AMITY GLOBAL BUSINESS SCHOOL MUMBAI

SUMMER INTERNSHIP REPORT ON

“A STUDY ON DIFFERENT TYPES OF INVESTMENT

AVENUES AND ROLE OF FINANCIAL PLANNING IN
WEALTH CREATION”

Submitted by:

PADMANABHAN PRATIK MADHU

MBA-SEM 2

A30201917005

UNDER THE GUIDANCE OF:

PROF. MEGHA HEMDEV,CFA

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 DECLARATION

I hereby declare that the project report entitled “A STUDY ON DIFFERENT

TYPES OF INVESTMENT AVENUES AND ROLE OF FINANCIAL
PLANNING IN WEALTH CREATION” under the guidance of Prof.
MEGHA HEMDEV, CFA Submitted in partial fulfillment of the
requirements for the award of the degree of Master of Business
Administration to AMITY GLOBAL BUSINESS SCHOOL, is my original
work – research study and not submitted for the award of any other
degree/diploma/fellowship or other similar titles or prizes to any other
institution/organization or university by any other person.

Roll no – 005

Date: -

Name: - Pratik Madhu Padmanabhan

Sign: -

Place: - AGBS, MUMBAI

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 CERTIFICATE

This is to certify that the work incorporated in the summer project

“DIFFERENT TYPES OF INVESTMENT AVENUES AND
ROLE OF FINANCIAL PLANNING IN WEALTH
CREATION” Submitted by Padmanabhan Pratik Madhu was
carried out by candidate Under my Supervision. Materials that has
been obtained from other sources has been duly acknowledge in the
report.

Name of the Guide: Prof. MEGHA HEMDEV,CFA

Signature:

Date:

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 ACKNOWLEDGEMENT

The only place where success comes before work is in the dictionary.

It is great exposure for me using my theoretical knowledge which I have learnt till
2nd semester of Master of Business Administration (M.B.A) in my project work
which I have done at Iarista Artha Solutions Pvt. Ltd. It is great pleasure to use
knowledge in practical way in our tenure of training.

I like to first heartily thanks to AMITY GLOBAL BUSINESS SCHOOL for

including project in our M.B.A. syllabus. It is helpful to learn real situation of
industry and helpful for increasing in our practical knowledge.

I thankful to Dr. Pankaj Shukla, Principal of Amity Global Business School

for giving me chance to do my project work. I am very thankful to Mr. Pratik
Sepuri, Managing Director of Iarista Artha Solutions Pvt. Ltd And Mr Jay Mehta
As without their help and guidance this project is not possible, They shared their
good knowledge and guided in my project work.

I am thankful to my project guide Mr.Pratik for guiding during my project tenure.

As he helps me whenever I need and spare his valuable time. Without this project is
not possible. I am thankful to my parents and my friends as they always motivate me
and help me directly or indirectly in my project work.

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 TABLE OF CONTENTS

Sr. No. Subject Page No.

1 Executive summary 7

2 Research Methodology 8

3 Literature Review 10

4 Introduction to investment 12

4a)Types of investment 12

4b)Different investment avenues 19

a)Shares 19

b)Bonds 29

c)Mutual funds 32

i)SIP vs Lump sum 40

d)Bank deposits 42

i)Fixed Deposits 42

c)Real estate 46

i)Reits funds in india 48

f)Different types of insurances in india:Ulips 49

i)Mutual funds vs Ulips 53

4c)Tax on different investments 56

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5 5a)What is Financial planning 57

5b)Who should seek for financial planning 58

5c)What financial planning gives you 59

5d)Six steps of financial planning 61

5e)Reasons for financial planning 68

5f)Case Study 69

6 Conclusion 74

7 Bibliography 75

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 EXECUTIVE SUMMARY

This project has been a great learning experience for me; at the same time, it gave me
enough scope to implement my analytical ability. This project as a whole can be divided
into two parts:

The first part gives an insight about the mutual funds and its various aspects. It is purely
based on whatever I learned at Iarista artha solutioins limited. One can have a brief
knowledge about mutual funds and all its basics through the project. Other than that the real
servings come when one moves ahead. Some of the most interesting questions regarding
mutual funds have been covered. Some of them are: Why has it become one of the largest
financial intermediaries? How investors do chose between funds? Most popular stocks
among fund managers, most lucrative sectors for fund managers, a special report on
Systematic Investment Plan, does fund performance persists and the topping of all the
servings in the form of portfolio analysis tool and its application.

All the topics have been covered in a very systematic way. The language has been kept
simple so that even a layman could understand. All the data have been well analyzed with
the help of charts and graphs.

The second part consists of data and their analysis, collected through a survey done on 60
people. It covers the topic´ need of financial advisors for mutual fund investors´. The data
collected has been well organized and presented. Hope the research findings and
conclusions will be of use. It has also covered why people don’t want to go for financial
advisors? The advisors can take further steps to approach more and more people and
indulge them for taking their advices.

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 RESEARCH METHODOLOGY

OBJECTIVE OF RESEARCH

 To study different types of investment avenues and their characteristics.

 To Understand risk and return criteria of different types of investment
avenues
 To study role of financial planning in Wealth Creation

DATA SOURCES

 Secondary data has been used to collect data.

 The secondary data has been collected through various journals and websites.

LIMITATION

 Time limitation
 Research has been done through secondary data
 Some of the data need update very frequently
 Possibility of error in data collection
 Possibility of error in analysis of data due change in market quite
frequently.

Research design
Secondary Research design has been used in order to obtain data in order to make this
report so that wide aspect of the market can be shown in the report

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 LITERATURE REVIEW

Perception of Investors towards the Investment Pattern on Different Investment Avenues -

A Review

In India, usually all investment avenues professed risky by the investors. The main features
of investments are security of principal amount, liquidity, income stability, approval and
easy transferability. Investment avenues are available such as shares, bank, companies, gold
and silver, real estate, life insurance, postal savings and so on. The required level of returns
and the risk tolerance decided the choice of the investor. The investment may be differ
choices from national savings certificates, provident fund, mutual fund schemes, insurance
schemes, chit funds, bank fixed deposits, and company fixed deposits, company shares,
bonds /debentures, government securities, postal savings schemes and real estate. It would
be concluded that in this fast affecting world, we save get extra money. Added risk directs
to more profit. For the example total liquidity, income stability a variety as shares, bank
companies, gold and silver, real estate, life insurance postal etc., but, most of the people
preferred bank deposit by the cause of more respondents invested for purchasing home and
long-term growth but, most of the investors could not aware to investing their money in
mutual funds and shares. More of debate and confusions in the investment pattern,
investment avenues. Therefore, in this paper, the researcher wants to check the earlier
research work based on investors among the investment avenues to get an idea about the
investment pattern.
INTRODUCTION

A financial market is the vertebrae of an economic scheme. It helps the allotment of share
capital crosswise in the productive sectors of the economy. This allocation of capital helps
to keep up strong weather for savings and investment. The financial system has more
dynamic than the real system as it has always reacted to the needs of the economy to help to
complete its goals. In the present financial system, there are so many investment avenues to
choose, today in financial market it has involved for anyone to decide about these avenues.
Some of these investment avenues offer attractive returns but with high risks, some propose
lower returns with very low risks. An overall analysis of these investment avenues with risk
and return trade is present in this article. An investment is can describe as perfect
investment, if it satisfies all the needs of all investors. Therefore, the starting point of
searching of any perfect investment must look at through the investor needs. If all those
needs are meets by the investment, then that investment termed the perfect investment. The

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most investors and advisors use a big deal of time thoughtful qualities of the thousands of
investments offered in India.

PritiMane [1] discussed the customer perception with regard to the mutual funds that the
schemes they preferred, the plans they are opting, the reasons behind such selections. This
research dealt with different investment options, which people prefer along with and apart
from mutual funds, like postal saving schemes, recurring deposits, bonds, and shares.
Conclude that mutual fund linked with share market and investors are not taking advice
from authority advisor to lead them for their investment in mutual fund so it creates the
difficulty to select the mutual fund plan favorable for them.

Awais et al. [2] explored that the factors which influence the decision-making process of
investors. According to their research, the decisions of the investors depend upon the
degree of the risk factors. Finally, they found that the increased level of knowledge about
financial information and the increased ability of analyzing that information, investor could
improve the capacity jump into risky investments for earning high returns by managing
investment efficiently

Shukla [3] attempted this research paper, about investor’s preference towards investment
avenues and the study focused on the salaried person only. The author concluded that
majority of the respondents invested their money based on education background and they
invested in purchasing home and long-term investment. Respondents have the criteria of
investment as safety and low risk.

Amudhan [4] analyzed the performance investment behavior concerned with choices
about purchases of small amounts of securities, deposits, mutual fund, insurance, Chit
Funds. Researcher confirmed that there looks to a positive degree of correlation between
the factors that behavioral finance theory and previous empirical evidence identified the
average investor. The result described investment offer to a person’s money to gain future
income in the form of interest, dividends, rent, premium, pension profit or approval of the
value of their standard capital.

Vaidehi et al. [5] argued that because of different investment strategies as motives and
styles by different needs. It studies the need for better accepting of behavioral pattern the
paper investors, the behavior pattern would aid the investment advisors to envision how the
investors respond to market schedule, and would allow them to developed suitable
allotment approaches for their customers. Among the selected factors the investment
motives, attained the long-term gain, which established to an essential factor chased by
dividend and growth prospects and balancing of short-term and long-term gain. Educational
qualification, occupation, age, income and amount of equity investments choose the
investing styles of the investors notably.

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What is an 'Investment?'

The term "investment" can refer to any mechanism used for generating future income. In
the financial sense, this includes the purchase of bonds, stocks or real estate property.
Additionally, a constructed building or other facility used to produce goods can be seen as
an investment. The production of goods required to produce other goods may also be seen
as investing.

Taking an action in the hopes of raising future revenue can also be considered an
investment. For example, when choosing to pursue additional education, the goal is often to
increase knowledge and improve skills in the hopes of ultimately producing more income.

In finance, the benefit from investment is called a return. The return may consist of
capital gains or investment income, including dividends, interest, rental income etc., or a
combination of the two. The projected economic return is the appropriately discounted
value of the future returns. The historic return comprises the actual capital gain (or loss) or
income (or both) over a period of time.

Investors generally expect higher returns from riskier investments. Financial a3ssets range
from low-risk, low-return investments, such as high-grade government bonds, to those with
higher risk and higher expected commensurate reward, such as emerging markets stock
investments.

Investors, particularly novices, are often advised to adopt a particular investment strategy
and diversify their portfolio. Diversification has the statistical effect of reducing overall
risk.

The three main types of investments are:

1. Ownership
2. Lending
3. Cash equivalents.
4. Others

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1. Ownership Investments
Ownership investments are what comes to mind for most people when the word
"investment" is batted around. They are the most volatile and profitable class of investment.
The following are examples of ownership investments:

Stocks: A stock is literally a certificate that says you own a portion of a company. More
broadly speaking, all traded securities, from futures to currency swaps, are ownership
investments, even though all you may own is a contract. When you buy one of these
investments, you have a right to a portion of a company's value or a right to carry out a
certain action (as in a futures contract).

Your expectation of profit is realized (or not) by how the market values the asset you own
the rights to. If you own shares in Apple and the company posts a record profit, other
investors are going to want Apple shares too. Their demand for shares drives up the price,
increasing your profit if you choose to sell the shares.

Business: The money put into starting and running a business is an investment.
Entrepreneurship is one of the hardest investments to make because it requires more than
just money. Consequently, it is also an ownership investment with extremely large potential
returns. By creating a product or service and selling it to people who want it, entrepreneurs
can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's
richest men, is a prime example.

