investment.

GOLD, that precious metal, has caught the fancy of many over the centuries. Especially India, which is the leading consumer of gold covering over 25% of the global market, according to the World Gold Council. The country is besotted with this yellow metal that’s not only used, as a saving’s option. In fact for centuries, the value of gold has transcended all national, political and cultural borders, making it the ideal currency.

Besides being the basic means of savings, gold is intertwined with the lives of the people and is a part of social and religious customs. It is still popular for its beauty, scarcity, resistance to rust and corrosion, besides being a hedge against inflation. The precious metal’s used as an investment is rooted in history and derives from its roles as a safe haven, a store of value and a monetary asset.

The Gleam Of Jewellery

About 50% of household investments in India are said to be in gold, most of it in the form of jewelry, unlike in developed countries, where such investments are made in coins and bars. It is yet to take the shape of pure investment vehicle seeking comparable returns. However, it has given over 9% returns during the last three years.

About 80% of gold imported or produced goes into making of jewellery. The remaining is retained or held in the form of coins, bars and

55


bullion. Trading in gold remained in the trader’s domain till the banks were allowed to sell imported gold to their customers about a few years ago. The banks made the certified metal available in the form of gold coins and bars, addressing the issue of quality.

Bright Exchange

The advent of gold trading on stock exchanges and technological development over the last decade is throwing up new hopes in the area of gold trading. In spot markets, gold is available for sale but in quantities of 10 grams or more, making it difficult for the retail investor to participate.

Once the exchange traded funds (ETFs) being proposed by the market regulator Securities and Exchange Board of India (SEBI), it would be possible for the investors to accumulate in quantities starting from one gram.

Tax Implications

Since there is no income as such from holding gold, there is no liability for income tax. But bullion and jewelry are subject to capital gains and wealth tax after necessary deductions. However, buying gold in large quantities may invite the taxman to your place.

Benefits

Gold as a means of investment is used for hedging against inflationary risks. The returns from gold, as was brought out by different studies over the last two decades, were not comparable with equities or some fixed investment categories. Globally, it is used as a hedge against uncertainties in the form of wars and calamities, which make its prices spiral.

The major benefit of gold as an investment is its low – to – negative correlation with most other asset classes. The price of gold is not linked to the performance of economy, industry or companies. It means that, when all the other asset classes fail to perform, gold would produce good returns. Thus, it would balance the performance of the portfolio during stable and unstable conditions.

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BONDS OR FIXED INCOME SECURITIES

There are various investments which provide fixed income from the investments to the investors. Bonds, debentures, public deposits are some of the example of fixed income securities. The investors get interest regularly from the companies. The investors may be paid quarterly, half – yearly, or yearly. The details of these securities are as follows:

1. Company Deposits / Public Deposits

In order to meet temporary financial needs, companies accept deposits from the investors. Such deposits are called public deposits or company fixed deposits and are popular particularly among the middle class investors. Almost all companies collect crores of rupees through such deposits. Companies were offering attractive interest rates previously. However, the interest rates are now reduced considerably. At present, the interest rate offered is 9 to 12 percent

At present along with private sector companies, even public sector companies and public utilities also accept such deposits in order to meet their working requirements. This source is popular and used extensively by the companies.

Advantages of Company Deposits / Public Deposits

Public deposits are available easily and quickly, provided that company enjoys public confidence.

This method of financing is simple and cheaper than obtaining loans from commercial banks. This makes public deposits attractive and agreeable to companies and also to depositors.

Public deposits enable the companies to trade on equity and pay higher dividends on equity shares.

The depositors receive interest in their deposits. This rate is higher than the interest rate offered by the banks. The interest rate is also paid regularly by reputed companies.

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The formalities to be completed for depositing money are easy and simple. There is no deduction of tax at source where interest does not exceed a particular limit.

The risk involved is also limited particularly when money is deposited with a reputed company.

2. Bonds And Debentures

In addition to company deposits, it is possible to purchase bonds and debentures of joint stock companies for investment purpose. Both represent creditorship securities. Debentures indicates loan given to the company at a specific rate of interest and on certain terms and conditions. Debentures are more popular than shares due to the safety and security available. Companies issue different types of debentures for the convenience of investors. At present, convertible bonds and debentures are popular among Indian investors.

In India, bonds and debentures are also issued by public sector companies and financial institutions. IDBI issues flexi-bonds, deep discount bonds, retirement bonds, growing interest bonds and regular income bonds. Such infrastructure bonds are popular among the investors and their response is encouraging. Public sector bonds normally get good response from the investing class.

Advantages Of Bonds

Easy transferability by endorsement and delivery

Safety and security due to government backing

Attractive interest and other favourable terms and conditions including wide choice as regards selection of bonds.

Investment exempted for wealth tax

Maturity period from 5 years to 25 years.

