ALL ABOUT INVESTMENT

A well-planned investment strategy is essential before having any investment decisions. A business
strategy is generally based upon long run period. Formation of business strategy largely dependent upon
the factors such as long-term goals and risk on the investment.

As the return on investment is not always clear, so the investors prepare the strategy so as to face
the ongoing challenges in investment. A balanced investment strategy is generally required in the
process of investment, which possesses long time period and some risk tolerance.

INTRODUCTION TO THE INVESTMENT ENVIRONMENT

To study the investment environment would be of importance to the investor, as it would also
encompass the demand supply match and mismatch.

Let us visualize the world and its economy. There are many countries with their many economies in
this environment. We see the interaction between countries at different stages in their development.
We see the many markets to enable this interaction between the various countries. Each of these
markets has its regulator, the trading platform and its system, its agents (or brokers), and the
participants. Here it is a question of demand and supply of various commodities, products & services
and trading instruments. And the analysis would encompass the demand-supply match/mismatch.

In this global environment, we have India with its economy and its own many markets. Among
these markets we have the securities market, with its regulator (SEBI), the trading platform and its
systems (stock exchanges), its agents (brokers) and its many participants (including corporate, financial
institutions both domestic and foreign, mutual funds, insurance companies, banks and individual
investors). Here again it is a question of demand and supply of various commodities, products & services
and trading instruments. And the analysis would encompass the demand-supply match and mismatch.

It would be advisable to note at this stage, that due to the liberalization process undertaken by India
over the last 20 years, we are today in an environment where events that take place in other parts of
the world have a direct or indirect effect on our economy. This would further effect the specific market
and finally would have an effect on the equity market.

Let us visualize a scenario of an industrial slowdown in the U.S. Amongst other things, this would have a
direct bearing (i.e. a reduction) on the demand of steel. To protect its own domestic steel industry, the
U.S. government would temporarily introduce trade barriers on steel imports. This in turn would cause a
reduced export of steel from India to the U.S., causing a temporary over supply of steel in the domestic
market. The steel manufacturers would have to tackle the higher levels of inventory and its associated
costs. In the domestic steel market, even if the demand were constant, the excess supply would cause a
reduction in the price realization per marketable ton of steel. This in turn would directly effect the
incomes and profit margins of the steel manufacturers. Such a situation would temporarily cause a drop
in the share prices of steel stocks in the equity market.
This example is to describe to you how logical the sequence of events is and what the end result would
be. However, this sequence does take a long duration of time to unfold, sometimes may even take
years.

jINVESTMENT ALTERNATIVES

There are a large number of investment instruments available today. To make our lives easier we would
classify or group them under 4 main types of investment avenues. We shall name and briefly describe
them.

1. Financial securities: These investment instruments are freely tradable and negotiable. These would
include equity shares, preference shares, convertible debentures, non-convertible debentures, public
sector bonds, savings certificates, gilt-edged securities and money market securities.

2. Non-securitized financial securities: These investment instruments are not tradable, transferable nor
negotiable. And would include bank deposits, post office deposits, company fixed deposits, provident
fund schemes, national savings schemes and life insurance.

3. Mutual fund schemes: If an investor does not directly want to invest in the markets, he/she could buy
units/shares in a mutual fund scheme. These schemes are mainly growth (or equity) oriented, income
(or debt) oriented or balanced (i.e. both growth and debt) schemes.

4. Real assets: Real assets are physical investments, which would include real estate, gold & silver,
precious stones, rare coins & stamps and art objects.

Before choosing the avenue for investment the investor would probably want to evaluate and compare
them. This would also help him in creating a well diversified portfolio, which is both maintainable and
manageable

INVESTMENT ATTRIBUTES

To enable the evaluation and a reasonable comparison of various investment avenues, the investor
should study the following attributes:

1. Rate of return

2. Risk

3. Marketability

4. Taxes

5. Convenience

Each of these attributes of investment avenues is briefly described and explained below.
1. Rate of return: The rate of return on any investment comprises of 2 parts, namely the annual income
and the capital gain or loss. To simplify it further look below:

Rate of return = Annual income + (Ending price - Beginning price) / Beginning price

The rate of return on various investment avenues would vary widely.

2. Risk: The risk of an investment refers to the variability of the rate of return. To explain further, it is the
deviation of the outcome of an investment from its expected value. A further study can be done with
the help of variance, standard deviation and beta.

3. Marketability: It is desirable that an investment instrument be marketable, the higher the

marketability the better it is for the investor. An investment instrument is considered to be highly
marketable when:

It can be transacted quickly.

The transaction cost (including brokerage and other charges) is low.

The price change between 2 transactions is negligible.

Shares of large, well-established companies in the equity market are highly marketable. While shares of
small and unknown companies have low marketability.

To gauge the marketability of other financial instruments like provident fund (which in itself is non-
marketable). Then we would consider other factors like, can we make a substantial withdrawal without
much penalty, or can we take a loan against the accumulated balance at an interest rate not much
higher than our earning rate of interest on the provident fund account.