Real Estate: Houses, apartments or other dwellings that you buy to rent out or repair and
resell are investments. However, the house you live in is a different matter because it is
filling a basic need. It fills a need for shelter and, although it may appreciate over time,
shouldn't be purchased with an expectation of profit. The mortgage meltdown of 2008 and
the underwater mortgages it produced are a good illustration of the dangers in considering
your primary residence an investment.

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Precious objects and collectibles: Gold, Da Vinci paintings and a signed LeBron James
jersey can all be considered an ownership investment - provided that these are objects that
are bought with the intention of reselling them for a profit. Precious metals and collectibles
are not necessarily a good investment for a number of reasons, but they can be classified as
an investment nonetheless. Like a house, they have a risk of physical depreciation (damage)
and require upkeep and storage costs that cut into eventual profits.

2. Lending Investments

Lending investments allow you to be the bank. They tend to be lower risk than ownership
investments and return less as a result. A bond issued by a company will pay a set amount
over a certain period, while during the same period the stock of a company can double or
triple in value, paying far more than a bond - or it can lose heavily and go bankrupt, in
which case bondholders usually still get their money and the stockholder often gets
nothing.

Your savings account: Even if you have nothing but a regular savings account, you can
call yourself an investor. You are essentially lending money to the bank, which it will dole
out in the form of loans. The return is currently quite low, but the risk is also next to nil
because of the Federal Deposit Insurance Corporation (FDIC).

Bonds: Bond is a catch-all category for a wide variety of investments from Treasuries and
international debt issues to corporate junk bonds and credit default swaps (CDS). The risks
and returns vary widely between the different types of bonds, but overall, lending
investments pose a lower risk and provide a lower return than ownership investments.

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3. Cash Equivalents

These are investments that are "as good as cash," which means they're easy to convert back
into cash.

Money market funds: With money market funds, the return is very small, 1% to 2%, and
the risks are also small. Although money market funds have "broken the buck" in recent
memory, it is rare enough to be considered a black swan event. Money market funds are
also more liquid than other investments, meaning you can write checks out of money
market accounts just as you would with a checking account.

Investing in Your Education

Your education is often called an investment and many times, it does help you earn a higher
income. A case could be made for you "selling" your education like a small business
service in return for income like an ownership investment.

The reason it's not technically an investment is a practical one. For the sake of clarity, we
need to avoid the absurdity of having everything be classified as an investment. We'd be
"investing" every time we bought an item that could potentially make us more productive,
such as investing in a stress ball to squeeze or a cup of coffee to wake you up. It is the
attempt to stretch the meaning of investment to purchases, rather than education, which has
obscured the meaning.

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Reasons Why You Need To Understand Investing

 Basic investments aren't difficult to understand and they are all most people
need."
Many people are intimidated by the thought of investing and that's understandable.
However, you'll do just fine if you put together a small, diversified portfolio comprised of
low-cost mutual funds and/or ETFs, make regular contributions and leave it alone.

This strategy is called passive investing or couch potato investing. Developed by long-time
personal finance columnist Scott Burns, it means investing in just two low-cost index
funds: one that tracks the S&P 500 and another that tracks a bond index (such as
the Vanguard Inflation-Protected Securities Fund.)

The percentage of your money that you invest in stocks versus bonds depends on your risk
tolerance and time horizon. The higher your risk tolerance and/or the longer your time
horizon, the more you invest in stocks. Stocks are more volatile, but have historically
brought higher returns. The lower your risk tolerance and/or the shorter your time horizon,
the more you tip the scales toward bonds. Bonds have traditionally been less volatile, but
yielded lower returns.

Once you've chosen your two index funds, all you have to do is add to your nest
egg regularly and rebalance your portfolio annually.

Not only is this strategy easy, it also has an above average track record, and the
diversification between stocks and bonds helps keep the portfolio from performing too
poorly during market downturns. This strategy also minimizes the investment fees that eat
away at many investors' returns.

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  There are plenty of people who will take your money if you don't understand
what they're doing with it.
There are many excellent financial advisors out there, but if you don't know the first thing
about investing, you won't know how to separate the good ones from the mediocre ones and
the downright unethical ones. At a bare minimum, you should know how to choose a
professional whom you can trust to act in your best interest.

For example, according to Jemstep.com, a free online investment guidance and

management service, you should know that Registered Investment Advisors are legally
required to put the client's interests first, but brokers are not. You should also understand
how your advisor is compensated and how they select recommended assets for their
clients.

Paying Your Investment Advisor - Fees Or Commissions?

A problem you could encounter with a broker is excessive trading in your account, since
each buy and sell order generates a commission. This practice isn't in your best interest,
since it doesn't take your investment goals into account and results in you paying excessive
trading fees. Churning can leave you with less money than you started out with.

Another problem with brokers is that they sometimes push investments on clients that are
in the brokerage firm's best interest because the firm holds a position in that investment.
Brokerage firms can also charge a number of fees that will eat into your investment returns.
These fees include inactivity fees, transfer fees, account maintenance fees and minimum
equity requirement fees. As if that weren't enough, full-service brokers are expensive. Their
commissions are several times what you'll pay to buy and sell stocks on your own through
a discount brokerage.

Investment advisors, on the other hand, are not only required to act in your best interest, but
they're also more likely to make buy and sell recommendations that are objective because
they aren't paid for every transaction you agree to. These advisors also don't have incentives
to push you into certain investments, regardless of whether they are your best option;
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however, their expertise doesn't come cheap. Investment advisors charge an hourly fee for
their services.

 You can save a bundle by managing your investments yourself."

When you manage your investments yourself, you save money in several ways:

1. You don't pay expensive commissions to a full-service broker.

2. You aren't pressured into expensive investments that benefit your broker
more than they benefit you.
3. You don't pay an expensive hourly rate to an investment advisor.

If you adopt the passive strategy described above, your only fees will be the expense
ratios charged by the mutual funds and ETFs you invest in. Since these fees are ongoing,
you'll want to keep them as low as possible. That isn't hard to do when major players like
Vanguard, Fidelity and iShares offer a variety of funds with expense ratios close to zero.

That being said, you can still rack up plenty of investment fees on your own if you aren't
careful. When choosing a discount brokerage and selecting investments, make sure to learn
what fees you'll be responsible for. Look for a brokerage that lets you buy and sell a broad
selection of ETFs and mutual funds without paying a commission. Also, look for a
brokerage with low commissions if you plan to invest in individual stocks. Finally, you'll
want to seek out ETFs and index funds with low expense ratios.

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Different types of investment avenues
The types of investments avenues we will know about briefly will be:

 Shares
 Bonds
 Mutual fund
 Fixed deposits.
 Public provident funds
 Ulip’s
 Real estate

1. Shares: A holder of stock (a shareholder) has a claim to a part of the

corporation's assets and earnings. In other words, a shareholder is an owner of a
company. Ownership is determined by the number of shares a person owns relative
to the number of outstanding shares. For example, if a company has 1,000 shares
of stock outstanding and one person owns 100 shares, that person would own and
have claim to 10% of the company's assets. Stocks are the foundation of nearly
every portfolio. Historically, they have outperformed most other investments over
the long run. A share is the interest of a shareholder in a definite portion of
the capital. It expresses a proprietary relationship between the company
and the shareholder. A shareholder is the proportionate owner of the
company.

A share is the interest of a shareholder in a definite portion of the capital. It

expresses a proprietary relationship between the company and the shareholder. A
shareholder is the proportionate owner of the company but he does not own the
company’s assets which belong to the company as a separate legal entity. Section
2(46) defines a share as, “A share in the share capital of a company and includes
stock except where a distinction between stock and shares is expressed or implied”.
An exhaustive definition of share has been given by Farwell J. in Borland’s trustee
v. steel bros. in the following words:

“A share is the interest of a shareholder in the company, measured by a sum of

money, for the purpose of liability in the first place, and of interest the second, but

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 also consisting of a series of mutual covenants entered into by all the shareholder
inter se in accordance with the companies act”. Thus a share

i) Measures the right of a shareholder to receive a certain proportion of the

profits of the company while it is a going concern and to contribute to the assets of
the company when it is being wound up; and

ii) Forms the basis of the mutual covenants contained in the articles binding the
shareholders inter se.

A share is a personal estate capable of being transferred in the manner laid

down in the articles of association. It is a movable property which can either be
mortgaged or pledged. Share is included in the definition of ‘good’ under the
provisions of the sale of goods act, 1930. Every share issued by a company under its
common seal specified the shares held by any member. The share certificate is the
prima facie evidence of the title of the member to such shares. The share certificate
is not a negotiable instrument.

Types of shares:
According to section 86 of the companies act, a company can issue only two types of
shares:

(a) Preference shares; and

(b) Equity shares.

Preference shares:

A preference share must satisfy the following two conditions:

I) It shall carry a preferential right as to the payment of dividend at a fixed rate; and

II) In the event of winding up, there must be a preferential right to the repayment of the
paid up capital.

These are two dominant characteristics of preference shares. So preference share may or
may not carry such other right as:

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(a) A preferential right to any arrears of dividend;

(b) A right to share in surplus profits by way of additional dividend;

(c) A right to be paid a fixed premium specified in the memorandum; and

(d) A right to share in surplus assets in the event of a winding up, after all kinds of capital
have been repaid.

 Cumulative and non-cumulative preference shares:

With regard to the payment of dividend, preference shares may be cumulative or non-
cumulative. In the case of cumulative preference shares, if the profits of the company in
any years are not sufficient to pay the fixed dividend, on the preference shares the
deficiency must be made up out of the profits of subsequent years. The accumulated arrears
of dividend must be paid before anything is paid out of the profits to the holders of any
other class of shares. In the case of non-cumulative preference shares, the dividend is only
payable out of the net profits of each year. If there are no profits in any year, the arrears of
dividend cannot be claimed in the subsequent years. Preference shares are presumed to be
cumulative unless expressly described as non-cumulative. Any ambiguous language in the
articles will not be enough to make them non-cumulative.

 Participating and Non-participating Preference Share:

Participating preference shares are those shares which are entitled, in addition to preference
dividend at a fixed rate, to participate in the balance of profits with the equity shareholders
after they get a fixed rate of dividend on their shares. The participating preference shares
may also have the right to share in the surplus assets of the company on its winding up.
Such a right must be expressly provided in the memorandum or the articles of association
of the company.

Non-participating preference shares are entitled only to a fixed rate of dividend and do not
share in the surplus profits. The preference shares are presumed to be non-participating,
unless expressly provided in the memorandum or the articles or the terms of issue. A mere
fact that the articles of a company confer on the preference shareholders a right to
participate with the equity shareholders in the surplus profits does not necessarily mean that
the preference shareholders are entitled to participate in the surplus assets also.

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  Redeemable preference shares:
According to section 80, a company limited by shares, if so authorized by its articles, may
issue redeemable preference shares. Such shares may be redeemed either after a fixed
period or earlier at the option of the company. In the case of irredeemable shares, the
capital is to be returned on the winding up of the company. The redeemable preference
shares can be redeemed, only subject to the following conditions:

i) Such shares must be fully paid

ii) Such shares shall be redeemed out of distributable profits or out of the proceeds of a
fresh issue made for the purposes of redemption.

iii) Any premium to be paid on redemption of such shares must be paid out of profits or out
of the share premium account.

iv) Where shares are so redeemed out of profits, a sum equal to the nominal value of the
shares redeemed must be transferred to the ‘capital redemption reserve account’. This
amount shall be treated as capital of the company and the provisions as regards reduction of
capital shall apply. The amount credited to the account cannot be paid out to the
shareholders as dividend. But it can be used to pay up unissued shares to be issued as fully
paid bonus shares.

Redemption of preference shares is not to be taken as reduction of the company’s

authorized share capital. Shares already issued cannot be converted into redeemable
preference shares.

Where a company fails to comply with these provisions, the company and every officer of
the company who is in default shall be punishable with fine which may extend to Rs. 1,000.

