VARIOUS INVESTMENT AVENUES IN INDIA

I. SAVINGS ACCOUNT

As the name denotes, this account is perfect for parking your temporary savings. These accounts

are one of the most popular deposits for individual accounts. These accounts provide cheque

facility and a lot of flexibility for deposits and withdrawal of funds from the account. Most of

the banks have rules for the maximum number of withdrawals in a period and the maximum

amount of withdrawal, but no bank enforces these. However, banks have every right to enforce

such boundaries if it is felt that the account is being misused as a current account. At present the

interest on these accounts is regulated by Reserve Bank of India. Presently Indian banks are

offering 3.50% p.a. interest rate on such deposits.

This account gives the customer a nominal rate of interest and he can withdraw money as and

when the need arises. The position of account is depicted in a small book known as 'Pass Book'.

Such accounts should be treated as a temporary parking area because the rate of interest is much

less than Fixed Deposits. As soon as one’s savings accumulate to an amount which he can spare

for a certain period of time, shift this money to Fixed Deposit. The returns on the money kept in

Savings Bank account will be less but the freedom to withdraw is the highest.

II. FIXED DEPOSITS/ TERM DEPOSITS

The term "fixed" in Fixed Deposits denotes the period of maturity or tenor. Fixed Deposit,

therefore, pre plans a length of time for which the depositor decides to keep the money with the

Bank and the rate of interest payable to the depositor is decided by this tenure. Rate of interest

differs from Bank to Bank. Normally, the rate is highest for deposits for 3-5 years. This,
however, does not mean that the depositor loses all his rights over the money for the duration of

the tenor decided. Deposits can be withdrawn before the period is over. However, the amount of

interest payable to the depositor, in such cases goes down.

Every Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days

to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits for the

duration of time for which the depositor decides to keep the money with the bank. However, in

case of need, the depositor can ask for closing the fixed deposit in advance by paying a penalty.

Soon some banks have even introduced variable interest fixed deposits. The rate of interest in

such deposits will keep on varying with the prevalent market rates i.e. it will go up if market

interest rate goes and it will come down if the market rates fall.

The rate of interest for Fixed Deposits (FD) differs from bank to bank. When the interest rates

were regulated by RBI all banks used to have the same interest rate structure. The present

trends indicate that private sector and foreign banks offer higher rate of interest.

Tax deduction

Banks should deduct tax at source on interest paid in excess of Rs. 5000 per annum to any

depositor. This is not per deposit but per individual. Therefore if an individual has 5 deposits and

the aggregate interest earned on these is Rs. 7000 though in each individual deposit, interest

should not exceed Rs. 2000, tax must be deducted at source.

Operation

While opening a fixed deposit account, the bank must issue a fixed deposit that should state the

following things on its face:

• Date of issue

• Due date

• Amount

• Rate of interest

• Period of deposit

• Amount at maturity

Early withdrawal

Sometimes a customer may want to withdraw his deposit before maturity. In such case, the

customer would have to request the bank to do so. Banks are permitted, at their discretion, to

allow early withdrawal and they can charge a penal interest for early encashment. The Reserve

Bank states that penal interest must not be charged if the deposit is reinvested in a fresh deposit

immediately. The rate of interest that will be paid is the rate for the period the deposit has been

with the bank. Banks may prohibit premature withdrawal of large deposits held by entities other

than individuals and HUFs if such depositors have been so advised at the time the account was

opened.

Renewal

Deposits can be renewed on maturity on the request of the depositor. Deposits may be renewed

before maturity in the following cases:

• If the deposit is renewable before the date of maturity

• If the period of renewal is longer than the remaining period of the original deposit.

Interest on renewal:

Interest on renewal will be on the original deposit at the rate applicable to the period for which

the deposit has actually run. Interest for the period from the date of renewal will be allowed at

the rate existing on the date of renewal.

Maturity

The deposit matures at the end of the period for which it has been placed. On maturity, the

depositor should instruct the bank to renew the deposit. The bank cannot do so without the

customer’s instruction.

If the depositor does not want to renew the deposit, he can ask for it to be paid to him either by a

cheque/ draft or credited to an account he has. Normally this instruction would be in the account

opening instructions. If the depositor does not renew or claim the deposit on its maturity, the

deposit will be designated as an overdue deposit in the books of the bank. The bank cannot close

and repay the deposit if the depositor does not make a demand. If the deposit matures on a

Sunday/ holiday/ any nonworking days, the bank should pay interest at the originally contracted

rate on the deposit amount for the Sunday/ holiday/ non business day. The deposit would be paid

back on the succeeding working day.

Renewal of overdue deposits

Banks can renew deposits at an interest rate prevailing on the date of maturity provided the

depositor approaches the bank within 14 days from the date of maturity of the deposit; if the
application is made after 14 days the rate of interest must be the rate prevailing on the date of

renewal of deposit.

Banks are free to decide the rate of interest between the date of maturity and the date of renewal.

The policies on all aspects of renewal of overdue interest are to be decided by the respective

boards of banks. This policy should be non discretionary and non discriminatory.

Advance on Fixed Deposits

Banks may grant loans on the security of the fixed deposit but they should maintain a reasonable

margin on any advance or facility given against the security of a term deposit. Banks are free to

charge a rate of interest on such lending without reference to its prime lending rate (BPLR). If

the term deposit is withdrawn before completion of the prescribed minimum maturity period it

must not be treated as an advance against the term deposit and interest must be charged at the

rates prescribed by the RBI.

On advances given on the security of fixed deposits to third parties up to Rs. 2, 00,000 banks can

charge interest without reference to its BPLR. If it exceeds Rs. 2 lakhs it must be at the rates

prescribed by the Reserve Bank (RBI). All the transactions must be rounded to the nearest rupee.

Fractions of 50 paisa and above will be rounded up and fractions below 50 paisa will be rounded

down. Cheques issued by a customer, which containing fractions of a rupee should not be

rejected or dishonored.

Joint Holdings

Fixed deposits may be in the name of an individual or in the joint names of two or more persons.

In case of joint holdings, if one of the joint depositors requests for premature withdrawal, it
should be done only after getting the approval of the other depositors. At the same time if one of

the joint depositor wants a loan against a fixed deposit, it should be given only after all the other

joint holders have signed the request.

Any one joint depositor’s request should not be entertained in such accounts; all the requests

should be signed by all the joint holders.

Loss of Fixed Deposit Receipt

A fixed deposit receipt is not negotiable or transferable. If the receipt is lost, customers can ask

for a duplicate. This is because banks are firm on fixed deposit receipts to be discharged and

surrendered before payment is affected.

Therefore in a joint holding account, all the holders should request for a duplicate receipt in

writing and execute a letter of indemnity to issue a duplicate. A note should also be made in the

bank’s records that a duplicate has been issued.

Repayment

If the deposit with interest is Rs. 20,000 or more the repayment must be by an account payee

cheque. It can also be made by crediting to the current/ savings account of the depositor.

Repayment of interest or principal should not be made to the account of another person and it is

usually made in the name of the first named person.

 III. Public Provident Fund (PPF)

Introduction

PPF is a 30 year old constitutional plan of the Central Government happening with the objective

of providing old age profits security to the unorganized division workers and self employed

persons. Currently, there are almost 30 lakhs PPF account holders in India across banks and post

offices.

Eligibility

Any individual salaried or non-salaried can open a PPF account. He may also pledge on behalf

of a minor, HUF, AOP and BOI. Even NRIs can open PPF account. A person can contain only

one PPF account. Also two adults cannot open a combined PPF account. The collective annual

payment by an individual on account of himself his minor child and HUF/AOP/BOI (of which

individual is member) cannot exceed Rs.70, 000 or else the excess amount will be returned

without any interest.

Subscription

The yearly contribution to PPF account ranges from a least of Rs.500 to a maximum of Rs.70,

000 payable in multiple of Rs.5 either in lump sum or in convenient installments, not exceeding

12 in a year.

Penalty in case of non-subscription

The account will happen to obsolete if the required minimum of Rs.500 is not deposited in any

year. The amount before now deposited will continue to earn interest but with no facility of
taking loan or making withdrawals. The account can be regularized by depositing for each year

of default, arrears of Rs.500 along with penalty of Rs.100.

Where to open

A PPF account can be opened at any branch of State Bank of India or its subsidiaries or in few

national banks or in post offices. On opening of account a pass book will be issued wherein all

amounts of deposits, withdrawals, loans and repayment together with interest due shall be

entered. The account can also be transferred to any bank or post office in India.

Interest rate

Deposits in the account earn interest at the rate notify by the Central Govt from time to time.

Interest is designed on the lowest balance among the fifth day and last day of the calendar month

and is attributed to the account on 31st March every year. So to derive the maximum, the

deposits should be made between 1st and 5th day of the month, as it also enables you to earn

interest on your Savings Bank A/c for the previous month.

Tenure

Even though PPF is 15 year scheme but the effectual period works out to 16 years i.e. the year of

opening the account and adding 15 years to it. The sum made in the 16th financial year will not

earn any interest but one can take advantage of the tax rebate.

Withdrawal

The investor is allowable to make one removal every year beginning from the seventh financial

year of an amount not more than 50% of the balance at the end of the fourth year or the financial
year immediately preceding the withdrawal, whichever is less. This facility of making partial

withdrawals provide liquidity and the withdrawn amount can be used for any purpose.