4. Taxes: Some of our investments would provide us with tax benefits while other would not. This would
also be kept in mind when choosing the investment avenue. Tax benefits are mainly of 3 types:

Initial tax benefits. This is the tax gain at the time of making the investment, like life insurance.

Continuing tax benefit. Is the tax benefit gained on the periodic return from the investment, such as
dividends.

Terminal tax benefit. This is the tax relief the investor gains when he liquidates the investment. For
example, a withdrawal from a provident fund account is not taxable.

5. Convenience: Here we are talking about the ease with which an investment can be made and
managed. The degree of convenience would vary from one investment instrument to the other.
COMPARISON OF INVESTMENT AVENUES

 ROR
 ROR CAPITAL  TAX
ANNUAL  RISK  MARKETABILITY  CONVINIENCE
APPRCIATION BENIFIT
INCOME
Financial
Securities
Equity Low High High High Yes High
Non-convertible
High Low Low Average Nil High
Debentures
Financial
Securities
           
(Non-
securitized)
Bank deposits Low Nil Low High Yes High

Provident fund Nil High Nil Average Yes High

Life insurance Nil High Nil Average Yes High

Mutual funds            
Growth/equity Low High High High Yes High
Income/debt High Low Low High Yes High
Real assets            
Real estate Low High Low Low Limited Average
Gold/silver Nil Average Average Average Nil Average
Rate of return of annual income, Rate of return of capital appreciation.

INVESTMENT DECISION MAKING: APPROACHES

As investors we would have diverse investment strategies with the primary aim to achieve superior
performance, which would also mean a higher rate of return on our investments. All investment
strategies can be broadly classified under 4 approaches, which are explained below.

Fundamental approach: In this approach the investor is concerned with the intrinsic value of the
investment instrument. Given below are the basic rules followed by the fundamental investor.There is
an intrinsic value of a security, which in turn is dependent on the underlying economic factors. This
intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors
related to an economy, industry and company.At any point in time, many securities have current market
prices, which are different from their intrinsic values. However, sometime in the future the current
market price would become the same as its intrinsic value. We as fundamental investors can achieve
superior results by buying undervalued securities and selling overvalued securities.

Psychological approach: The psychological investor would base his investment decision on the premise
that stock prices are guided by emotions and not reason. This would imply that the stock prices are
influenced by the prevalent mood of the investors. This mood would swing and oscillate between the
two extremes of “greed” and “fear”. When “greed” has the lead stock prices tend to achieve dizzy
heights. And when “fear” takes over stock prices get depressed to lower than lower levels.

As psychic values seem to be more important than intrinsic values, it is suggested that it would be more
profitable to analyze investor behaviour as the market is swept by optimism and pessimism. Which
seem to alternate one after the other. This approach is also called “Castle-in-the-air” theory. In this
approach the investor uses some tools of technical analysis, with a view to study the internal market
data, towards developing trading rules to make profits.

In technical analysis the basic premise is that price movement of stocks have certain persistent and
recurring patterns, which can be derived from market trading data. Technical analysts use many tools
like bar charts, point and figure charts, moving average analysis, market breadth analysis amongst
others.

Academic approach: Over the years, the academics have studied many aspects of the securities market
and have developed advanced methods of analysis. The basic rules are:

The stock markets are efficient and react rationally and fast to the information flow over time. So, the
current market price would reflect its intrinsic value at all times. This would mean "Current market price
= Intrinsic value".

Stock prices behave in a random fashion and successive price changes are independent of each other.
Thus, present price behavior can not predict future price behavior.

In the securities market there is a positive and linear relationship between risk and return. That is the
expected return from a security has a linear relationship with the systemic or non-diversifiable risk of
the market.

Eclectic approach: This approach draws upon all the 3 approaches discussed above. The basic rules of
this approach are:

1. Fundamental analysis would help us in establishing standards and benchmarks.

2. Technical analysis would help us gauge the current investor mood and the relative strength of
demand and supply.

3. The market is neither well ordered nor speculative. The market has imperfections, but reacts
reasonably well to the flow of information. Although some securities would be mispriced, there is a
positive correlation between risk and return.

COMMON ERRORS IN INVESTMENT MANAGEMENT

In any endeavor we undertake, we are sometimes right and make correct decisions and sometimes we
are wrong and prone to errors. We are prone to these errors, when we do not have a correct
perspective of the environment or lack a correct assessment of the current situation in the environment.

We would have to watch out for these errors to reduce the probability of losses. For instance, it
would be very difficult and an error to be in a buy or hold position if the market is in a bearish mode.
Similarly, it would be difficult and an error to be in a sell or short position if the market is in a bullish
trend. It would be advisable, correct and profitable to trade with the trend and not against it.