Redemption of redeemable preference shares shall be notified to the registrar within one
month of redemption. Where redeemable preference shares have been issued, the balance
sheet must contain a statement specifying what part of the capital consists of such shares
and the earliest date on which the company has power to redeem the shares.

Equity shares:
All shares which are not preference shares are equity shares. Equity shareholders have the
residual rights of the company. They may get higher dividend than preference shareholders
if the company is prosperous or get nothing if the business of the company flops. In the
winding up, the equity shares are entitled to the entire surplus assets remaining after the
payment of the liabilities and the capital of the company; unless the articles confer right on
the preference shares a right to participate in the distribution of surplus assets.
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Demat account : Have you seen a bank statement? Demat account is just similar and
is an account to hold your shares in the electronic form. Each time you sell shares they
are debited from your account and each time you buy shares they are credited to your
demat account. If you sell shares they are debited from your demat account and the
bank account is credited. Each time you buy shares, you have to pay and the bank
account is debited and the demat account is credited with the shares bought.

ADVANTAGES AND DISADVANTAGES OF EQUITY SHARE

INVESTMENT:

DIVIDEND
An investor is entitled to receive a dividend from the company. It is one of the two main
sources of return on his investment.

CAPITAL GAIN
The other source of return on investment apart from dividend is the capital gains. Gains
which arise due to rise in market price of the share.

LIMITED LIABILITY
Liability of shareholder or investor is limited to the extent of the investment made. If the
company goes into losses, the share of loss over and above the capital investment would
not be borne by the investor.

EXERCISE CONTROL
By investing in the company, the shareholder gets ownership in the company and thereby
he can exercise control. In official terms, he gets voting rights in the company.

CLAIM OVER ASSETS AND INCOME

An investor of equity share is the owner of the company and so is the owner of the assets of
that company. He enjoys a share of the incomes of the company. He will receive some part

22
of that income in cash in the form of dividend and remaining capital is reinvested in the
company.

RIGHTS SHARES
Whenever companies require further capital for expansion etc, they tend to issue ‘rights
shares’. By issuing such shares, ownership and control of existing shareholders are
preserved and the investor receives investment priority over other general investors.

BONUS SHARES
At times, companies decide to issue bonus shares to its shareholders. It is also a type of
dividend. Bonus shares are free shares given to existing shareholders and many times they
are given in lieu of dividends.

LIQUIDITY
The shares of the company which is listed on stock exchanges have the benefit of any time
liquidity. The shares can very easily transfer ownership

STOCK SPLIT
Stock split means splitting a share into parts. How should an investor be benefited by this?
By splitting of share, the per-share price reduces in the market which eventually increases
the readability of share. At the end, stock split results in higher volumes with a number of
investors leading to high liquidity of the share.

DISADVANTAGES

DIVIDEND
The dividend which a shareholder receives is neither fixed nor controllable by him. The
management of the company decides how much dividend should be given.

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HIGH RISK
Equity share investment is a risky share compared to any other investment like debts etc.
The money is invested based on the faith an investor has in the company. There is no
collateral security attached with it

FLUCTUATION IN MARKET PRICE

The market price of any equity share has a wide variation. It is always very difficult to book
profits from the market. On the contrary, there are equal chances of losses.

LIMITED CONTROL
An equity investor is a small investor in the company, therefore, it is hardly possible to
impact the decision of the company using the voting rights.

RESIDUAL CLAIM
An equity shareholder has a residual claim over both the assets and the income. Income
which is available to equity shareholders is after the payment of all other stakeholders’
viz. debenture holders etc

ADVANTAGES AND DISADVANTAGES OF PREFERENCE SHARE

INVESTMENT

Advantages:

1. Appeal to Cautious Investors:

Preference shares can be easily sold to investors who prefer reasonable safety of their

capital and want a regular and fixed return on it.

24
2. No Obligation for Dividends:
A company is not bound to pay dividend on preference shares if its profits in a particular

year are insufficient. It can postpone the dividend in case of cumulative preference shares

also. No fixed burden is created on its finances.

3. No Interference:
Generally, preference shares do not carry voting rights. Therefore, a company can raise

capital without dilution of control. Equity shareholders retain exclusive control over the

company.

4. Trading on Equity:
The rate of dividend on preference shares is fixed. Therefore, with the rise in its earnings,

the company can provide the benefits of trading on equity to the equity shareholders.

5. No Charge on Assets:
Preference shares do not create any mortgage or charge on the assets of the company. The

company can keep its fixed assets free for raising loans in future.

6. Flexibility:

A company can issue redeemable preference shares for a fixed period. The capital can be

repaid when it is no longer required in business. There is no danger of over-capitalization

and the capital structure remains elastic.

25
7. Variety:
Different types of preference shares can be issued depending on the needs of investors.

Participating preference shares or convertible preference shares may be issued to attract

bold and enterprising investors.

Preference shares can be made more popular by giving special rights and privileges such as

voting rights, right of conversion into equity shares, right of shares in profits and

redemption at a premium.

Disadvantages:
1. Fixed Obligation:
Dividend on preference shares has to be paid at a fixed rate and before any dividend is paid

on equity shares. The burden is greater in case of cumulative preference shares on which

accumulated arrears of dividend have to be paid.

2. Limited Appeal:
Bold investors do not like preference shares. Cautious and conservative investors prefer

debentures and government securities. In order to attract sufficient investors, a company

may have to offer a higher rate of dividend on preference shares.

3. Low Return:
When the earnings of the company are high, fixed dividend on preference shares becomes

unattractive. Preference shareholders generally do not have the right to participate in the

prosperity of the company.

26
4. No Voting Rights:
Preference shares generally do not carry voting rights. As a result, preference shareholders

are helpless and have no say in the management and control of the company.

5. Fear of Redemption:
The holders of redeemable preference shares might have contributed finance when the

company was badly in need of funds. But the company may refund their money whenever

the money market is favorable. Despite the fact that they stood by the company in its hour

of need, they are shown the door unceremoniously.

Some extra ordinary shares over the years:

CERA SANITARYWARE: Net profit has been rising by 40% a year and year on an
average for the last 10 years it rose from Rs 9.1 on 31 December 2003 to Rs 701.50 on 31
December 2013.

CRISIL: It has been giving huge returns to investors for the past 10 years primarily due to
its robust business model. It has been able to successfully diversify into the non-rating
business with a series of acquisitions. Operating profit rose 32% a year on an average
between 2005 and 2013. The stock rose 2,090% between 31 December 2003 (Rs 55) and 31
December 2013 (Rs 1,207).

27
 2. Bonds: Bonds are debt instruments whereby an investor effectively is loaning
money to a company or agency (the issuer) in exchange for periodic interest
payments plus the return of the bonds face amount when the bond matures. Bonds
are issued by corporations, the federal government plus many states, municipalities
and governmental agencies.
A bond, also known as a fixed-income security, is a debt instrument created
for the purpose of raising capital. They are essentially loan agreements between the
bond issuer and an investor, in which the bond issuer is obligated to pay a specified
amount of money at specified future dates. A typical corporate bond might have a
face value of Rs 100 and pay interest semi-annually. Interest on these bonds is fully
taxable, but interest on municipal bonds is exempt from federal taxes and may be
exempt from state taxes for residents of the issuing state. Interest on Treasuries is
taxed at the federal level only. Bonds and other fixed-income securities play a critical
role in an investor's portfolio. Owning bonds helps to diversify a portfolio, as the
bond market doesn't rise or fall alongside the stock market. More important, bonds
are generally less volatile then stocks, and are usually viewed as a
"safer" investment. When an investor purchases a bond, they are "loaning"
that money (called the principal) to the bond issuer, which is usually raising money
for some project. When the bond matures, the issuer repays the principal to the
investor. In most cases, the investor will receive regular interest payments from the
issuer until the bond matures.

Different types of bonds offer investors different options. For example, there
are bonds that can be redeemed prior to their specified maturity date, and bonds that can
be exchanged for shares of a company. Other bonds have different levels of risk, which
can be determined by its credit rating.

Bond rating agencies like Moody's and Standard & Poor's (S&P) provide a
service to investors by grading fixed income securities based on current research. The
rating system indicates the likelihood that the issuer will default either on interest
or capital payments.

Bonds and other fixed-income securities play a critical role in an investor's portfolio.
Owning bonds helps to diversify a portfolio, as the bond market doesn't rise or fall
alongside the stock market. More important, bonds are generally less volatile
then stocks, and are usually viewed as a "safer" investment.

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The main types of Bonds are:
Commercial Paper -- A short-term commercial bond that matures in less than three
months.
Convertible Bond -- A bond that can be exchanged for other investment securities.
Debentures -- An unsecured bond not backed by collateral.
Maturity Date Bond -- The specified date when the bond issuer must pay back the
investor's principal.
Municipal Bond -- A bond issued by a state or local government.
Treasury Bond -- Long-term bonds issued by the U.S. Treasury.

Debentures

Debentures have no collateral. Bond buyers generally purchase debentures based on the
belief that the bond issuer is unlikely to default on the repayment. An example of a
government debenture would be any government-issued Treasury bond (T-
bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk-free
because governments, at worst, can print more money or raise taxes to pay these types of
debts.

Debentures are the most common form of long-term loans that can be taken out by a
corporation. These loans are repayable on a fixed date and pay a fixed rate of interest. A
company normally makes these interest payments prior to paying out dividends to
its shareholders, similar to most debt instruments. In relation to other types of loans and
debt instruments, debentures are advantageous in that they carry a lower interest rate and
have a repayment date that is far in the future.

Convertible and Nonconvertible Debentures

There are two types of debentures , convertible and nonconvertible. Convertible

debentures are bonds that can convert into equity shares of the issuing corporation after a
specific period of time. These types of bonds are the most attractive to investors because of
the ability to convert, and they are most attractive to companies because of the low interest
rate.Nonconvertible debentures are regular debentures that cannot be converted into equity
of the issuing corporation. To compensate, investors are rewarded with a higher interest
rate when compared with convertible debentures.

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Features of a Debenture

All debentures have specific features. First, a trust indenture is drafted, which is an
agreement between the issuing corporation and the trust that manages the interest of the
investors. Next, the coupon rate is decided, which is the rate of interest that the company
will pay the debenture holder or investor. This rate can be either fixed or floating and
depends on the company's credit rating or the bond's credit rating.

For nonconvertible debentures, the date of maturity is also an important feature. This date
dictates when the issuing company must pay back the debenture holders. However, the
company has a few options for how it will repay. The most common form of repayment is
called a redemption out of capital, in which the issuing company makes a lump sum
payment on the date of maturity. A second option is called a debenture redemption reserve,
in which the issuing company transfers a specific amount of funds each year until the
debenture is repaid on the date of maturity.

Key Differences Between Bonds and Debentures

The following are the major differences between bonds and debentures:

1. A financial instrument issued by the government agencies, for raising capital

is known as Bonds. A financial instrument issued by the companies whether
it is public or private for raising capital is known as Debentures.
2. Bonds are backed by assets. Conversely, the Debentures may or may not be
supported by assets.
3. The interest rate on debentures is higher as compared to bonds.
4. The holder of bonds is known as bondholder whereas the holder of
debentures is known debenture holder.
5. The payment of interest on debentures is done periodically whether the
company has made a profit or not while accrued interest can be paid on the
bonds.
6. The risk factor in bonds is low which is just opposite in the case of
debentures.
7. Bondholders are paid in priority to debenture holders at the time of
liquidation.

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3.Mutual funds: A Mutual fund is a pooled investment vehicle managed by an
investment manager that allows investors to have their money invested in stocks, bonds or
other investment vehicles as stated in the fund’s prospectus. Mutual funds are valued at the
end of trading day and any transactions to buy or sell shares are executed after the market
close as well.