Loan

The depositor can take a loan in the third financial year of opening the account for up to 25% of

the balance at the end of second previous financial year. Further no loan can be taken after 6th

financial year. Ongoing with the preceding example the first loan can be taken through FY 2002-

03 for 25% of the balance at the end of FY 2000-01. The loan is to be repaid in 36 months

following the month in which loan is taken either in lump sum or in installments. The fresh loan

will be given only after previous loan is repaid in full with interest at 1% p.a. over the interest

paid on PPF. Moreover, if the loan is not repaid within stipulated time, the interest would be

charged @ 6% p.a. instead of 1% p.a. In the event of death of subscriber, his legal heirs/nominee

shall repay the interest on the loan.

Maturity

On maturity, the account can be closed by making an application for withdrawal of entire

balance together with interest after adjustments, if any. However, the account can also be

extended for any period in a block of five years at each time, with or without fresh contribution.

If the account is continued without fresh contribution, the entire sum can be withdrawn

either in lump sum or in installments not exceeding one in a year. If continued with fresh

subscriptions, withdrawal is permitted for up to 60% of the balance at the beginning of each

extended period in one or more installments, but not more than once a year.

Nomination
One or more nominations can be made by the subscriber to accept the amount standing to his

credit in the event of his death. Nomination once made can also be cancelled or varied. If the

nominee is a minor the depositor can assign any person to receive the amount due during the

minority of the nominee. The capability of nomination is also available in case of HUF but not

for minors. In the event of death of subscriber the amount standing to his credit after making

adjustments, if any shall be paid to the nominee or nominees on making a request by them

together with proof of death of subscriber. If any nominee is dead, the proof of death of nominee

is also required. However, if the balance is not withdrawn it will continue to earn interest. Fresh

contributions and limited withdrawals by nominee are not acceptable after the death of the

account holder. It is sensible to open a savings account of the nominee or nominees in the same

bank and mention this number in the PPF account opening form. Also, since a single cheque is

issued in favour of all the nominees, it would be prudent for the nominees to open a joint saving

bank account. Where there is no nomination the balances after making adjustment shall be paid

to the legal heirs on production of succession certificate/probate acquire which requires lot of

time and paperwork. Therefore, to reduce hardships if the balance is up to Rs1 lakh, it will be

paid to legal heirs on production of i) a letter of indemnity, ii) an affidavit, iii) a letter of

disclaimer and iv) the death certificate. But in practice, if the bank manager is convinced and

closely acquainted, he usually pays you the entire sum of money.

Tax treatment

The contributions made to the PPF account are eligible for deduction u/s 80C of Income Tax

Act. The interest earned and the entire amount received on maturity or premature withdrawal is

completely tax-free. Moreover, the balance held in PPF account is fully exempt from wealth tax,

without any limit.

Benefits of Public Provident Fund

For one it scores high on safety since your main amount invested carries the Government of

India badge of honor. Two with Big Brother watching your investment in a PPF also qualifies

for tax breaks under Section 80C of the Income Tax Act. What’s more even the interest earned

(8 percent compounded annually) is free from income tax making it the first among equals for

debt-based products. A comparable product will have to earn 11.5 per cent at the 30.6 per cent

tax rate to be equal to the return that the PPF gives. And there is yet more to come, there is no

cost to entry, upholding or exit on this product.

The investment in PPF offers highest security as it is a government-backed scheme. The

return of 8% p.a. offered by the scheme actually works out to be higher due to tax benefits and

the compounding factor (interest on interest earned).

You can either open a PPF account at any branch of the State Bank of India and its

subsidiaries, a few branches of the other nationalized banks, and all head post offices in the

country. Once you open an account do keep count-your investment is limited to an Rs.500-

70,000 band in a single monetary year. And you can jolly well chip in to this account for 15

years. Unlike in a bank returning deposit or insurance payments you do not need to deposit the

same amount every month or year. Hassle-free investment every year would keep the doctor

away. Before maturity, you can make withdrawals from your account starting the sixth financial

year. You may even apply for a loan from the third year on. Compared with debt funds and the

fixed deposits, PPF gives the biggest bang for the money.
 IV. NATIONAL SAVINGS CERTIFICATES

National Savings Certificate (NSC) is a fixed interest, long term instrument for investment.

NSCs are issued by the Department of Post, Government of India. Since they are backed by the

Government of India, NSCs are a practically risk free avenue of investment. They can be bought

from authorized post offices. NSCs have a maturity of 6 years. They offer a rate of return of 8%

per annum. This interest is calculated every six months, and is merged with the principal. That

is, the interest is reinvested, and is paid along with the principal at the time of maturity. For

every Rs. 100 invested, you receive Rs. 160.10 at maturity.

NSCs qualify for investment under Section 80C of the Income Tax Act (IT Act). Even

the interest earned every year qualifies under Sec 80C. This means that investments in NSCs and

the interest earned on it every year, up to Rs. 1 Lakh, are deductible from the income of the

investor. There is no tax deducted at source (TDS).

Features of NSC

• Minimum investment Rs. 500/- No maximum limit.

• Rate of interest 8% compounded half yearly.

• Rs. 1000/- grow to Rs. 1601/- in six years.

• Two adults, Individuals, and minor through guardian can purchase.

• Companies, Trusts, Societies and any other Institutions not eligible to purchase.

• Non-resident Indian/HUF cannot purchase.

• No pre-mature encashment.
• Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5

years under section 80 C of Income Tax Act.

• Maturity proceeds not drawn are eligible to Post Office Savings account interest for a

maximum period of two years.

• Facility of reinvestment on maturity.

• Certificate can be pledged as security against a loan to banks/ Govt. Institutions.

• Facility of encashment of certificates through banks.

• Certificates are encashable in any Post office in India before maturity by way of transfer

to desired post office.

• Certificates are transferable from one Post office to any Post office.

• Certificates are transferable from one person to another person before maturity.

• Duplicate Certificate can be issued for lost, stolen, destroyed, mutilated or defaced

certificate.

• Nomination facility available.

• Facility of purchase/payment to the holder of Power of attorney.

• Tax Saving instrument - Rebate admissible under section 80 C of Income Tax Act.

• Interest income is taxable but no TDS

• Deposits are exempt from Wealth tax.

 V. POST OFFICE SAVINGS:

There are various investment schemes available in post offices, like KVP (Kisan Vikas Patra),

MIS (Monthly Income Scheme) and various others. All these schemes are completely risk-free,

and you do not need to have large sum of money to start investing in these post office schemes.

Some schemes offer Tax-saving benefits and some gives tax-free returns. So you need to find

out some scheme as per your requirements.

These are some of the safe and secure investments that you can opt for. Though the interest rates

are not so high, but still you must invest some part of your money into any of these investment

instruments. It is your hard-earned money, so better play safe and invest some part in secure

funds also

VI. GOVERNMENT SECURITIES

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

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

borrowing program.

The term Government Securities includes:

• Central Government Securities.

• State Government Securities

• Treasury bills
 The Central Government borrows funds to finance its 'fiscal deficit'. The market

borrowing of the Central Government is increased through the issue of dated securities and 364

days treasury bills either by auction or by floatation of loans. In addition to the above, treasury

bills of 91 days are issued for managing the temporary cash mismatches of the Government.

These do not form part of the borrowing program of the Central Government.

Features

• Features of Government Securities

• Issued at face value

• No default risk as the securities carry sovereign guarantee.

• Ample liquidity as the investor can sell the security in the secondary market

• Interest payment on a half yearly basis on face value

• No tax deducted at source

• Can be held in D-mat form.

• Rate of interest and tenor of the security is fixed at the time of issuance and is not

subject to change (unless intrinsic to the security like FRBs).

• Redeemed at face value on maturity

• Maturity ranges from of 2-30 years.

• Securities qualify as SLR investments (unless otherwise stated).

Benefits of Investing in Government Securities

• No tax deducted at source

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

• Qualifies for SLR purpose

• Zero default risk being sovereign paper

• Highly liquid.

• Transparency in transactions and simplified settlement procedures through CSGL/NSDL.

VII. Mutual Funds

A mutual fund is a professionally-managed firm of collective investments that pools

money from many investors and invests it in stocks, bonds, short-term money market

instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as

the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses,

and collects the dividend or interest income. The investment proceeds are then passed along to

the individual investors. The value of a share of the mutual fund, known as the net asset value

per share (NAV), is calculated daily based on the total value of the fund divided by the number

of shares currently issued and outstanding.

Types of Mutual Funds:

 On the basis of their structure and objective, mutual funds can be classified into following
major types:

 Closed-end funds
 Open-end funds
 Large cap funds
 Mid-cap funds
 Equity funds
 Balanced funds
 Growth funds
 No load funds
 Exchange traded funds
 Value funds
 Money market funds
 International mutual funds
 Regional mutual funds
 Sector funds
 Index funds
 Fund of funds

Closed-end Mutual Fund

A closed-end mutual fund has a set number of shares issued to the public through an

initial public offering. These funds have a stipulated maturity period generally ranging from 3 to

15 years. The fund is open for subscription only during a specified period. Investors can invest in

the scheme at the time of the initial public issue and thereafter they can buy or sell the units of

the scheme on the stock exchanges where they are listed. Once underwritten, closed-end funds

trade on stock exchanges like stocks or bonds. The market price of closed-end funds is
determined by supply and demand and not by net-asset value (NAV), as is the case in open-end

funds. Usually closed mutual funds trade at discounts to their underlying asset value.

Open-end mutual fund

An open-end mutual fund is a fund that does not have a set number of shares. It continues

to sell shares to investors and will buy back shares when investors wish to sell. Units are bought

and sold at their current net asset value. Open-end funds keep some portion of their assets in

short-term and money market securities to provide available funds for redemptions. A large

portion of most open mutual funds is invested in highly liquid securities, which enables the fund

to raise money by selling securities at prices very close to those used for valuations.