Listing on nearby stock exchange

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Simple procedure for investment

3. Government Of India Savings Bonds

(a) Government of India 8.0% Savings (Taxable) BondsThe GOI has recently introduced these 8% savings (taxable) bonds. These bonds are convenient for charitable trusts. It is the best option for investment of surplus funds. There is no maximum limit for investment in the bonds. 8% interest payable is taxable.

Important Features of 8% India Savings (Taxable) Bonds Resident individuals (not NRI), minor, HUF, Charitable

Institutions and universities can buy these bonds.

8% p.a. interest is payable half yearly or Rs. 1000 becomes Rs. 1601 after 6 years. Half yearly or cumulative interest payment options are available. Interest is eligible for deduction u/s 80C (upto Rs. 1,00,000).

It is for the period of six years.

Bonds are not transferable and pledgable.

No TDS will be deducted on interest.

Nomination facility is available.

b) 9.00% GOI Senior Citizens Savings Schemes

It is a special investment scheme introduced for the benefits of senior citizens. And its important features are as follows:

Resident Indians aged 60 years and above can invest in this scheme.

Interest rate is 9% and is payable quarterly.

Period of scheme is 5 years

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Ceiling for maximum permissible deposit per person is Rs. 15,00,000.

Account can be opened jointly with spouse only.

No TDS will be deducted but interest is taxable.

Premature withdrawal facility is available after one year.


c) Government of India 6.50% Savings (Tax free) Bonds

Recently, the government has started issuing 6.50% (tax free) bonds which are reasonably attractive and secured investment for individuals and institutions.

Important Features of Government of India 6.50% Savings (Tax free) Bonds

Resident individuals (not NRI), HUF, and minor through guardian can invest in this bonds.

No maximum limit on the amount of investment in this bonds.

Interest 6.50%, interest is payable half yearly or cumulative. Interest payment in exempted from income tax – no wealth tax.

Maturity period is of 5 years.

Pledge and transfer are not allowed. However, the bonds can be transferred only by way of gifts.

Cumulative as well as non cumulative facility is available

Redemption (pre mature encashment) is allowed after 3 years only.

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It may be noted that 6.50% savings bonds offers more benefits / concessions as compared to 8.0% savings (taxable) bonds. Both the bonds are popular and used extensively as a safe and secure investment avenue by large number of rich investors. Both the investments are not available to NRIs. The new savings bonds of GOI are similar to relief bonds which RBI was issuing previously on behalf of the Government of India. RBI relief bonds are discontinued till further notice. The appreciation for both categories of bonds may be submitted to SBI or HDFC banks. They issue bond of certificates of GOI.

ANALYSIS ON SURVEY REPORT

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1. Are you aware of different types of investment schemes?

Yes:- 96%

No:- 4%

2. Are you aware of Mutual Funds Schemes available in the

market?

Yes:- 76%

No:- 34%

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3. Are you ready to Invest in Mutual Funds?

Yes:- 68%

No:- 32%

4. According to you, which is the best Investment alternative

you would like to invest from the following?

Real Estate Properties:- 34%

Post Office Savings:- 42%

Gold & Silver:- 27%

5. Have you ever invested in any Investment Schemes?

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Yes- 83%No- 17%

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INTERVIEW

I Interviewed to Mr. Furqan Qureshi a Investment Consultant, who is

a member of BSEL & NSEIL. The Interview was regarding the

investment alternatives in which he would like to invest. I took the

interview in a questionnaire type.

1. If I give you Rs. 50,000, where would you like to invest and why?

If I had Rs. 50,000, I would like to invest that money in Mutual Funds,

as various companies are coming up with various Mutual Fund Schemes.

And due to regular returns, high liquidity, and also they are subject to

many government regulations that protect Investors from fraud. Even I

would like to go for Equity shares.

I am interested in investing for short period and for high profit.

2. Would you like to go for Insurance Policies and which would you

prefer Private or Government?

As far as Returns are concerned, I would not like to go any Insurance

policies as they are Expensive. But after the age of 40, I would like to go

for Insurance for the safety and security for my family and then returns

will be secondary motive.

I am not interested in Private Sector as there is an increasing competition

in the market it may result into shut down or winding up of the company.

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3. What about investing in Post Office Savings Schemes?

Post Office Savings Schemes are good for the retired persons who

can’t risks. I would like to go for Post office Savings Schemes since it is

backed up by the government of India.

In post Office Savings Schemes, I would like to go Recurring Account

as I would be saving some part of my income on monthly or on recurring

basis.

4. How about investing in Gold or Silver|?

I would like to Invest in Gold as Gold is good Investment for

emergency.

5. What do you think about Real Estate Property Investment?

According to me, one should look at Real Estate Properties being

Potential Investment Avenue.

And I would go for Commercial place rather than residential. And

there is capital gain in the future. And also I would rent the property and

earn additional income from it.

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Economy & Finance

Investment alternative