Mutual funds can passively track stock or bond market indexes such as the S&P 500, the
Barclay’s Aggregate Bond Index and many others. Other mutual funds are actively
managed where the manager actively selects the stocks, bonds or other investments held by
the fund. Actively managed mutual funds are generally more costly to own. A fund’s
underlying expenses serve to reduce the net investment returns to the mutual fund
shareholders.

Mutual funds can make distributions in the form of dividends, interest and capital gains.
These distributions will be taxable if held in a non-retirement account. Selling a mutual
fund can result in a gain or loss on the investment, just as with individual stocks or bonds.
A mutual fund company collects money from several investors, and invests it in various
options like stocks, bonds, etc. This fund is managed by professionals who understand the
market well, and try to accomplish growth by making strategic investments. Investors get
units of the mutual fund according to the amount they have invested. The Asset
Management Company is responsible for managing the investments for the various
schemes operated by the mutual fund. It also undertakes activities such like advisory
services, financial consulting, customer services, accounting, marketing and sales functions
for the schemes of the mutual fund.

Benefits of investing in mutual funds:

Professional Management
When you invest in a mutual fund, your money is managed by finance professionals.
Investors who do not have the time or skill to manage their own portfolio can invest in
mutual funds. By investing in mutual funds, you can gain the services of professional fund
managers, which would otherwise be costly for an individual investor.

Diversification
Mutual funds provide the benefit of diversification across different sectors and companies.
Mutual funds widen investments across various industries and asset classes. Thus, by
investing in a mutual fund, you can gain from the benefits of diversification and asset
allocation, without investing a large amount of money that would be required to build an
individual portfolio.
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Liquidity
Mutual funds are usually very liquid investments. Unless they have a pre-specified lock-in
period, your money is available to you anytime you want subject to exit load, if any.
Normally funds take a couple of days for returning your money to you. Since they are well
integrated with the banking system, most funds can transfer the money directly to your
bank account.

Flexibility
Investors can benefit from the convenience and flexibility offered by mutual funds to invest
in a wide range of schemes. The option of systematic (at regular intervals) investment and
withdrawal is also offered to investors in most open-ended schemes. Depending on one’s
inclinations and convenience one can invest or withdraw funds.

Low transaction cost

Due to economies of scale, mutual funds pay lower transaction costs. The benefits are
passed on to mutual fund investors, which may not be enjoyed by an individual who enters
the market directly.

Transparency
Funds provide investors with updated information pertaining to the markets and schemes
through factsheets, offer documents, annual reports etc.

Well regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of
India (SEBI), which endeavors to protect the interests of investors. All funds are registered
with SEBI and complete transparency is enforced. Mutual funds are required to provide
investors with standard information about their investments, in addition to other disclosures
like specific investments made by the scheme and the quantity of investment in each asset
class.

The types of mutual funds are:

 EQUITY FUNDS
 DEBT FUNDS
 HYBRID FUNDS

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Equity funds: Funds that invest primarily in stocks represent the largest category of
mutual funds. Generally, the investment objective of this class of funds is long-term capital
growth. There are, however, many different types of equity funds because there are many
different types of equities. The idea here is to classify funds based on both the size of the
companies invested in (their market caps) and the growth prospects of the invested stocks.

The types of equity mutual funds are:

Large Cap Funds

Lap cap funds are the funds which comprise of blue-chips companies having large
market capitalization. However, one should know that the criteria of being a large
cap varies from company to company, which basically depends on the huge market
capitalization.
There are several types of mutual fund schemes available in the market which can be
either bought from financial services companies or directly through AMCs. These
funds are designed in a way to provide stability and sustainability throughout the
investment tenure. The returns are slightly lesser but can easily beat inflation in the
long term. These funds, when linked with a financial goal, can help you in achieving
them in the long term.
Mid-Small CapFunds
These funds provide exceptionally high returns but they are very risky in nature.
These funds comprise of stocks of small and emerging companies which ideally
provide very good returns in future terms. Generally, as the name suggests, these
companies have low market capitalization. If you think that you are aggressive in
taking risks, then you can invest in such kind of funds.
Flexi-cap Funds
These funds are more or less diversified type of funds. As the funds do not
dependent on the market capitalization of a company, the fund manager is able to
make the best use of opportunities which they can get through market volatility. The

33
scope of doing diversification of the investment widens when you are investing
your money in flexi cap funds.
Diversified Funds
One can minimise one’s risk by taking exposure to this investment fund. This fund
spreads the risk into various sectors as the investment fund contains a wide variety
of securities. This fund helps the risk-averse investors to take exposure to a
diversified mutual fund scheme. Also, actively managing diversification helps in
preventing the events that affect one sector and may reduce heavy losses if market
conditions willingly go wrong anytime in future during the investment tenure.
Thematic Funds
Unlike sector funds where you can invest your money only in certain sectors, these
funds provide a wider scope of diversification while making investments. Here the
fund manager does the selection of companies from different sectors on the basis of
a common theme. For example, the theme can be infrastructure funds which
comprise of sectors like oil corporations, gas, steel, etc.
These funds carry a very minimum lock-in period and provide you a tax benefit of
Rs 1.5 lakh under section 80C of I-T Act. These funds are equity linked which not
only provide you the taxation benefit but also help in boosting your invested amount
by generating a good amount of inflation-beaten corpus at the time of maturity.
Mostly, the scheme which falls under this category has a lock-in period of 3 years
only.
Index Fund
An index fund is a fund whose returns are matched with the market index
component. These funds are passive in nature. Index funds generally have low
expense ratio because of which they tend to outperform various other indexes.
However, one should know that these funds consist of moderately high risk.

34
Debt funds: Bond funds invest and actively trade in various types of bonds. Bond funds
are often actively managed and seek to buy relatively undervalued bonds in order to sell
them at a profit. These mutual funds are likely to pay higher returns than certificates of
deposit and money market investments, but bond funds aren't without risk. Because there
are many different types of bonds, bond funds can vary dramatically depending on where
they invest. For example, a fund specializing in high-yield junk bonds is much more risky
than a fund that invests in government securities. Furthermore, nearly all bond funds are
subject to interest rate risk, which means that if rates go up the value of the fund goes
down.

Types of debt mutual funds are

Gilt Funds:

Gilt funds invest in Government securities with varying maturities. Average maturities of
government bonds in the portfolio of long term gilt funds are in the range of 15 to 30 years.
The fund manager in long term gilt funds actively manage their portfolio and take duration
calls with outlook on the interest rate. The returns of these funds are highly sensitive to
interest rates movements. The NAVs of gilt funds can be extremely volatile. The primary
objective of Gilt Funds is capital appreciation. Investors with moderate to high risk
tolerance level, looking for capital appreciation, can invest in Gilt Funds.

Income Funds:

Income funds invest in a variety of fixed income securities such as bonds, debentures and
government securities, across different maturity profiles. For example they can invest in 2
to 3 year corporate non convertible debenture and at the same time invest in a 20 year
Government bond. Their investment strategy is a mix of both hold to maturity (accrual
income) and duration calls. This enables them to earn good returns in different interest rate
scenarios. However, the average maturities of securities in the portfolio of income funds are
in the range of 7 to 20 years. Therefore, these funds are also highly sensitive to interest rate
movements. However, the interest rate sensitivity of income funds is less than gilt funds.

35
Investors with moderate to high risk tolerance level, looking for both income and capital
appreciation in different interest rate scenarios, can invest in income funds.

Short Term Debt Funds:

Short term bond funds invest in Commercial Papers (CP), Certificate of Deposits (CD) and
short maturity bonds. The average maturities of the securities in the portfolio of short term
bond funds are in the range of 2 – 3 years. The fund managers employ a predominantly
accrual (hold to maturity) strategy for these funds. Short term debt funds are suitable for
investors with low risk tolerance, looking for stable income.

Credit Opportunities Funds:

Credit opportunities fund are similar to short term debt funds. The fund managers lock in a
few percentage points of additional yield by investing in slightly lower rated corporate
bonds. Despite the slightly lower credit rating of the bonds in the credit opportunities fund
portfolio, on an average, majority of the bonds in the fund portfolios are rated AAA and
AA. The average maturities of the bonds in the portfolio of credit opportunities funds are in
the range of 2 – 3 years. The fund managers hold the bonds to maturity and so there is very
little interest rate risk. Credit Opportunities funds are suitable for investors with low risk
tolerance, looking for slightly higher income than short term debt funds.

Fixed Maturity Plans:

Fixed Maturity Plans (FMPs) are close ended schemes. In other words investors can
subscribe to this scheme only during the offer period. The tenure of the scheme is fixed.
FMPs invest in fixed income securities of maturities matching with the tenure of the
scheme. This is done to reduce or prevent re-investment risk. Since the bonds in the FMP
portfolio are held till maturity, the returns of FMPs are very stable. FMPs are suitable for
investors with low risk tolerance, looking for stable returns and tax advantage over an
investment period of 3 years or more. They can provide better post tax returns than bank
fixed deposits and are attractive investment options when yields are high.

Liquid Funds:

Liquid fund are money market mutual funds and invest primarily in money market
instruments like treasury bills, certificate of deposits and commercial papers and term
deposits, with the objective of providing investors an opportunity to earn returns, without

36
compromising on the liquidity of the investment. Typically they invest in money market
securities that have a residual maturity of less than or equal to 91 days. Liquid funds give
higher returns than savings bank. Unlike savings bank interest, no tax is deducted at source
for liquid fund returns. There is no exit load. Withdrawals from liquid funds are processed
within 24 hours on business days. Liquid funds are suitable for investors who have
substantial amount of cash lying idle in their savings bank account.

Monthly Income Plans:

Monthly income plans are debt oriented hybrid mutual funds. These funds invest 75 – 80%
of their portfolio in fixed income securities and the 20 – 25% in equities. The equity portion
of the portfolio of Monthly Income Plans provides a kicker to the generally stable returns
generated by the debt portion of the portfolio. Monthly income plans can generate higher
returns from pure debt funds. However, the risk is also slightly higher in monthly income
plans compared to most of the other debt fund categories.

HYBRID FUNDS: The objective of these funds is to provide a balanced mixture of

safety, income and capital appreciation. The strategy of balanced funds is to invest in a
portfolio of both bond and equities. A typical balanced fund will have a weighting of 60%
equity and 40% bond. The weighting might also be restricted to a specified maximum or
minimum for each asset class, so that if stock values increase much more than bonds, the
portfolio manager will automatically rebalance the portfolio back to 60/40.It becomes really
necessary to know about your goals before investing in hybrid funds as the proportion is
very important in this funds.Based on the goal we can invest in different type of hybrid
funds such as equity oriented hybrid funds where the proportion of fund invested in equity
is more as well as in Debt oriented hybrid funds where proportion of funds invested in debt
is more.

37
 Types of hybrid funds

 Debt Oriented Hybrid Funds – Debt oriented hybrid funds consist of aggressive,
moderate and conservative funds. These schemes vary due to the difference in exposure
to debt and equity. An aggressive hybrid mutual fund has an equity exposure of 30%, a
moderate hybrid mutual fund has an equity exposure of maximum 30% and a
conservative hybrid mutual fund will have an equity exposure of 10% or lesser. The
holding period is 3 years for funds with long-term capital gains. Monthly Income Plans
(MIPs) fall under this category. It only has a marginal exposure to equity, which is not
more than 30%. The investor will receive regular returns on the investment on an annual,
half-yearly, quarterly or monthly basis. MIPs offer both dividend and growth options.
 Equity Oriented Hybrid Funds – Equity oriented hybrid funds are centered mostly
around equities, in the sense that exposure to equities is higher than the exposure to debt.
These type of hybrid funds are highly volatile due to the increased exposure to equities.
In order to make equity investment for tax benefits and capital gains, balanced funds with
an equity exposure above 65% is the best option. Balanced Fund is an equity oriented
hybrid fund. 50% of the portfolio would consist of equity and equity-related securities
and the remaining would be invested in money market instruments and debt. Returns
from Balanced Funds are free of tax if it has been maintained for at least a year.
 Arbitrage Funds – Arbitrage funds are hybrid mutual funds that seize arbitrage
opportunities in the cash and derivative market. A large portion of the investment is
made in the debt segment. Arbitrage hybrid funds have lower equity taxation as well as
lower volatility. There is risk associated with these funds.
 Asset Allocation Funds – Asset Allocation Funds are hybrid funds in which the
exposure to debt and equity keeps varying. Most of the funds that are associated with this
are from funds schemes.