Large Cap Funds

Large cap funds are those mutual funds, which seek capital appreciation by investing

primarily in stocks of large blue chip companies with above-average prospects for earnings

growth. Different mutual funds have different criteria for classifying companies as large cap.

Generally, companies with a market capitalization in excess of Rs 1000 crore are known large

cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap

stocks), because such companies are usually widely researched and information is widely

available.

Mid cap funds

Mid cap funds are those mutual funds, which invest in small / medium sized companies.

As there is no standard definition classifying companies as small or medium, each mutual fund

has its own classification for small and medium sized companies. Generally, companies with a
market capitalization of up to Rs 500 crore are classified as small. Those companies that have a

market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized.

Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in

mid caps nowadays because the price of large caps has increased substantially. Small / midsized

companies tend to be under researched thus they present an opportunity to invest in a company

that is yet to be identified by the market. Such companies offer higher growth potential going

forward and therefore an opportunity to benefit from higher than average valuations. But mid

cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should

be exercised while investing in mid cap mutual funds.

Equity Mutual Funds

Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest

pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or

equity, in companies, and the aim of stock ownership is to see the value of the companies

increase over time. Stocks are often categorized by their market capitalization (or caps), and can

be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily

in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap

funds. Equity fund managers employ different styles of stock picking when they make

investment decisions for their portfolios. Some fund managers use a value approach to stocks,

searching for stocks that are undervalued when compared to other, similar companies. Another

approach to picking is to look primarily at growth, trying to find stocks that are growing faster

than their competitors, or the market as a whole. Some managers buy both kinds of stocks,

building a portfolio of both growth and value stocks.

Balanced Fund

Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a

combination of common stock, preferred stock, bonds, and short-term bonds, to provide both

income and capital appreciation while avoiding excessive risk. Balanced funds provide investor

with an option of single mutual fund that combines both growth and income objectives, by

investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure

that these funds will manage downturns in the stock market without too much of a loss. But on

the flip side, balanced funds will usually increase less than an all-stock fund during a bull

market.

Growth Funds

Growth funds are those mutual funds that aim to achieve capital appreciation by

investing in growth stocks. They focus on those companies, which are experiencing significant

earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to

look for the fastest-growing companies in the market. Growth managers are willing to take more

risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-

average earnings momentum or price appreciation. In general, growth funds are more volatile

than other types of funds, rising more than other funds in bull markets and falling more in bear

markets. Only aggressive investors, or those with enough time to make up for short-term market

losses, should buy these funds.

No-Load Mutual Funds

Mutual funds can be classified into two types - Load mutual funds and No-Load mutual

funds. Load funds are those funds that charge commission at the time of purchase or redemption.
They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds.

Front-end load funds charge commission at the time of purchase and back-end load funds charge

commission at the time of redemption.

On the other hand, no-load funds are those funds that can be purchased without commission. No

load funds have several advantages over load funds. Firstly, funds with loads, on average,

consistently underperform no-load funds when the load is taken into consideration in

performance calculations. Secondly, loads understate the real commission charged because they

reduce the total amount being invested. Finally, when a load fund is held over a long time

period, the effect of the load, if paid up front, is not diminished because if the money paid for the

load had invested, as in a no-load fund, it would have been compounding over the whole time

period.

Exchange Traded Funds

Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an

exchange. An exchange traded fund is similar to an index fund in that it will primarily invest in

the securities of companies that are included in a selected market index. An ETF will invest in

either all of the securities or a representative sample of the securities included in the index. The

investment objective of an ETF is to achieve the same return as a particular market index.

Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade

roughly in line with the net asset values of their underlying portfolios.

Value Funds
 Value funds are those mutual funds that tend to focus on safety rather than growth, and

often choose investments providing dividends as well as capital appreciation. They invest in

companies that the market has overlooked, and stocks that have fallen out of favour with

mainstream investors, either due to changing investor preferences, a poor quarterly earnings

report, or hard times in a particular industry. Value stocks are often mature companies that have

stopped growing and that use their earnings to pay dividends. Thus value funds produce current

income (from the dividends) as well as long-term growth (from capital appreciation once the

stocks become popular again). They tend to have more conservative and less volatile returns than

growth funds.

Money Market Mutual Funds

A money market fund is a mutual fund that invests solely in money market instruments.

Money market instruments are forms of debt that mature in less than one year and are very

liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money

market are relatively risk-free. Money market funds are generally the safest and most secure of

mutual fund investments. The goal of a money-market fund is to preserve principal while

yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is

not entirely risk free. When investing in a money-market fund, attention should be paid to the

interest rate that is being offered.

International Mutual Funds

International mutual funds are those funds that invest in non-domestic securities markets

throughout the world. Investing in international markets provides greater portfolio diversification

and let you capitalize on some of the world's best opportunities. If investments are chosen
carefully, international mutual fund may be profitable when some markets are rising and others

are declining. However, fund managers need to keep close watch on foreign currencies and

world markets as profitable investments in a rising market can lose money if the foreign

currency rises against the dollar.

Regional Mutual Fund

Regional mutual fund is a mutual fund that confines itself to investments in securities

from a specified geographical area, usually, the fund's local region. A regional mutual fund

generally looks to own a diversified portfolio of companies based in and operating out of its

specified geographical area. The objective is to take advantage of regional growth potential

before the national investment community does. Regional funds select securities that pass

geographical criteria. For the investor, the primary benefit of a regional fund is that he/she

increases his/her diversification by being exposed to a specific foreign geographical area.

Sector Mutual Funds

Sector mutual funds are those mutual funds that restrict their investments to a particular

segment or sector of the economy. These funds concentrate on one industry such as

infrastructure, heath care, utilities, pharmaceuticals etc. The idea is to allow investors to place

bets on specific industries or sectors, which have strong growth potential. These funds tend to be

more volatile than funds holding a diversified portfolio of securities in many industries. Such

concentrated portfolios can produce tremendous gains or losses, depending on whether the

chosen sector is in or out of favour.

Index Funds
 An index fund is a type of mutual fund that builds its portfolio by buying stock in all the

companies of a particular index and thereby reproducing the performance of an entire section of

the market. The most popular index of stock index funds is the Standard & Poor's 500. An S&P

500 stock index fund owns 500 stocks-all the companies that are included in the index. Investing

in an index fund is a form of passive investing. Passive investing has two big advantages over

active investing. First, a passive stock market mutual fund is much cheaper to run than an active

fund. Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.

Fund of Funds

A fund of funds is a type of mutual fund that invests in other mutual funds. Just as a

mutual fund invests in a number of different securities, a fund of funds holds shares of many

different mutual funds. Fund of funds are designed to achieve greater diversification than

traditional mutual funds. But on the flipside, expense fees on fund of funds are typically higher

than those on regular funds because they include part of the expense fees charged by the

underlying funds. Also, since a fund of funds buys many different funds which themselves invest

in many different stocks, it is possible for the fund of funds to own the same stock through

several different funds and it can be difficult to keep track of the overall holdings.

Advantages of Mutual Funds

The 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. 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:

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:

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:

You 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
Flexibility

Choice of schemes

Tax benefits

Well regulated

Drawbacks of Mutual Funds

Mutual Funds have their own drawbacks and it may not suit the investment needs of all

kinds of investors because of its limitations and the drawbacks.

Following are the few drawbacks of Mutual Funds:

No Guarantees:

No investment is risk free. If the entire stock market declines 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 risk 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 you don't use a broker or other financial adviser, you will pay a sales

commission if you buy shares in a Load 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.

Management risk:

When you invest in a mutual fund, you 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, you might not make as much money on your investment as you expected. Of course, if

you invest in Index Funds, you forego management risk, because these funds do not employ

managers.

The Future

By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is

estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be

Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of

the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current

growth rate, by year 2010, mutual fund assets will be double.

VIII. Life Insurance

Life insurance is a contract between the policy owner and the insurer, where the insurer

agrees to pay an amount of money upon the happening of the insured individual's or individuals'

death or other event, like terminal illness, critical illness. In return, the policy owner agrees to

pay a fixed amount called a premium at regular intervals or in bulge sum.

 Like other insurance policies, life insurance is also a contract between the insurer and the

policy owner whereby a benefit is paid to the nominated beneficiaries if an insured event occurs

which is covered by the policy. The assessment for the policyholder is derived not from an actual

claim event. But to a certain extent it is the value derived from the 'peace of mind' experienced

by the policyholder, because of the negating of adverse financial consequences caused by the

death of the Life Assured. To be a life policy the insured event must be based upon the lives of

the people named in the policy.

Types of Life Insurance

Life insurance may be divided into two basic classes, temporary and permanent or it can

be divided into following subclasses - term, universal, whole life and endowment life insurance.

1. Temporary term

Here life insurance coverage is for a specified term of years for a specified premium. The

policy does not accumulate cash value. Term is generally considered pure insurance, where the

premium buys protection in the event of death and nothing else.

The three key factors to be considered in term insurance are face amount receivable on death,

premium to be paid, and length of coverage. Various insurance companies sell term insurance

with many different combinations of these three parameters. The face amount can remain

constant. The term can be for one or more than one years.

A policy holder insures his life for a specified term. If he dies before that specified term is up,

his named beneficiary receives a payout. If he does not die before the term is up, he receives

nothing.
2. Permanent Life Insurance

Permanent life insurance is life insurance that remains in force until the policy matures

and unless the owner fails to pay the premium when due. The policy cannot be canceled by the

insurer apart from fraud in the application, and that termination must occur within a period of

time defined by law. Permanent insurance builds a cash value that reduces the amount at risk to

the insurance company and thus the insurance expense over time. The four basic types of

permanent insurance are whole life, universal life, limited pay and endowment.

a) Whole life coverage

Whole life insurance provides for many premiums, and a cash value table included in the

policy guaranteed by the company. The main advantages of whole life are guaranteed death

benefits, cash values, fixed and known annual premiums, and mortality and expense charges will

not reduce the cash value shown in the policy. The primary disadvantages of whole life are

premium inflexibility.