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Open end vs close ended mutual funds

Open-End Funds
Many investment products are not one single product, but are instead a collection of
individual products. Just as you wear different pieces of clothing that make up your whole
wardrobe, products like mutual funds and ETFs do the same thing by investing in a
collection of stocks and bonds to comprise the entire fund.

There are two types of these products on the market. Open-end funds are what you know as
a mutual fund. They don't have a limit as to how many shares they can issue. When an
investor purchases shares in a mutual fund, more shares are created, and when somebody
sells his or her shares the shares are taken out of circulation. If a large number of shares are
sold (called a redemption), the fund may have to sell some of its investments in order to pay
the investor.

You can't watch an open-end fund in the same way you watch your stocks because they
don't trade on the open market. At the end of each trading day, the funds reprice based on
the number of shares bought and sold. Their price is based on the total value of the fund or
the net asset value (NAV).

Closed-End Funds
Closed-end funds (CEFs) may look similar, but they're actually very different. A closed-
end fund functions much more like an exchange traded fund (ETF) than a mutual fund. It is
launched through an IPO in order to raise money and then traded in the open market just
like a stock or an ETF. It only issues a set amount of shares and, although their value is also
based on the NAV, the actual price of the fund is affected by supply and demand, allowing
it to trade at prices above or below its real value.

More than $260 billion is held in the closed-end funds market, yet it is not well known by
retail investors. Some funds, like BlackRock Corporate High Yield Fund VI (HYT), pay a
dividend of around 8%, making these funds an attractive choice for income investors.

Investors have to know a key fact about closed-end funds: Nearly 70% of these products
use leverage as a way to produce more gains. Using borrowed money to invest can be risky,
but it also may produce big returns. Closed-end funds had an average return of 12.4% in
2017, reports CEF Insider.

The Bottom Line

Open-end products may represent a safer choice than closed-end funds, but the closed-end
products might produce a better return, combining both dividend payments and capital
appreciation. Of course, investors should always compare individual products within an
asset class; some open-end funds may be more risky than some closed-end funds.

39
 Investing in mutual fund sip vs lump sum in different markets
1. Bull Market
2. Bear Market
3. Bull-Bear Market

In a bull market:

January 2003 to January 2008 was a five years long bull market. BSE Sensex surged from
3,000 to 20,000 in five years, gave more than 6 fold returns. To determine whether Lump
sum investment is better or SIP, let’s assume that an investor had invested a lump sum
amount of Rs 60,000 in January 2003 for five years while another investor chose to invest
Rs 1000 per month for the same period. From the below table, we can see that SIP had
given 46% return (XIRR), more return than 43% CARG of lump sum investment. But since
the lump sum investor has invested more money, Rs 60,000, in January 2003, the value of
the investment is more than the SIP investments. Thus, in bull market lump sum
investments give more return than SIP.

In a bear market:

The next test of lump sum and SIP investments are in a bear market. 2008 market crash was
so bad that BSE Sensex lost half of its value in less than one year. In January 2008, BSE
Sensex was trading around 20,000 but by January 2009, it plunged to 9,000. In such a
market everyone lost money. But who lost the more - a lump sum investor or an SIP
investor. So, to determine who the loser is and who is the winner, we assumed two

40
investors started investing for 1 year in January 2008, one invested a lump sum amount of
Rs 12,000 while other invested Rs 1,000 per month.

In a complete market cycle( Bull and bear cycle)

Till now, we have discussed the lump sum investments and SIP investments in a Bull
market and a Bear market separately. Now, we are going to discuss which is better, lump
sum investments or SIP investments, in a full market cycle. In January 2008, BSE Sensex
was trading at 20,000, then the market crashed and it plunged to 9000 in January 2009. The
market again touched the 20,000 mark in January 2011. Again, we assumed an investor
invested lump sum amount of Rs 36,000 in January 2008 while another started investing Rs
1,000 per month for three years in BSE Sensex. It clearly evident that since the market
crashed in 2008, the lump sum investor recovered his investment after 3 years. While, SIP
investor made good returns in a full market cycle. After 3 years, his total investment
became Rs 50,815.

Conclusion

Broadly saying, SIPs are better than lump sum investments. Many investors think they will
invest when the market is at the bottom, but it is very difficult to time the market. Besides
return, SIPs are best investments for a person who get regular income. In addition to that,
an investor need not to disburse his saving at once.

Types of bank deposits

Time Deposits: When money is deposited with tenure it cannot be withdrawn from the
deposit before its tenure ends. This is known as “Time Deposits” or “Term Deposits”. The
interest rate is generally higher for time deposits of longer tenure. On the basis of their
nature, time deposits may be of three types as follows:

Fixed Deposit: A fixed deposit (FD) is a financial instrument provided by banks

or NBFCs which provides investors a higher rate of interest than a regular savings account,

41
until the given maturity date. It may or may not require the creation of a separate account.
The defining criteria for a fixed deposit are that the money cannot be withdrawn from the
FD as compared to a recurring deposit or a demand deposit before maturity. Some banks
may offer additional services to FD holders such as loans against FD certificates at
competitive interest rates. It's important to note that banks may offer lesser interest rates
under uncertain economic conditions. The interest rate varies between 4 and 7.25 percent.
The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as 10
years. These investments are safer than Post Office Schemes as they are covered by the
Deposit Insurance and Credit Guarantee Corporation. However, DICGC guarantees amount
up to ₹ 100,000 per depositor per bank. They also offer income tax and wealth tax benefits .

Features of fixed deposits

 The main purpose of fixed deposit account is to enable the individuals to earn a
higher rate of interest on their surplus funds (extra money).
 The amount can be deposited only once. For further such deposits, separate accounts
need to be opened.
 The period of fixed deposits range between 15 days to 10 years.
 A high interest rate is paid on fixed deposits. The rate of interest may vary as per
amount, period and from bank to bank.
 Withdrawals are not allowed. However, in case of emergency, banks allow to close
the fixed account prior to maturity date. In such cases, the bank deducts 1%
(deduction percentage many vary) from the interest payable as on that date.
 The depositor is given a fixed deposit receipt, which depositor has to produce at the
time of maturity. The deposit can be renewed for a further period.

Advantages of Fixed Deposit Account

 Fixed deposit encourages savings habit for a longer period of time..

 Fixed deposit account enables the depositor to earn a high interest rate.
 The depositor can get loan facility from the bank.
 On maturity the amount can be used to make purchases of assets.
 The bank can get the funds for a longer period of time.
 The bank can lend such funds for short term loans to businessmen.
 Fixed deposits indirectly boost economic development of the country.

42
  The bank can also invest such funds in profitable areas.

Disadvantages of fixed deposit Account

 Not surprisingly, FD as an investment is less risky then this aspect is the

reason why its returns are lower compared to other investment options.

 Then there is an issue of liquidity, while your money is locked up with

the bank, it is not easy to withdraw at a moment's notice.

 In fact if you withdraw before the agreed duration, you will be penalized.
Also, there is no tax benefit in this investment, unlike the infrastructure
bonds or the National Savings Certificate (NSC).

 So, even from a taxation point this is not the best of investment options.

 Some banks charge as much as 1 per cent, if you beak the deposit early,
which means you need to either make sure that you invest in multiple
deposits of small amounts.

Re-investment deposits: Interest is compounded quarterly and paid on maturity, along

with the principal amount of the deposit. In the Flexi Deposits amount in savings deposit
accounts beyond a fixed limit is automatically converted into term-deposits.

· Recurring deposits: Fixed amount is deposited at regular intervals for a fixed term and
the repayment of principal and accumulated interest is made at the end of the term. These
deposits are usually targeted at persons who are salaried or receive other regular income. A
Recurring Deposit can usually be opened for any period from 6 months to 120 months.

2. Demand deposits: When the funds deposited can be withdrawn by the customer
(depositor / account holder) at any time without any advanced notice to banks; it is called
demand deposit. One can withdraw the funds from these accounts any time by issuing
cheque, using ATM or withdrawal forms at the bank branches.

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· Current Accounts: In this type of deposit, bank has to pay the money on demand to the
depositor. The cost to maintain the accounts is high and banks ask the customers to keep a
minimum balance.

· Saving Accounts: Savings deposits are subject to restrictions on the number of

withdrawals as well as on the amounts of withdrawals during any specified period. Further,
minimum balances may be prescribed in order to offset the cost of maintaining and
servicing such deposits.

3. CASA Deposit: CASA Deposits refers to Current Account Saving Account Deposits. As
an aggregate the CASA deposits are low interest deposits for the Banks compared to other
types of the deposits. So banks tend to increase the CASA deposits and for this they offer
various services such as salary accounts to companies, and encouraging merchants to open
current accounts, and use their cash-management facilities

4. NRO, NE(E)RA and FCNA(A) Account: There are several kinds of accounts available
for non resident Indians , Persons of Indian Origin and Overseas Citizens of India. They are
as follows:

· Non Resident Ordinary Accounts: (NRO):

· Non-Resident (External) Rupee Account (NR(E)RA

· Foreign Currency Non-Resident Account: (FCNR)

5 Deposit Insurance in India: In India, the bank deposits are covered under the insurance
scheme provided by DICGC. When a bank covered by DICGC fails, or undergoes
liquidation or is merged with another bank; the DICGC pays the amount due to depositors
via the officially appointed liquidator in a time bound manner.

Inter-company deposit is the deposit made by a company that has surplus

funds, to another company for a maximum of 6 months. It is a source of
short-term financing.

Such deposits are of three types:

1. Call Deposit:
Such a type of deposit is withdrawn by the lender by giving a notice of one day. However,

in practice, a lender has to wait for at least 3 days.

2. Three-month Deposit:

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As the name suggests, such type of a deposit provides funds for three months to meet up

short-term cash inadequacy.

3. Six-month Deposit:
The lending company provides funds to another company for a period of six months

Real estate: This is an investment as old as the practice of land ownership. A person
will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for
paying the mortgage, taxes and costs of maintaining the property. Buying real estate is
about more than just finding a place to call home. Investing in real estate has become
increasingly popular over the last 50 years and has become a common investment vehicle.

The real estate sector is one of the most globally recognized sectors. In India, real
estate is the second largest employer after agriculture and is slated to grow at 30 per
cent over the next decade. The real estate sector comprises four sub sectors -
housing, retail, hospitality, and commercial. The growth of this sector is well
complemented by the growth of the corporate environment and the demand for
office space as well as urban and semi-urban accommodations. The construction
industry ranks third among the 14 major sectors in terms of direct, indirect and
induced effects in all sectors of the economy.

It is also expected that this sector will incur more non-resident Indian (NRI)
investments in both the short term and the long term. Bangalore is expected to be the
most favored property investment destination for NRIs, followed by Ahmadabad,
Pune, Chennai, Goa, Delhi and Dehradun.

India's rank in the Global House Price Index has jumped 13* spots to reach the
ninth position among 55 international markets, on the back of increasing prices in
mainstream residential sector.
The Indian real estate market is expected to touch US$ 180 billion by 2020.
Housing sector is expected to contribute around 11 per cent to India’s GDP by 2020.
Retail, hospitality and commercial real estate are also growing significantly,
providing the much-needed infrastructure for India's growing needs.