Cash value can be accessed at any time through policy loans. These loans decrease the

death benefit if it is not paid back, payback is optional. Cash values are not paid to the

beneficiary upon the death of the insured; the beneficiary gets only the death benefits

b) Universal life coverage

Universal life insurance is a somewhat new insurance product intended to provide

permanent insurance coverage with greater flexibility in premium payment and it gives higher

internal rate of return. There are several types of universal life insurance policies which include

interest sensitive, variable universal life insurance, and equity indexed universal life insurance.
 A universal life insurance policy also includes a cash account. Premiums will increase

the cash account. Interest is paid within the policy on the account at a rate specified by the

company. Mortality charges and administrative costs are then charged against the cash account.

In all life insurance, there are basically two functions that is mortality function and a cash

function. The mortality function would be the classical notion of pooling risk where the

premiums paid by everybody else would cover the death benefit for the one or two who will die

for a given period of time. The cash function inherent in all life insurance says that if a person is

to reach age 95 to 100 then the policy matures and endows the face value of the policy.

c) Limited-pay

In this type of life insurance, all the premiums are paid over a specified period. Common

limited pay periods include 10-year, 20-year, and paid-up at age 65.

d) Endowments

Endowments are policies in which the cash value developed inside the policy equals the

death benefit at a certain age. The age this commences is known as the endowment age.

Endowments are considerably more expensive than whole life or universal life because the

premium paying period is shortened and the endowment date is earlier.

Advantages of a Life Insurance Policy

1. Financial Security

Life Insurance provides financial security. When the breadwinner of a family dies the life

insurance policy is a help to the family. They can make use of the funds paid by the insurance

company to meet their Individual and family’s needs who take up a life insurance policy have to
pay premiums. Therefore they will naturally be forced to give sufficient funds for this purpose.

This practice encourages thrift and also helps them to plan for some productive schemes. Life

Insurance Policies also help people to take care of their families in case of retirements. This can

come as a great relief especially if the person who retires does not have alternative sources of

income to take care of his family.

2. Helps to diverts States Resources for Other Purpose

One important duty of the governments in any country is to take care of the old and

dependent population. The state also allocates funds for this purpose. With the increasing

awareness of insurance the governments can be assured of spending less for the old. As a result

they can concentrate on strong issues and problems in the society.

3. Facilitates Economic Movements

Life insurance companies collect premiums from various investors. They are thus able to

gather large funds. This money is used to finance trade and development activities. Finally

production of goods and services will increase and the economy of the nation will be improved.

4. Helps to Avail Tax Exemptions

The policy holders are allowed to claim income tax exemptions for paying the premiums.

The amount and the level to which they are allowed depends on other factors like the persons

income and if the insurer is a private player or run by the state. This provision will indirectly

tempt people to invest in insurance and attain a mutual benefit of tax exemption and providing

security as well.
 Since universal life insurance is a long term investment it is not advised to borrow money

either by loans or through surrender values as they reduce your policy amount. In case of

emergency needs you may still consider them if you are promptly able to repay them with

interests if any so that it does not affect your policy.

Unit-Linked Insurance Plans (ULIPs)

When we talk of Insurance as an investment option, ULIPs have an important role as

many of the investors now a days go for this as a profitable avenue. ULIP is an abbreviation for

Unit Linked Insurance Policy. A ULIP is a life Insurance policy which provides a mixture of risk

cover and investment. The dynamics of the capital/stock market have a direct bearing on the

performance of the ULIPs.

Under this policy the insurer allocates the total premium into various units. The insured is

also given the opportunity to choose the option of investment units. Most of them prefer to

allocate them in financial investments and assets. The number of units they choose on each

option differs from individual to individual. Some of them may choose to invest more on

properties while the rest prefer to invest more on financial instruments such as shares,

debentures, etc.

Likewise the insurer takes care to allocate a unit of the premium for insurance

maintenance and the ancillary expenses. The insured will have no choice over this. The insured

is also excused from paying income tax for the amount received from the company. However

this policy does not guarantee profits like the previous and is therefore risky as far as returns are

concerned.
 ULIPs fundamentally work like a mutual fund with a life cover thrown in. They invest

the premium in market-linked instruments like stocks, debentures, corporate bonds and

government securities. Investments in ULIPs help to gain tax benefits under Section 80C.

Return on Investment from ULIP is not guaranteed.” In ULIP products/policies, the

investment risk in investment portfolio is borne by the policy holder”. Depending upon the

performance of the unit linked funds chosen; the policy holder may realize gains or losses on

his/her investments. It should also be noted that the past performance of a fund are not

necessarily indicative of the future returns of the fund.

Types of Funds do ULIP Offer

The majority of insurers offer a wide range of funds to suit one’s investment objectives,

risk profile and time horizons. Different funds have different risk profiles. The potential for

returns also varies from fund to fund.

The following are some of the universal types of funds available along with an indication of their

risk characteristics.

Name of the fund Nature of Investment Risk category

  Primarily invested in company  

Equity Funds stocks with the general aim of Medium to

  capital appreciation High

   
Income, Fixed Invested in corporate bonds,  

Interest government securities and other Medium

 and Bond Funds fixed income instruments  

 
Cash Funds Invested in cash,  

(Money bank deposits and money market  

Market Funds ) instruments Low

     
Balanced Funds Combining  

  equity investment with Medium

  fixed interest instruments

RISK ASSOCIATED WITH ULIPS

ULIPs are also known as investment plans is an ideal package that comes with insurance

coverage and investment options. So that leaves the customer with the opportunity of investing

in equities. But they need to keep in mind that the investments in stocks are subject to the

fluctuations of the market. The volatility in equity markets can keep the customer anxious and

disturbed since they wouldn't like to see their reserve being affected. Customer need to know

their risk taking capacity and then make a choice accordingly by choosing an appropriate fund.

ULIPs offer the option to invest in anyone of the four funds. If customers are not tending

to take a lot of risk then they can certainly invest in secured or balanced fund. However the best

part of having an investment plan is that one can switch from one fund to another, which they

find less risky. Two factors considered responsible for the introduction of ULIPs are firstly- the
entry of private insurance companies in the insurance sector and the second factor being the

decline of guaranteed returns on endowment plans.

Private players proved their innovative ideas with the introduction of ULIPs. The

performance of these plans has also been quite impressive. The performance of stock market has

made ULIPS all the more popular. It is the only option that lets one to be a part of the stock

market and at the same time offers insurance coverage. It is like the better of two things merged

into one and honestly things couldn't get any better when we bring its other features into the

limelight.

An innovative aspect of ULIPs is the 'top-up' facility; a top-up is a one-time additional

investment that is paid apart from the predetermined annual premium of the policy. This feature

works well when customers have a surplus that they are looking to invest in a market-linked

avenue. ULIPs also have the facility that allows the holder to skip premiums if they have paid

their premiums regularly for the first three years. For example, if you have paid your premiums

dutifully for the first three years then you have missed out the payment of fourth year's premium

then the insurance company will make the necessary adjustments from your investment surplus

and will ensure that the policy remains active. But it is always advisable to pay the premiums

regularly to avoid difficulties. All these facilities are not available with any other policy. This

makes it a differentiating factor when compared to policies like traditional endowment, term or

money back policies.

Another important characteristic is that ULIPs disclose their portfolios regularly. This

gives the customer an idea of how the money is being managed. Another important feature is its

'liquidity' factor. Since ULIP investments are NAV (Net Asset Value) -based it is possible to
withdraw a portion of the investments before maturity. It is possible only after the completion of

the lock-in period, usually it is three years. Such facility is not available with a traditional

endowment policy. With ULIPs one can also take advantage of the tax benefits which is offered

under Section 80C. It is subject to a maximum limit of Rs 1, 00,000. Investment plans are mainly

for those looking for security with an inclination for the share market.

IX. Bonds & Debentures

Bonds & Debentures, these two words can be used interchangeably. In Indian markets,

we use the word bonds to indicate debt securities issued by government, semi-government

bodies and public sector financial institutions and companies. We use the word debenture to

refer to the debt securities issued by private sector companies.

• Bonds - Debt securities issued by Govt. or Public sector companies

• Debentures - Debt securities issued by private sector companies

In other words we can tell that a bond is a debt security, similar to an I.O.U. When you

purchase a bond, you are lending money to a government, municipality, corporation, or Public

entity known as the issuer. The issuer promises to pay you a specified rate of interest during the

life of the bond, in return for the loan. They also promises to repay the face value of the bond

(the principal) when it “matures.”

Following are allowed to issue bonds

• Governments

• Municipalities

• Variety of institutions

• Corporations

There are many types of bonds, each having diverse features and characteristics. Bonds

and stocks are both securities, but the major difference between the two is that stockholders have

an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake

in the company (i.e., they are lenders). Another difference is that bonds usually have a defined

term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding

indefinitely.

Returns in Bonds

Returns is depends on the nature of the bonds that have been purchased by the investor.

Bonds may be secured or unsecured. Firstly, always check up the credit rating of the issuing

company before purchasing the bond. This gives you a working knowledge of the company's

financial health and an idea about the risk considerations of the instrument itself. Interest

payments depend on the health and credit rating of the issuer. Therefore, it is essential to check

the credit rating and financial health of the issuer before loosening up the bond. If you do invest

in bonds issued by the top-rated Corporates, there is no guarantee that you will receive your

payments on time.
Risks in Bonds

In certain cases, the issuer has a call option mentioned in the prospectus. This means that

after a certain period, the issuer has the choice of redeeming the bonds before their maturity. In

that case, while you will receive your principal and the interest accrued till that date, you might

lose out on the interest that would have accrued on your sum in the future had the bond not been

redeemed? Always remember that if interest rates go up, bond prices go down and vice-versa.

Buying and Holding of Bonds

Investors can subscribe to primary issues of Corporates and Financial Institutions (FIs). It

is common practice for FIs and Corporates to raise funds for asset financing or capital

expenditure through primary bond issues. Some bonds are also available in the secondary

market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. However, this

amount varies from issue to issue. There is no prescribed upper limit to your investment. The

duration of a bond issue usually varies between 5 and 7 years.

Selling of Bonds

Selling bonds in the secondary market has its own drawbacks. First, there is a liquidity

problem which means that it is a tough job to find a buyer. Second, even if you find a buyer, the

prices may be at a sharp discount to its intrinsic value. Third, you are subject to market forces

and, hence, market risk. If interest rates are running high, bond prices will be down and you may

well end up incurring losses. On the other hand, Debentures are always secured.

How to Invest in Bonds

There are several ways to invest in bonds. We can buy any of the following;
• Individual bonds

• Bond funds

• Money Market Funds.

Individual Bonds

There are a variety of individual bonds to choose from. Before investing you should find

a bond that matches your investment needs and expectations. Most individual bonds are bought

and sold in the over-the-counter (OTC) market. The OTC market comprises hundreds of

securities firms and banks that trade bonds by phone or electronically.

Bond Funds

Bond funds are another way to invest in the bond markets. Bond funds, like stock funds,

offer professional selection and management of a portfolio of securities. They permit an investor

to diversify risks across a wide range of issues and offer a number of other advantages, such as

the option of reinvesting the interest payments, distribution of interest payments periodically,

etc.

Money Market Funds

Money market funds refer to pooled investments in short-term, highly liquid securities.

These securities include Treasury Bills, Municipal bonds, Certificates of deposit issued by major

commercial banks, and commercial paper issued by established corporations. Normally, these

funds consist of securities and other instruments having maturities of three months or less.

Money market funds also offer convenient liquidity, since most allow investors to withdraw their

money at any time.

 When you are investing in a bond, you are buying the debt of its issuer, which might be

the India government or an affiliated entity, a state or Municipal government or a corporation.

Every bond has certain features they are:

• A definite maturity date, on which bond issuer promises to repay the bondholder.
• A promise to pay taxable or tax-exempt interest at a stated “coupon” rate.
• A yield, or return on investment, which is a function of the bond’s coupon rate
• A credit rating indicates the possibility that the issuer will be able to repay its debt.

Risks Associated with Bond Investment

Generally bonds guarantee safer and more stable returns than stocks, but bonds have

certain risks. Such as;

• Interest rate risk

• Liquidity risk
• Credit risk
• Call risk or reinvestment risk
Interest rate risk
When interest rates rise in the market, bond prices fall. If you need money and have to

sell your bond before maturity for a higher rate you will be disappointed because you will

probably get less than you paid for it. Interest rate risk declines as the maturity date gets closer.

Liquidity risk

If the bond issuer’s credit rating falls or prevailing interest rates are much higher than the

coupon rate, it may be difficult for an investor who wants to sell before maturity to find a buyer.
Bonds are normally more liquid during the initial period after issuance because during that

period trading volume of bonds will be larger.

Credit risk

If the issuer runs into financial difficulty or declares bankruptcy, it could default on its

obligation to pay the bondholders. In fact the buyer won’t get anything back.

Call risk or reinvestment risk

If a bond is callable, the issuer can redeem it prior to maturity, on defined dates for

defined prices. Bonds are generally called when interest rates are falling, leaving the investor to

reinvest the earnings at lower rates.

Debentures

A debenture is similar to a bond except the securitization conditions are different. A

debenture is generally unsecured in the sense that there are no liens or pledges on specific assets.

It is defined as a certificate of agreement of loans which is given under the company's stamp and

carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of

interest rates) and the principal amount whenever the debenture matures.

In finance, a debenture is a long-term debt instrument used by governments and large

companies to obtain funds. The advantage of debentures to the issuer is they leave specific assets

burden free, and thereby leave them open for subsequent financing. Debentures are generally

freely transferrable by the debenture holder. Debenture holders have no voting rights and the

interest given to them is a charge against profit.

Debentures vs. Bonds:

Debentures and bonds are similar except for one difference bonds are more secure than

debentures. In case of both, you are paid a guaranteed interest that does not change in value

irrespective of the fortunes of the company. However, bonds are more secure than debentures,

but carry a lower interest rate. The company provides collateral for the loan. Moreover, in case

of liquidation, bondholders will be paid off before debenture holders.

A debenture is more secure than a stock, but not as secure as a bond. In case of

bankruptcy, you have no collateral you can claim from the company. To compensate for this,

companies pay higher interest rates to debenture holders. All investment, including stocks bonds

or debentures carry an element of risk.

X. Commercial Papers

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. It was introduced in India in 1990 with a view to enable highly rated corporate

borrowers/ to diversify their sources of short-term borrowings and to provide an additional

instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted

to issue CP to enable them to meet their short-term funding requirements for their operations. CP

can be issued in denominations of Rs.5 lakhs or multiples thereof. Amount invested by a single

investor should not be less than Rs.5 lakhs (face value). It will be issued foe a duration of

30/45/60/90/120/180/270/364 days. Only a scheduled bank can act as an Issuing and Paying

Agent IPA for issuance of CP.

Features of Commercial Papers

• They are unsecured debts of Corporates and are issued in the form of promissory notes,
redeemable at par to the holder at maturity.

• Only Corporates who get an investment grade rating can issue CPs, as per RBI rules.

• It is issued at a discount to face value

• Attracts issuance stamp duty in primary issue

• Has to be mandatorily rated by one of the credit rating agencies

• It is issued as per RBI guidelines

• It is held in Demat form

• CP can be issued in denominations of Rs.5 lakhs or multiples thereof. Amount invested by

a single investor should not be less than Rs.5 lakhs (face value).

• Issued at discount to face value as may be determined by the issuer.

• Bank and FI’s are prohibited from issuance and underwriting of CP’s.

• Can be issued for a maturity for a minimum of 15 days and a maximum up to one year
from the date of issue.

Who can Issue Commercial Papers?

• Corporates and primary dealers (PDs)

• All-India financial institutions (FIs)

Maturity

CP can be issued for maturities between a minimum of 7 days and a maximum up to one

year from the date of issue.

Investment in CP

CP may be issued to and held by individuals, banking companies, other corporate bodies

registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and

Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set

for their investments by Securities and Exchange Board of India. Banks still continue to be a

major player in the CP market.

Mode of Issuance

CP can be issued either in the form of a promissory note or in a dematerialized form

through any of the depositories approved by and registered with SEBI. CP will be issued at a

discount to face value as may be determined by the issuer. No issuer shall have the issue of CP

underwritten or co-accepted.

CP Issue Expenses

 Stamp duty 0.2% - If placed through banks

 1.0% - If placed through merchant bankers

 Rating fees* 0.10% (subject to a minimum of Rs.100,000)

(For a rating from CARE)

 Issuing and paying agent fee 0.1%

(All charges are on per annum basis and are subject to changes from time to time)

CP is issued at a discount to the face value. The following costs are involved in the issue of CP:
*CARE charges a rating fee of 0.10% of the amount of issue subject to a minimum of

Rs.100,000 and a maximum of Rs.30,00,000. For issues above Rs.500 crore, the maximum fee

would be Rs.40 lakhs

XI. Certificate of Deposit

A certificate of deposit or CD is a time deposit, a financial product commonly offered to

consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in

that they are insured and thus virtually risk-free; they are "money in the bank". They are

different from savings accounts in that the CD has a specific, fixed term (often 3 months, 6

months, or 1 to 5 years), and, usually, a fixed interest rate. It is intended that the CD be held until

maturity, at which time the money may be withdrawn together with the accrued interest.

Eligibility to issue CD

• Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area
Banks

• All-India Financial Institutions that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.

Who can subscribe

CDs can be issued to individuals, corporations, companies, trusts, funds, associations,

etc. Non- Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis

which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI

in the secondary market.

Maturity

• The maturity period of CDs issued by banks should be not less than 7 days and not more
than one year.

• The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the
date of issue.

Discount/ Coupon Rate

CDs may be issued at a discount on face value. Banks/FIs are also allowed to issue CDs

on floating rate basis provided the methodology of compiling the floating rate is objective,

transparent and market-based. The issuing bank/FI is free to determine the discount/coupon rate.

The interest rate on floating rate CDs would have to be reset periodically in accordance with a

pre-determined formula that indicates the spread over a transparent benchmark.

Reserve Requirements

Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio

(CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.

Transferability

Physical CDs are freely transferable by endorsement and delivery. Dematted CDs can be

transferred as per the procedure applicable to other demat securities. There is no lock-in period

for the CDs.

Loans/Buy-backs

Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own

CDs before maturity.

 XII. STOCK MARKET

The first step is to understand the stock market. A share of stock is the smallest unit of

ownership in a company. If you own a share of a company’s stock, you considered as the part

owner of the company.

You will have the right to vote on members of the board of directors and other significant

matters before the company. If the company distributes profits to shareholders, you are expected

to receive a proportionate share.

One of the exceptional features of stock ownership is the notion of limited liability. If the

company loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock

becomes insignificant. However the creditors can’t come after your personal assets. This is not

necessarily true in the case of private-held companies.