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 New housing launches across top seven cities in India increased 27 per cent year-on-
year in January-March 2018.
India is expected to witness an upward rise in the number of real estate deals in
2018, on the back of policy changes that have made the market more transparent.
Sectors such as IT, retail, consulting and e-commerce have registered high demand
for office space in recent times. Office space demand in the country increased 23 per
cent year-on-year in January-March 2018 with office space absorption at 11.4
million square feet during the quarter. Private equity inflows in office and IT/ITES
real estate have grown 150 per cent between 2014 and 2017 backed by a strong
attraction towards office sector.

The Indian real estate sector has witnessed high growth in recent times with the rise in
demand for office as well as residential spaces. Private equity investments in real estate are
estimated to grow to US$ 100 billion by 2026 with tier 1 and 2 cities being the prime
beneficiaries. Private equity investments in Indian real estate increased 15 per cent year-on-
year in January-March 2018 to Rs 16,530 crore (US$ 2.56 billion). According to data
released by Department of Industrial Policy and Promotion (DIPP), the construction
development sector in India has received Foreign Direct Investment (FDI) equity inflows to
the tune of US$ 24.67 billion in the period April 2000-December 2017.

Government Initiative
The Government of India along with the governments of the respective states has taken
several initiatives to encourage the development in the sector. The Smart City Project,
where there is a plan to build 100 smart cities, is a prime opportunity for the real estate
companies. Below are some of the other major Government Initiatives:

 In May 2018, construction of additional 150,000 affordable houses was sanctioned

under Pradhan Mantri Awas Yojana (PMAY), Urban.
 In February 2018, creation of National Urban Housing Fund was approved with an
outlay of Rs 60,000 crore (US$ 9.27 billion).
 Under the Pradhan Mantri Awas Yojana (PMAY) Urban 1,427,486 houses have
been sanctioned in 2017-18. In March 2018, construction of additional 3,21,567
affordable houses was sanctioned under the scheme.

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Road Ahead
The Securities and Exchange Board of India (SEBI) has given its approval for the Real
Estate Investment Trust (REIT) platform which will help in allowing all kinds of investors
to invest in the Indian real estate market. It would create an opportunity worth Rs 1.25
trillion (US$ 19.65 billion) in the Indian market over the years. Responding to an
increasingly well-informed consumer base and, bearing in mind the aspect of globalisation,
Indian real estate developers have shifted gears and accepted fresh challenges. The most
marked change has been the shift from family owned businesses to that of professionally
managed ones. Real estate developers, in meeting the growing need for managing multiple
projects across cities, are also investing in centralised processes to source material and
organise manpower and hiring qualified professionals in areas like project management,
architecture and engineering.
The growing flow of FDI into Indian real estate is encouraging increased transparency.
Developers, in order to attract funding, have revamped their accounting and management
systems to meet due diligence standards.

REITS Funds in India:

Now, REIT Funds in India will soon become a reality. As on date, there are no REIT
listed in India which are available for investment for common men. REITs is an
investment concept that will benefit common men the most. In order to give a push-start
to REITS implementation in India, SEBI/Government has approved FDI in REITs.

This will make REIT Funds popular in India. Further, when common men participation
will improve and penetration of REIT funds will improve even more. Soon, shares of
REITs will be available for online trading. Like common shares, REITs can also be
traded. Involvement of common men will result in huge cash-inflow for REITs.

REITs will invest its funds in real estate properties.

The main target of REITs will be shopping malls, hotels, offices, hotels, nursing homes
etc. At present, in India, REITs will not be allowed to buy residential buildings.

But one important query?

Why people should buy REITs fund units? Why not buy commercial properties
directly?

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  Direct investment in real estate property is very capital intensive. But each
shares of REITs will be comparatively more affordable (it will not require large
capital outflows).
 Moreover, buying property directly exposes common men to the POWERFUL
BUILDERS. Investing through REITs will eliminate dealing with builders
altogether.
 REITS will also easy the whole process of investing in Real Estate Properties,
how?

Imagine yourself buying a property for investing purpose?

What steps one has to take while investing?

 Identify a good property,

 book a property,
 make self-contribution,
 arrange for balance funds (if loan is required),
 prepare a sale deed
 registration of sale deed,
 taking of handover from present owner/builder,
 maintenance of property etc.

But buying REITs (instead of directly a property) will eliminate all these steps.

REITs is perhaps the most transparent investment vehicle available for common man to
invest in real estate market.

REITs are also regulated by a regulator which will further eliminate the chances of any
bungling commonly done by substandard-builders.

Properties developed by quality builders are expensive and are generally out of reach of
common men.

Here Are Some Most Common Types of Life Insurance Policies:

1. Term Insurance or Term Plan
These are the most basic and affordable form of Life Insurance. Term plans provide life
cover with no profits/ savings component. The premiums are much cheaper in a term
insurance than other Life Insurance plans. If the policyholder expires during the policy
term, a fixed quantum of money (sum assured) is paid to his/ her beneficiaries. If the
policyholder survives the entire policy term, no payout will be provided.

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2. Whole Life Policy
Unlike a term insurance, the policy is not defined in a whole life policy, so the policyholder
can enjoy the life cover throughout his/her life. By paying regular premiums, the
policyholder gets a complete life cover. The policyholder needs to pay regular premiums
until he expires, and upon that total amount, the corpus is paid to his family. The whole life
policy expires only when any eventuality occurs as there is no pre-defined tenure.

3. Endowment Plan
An endowment plan is different from a term plan in terms of maturity benefit. Unlike a
term plan, an endowment plan pays out the sum assured along with profits in case of an
eventuality during the policy term as well as on survival of insured. The profits are the
result of investing the premiums in the asset market. Another difference is, endowment
plans come with higher fees and premiums for paying out sum assured with profits in both
scenarios – death or maturity.

4. Unit Linked Insurance Plan

Unit Linked Insurance Plan (ULIP) is linked to markets and thus, it is a form of the
traditional endowment plan in which the sum assured is paid on death/maturity. However,
in ULIP, you have the liberty to choose the investments’ allocation in stock/debt markets
and its value is captured by the net asset value (NAV). Also, ULIP is a combination of
insurance and investment, whereas mutual fund is a pure investment avenue.

5. Money Back Policy

This policy too is a form of the endowment plan, however, it gives periodic payments to the
beneficiary over the policy term. The insurer pays a portion of the sum assured at regular
intervals. In case of policyholder’s death over the term of the policy, the full sum assured is
given to the beneficiary. If the policyholder survives the policy term, he/ she receives the
balance sum assured.

6. Children’s Policy
These policies can be obtained in the name of the policyholder’s child. It is beneficial only
for the child and provides a financial assistance to the parents when their child reaches a
particular age of his/ her life.

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7. Annuity Plan
It is similar to a term insurance policy and aims at covering policyholder’s income loss.
Post-retirement, the regular income source ceases to exist for an individual (mainly for
private job holders) and it doesn’t take long to exhaust benefits like gratuity or provident
funds. At that time, annuity plan provides regular income in the form of pension to the
policyholder for safeguarding his/ her retirement. To enjoy financial freedom post-
retirement, it is best to get an annuity plan.

3. Ulips: ULIP is a life insurance product, which provides risk cover for the policy
holder along with investment options to invest in any number of qualified
investments such as stocks, bonds or mutual funds. As a single integrated plan, the
investment part and the protection part can be managed according to specific needs
and choices.

In Unit Linked Insurance Plans(ULIP), the investments made are subject to risks
associated with the capital markets. This investment risk in investment portfolio is
borne by the policy holder. Thus, you should make your investment choice after
considering your risk appetite and needs.

. A unit linked insurance plan can be utilized for various benefit payouts including
life insurance, retirement, education and more. A ULIP offers varying provisions to
the investor as benefits. A ULIP is typically opened by an investor seeking to
provide coverage for beneficiaries. It is paid into by the owner in the form
of premiums, with the intention of the plan’s worth to be paid out at a specified time
frame for a specific purpose. With a life insurance ULIP, the beneficiary would
receive payments following the owner’s death. Plans can include varying provisions
for triggering payments.

A unit linked insurance plan’s investment options are structured similar to a mutual
fund. The assets in a ULIP vehicle are managed to a specified objective. The
vehicle calculates a daily net asset value. The vehicle is market-linked and appreciates

50
 with increasing share value. When an investor purchases units in a ULIP, he or she is
purchasing units along with a larger number of investors, just like an investor would
purchase units in a mutual fund. Different ULIPs offer different qualified investments.
Investors can buy shares in a single strategy or diversify their investments across
multiple market-linked ULIP funds.

ULIPs require a premium. Premiums vary with the terms of each ULIP. An initial
lump sum is typically required along with annual, semi-annual or monthly premium
payments. Premium payments are proportionally invested towards specified coverage
and in the designated investments.

Unit linked insurance plan investors can make changes to their fund preferences
throughout the duration of their investment. The funds offer transferring flexibility.
Numerous investment options are also available including stock funds, bond funds
and diversified funds.

Unit linked insurance plans allow for the coverage of an insurance policy with
premium payments allocated to funds that are expected to increase at market rates
over time. Be sure to read the plan's prospectus before purchasing any ULIP.

Depending upon the death benefit, there are broadly two types of ULIPs. Under Type-I
ULIP, the nominee gets the higher of Sum Assured and Fund Value while under Type-II
ULIPs, the nominee of the policy holder gets the Sum of Sum Assured and Fund Value in
the event of demise of the policy holder.

There are a variety of ULIP plans to choose from based on the investment objectives of the
investor, his risk appetite as well as the investment horizon. Some ULIPs play it safe by
allocating a larger portion of the invested capital in debt instruments while others purely
invest in equity. Again, all this is totally based on the type of ULIP chosen for investment
and the investor preference and risk appetite.

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Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that
are deducted from the payable premium. The notable ones include policy administration
charges, premium allocation charges, fund switching charges, mortality charges, and a
policy surrender or withdrawal charge. Some Insurer also charge "Guarantee Charge" as a
percentage of Fund Value for built in minimum guarantee under the policy.

ULIP investment offerings are primarily concentrated in India where they were first
launched. HDFC Life is a leading provider of ULIP investments. The firm’s plans offer
varying provisions, terms and investment options. Other ULIP providers include Aegon
Life, PNB MetLife, Kotak Life, ICICI, IndiaFirst, SBI Life and IDBI Federal.

Mutual funds or ULIPs - Where to invest?

Insurance industry introduced Unit Linked Insurance Plan (ULIP) some years back
when the stock market was rising and people wanted to take advantage of capital
appreciation. ULIP, even though an insurance product, exposed investors to market
risk to a large extent because of its market linked portfolio. ULIP was an instant hit
and it did give good returns to investors. In fact, ULIP started being used as a
speculative product where people can make easy money. This was far from the truth.
The trouble started when market started its downward journey.

Higher fee, in addition to a declining market, was a double whammy for investors.
There was much noise from investors' community which forced insurance
companies to restructure the product. The new ULIP is a much better product from
safety point of view but it also gives you less return than what it provided earlier.

In comparison, mutual funds are a pure investment product. There are different types
of mutual funds based on the risk exposure. Equity oriented mutual funds invest

52
major part of the fund in equities. Hybrid funds or balanced funds invest in both
equities and debt. Debt funds invest in bonds and fixed income securities. Let’s look
at some aspects of investing and understand how these two popular products fair
against each other.

Risk exposure - ULIPs are a relatively less risky product because they are insurance
products. Even though ULIPs have great variety of products available investing in
equities and bonds, they have to be more careful in investment because of the nature
of insurance products. Mutual funds are of various types as explained above. Equity
oriented mutual funds are more risky than the hybrid ones and hybrid mutual funds
are more risky than the debt funds.