There are two types of stock:

• Common stock

• Preferred stock

The majority of the stock held by individuals is common stock.

Common Stock

Common stock corresponds to the majority of stock held by the public. It has voting

rights as well as right to share in dividends. When you hear or read about “stocks” price

swinging up or down, it always refers to “common stock”.

Preferred Stock
 Regardless of its name, preferred stock has fewer rights than common stock, but in one

important area which is dividends. Companies that issue preferred stocks generally pay

consistent dividends and preferred stock always has first call on dividends over common stock.

Investors buy preferred stock for its current income from dividends, so always find for

companies that make big profits to use preferred stock to return some of those profits via

dividends.

Liquidity

Another advantage of common stocks is that they are highly liquid for the most part.

Small and/or obscure companies may not trade regularly, except for most of the larger

companies’ trade daily creating an opportunity to buy or sell shares. In the stock markets, you

can buy or sell shares of most publicly traded companies approximately any day the markets are

open.

Stock Market Trading

Stock market trading consists of buying and selling of company stocks and as well as

stock derivatives. This type of trading usually takes place in a stock exchange, in which

companies need to be listed in order for their shares to be bought and sold. This trading market

provides with substantial earnings potential and is one among the most popular investment

options.

Working of Stock Market

Stock market trading is normally done by brokers. As a result, the first step is to seek a

reliable investment broker. Stock market trading occurs at a physical stock exchange, where
buyers and sellers of company shares meet and agree on the price at which the transactions

would materialize.

Conventional stock trading entails an investor placing an order for a specific number of

shares of a company with his/her broker present in the physical stock market. The broker

forwards the order to the floor clerk, who then attempts to locate a trader desire to sell those

shares. Bids are then exchanged. The transaction closes only after the buyer agrees on the price

quoted by the seller. This technique is also called “open outcry,” because it involves traders

crying out their bids.

Stock market trading will also takes place online. This procedure is much quicker and

less complicated than trading in the physical stock market. Online stock market trading

engrosses the real time placement of buying and selling orders for stocks. The transaction is

accomplished when the trading system is capable to match bids and a confirmation is received.

Benefits of Stock Market Trading

1. It promotes economic growth.

2. It helps companies raise capital and handle financial issues.

3. It ensures that money is invested in businesses to enhance profit potential.

4. It helps investors realize substantial profits.

Drawbacks of Stock Market Trading:

1. It proposes lower leverage than other forms of trading, such as Forex trading.

2. The short selling of stocks is hard, because stock prices do not appreciate significantly in
a short span of time. Accordingly, there is a wait period before you can book healthy profits.
 3. It is traded for limited hours in a day.

Shares

Shares are the marketable instruments issued by the companies in order to raise the

required capital. Shares are issued by each and every company which goes public. These are

very popular investments which are traded every day in the stock market and the value of the

share at the end of the day decides the value of the firm.

A company when it decides to raise capital from public prepares a memorandum, capital

required which is written down in this is called as authorized capital and then prospectus is

prepared which is verified by SEBI. SEBI permits the company to raise the capital and as a

result company offers it to the public this is known as Issued Capital. Part of the capital issued

which is subscribed by public is Subscribed Capital. If the number of subscriptions is more than

the number of shares then it is called as over-subscription and if the number of subscriptions is

less then it is called as under subscription. The amount paid by the investor is paid up Capital.

Types of Shares

• Equity Shares

• Preference Shares

Equity Shares

Equity Shares are issued and are traded everyday in the stock market. The returns on the

equity shares are not at all fixed. It depends on the amount of profits made by the company. The
board of directors decides on how much of the dividends will be given to equity share holders.

Share holders can accept to it or reject the offer during the annual general meeting.

Types of Equity shares

The Equity share is a common name, some of the types of equity shares are

• Blue Chip Shares

• Income Shares

• Growth shares

• Cyclical Shares

• Defensive shares

• Speculative shares

Blue Chip Shares

These are the shares of some of the companies which have been doing extremely well in

the past few years. These are usually well established companies. The word blue-chip shares

came into existence when IBM Company was doing very well and shares of that company were

trading at higher prices. The companies which come under this umbrella are never fixed as the

performance of some of the companies may suddenly fall down and some of the companies

which never did well start to do extremely well. Hence it can be said that list of blue-chip

companies keeps on changing each year. The companies which come under this are market

leaders and have the potential to dictate terms.

Income Shares

These are the shares of the companies which have stable operations. The companies have

a high dividend payout ratio and when the dividends paid are high it implies that the profits

saved for company is less and hence less opportunities of growth.

Growth shares

These are the shares of companies which have secured their positions in a particular

industry. These shares have less dividend payout ratio and hence high growth potential.

Cyclical Shares

There is a definite business cycle that keeps on operating and these are the shares of that

company whose performance varies with the stages of the cycle. It means to say that the prices

of the shares are affected by the variations in the economy.

Defensive shares

These are the shares of the company whose performance does not change with the

changes in the economy.

Speculative shares

These are the shares which are traded in the company which have a lot of speculations.
 Shares cannot be put into one category strictly because the characteristics of the shares

are overlapping in the sense that the blue-chip shares which are in great demand in the market

fall under blue-chip shares and speculative shares.

Further Classification

One more classification of shares is given by one of the most successful and respected

investor all around the world Peter Lynch. According to him the shares can be classified into 6

types

• Slow Growers
• Fast Growers
• Stalwarts
• Cyclical
• Turn-around
• Asset plays
Slow Growers

These are large companies which have the growth rate equal to the industry growth rate

or their growth is equal or slightly faster than the GDP (Gross Domestic Product).

Fast Growers

These are shares of newly started successful companies which have a very good growth

rate (the rate is usually 10 to 25 percent) per year.

Stalwarts
 These are shares of very large companies which have stable growth. The dividend payout

ratio is high. These companies are growing but not rapidly as in the case of fast growers.

Cyclical

These are the shares of the company which is going through the business cycle or there is

variation due to economic factors.

Turn-around

These are the shares of the companies which have started performing very well. These

companies were fairing badly in the past and all of a sudden there is a turn-around in their

performance.

Asset plays

These are the shares of the companies who are not given any recognition though they

have a large asset base.

Advantages

• Equity shares give greater returns if the company makes profits. It is in comparison to
debenture holders or preference share holders.

• There is a tremendous amount of capital appreciation if the shares are of a good

performing company.

• The equity shares are easily transferable.

• The equity shares are traded at the stock exchanges so they can be bought and sold easily.
These can be easily liquidated.

• The equity share holders have got the right to vote in the annual general meeting.
• Only the equity share holders have the right to choose the board of directors.

• Equity share holders have the right to oppose any of the decisions taken by the board of
directors. This is what happened when Mr. Ramalinga raju tried to buy Maytas Company

Disadvantages

• No doubt equity shares have attractive and better returns but in case the firm has not
performed well or is going for diversification or is investing in some venture then the profits
carried forward will be more and the dividends paid will be less.

• In worst cases if the company goes bankrupt then it is dissolved. The assets are sold and
the money obtained is distributed amongst the stake holders then only if something is left out
after it is distributed to debenture holders and preference share holders it is given to equity share
holders.

No doubt equity shares have both advantages and disadvantages but the fact is that equity

shares are the most sought financial instruments for both investment or for speculation.

Preference Shares

These are other type of shares. The preference shares are market instrument issued by the

companies to raise the capital. Preference shares have the characteristics of both equity shares

and debentures. Fixed rate of dividends are paid to the preference share holder as in case of

debentures, irrespective of the profits earned company is liable to pay interest to preference share

holders.

Types of Preference Shares:

• Cumulative & Non cumulative shares

• Redeemable & Non-redeemable
• Convertible & Non-convertible shares
• Participating and non-participating
Cumulative & Non cumulative shares

Suppose a company does not make any profits for two successive years and makes huge

profits in the third year. Then the people who have cumulative shares will get the interest of the

three years and in case of non-cumulative share holders they do not receive the interest of past

two years.

Redeemable & Non-redeemable

The redeemable shares are redeemed within the life time of the company or before the

company closes down or to say that these shares have a maturity period. In case of non-

redeemable shares they mature only upon closing down of the company.

Convertible & Non-convertible shares

Classes of shares which can be converted to other forms of shares or securities are called

as convertible shares. Whether they are converted to equity shares, debentures depend on the

rules laid down by the company. If the shares are not convertible to any other security on their

maturity period are called as non-convertible shares.

Participating and non-participating

A company goes bankrupt and is dissolved. Now its assets are sold and liabilities are paid

up. First debenture holders are paid then preference share holders and at last the equity share

holders. After paying up each one of them still there is some surplus amount left now if the

investors have participating preference shares then the surplus amount left will be distributed
equally between equity share holders and participating share holders. These are very less

preferred in the market because the investor is looking out for long term investment and good

returns.

Advantages

• These yield fixed rate of returns

• Preference is given compared to equity share holders while distributing the dividends and
once the company is dissolved.
• It’s a hybrid instrument having some of the characteristics of debentures and equity
shares
.
Disadvantages
• They do not provide the investor with any of the voting rights.
• If the company gets huge profits then they won’t get any extra bonus.

XIII. Commodity Trading

The terms “commodities” and “futures” are often used to depict commodity trading or

futures trading. It is similar to the way “stocks” and “equities” are used when investors talk

about the stock market. Commodities are the actual physical goods like gold, crude oil, corn,

soybeans, etc. Futures are contracts of commodities that are traded at a commodity exchange like

MCX. Apart from numerous regional exchanges, India has three national commodity exchanges

namely, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange

(NCDEX) and National Multi-Commodity Exchange (NMCE). Forward Markets Commission

(FMC) is the regulatory body of commodity market.

 It is one of a few investment areas where an individual with limited capital can make

extraordinary profits in a relatively short period of time. Many people have become very rich by

investing in commodity markets. Commodity trading has a bad name as being too risky for the

average individual. The fact is that commodity trading is only as risky as you want to make it.

Those who treat trading as a get-rich-quick scheme are likely to lose because they have to take

big risks. If you act carefully, treat your trading like a business and are willing to settle for a

reasonable return, the possibility of success is very high.

The course of trading commodities is also known as futures trading. Unlike other kinds

of investments, such as stocks and bonds, when you trade futures, you do not really buy anything

or own anything. You are speculating on the future direction of the price in the commodity you

are trading. This is like a bet on future price direction. The terms "buy" and "sell" merely

indicate the direction you expect future prices will move. If, for example, you were speculating

in wheat, you would buy a futures contract if you thought the price would be going up in the

future. You would sell a futures contract if you thought the price of wheat would go down. For

every trade, there is always a buyer and a seller. Neither person has to own any wheat to

participate. But he has to deposit sufficient capital with a brokerage firm to insure that he will be

able to pay the losses if his trades lose money.

Players Involved in Commodities Trading

1. Commercials
2. Large Speculators
3. Small Speculators
Commercials: The entities involved in the production, processing or merchandising of a

commodity. For example, both the wheat farmer and biscuit manufacturer are commercials.

Commercials account for most of the trading in commodity markets.

Large Speculators: A group of investors that pool their money together to reduce risk and

increase return. Like mutual funds in the stock market, large speculators have money managers

that make investment decisions for the investors as a whole.

Small Speculators: Individual commodity traders who trade on their own accounts or through a

commodity broker are called as small speculators. Both small and large speculators are known

for their ability to shake up the commodities market.

Working of Commodity Market

Commodity Market works Just like stock futures. When you buy Futures, you don't have

to pay the entire amount, just a fixed percentage of the cost. This is known as the margin. Let's

say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100

gms. 100 gms of gold may be worth Rs. 1,50,000. The margin for gold set by MCX is 3.5%. So

you only end up paying Rs 5,250.

The low margin means that you can buy futures representing a large amount of gold by

paying only a fraction of the price. So you bought the Gold Futures contract when it was Rs.

1,50,000 per 100 gms. The next day, the price of gold rose to Rs 1,60,000 per 100 gms. Rs

10,000 (Rs 1,60,000 - Rs 1,50,000) will be credited to your account. The following day, the price

dips to Rs 1,55,000. Rs 5000 will get debited from your account (Rs 1,60,000 - Rs 1,55,000).
 XIV. Trading in Foreign Exchange market

Forex trading is the immediate trade of one currency and the selling of another.

Currencies are traded through an agent or dealer and are traded in pairs. For example Euro

(EUR), US dollar (USD), British pound (GBP) or Japanese Yen (JPY).

Here you are not buying anything physical; this type of trading is confused. Think of

buying a currency as buying a share of a particular country. When you purchase say Japanese

Yen, you are in effect buying a share in the Japanese financial system, as the price of the

currency is a direct reflection of what the market thinks about the current and future health of the

Japanese economy. In common, the exchange rate of a currency versus other currencies is a

reflection of the condition of that country's financial system compared to the other countries

financial system.

Unlike other financial markets like the New York Stock Exchange, the Forex spot market

has neither a physical location nor a central exchange. The Forex market is measured an Over-

the-Counter (OTC) or Interbank market, due to the fact that the entire market is run

electronically within a network of banks continuously over a 24-hour period.

Until the late 1990's only the big guys could play this game. The first requirement was

that you could trade only if you had about ten to fifty million bucks to start with Forex. Forex

was initially intended to be used by bankers and large institutions and not by small guys.

However because of the rise of the Internet, online Forex trading firms are now able to offer

trading accounts to 'retail' traders. All you need to get started is a computer, a high-speed Internet

connection, and the information.

The Most Common Currencies Traded in the Forex Market

Symbol Country Currency Nick Name

USD United States Dollar Buck

EUR Euro member Euro Fiber

JPY Japan Yen Yen

GBP Great Britain Pound Cable

CHF Switzerland Franc Swissy

CAD Canada Dollar Loonie

AUD Australia Dollar Aussie

NZD New Zealand Dollar Kiwi

IND India Rupee Rupee

The foreign exchange market is exclusive because of the following reasons;

• Its trading volumes

• The tremendous liquidity of the market
• Its geographical dispersion
• Its long trading hours
• The variety of factors that affect exchange rates.
• The low limits of profit compared with other markets of fixed income but profits can be
high due to very great trading volumes
• The use of leverage

Benefits of Forex Trading

Online Forex trading is a speedy way to use your investment capital to its fullest. The

Forex markets present distinct advantages to the small and large trader’s alike making Forex

currency trading in many ways preferable to other markets such as stocks options or traditional

futures. Here are some of the important benefits of online Forex trading.

Forex is the largest market.

Forex trading volume is more than 1.9 billion more than 3 times larger than the equities

market and more than 5 times bigger than futures; give Forex trader’s nearly limitless liquidity

and flexibility.

No Bulls or Bears!

Because Forex trading online involves the buying of one currency while simultaneously

selling another you have an equal opportunity for profit no matter which way the currency is

headed. Another advantage is that there are only around 14 pairs of currencies to trade as

opposed to many thousands of stocks options and futures.

Forex trading online offers great leverage

You can make the most of your investment income with Forex trading online. Some

brokers offer 200:1 margin ratios in your trading accounts. Mini-FX accounts which can

naturally be opened with only $200-300 offer 0.5% margin meaning that $50 in trading capital
can control a 10,000 unit currency position. This is why people are flocking to Forex trading

online as a way to highly leverage their investments.

Forex prices are predictable.

Currency prices though unstable tend to create and follow trends allowing the officially

trained Forex trader to spot and take benefit of many entry and exit points.

Forex trading online is commission free

No commissions no exchange fees or any other hidden fees. This is a very transparent

market and you will find it very easy to research the currencies and the countries concerned.

Forex brokers make a small percentage of the bid/ask spread and that's it. No longer have any

needed to compute commissions and fees when executing a trade.

Forex trading online is instant.

The FX market is superbly speedy. Your instructions are executed filled and established

regularly within 1-2 seconds. Because this is all done electronically with no humans concerned

there is little to slow it down. Forex trading online can get you where you want to go earlier and

more helpfully than any other form of trading.

XV. Real estate as an investment option

The growth curve of Indian economy is at an all time high and contributing to the

upswing is the real estate sector in particular. Investments in Indian real estate have been
strongly taking up over other options for domestic as well as foreign investors.

The boom in the sector has been so appealing that real estate has turned out to be a

convincing investment as compared to other investment vehicles such as capital and debt

markets and bullion market. It is attracting investors by offering a possibility of stable income

yields, moderate capital appreciations, tax structuring benefits and higher security in comparison

to other investment options.

A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) and

Ernst & Young has predicted that Indian real estate industry is poised to emerge as one of the

most preferred investment destinations for global realty and investment firms in the next few

years.

The potential of India's property market has a revolutionizing effect on the overall

economy of India as it transforms the skyline of the Indian cities mobilizing investments

segments ranging from commercial, residential, retail, industrial, hospitality, healthcare etc. But

maximum growth is attributed to its growth from the booming IT sector, since an estimated 70

per cent of the new construction is for the IT sector.

High demand for commercial real estate

The commercial property market has been growing at an annual rate of approximately

30% over the past eight years across major locations in India. Moreover, there is an up shooting

demand for 200 million sq. ft over the next five years.
 Real estate industry research has also thrown light on investment opportunities in the

commercial office segment in India. The demand for office space is expected to increase

significantly in the next few years, primarily driven by the IT and ITES industry that requires an

projected office space of more than 367 million sq ft till 2012-13.

Retail sector facilitating real estate growth

Apart from the IT and ITES industry influencing the Indian real estate sector, India is

also getting into the knowledge based manufacturing industry on a large scale. Retail, one of

India's largest industries, has presently emerged as one of the most dynamic and fast paced

industries of our times with several players entering the market.

The contemporary retail sector in India which is reflected in sprawling shopping centers

and multiplex- malls is also contributing to large scale investments in the real estate sector with

major national and global players investing in developing the infrastructure and construction of

the retailing business. Over 500 shopping arcades are under construction phase and will be

operational by 2008.

Accounting for over 10 per cent of the country's GDP and around eight per cent of the

employment retailing in India is gradually inching its way toward becoming the next boom

industry. And if industry experts are to be believed, the prospects of both the sectors are

mutually dependent on each other.

Another emerging trend in real estate sector in India is investment in the hospitality or

hotel industry. The exceptional boom in inbound tourism and the IT sector has also led to an

unprecedented shortage of rooms, with hotels all over the country witnessing their highest-ever

occupancy rates.
 XVI. INVESTMENT IN GOLD.

Gold has got lot of emotional value than monetary value in India. India is the largest

consumer of gold in the world. In western countries, you can find most of their gold in their

central banks. But in India, we use gold mainly as jewels. If you look at gold in a business sense,

you will understand that gold is one of the all time best investment tool. My dear readers, today I

would like to discuss on investments in gold and its potential.

I don¡¦t think that I need to give you the definition of gold, because everyone is familiar

with gold and in India almost everyone use gold in their daily life. Gold is one of the safest and

low risk investment tools in the world and obviously in India also. Gold can be readily bought or

sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most

other investments, including stocks of the world¡¦s largest corporations. Gold proved to be the

most effective means of raising cash during the 1987 stock market crash, and again during the

1997/98 Asian debt crisis. So holding a portion of portfolio in gold can be invaluable in

moments when cash is essential, whether for margin calls or other needs.