Potential of Returns - Since ULIPs invest in relatively low risk products, the
potential of returns is also low. The reason is that they have to promise sum assured
irrespective of whether the plan makes money. Mutual funds are of different
varieties. Equity oriented mutual funds give higher returns than the hybrid ones.
Hybrid mutual funds offer better returns than debt funds.

Lock-in period - Since ULIP is an insurance product, insurance companies define a

lock-in period for investment. Hence if an investor buys ULIP, he or she cannot sell
before the lock-in period of 3 to 5 years depending on individual ULIP products and
the structure. Most of the mutual funds typically do not have any lock-in period.
You can buy and sell mutual funds anytime. There is a certain type of mutual funds,
known as closed fund, which have lock-in period of 3 years.

Liquidity - Liquidity is defined as the ease with which investors can redeem their
investment. It is also about time it takes to receive your investment back after
redemption. Needless to say, mutual funds are more liquid since it is more widely
traded in the market.

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Charges - The advantage of mutual fund is its low charges and professional
management. The management fee of mutual funds is typically 1% to 2%. ULIP
charges are higher.

Important Points to keep in mind

Investors should understand the difference between investment and insurance. Never mix
these two important aspects of your financial life. The purpose of insurance is to protect
your family in case of any exigencies. The purpose of investment is to build wealth
overtime. Mutual funds are great product to earn higher returns and build wealth overtime.
Investors should stay with mutual funds for longer time to earn higher returns.

At the same time, when investors buy ULIP, it is good to continue with it till the maturity.

One major advantage mutual funds have over ULIP is their history. Mutual funds are in the
market for quite a number of years and hence investors can look at the history of returns.
The data point available in the market to help investors to select right mutual fund is vast.
The same is not available for ULIP.

ULIPs and Mutual funds offer a variety of products based on risk profile. Investors should
understand their risk profile and investment period and then decide accordingly. If an
investor has low risk profile and an investment horizon of 3 years, investing in ULIPs or
mutual funds with major portion in equity is not a good idea. Similarly an investor with
longer investment horizon and high risk appetite should go for equity oriented mutual fund
or ULIPs with bigger exposure to equities.

Finally, even when investors have bought ULIP as insurance, they must take term insurance
to have sufficient protection. The sum assured in term insurance is very high compared to
ULIP or any other insurance plan. Term insurance products are pure insurance plan where a
large sum is paid to your family members in case of any eventuality. If nothing happens to
the insured, there is no disbursement of money.

54
Taxes on different investments

1) Equity & Shares/Stocks:- 15% tax if redeemed/sold before 1 year & 10% Tax above
profit of Rs.100000/- if sold/ redeemed after 1 year.

2) Debt Mutual Funds:- Tax as per tax bracket if redeemed before 3 years without
Indexation benefit. 20% tax if redeemed after 3 years with indexation benefit.

3)FDs:- The interest income from bank fixed deposit is fully taxable, unlike savings bank
account where one gets income tax exemption on the interest earned up to Rs 10,000 in a
year. In case of FDs, banks deduct tax at source (TDS) at the rate of 10 per cent if the
interest income for the year is more than Rs 10,000.

4)Real estate

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 The role of financial planning in wealth creation

What is financial planning??

In general usage, a financial plan is a comprehensive evaluation of an individual's
current pay and future financial state by using current known variables to predict future
income, asset values and withdrawal plans. This often includes a budget which
organizes an individual's finances and sometimes includes a series of steps or specific
goals for spending and saving in the future. This plan allocates future income to various
types of expenses, such as rent or utilities, and also reserves some income for short-term
and long-term savings. A financial plan is sometimes referred to as an investment plan,
but in personal finance a financial plan can focus on other specific areas such as risk
management, estates, college, or retirement.

Financial Planning & Advisories is meant for anyone who wants to sort out the
financial portion of their lives, There is a flawed thinking that financial planning & wealth

56
management advice is required only by the rich. The rich require it no doubt; but the less
well endowed, need it even more, as the margin of error is low in their case, in view of their
limited finances.

The next argument is regarding the fee. If one pays a fee for advice, it is that much money
less for investments. Investments made without proper advice can be toxic and detrimental
to one’s long-term interest. In fact, one may actually be throwing good money after bad
investments – eventually ruining one’s prospects of achieving goals. Also, there are lot of
those who will offer “Free advice”. Free advice is actually very costly as such people
suggest what gives them the most commissions. In effect one may be paying much more in
such a scenario, indirectly.

A financial plan may contain prospective financial statements, which are similar, but
different, than a budget. Financial plans are the entire financial accounting overview of a
company. Complete financial plans contain all periods and transaction types. It's a
combination of the financial statements which independently only reflect a past, present, or
future state of the company. Financial plans are the collection of the historical, present, and
future financial statements; for example, a (historical & present) costly expense from an
operational issue is normally presented prior to the issuance of the prospective financial
statements which propose a solution to said operational issue.

The confusion surrounding the term financial plans might stem from the fact that there are
many types of financial statement reports. Individually, financial statements show either the
past, present, or future financial results. More specifically, financial statements also only
reflect the specific categories which are relevant. For instance, investing activities are not
adequately displayed in a balance sheet. A financial plan is a combination of the individual
financial statements and reflects all categories of transactions (operations & expenses &
investing) over time.

Who should seek out for financial planning?

 Salaried people & professionals, across the age spectrum would find the best fit.

57
 Those who want dispassionate & unbiased financial advice regarding various aspects of
their finances from experienced advisors with proven expertise, would find it to be a
good fit. You can assured of honesty, integrity & ethical conduct, in all dealings.
Having a true, fee-only financial planner, who is only interested in your welfare, would
be an elevating experience.
 Those who are really serious about sorting out their finances and achieving their goals.
Those who want proper control over their goals and would want to ensure that they are
achieved in a pre-meditated manner, instead of leaving it to chance. This results in
clarity & peace of mind.
 Those who want to get the big picture it does a 360 degree analysis & then offer advice,
taking into account all factors.
 Also, they will find that it will bring in efficiencies in money management, Investments,
Tax planning, Insurance & Protection and others. Also it would ensure that our people
don’t make the typical mistakes people make, in connection with finances.

Money earned needs to work for you to further your goals. Financial planning
assists you there.

What financial planning gives you

Financial Planning is a process that lays the roadmap to systematically achieve the goals
you may have, by way of appropriate wealth management. A Financial plan gives you a
structure, a pathway to follow & achieve your goals in a pre-meditated manner. While
creating the plan, the planner looks into your life goals, your current situation, committed
expenses, income / expense pattern, risk exposure, cash flows, future commitments etc. and
suggests a plan of action, with which you could comfortably sail through life, meeting all
the goals set within the timeframe, in a planned manner.

This process brings in the required perspective and gives you a framework, to
systematically achieve your goals. It also forces discipline in spending and saving, which

58
helps you to cruise towards your goals, relentlessly and achieve them eventually. The
planner would suggest corrective steps in existing investments and loans, as required,
unlock money locked-up in unproductive assets, discuss your goals, funding of assets,

expense rationalization, provide clarity about future requirements for children, retirement
funding, provisioning for medical exigencies, providing a security blanket for the family,
correct asset/ savings mix, tax planning … in short, everything that concerns you.

As can be seen, the financial plan is the blueprint that the planner creates to put a
framework to what needs to be achieved. It lays down the path that one needs to travel to
achieve the goals. The Financial Plan & the advice offered therein, ensures that there is
clarity and step by step progression towards the goal, ensuring peace of mind.

Financial Planning is an ongoing exercise. Financial Planning is just the start of the
journey. We engage with our clients on an ongoing basis after the plan to ensure that they
are always on track.

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The 6 Steps of Financial Planning

 Defining the goal

 Gather data
 Analyze data
 Develop a plan
 Implement the plan
 Monitor the plan

Step1: Defining the goal

The first step of financial planning process is to define specific goals. The more specific
the goals are the better. Sometimes, you may not have enough clarity about all the
financial goals in your life. An expert financial planner or adviser can help you define
the goals across your savings and investment lifecycle and determine the specific
numbers you need to reach specific goals. You should remember that a financial plan is
not working towards a singular goal, like retirement planning, children’s education,
marriage etc. A financial plan includes multiple goals across your savings and
investment lifecycle. However, you should establish definite time frames for the
achievement of each of these goals. Even though, ideally, we would like to achieve or
even exceed all our goals, it is useful to prioritize the goals, especially if there are
constraints with regards to how much you can invest and save. For example, you may
prioritize your child’s higher education over buying a house or some other financial
goal. The financial planner will take your priority into consideration, when developing
your financial plan. Once the financial goals and the priorities are determined, the
financial planner or adviser will examine these goals in respect to the investor’s
resources and other constraints (if any). The objective of this step is to help the clients
define specific, realistic, actionable financial goals

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Step2: Gather data

The second step in the financial planning is to collect the data regarding the
investor’s income, expenses, existing fixed and financial assets, life and health
insurance, lifestyle and other important factors, that will form the inputs in the
investor’s financial plans. Financial planners or advisers may employ different
methods to collect the data from the investors. Some financial planners or advisers
may send you a survey form or questionnaire that you will have to fill out and send
back to your financial planners or adviser. Many financial planners or advisers
prefer face to face meetings with their clients to collect this data. Face to face
meetings is often more effective than sending just sending a survey form or
questionnaire. Through a face to face interaction, the financial planner or adviser can
clarify certain details about their client that the questionnaire may not be able to. A
face to face meeting also helps the investors clarify doubts, expectations or share
additional details with their financial planners or advisers. We recommend that, the
investor insists on a face to face meeting, even if his or her financial planner or
adviser does not ask for one. It is always helpful for the investor. Some financial
planners or advisers may send a survey form or questionnaire for the investor to fill
up, and then follow it up with a face to face meeting with the investor. Whatever the
method of interaction for data gathering, it is always beneficial for investors to share
as much information as possible with their financial planners or advisers.
Withholding financial or other important information from the financial planner or
adviser is never useful. Investors should remember that the role of the financial
planner or adviser is very much like a family physician. Just like, we should share
all medical and health related information with our family physician, we should
share all our financial information or any other information that may potentially
have an impact on our financial situation with our financial planner or adviser.

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Step 3: Analyze data

The third step of the financial planning process is the data analysis part. The
financial planner will review the investor’s financial situation, current cash flow
statement, debt or loan situation, existing insurance policies (both life and non-
life insurance) and other legal documents (if required). Through a structured
financial analysis process, the financial planner will determine your asset
allocation strategy and insurance (both life and health) needs to meet your
financial objectives. The financial planner may also suggest additional life and
health insurance, if he or she determines, based on the financial analysis, that you
are not adequately insured. What is the investor’s responsibility at this stage?
While all the work in this step is done by the financial planner, as an investor,
you should also involve yourself in this process, by scheduling reviews and
making sure that you understand the analysis. It is, after all, your financial plan .

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Step 4: Develop a plan

As a next step, your financial planner or adviser will make the actual
recommendation with respect to your comprehensive financial plan. This will
include your asset allocation strategy, alternate investment options (e.g. mutual
funds, equity investing, traditional debt products etc.), life and health insurance
needs. Your financial planner or adviser will schedule a meeting with you, to discuss
these recommendations. This is a very important step in the financial process for
you, as a client. You should make sure that you understand all the recommendations
and the reasons thereof. You should ask as many questions as you would like to,
regarding each strategy or product, because they will be crucial in meeting your
financial objectives. Investors should remember that the final investment decisions
rest with them, and therefore they should ensure that they are comfortable with their
financial plan and execution strategy. Recommendations can change during this step
and altered based on the investor's inputs.