Recent independent studies have revealed that traditional diversifiers often fall during

times of market stress or instability. On these occasions, most asset classes (including traditional

diversifiers such as bonds and alternative assets) all move together in the same direction. There

is no ¡§cushioning¡¨ effect of a diversified portfolio ¡X leaving investors disappointed. However,

a small allocation of gold has been proven to significantly improve the consistency of portfolio

performance, during both stable and unstable financial periods. Greater consistency of

performance leads to a desirable outcome ¡X an investor whose expectations are met.

Indian Gold Market Current Scenario:

  Size of the Gold Economy: more than Rs. 30,000 crores

 Number of gold jewelry manufacturing units: 1,00,000

 Number of people employed: 5,00,000

 Gems & Jewellery constitute 25% of India¡¦s exports about 10% of our import bill

constitute gold import.

 Number of banks allowed importing gold: 15 (While recently this has been liberalized,

detailed notification is awaited)

 Official estimates of the stock of gold in India: 9,000 tons

 Unofficial estimates of the stock of gold in India: 12,000 ¡V 14,000 tons

 Gold held by the Reserve Bank of India: 358 tons

 Gold production in India: 2 tons per annum.

Demand for gold in the Indian Market:

India has the highest demand for gold in the world and more than 90% of this gold is

acquired in the form of jewellery. Following are the factors influencing the demand for gold. The

movement of gold prices is one of the important variables determining demand for gold. The

increase in the irrigation, technological change in agriculture (through mechanization and high

yielding varieties), have generated large marketable surplus and a highly skewed rural income

distribution is another factors contributing to additional demand for gold.

Black money originating in the services sector, like real estate and public sector, has

contributed to gold as store of value. Hence income generated in these service sectors can be
treated as a determining variable. Since bank deposits, unit trust of India, Mutual funds, small

savings, etc are alternative avenues for investing savings, the weighted return on these

alternative assets can be considered as other influencing factors.

Demand for gold also depends upon prices of other commodities. When there is an

increase in general price level, it has two effects: first it reduces the purchasing power available

for acquisition of jewellery and secondly, it reduces the real return on gold. It has depressing

effect on the component of demand in both ways.

Inflation redistributes incomes in favour of non-wage income earners, leading to more

skewed income distribution. With incremental income of non-wage earners, the demand for gold

as a store of value can be expected to rise.

Supply of Gold

The main economic effects that arise from the changes in the supply of gold can be seen

against the quantum of gold that is already in existence in the economy. The supply of gold is

not up to the requirements as the production of gold is also coming down and demand for gold is

going up very sharply.

Gold as an Investment Option:

Gold as an investment tool always gives good returns, flexibility, safety and liquidity to

the investors. Therefore as a financial consultant my advice to you all is, kindly allocate a

portion of your portfolio for gold investments. Practice the habit of buying at least one gram of

gold every month.

XVII. The Emerging Investment Avenues

 According to a study undertaken jointly by Merrill Lynch, Cap Gemini, and Ernst &

Young, High Net worth Individuals [HNIs] or wealthy investors are proactive in portfolio

management, risk management, consolidation financial assets and use of diversification

strategies as actively as large institutions. HNIs are proactive in identifying new investment

options and take inputs from professional advisors in volatile market conditions.

HNIs are dynamic in modifying their asset allocation and were among the first investors

to move from equities to fixed income during 2001-2002 period of downturn in equity markets.

They shifted back to equities when they identified favorable market trends.

Investment products and avenues

• Managed products: Managed product service is the most popular investment strategy

adopted by wealthy investors globally

• Real Estate: Wealthy investors have found this asset class very attractive and have

invested directly in real estate and indirectly through real estate investment trusts.

• Art and passion: Wealthy investors also have their investment in art, wine, antiques, and

collectibles

• Precious Metals: Gold and other precious metals are attractive investment options to

balance the asset allocation

• Commodities: Wealthy investors have turned to commodities to offset the lower returns

from fixed income securities.

• Alternative investments: Hedge funds and Private equity investments such as venture

funds are becoming increasingly popular with wealthy investors to reduce the investment risks
related to stock market fluctuations. This is because these instruments have low correlation with

equity asset class performance. Investment in non correlated assets, such as commodities helps

to improve diversification of the portfolio amidst volatile market conditions.

XVIII. Hedge Funds

Over the last 15 years, hedge funds have become increasingly popular with high net

worth individuals, as well as institutional investors. The number of hedge funds has risen by

about 20% per year and the rate of growth in hedge fund assets has been even more rapid.

A hedge fund is a private investment fund, charging a performance fee and is open to

only a limited number of investors. These funds are like mutual funds, which collect money from

investors and use the proceeds to buy stocks and bonds. They can invest on almost any type of

opportunity; in any market where in good returns are expected with low risk levels.

Protecting capital and producing good return in all kinds of market conditions, while

attempting to minimize the risk, is the main objective of most of the hedge funds.

Hedge funds have grown in size and have a great influence on public securities and

private investment markets. Hedge funds are not currently subject to any direct regulation, unlike

mutual funds, pension funds and insurance companies. They are limited only by the terms of

contacts governing the particular fund.

Hedge funds may be either long or short assets or may enter into futures, swaps, and

other derivative contracts. In this way, hedge funds are able to follow complex strategies,

intending to profit from market volatility or from falling market.

Characteristics of Hedge Funds:

• A hedge fund generally uses several kinds of financial instruments to reduce risk and add

more returns. It tries to reduce the correlation with equity and fixed income markets. Many

hedge funds use short selling, leverage, derivatives such as puts, calls, options, futures, etc. to

accomplish their goals.

• The nature of hedge funds differs a lot in terms of investment returns, instability and risk

symptoms. Normally, hedge fund strategies intend to hedge against Markey fluctuations.

However, this does not mean that all hedge funds can give great advantage in unfavorable

market conditions.

• The hedge fund manager’s compensation is linked to his overall performance. This

stimulates the fund managers to deliver their best. At times, hedge fund managers may invest

their own money in the funds that they manage.

• Most of the investors in hedge funds such as pension funds, endowments, insurance

companies, private banks, and high net worth individuals invest in hedge funds to minimize their

overall portfolio risk and enhance returns.

• Many hedge funds can produce uncorrelated returns i.e. returns that are not dependant on

market fluctuations. Such abnormal returns from hedge funds are a great advantage in difficult

market conditions.

• Highly skilled, specialized and experienced fund managers manage hedge funds. They

are disciplined and diligent and believe in doing everything within there is of competency and

competitive advantage.
Hedge Fund Risks:

 Lack of transparency

 Limited liquidity

 Difficulty accessing quality hedge funds

 Unreliable or incomplete return data

 Valuation risk

 Asymmetrical nature of Hedge fund returns distributions [SKEW]

 Counterparty risk [Leverage]

XIX. Investment in Art

Today, we find that an increasing number of individuals are looking at alternative

investments, which provide them with a diversification away from a particular asset class.

People are willing to invest and looking for areas other than the stock market for investing.

Investing in the vintage wine, coins, stamps and Art, is now an indulgence which gives them an

opportunity to cash in on their hobbies, without having the level of expertise that is required for

other direct investments.

Art is being incorporated into the investor's overall asset allocation decision. The art

scene around the world is growing significantly. With more and more investors looking at art as

an alternative asset class and a store of a long term value, average annual art valuations have

outpaced average annual stock market valuations by more than three times since 2000.
 Now this market is much stronger. In terms of returns one can see the market price has

gone up four to five times, in some cases ten times in the past four years. With a sharp rise in the

value of art and a comparatively disappointing performance in the stock markets and the real

estate, individuals with money are now tapping Art as an alternate investment avenue.

This is the reason why Citigroup and others are buying paintings as an investment for

their very important private-banking clients. Wealthy clients who switch to art collection, as a

way of diversifying investments, can find it an unexpectedly pleasurable experience. Unlike

incase of stocks and shares, investors can literally admire their expensive investment.

Risk

"Art" is not everyone's cup of tea. It varies to great extent depending on public tastes and

other factors. Hence, they are considered to be high risk, speculative investments. Also art

cannot be resold quickly for a profit. In other words, it is not a very liquid investment to earn

reasonable amount of profit; one might have to stay invested very long period of time. One

should be careful while making investment in this asset class. Art is illiquid; it needs

maintenance, storage, security, and it doesn't give dividends, bonuses or income.

XX. Private equity investments

Is the most important funding source in the entrepreneurial marketplace? Private equity

investments contribute to the funding of around 25 times the number of businesses the venture

capitalists fund each year.

 Private equity investments are usually derived from a high net-worth individual who

represents an essential source of funding for early stage, high-risk ventures. It is estimated that

one-seventh of the 300,000 + start/early growth firms in the US receive funding from angel

investors. This translates into over $20 billion of investment in approximately 50,000 deals each

year. This investment group exceeds venture capital sources which are estimated at $5 - $7

billion spread over 1,000 venture capital investments each year.

A typical profile of a private equity investor:

• Is someone that prefers to invest within one day of travel?

• Is very well educated
• Tends to invest collectively within a group of other private equity investors
• Usually invests within the dollar range of $10,000 - $500,000, averaging $230,000
• Makes one investment every two years

Private equity investors have proven to be the single most important players in the

entrepreneurial marketplace. Private capital investors fund thirty to forty times as many

entrepreneurial companies as the entire venture capital industry and estimates put the total

amount between $20 - $60 billion annually.