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Step 5: Implement the plan

The penultimate step of the financial planning process is the implementation of

the investor’s financial plan. This involves the actual process of purchasing the
investment and insurance products. At this stage various regulatory and
procedural requirements need to be fulfilled, depending on the products
involved. As an investor, you may need to submit the documentation for Know
Your Client (KYC), fill the application forms for mutual funds, demat and
trading accounts for equity investing, and proposal forms for life
insurance and Mediclaim. Your financial adviser will play a big role in fulfilling
these requirements, including collecting the documents for KYC and filling out a
major portion of the application or proposal forms. However, it is important, that
you remained involved in the entire process. Even if you delegate the
responsibility of filling the major portions application or proposal forms to your
financial advisers, make sure you verify the information in the forms, to ensure
nothing is incorrectly stated. You should also carefully read the brochures of the
products, that you are investing in or purchasing, so that you understand all the
terms and conditions of the product(s). If you do not have the time to read
individual product brochures, you should make sure that, you ask the financial
adviser all the pertinent questions.

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Step 6: Monitor the plan

The final step of the financial planning process is monitoring and tracking the
progress made on your financial plan. You should review your financial plan, to
evaluate the effect of changes in your income levels, your financial situation,
your tax situation, new tax rules, new products and changes in market conditions.
Normally, your financial planner or adviser will schedule meetings with you at a
regular frequency, to review your portfolio and discuss if any change needs to be
made in your financial plan, asset allocation strategy and product strategy. But
even if your financial planner or adviser does not schedule regular meetings, you
should insist on meeting with your financial planner or adviser at some regular
frequency, e.g. quarterly, semi-annually, annually etc. At the end of the day, it is
your financial plan and your financial aspirations that are at stake. Therefore, the
onus is really on the investor, to make sure that their financial plan is on track.
Also, we should remember that financial planning is not a static, but a dynamic
exercise. Your financial situation, goals and aspirations may change over time.
Therefore, you should meet with your financial planner or adviser on a regular
basis, to ensure that your portfolio is doing well and at the same time, ensure that
any change to your financial situation, goals or aspirations is appropriately
reflected in your financial plan, and executed upon.

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 Ten reasons why financial planning is important

1. Income: It's possible to manage income more effectively through planning.

Managing income helps you understand how much money you'll need for tax
payments, other monthly expenditures and savings.
2. Cash Flow: Increase cash flows by carefully monitoring your spending patterns and
expenses. Tax planning, prudent spending and careful budgeting will help you keep
more of your hard earned cash.
3. Capital: An increase in cash flow, can lead to an increase in capital. Allowing you
to consider investments to improve your overall financial well-being.
4. Family Security: Providing for your family's financial security is an important part
of the financial planning process. Having the proper insurance coverage and policies
in place can provide peace of mind for you and your loved ones.
5. Investment: A proper financial plan considers your personal circumstances,
objectives and risk tolerance. It acts as a guide in helping choose the right types of
investments to fit your needs, personality, and goals.
6. Standard of Living: The savings created from good planning can prove beneficial
in difficult times. For example, you can make sure there is enough insurance
coverage to replace any lost income should a family bread winner become unable to
work.
7. Financial Understanding: Better financial understanding can be achieved when
measurable financial goals are set, the effects of decisions understood, and results
reviewed. Giving you a whole new approach to your budget and improving control
over your financial lifestyle.
8. Assets: A nice 'cushion' in the form of assets is desirable. But many assets come
with liabilities attached. So, it becomes important to determine the real value of an
asset. The

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 knowledge of settling or canceling the liabilities, comes with the understanding of
your finances. The overall process helps build assets that don't become a burden in
the future.

9. Savings: It used to be called saving for a rainy day. But sudden financial changes can
still throw you off track. It is good to have some investments with high liquidity. These
investments can be utilized in times of emergency or for educational purposes.
10. Ongoing Advice: Establishing a relationship with a financial advisor you can trust is
critical to achieving your goals. Your financial advisor will meet with you to assess your
current financial circumstances and develop a comprehensive plan customized for you.

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 FINANCIAL PLANNING – CASE STUDY
Prashant and Srividya Nair are a salaried couple staying in the central suburbs of Mumbai.
Prashant works as a programmer for an IT firm, while Srividya works in the administration
department of an FMCG company. The family comprises of 6 members, Prashant &
Srividya, their 2 kids and Prashant’s parents.

Name Age Relationship Health History

Prashant Nair 38 Self Healthy
Srividya 35 Wife Healthy
Dinesh Nair 74 Father High BP.
Lakshmi Nair 70 Mother High BP, Diabetes
Asha 7 Daughter Healthy
Vineet 5 Son Healthy
Their inflows, outflows & Networth details are given below.
Inflows
Monthly Yearly
Prashant 64500 774000
Srividya 21000 252000
85500 1026000
Outflows
Household expenses 27500 330000
Life insurance 5333.33 64000
Total Outflow 32833.3 394000
Investments
PPF 5833.33 70000
Surplus 46833.3 562000
Networth
Self Occupied home 4200000
Savings Account 550000

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 PPF (both accounts) 400000
EPF (both accounts) 445000
Stocks & Mutual funds 200000
Loans -0
Networth 5795000
Srividya has decided to discontinue working after 1 year to concentrate on her
children’s education. Both the kids are going to school and grand parents take the
responsibility of looking after them during the day, in the absence of Prashant & Srividya.
Prashant would like to continue working in the IT industry and the family’s financial goals
are enumerated below.
INSURANCE
Inspite of paying an annual premium of Rs. 64000, Prashant is covered for a sum assured of
Rs. 12 lakhs while Srividya is covered for Rs. 400000. Prashant’s Employer provides group
floater mediclaim cover of Rs. 300000 for the family of 4, excluding the parents. Parents
are not covered by any form of medical insurance.
FINANCIAL GOALS
The following are the financial goals as enumerated by Prashant and Srividya in
present value terms.
1. Educational funding of Asha – Rs. 1 lakh each year from age 17 to 20 and Rs. 3 lakhs
at her age of 21 years
2. Educational funding of Vineet – Rs. 1 lakh each year from age 17 to 20 and Rs. 3
lakhs at his age of 21 years
3. Marriage funding of Asha – Rs. 4 lakhs at her age of 26 years
4. Marriage funding of Vineet at his age of 27 years
5. Retirement in the year 2031 when Prashant turns 58 years old.

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Sr. Financial Goal Today’s cost Approximate Year Inflation
No. Category:- Responsibilities No. of Years Adjusted Cost
Rs. to Goal Rs.
1 Daughters Education’
1.2 Required at Age 17 Years Rs.100,000.00 10 2021 Rs.259,374
1.3 Required at Age 18 years Rs.100,000.00 11 2022 Rs.285,312
1.4 Required at Age 19 years Rs.100,000.00 12 2023 Rs.313,843
1.5 Required at Age 20 years Rs.100,000.00 13 2024 Rs.345,227
1.6 Required at Age 21 years Rs.300,000.00 14 2025 Rs.1,139,250
Rs.700,000.00 Rs.2,343,005

2 Son’s Education
2.2 Required at Age 17 Years Rs.100,000.00 13 2024 Rs.345,227
2.3 Required at Age 18 years Rs.100,000.00 14 2025 Rs.379,750
2.4 Required at Age 19 years Rs.100,000.00 15 2026 Rs.417,725
2.5 Required at Age 20 years Rs.100,000.00 16 2027 Rs.459,497
2.6 Required at Age 21 years Rs.300,000.00 17 2028 Rs.1,516,341
Rs.700,000.00 Rs.3,118,540
3 Marriage of Daughter Rs.400,000.00 19 2029 Rs.2,446,364
4 Marriage of son Rs.400,000.00 22 2032 Rs.3,256,110
5 Retirement at Age 58years
Expenses considered Rs.252,000.00 20 2027 Rs.1,070,458
Corpus required 20 Rs.22,953,250

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 Assumptions
 General inflation (retirement) – 7.5%
 Educational & Marriage inflation – 10%
 Expected annual increase in salary – 5%
 Returns on Equity & Equity mutual funds – 12%
 Returns on PPF – 8%
 Returns on EPF – 8.5%
 Retirement corpus growth 1.87% (adjusted to inflation)

PROJECTIONS AND RECOMMENDATIONS.

A. CONTINGENCY FUND:
1. The family should maintain a contingency fund of Rs. 83000 (rounded off). Rs. 15000 to
maintained as cash at home and the rest in his savings account linked with FD.
2. Considering Prashants parents health status and the fact that they don’t have any medical
cover, Rs. 300000 to be maintained in a bank FD as a back up for their unforeseen medical
expenses.
The above allocation can be managed from the savings account balance

B. INSURANCE
1. Accident: Prashant should take an accident policy of 25 lakhs with a TTD (Total
temporary benefit) of 7.5 lakhs. The premium will come to around Rs. 3500.
2. Health: Prashant and Srividya should take an individual cover of Rs. 5 lakhs each and
Rs. 2 lakhs for their daughters, the premium for which will be approximately
Rs. 15500.

3. Life: As per the expense replacement method there is a shortfall of Rs. 80 lakhs of life
insurance cover which should be covered by Term plan for a period of 25 years at an
approximate cost of Rs. 20000 p.a.
C. FINANCIAL GOALS
1. For Daughters educational requirement starting from 17 th to 21st year of her age, SIP in
Equity Diversified Mutual fund to be started for an amount of Rs. 6750
2. For Son’s educational requirement starting from his 17 th to 21st year an sip of Rs. 5750 to
be started in a Diversified Equity mutual fund.

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3. Daughter’s Marriage requirement can be funded by starting an SIP of Rs. 3000 in a
diversified MF.
4. Son’s marriage can be funded by an SIP of Rs. 2500 in a Nifty Index MF.
5. The retirement expenses at age 58 will be Rs. 10, 70,458 per year for which a corpus of Rs.
2, 29, 53,250 is required which can sustain till the age of 85 years.
A major part of the corpus can be easily funded by PF, PPF & Gratuity benefits which will
altogether fetch Rs. 1, 59, 15,000 at retirement. The shortfall of Rs. 70, 38,000 can be
achieved by starting an SIP of Rs. 7250 in an Index Mutual fund.
D. RECOMMENDED CASH FLOW
Total inflow 85500 1026000

Outflows
Household expenses 27500 330000
Life insurance 7000 84000

Accident & Mediclaim 1583.33 19000

PPF 5833.33 70000

SIPS 25250 303000

Total Outflow 67166.7 806000

Surplus 18333.3 220000

The surpluses can be maintained in savings bank and can be used to fund the SIPs for next
year when Srividya won’t be working.

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Conclusion:
From the above analysis it can be concluded that

 Investments in India are growing day by day because of rise of awareness as

well as rise in opportunities.
 Lot of initiatives have been taken by the government as well as the SEBI so
that people are aware about investment and make investment as their habit
 Still most people don’t understand the difference between savings and
investment
 Financial planning is still considered as an expense by many people but
which is not true.
 Financial planning is not only important for people of middle age but it is
even useful for the people who have just started their carrier as it can give
them a clear view of what they have do with their finances.
 Financial planning has to be done understanding the risk appetite of the
client, if the risk appetite is high more funds are have to be invested in equity
funds while people having less risk appetite their funds should be invested in
debt funds so that along with returns the risk will be less.

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www.investopedia.com
www.goodreturns.in/personal-finance/planning/2013/05/fixed-deposit-
advantages-disadvantages-175459.html
www.quora.com/Which-one-is-the-best-way-to-invest-SIP-or-lump-sum-in-a-
mutual-fund-considering-the-current-Indian-market
http://www.yourarticlelibrary.com/share-market/preference-shares-definition-
advantage-and-disadvantage/27969
/fpgindia.org/2011/03/financial-planning-case-study.html
www.getmoneyrich.com/reit-funds-in-india/
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