Still investors of all hues and levels of experience are prone to errors. Some of these errors are listed and
described below:

Goals beyond rational expectation: Here the investor probably thinks that he owns the company lock,
stock and barrel. Or that the market owes him his profits for having exposed himself to the market risks.
Or the investor may have a targeted expected rate of return beyond what the market would be able to
give him consistently over time. On the other hand, unrealistic goals could also be a result of unjustified
claims made by a company going for a new issue. Or misplaced expectations due to exceptionally good
past performance of the investment instrument or a mutual fund or a portfolio manager. Or promises
not kept by tipsters, market operators and fly by night operators.

An investment policy not clearly defined: This would also include an unclear view on risk. Here, the
investor would be prone to greed and fear as the market goes up and down, respectively. This vacillation
would cause the investor much loss and pain.

Seat of the pant decision making: Investors without even realizing it base their decisions on incomplete
information. Some of the thoughts of the investor would be:

Come on! I know what is going on in the market, and there isn’t any time to do a detailed analysis. I
don’t want an opportunity loss if I delay.

All that hard work is strictly for the mediocre. I know I am right.

He is my guru and can’t be wrong.

We must clarify at the beginning whether we are doing an investment exercise or are we indulging in
ego satisfaction. If it is investment then do the analysis as the markets and the investment instruments
will still be there tomorrow. On the other hand, if it is ego satisfaction, then may the Gods bless you, as
other would profit from your market actions.

Another situation could cause the investor a loss of balance. As the market goes up and continues
going up, the investor tends to set aside all thoughts on the various investment risks and follows the
investing public. Here, the investor is being greedy, and sooner or later would pay the price for this error
of judgment.

Stock switching: In this situation, the investor is selling one stock and at the same time buying another
stock. This is interesting, as here the investor expects that the first stock would go down in value, while
the second stock would go up. This is unique and is rarely successful.

Two scenarios require our attention:

It maybe the right time to sell the first stock, but it may not be the right time to buy the second stock, as
that too maybe on its way down.

It maybe the right time to buy the second stock, but it may not be the right time to sell the first stock, as
it may still have some upside left.

The love for a cheap stock: A cheap stock is a very attractive proposition for any investor, as he is able to
buy large quantities of the same. Investors find it easier to buy 1,000 shares of a INR 10.00 stock, and
find it difficult to buy 100 shares of a INR 100.00 stock. The total investment amount is the same in both
cases.

In certain situations, when a stock price moves down, investors start buying and continue to buy larger
quantities of the same stock. The investor here is averaging his price down. But, he does not have a
guarantee that in the foreseeable future the price trend of this stock would reverse and go above his
average purchase price. Averaging can be dangerous.

Over-diversification: Is a situation, when an investor has a large number of names in his portfolio,
maybe 50 or 60 or even more.Let’s be practical, it is like owning an index and more. Therefore the
investor’s portfolio performance would be about the same as the index or marginally above or below it
depending on the names in the portfolio.

Secondly, managing and monitoring would become a Herculean task. The investor would get a false
sense of safety in numbers. Decision-making would become slow and ineffective. If the market goes
down due to a systemic risk factor, all the stocks including the best would move down in price. And the
investor would not know what to sell, at what price to sell and when to sell.

Ideally, a portfolio should consist of 10-15 well-researched stocks. In any case as individual investors we
are not institutions, nor do we have the requisite staffing to effectively monitor and manage a larger
number of stocks.

Under-diversification: Is a situation in which an investor has only 1-2 stocks in his portfolio. This maybe
due to a situation of over-confidence in the expected performance of these stocks. Or maybe the result
of plain complacency.
This is not a good portfolio strategy, as the investor has exposed himself to all market risks to a larger
extent due to a lack of diversification. We must always remember that we diversify our portfolio to
minimize the systemic or non-diversifiable risks. In any case, this high level of risk exposure is not really
necessary if we view ourselves as long term investors.

The lure of known companies: Investors are tempted to buy shares of companies that they know and
are familiar with. However, the investor should keep in mind, that his knowing a company is not
correlated to the returns he expects to derive from his investments in its stock.

Wrong attitude towards profits and losses: An average investor due to ego and pride does not want to
recognize or admit that he may have made a mistake. Let’s look at two situations:An investor buys a
stock, and soon thereafter its price goes down. Instead of applying a stop loss and getting out of the
stock, the investor holds the stock in expectation of a rebound or trend reversal. However, the price
continues moving down with a potential of a further decline. Now, the investor is holding the stock at a
30%-40% loss. Here, the investor wants to postpone the booking of this substantial loss and the
acknowledgement of having made a mistake.

When the stock price does move up, the investor is ready and waiting to sell this stock at or marginally
above his purchase price, even if the stock is expected to move up into a higher trading range. Here the
investor sells to gain the relief of not having incurred a substantial loss and also he does not have to
acknowledge his mistake at the start of this investment. Both these situations are loaded towards the
reinforcement of losses and not profits.

INVESTMENT AND SPECULATION

There is a very thin and blurred line between investing and speculating (or gambling). To have a clearer
understanding of this, we would differentiate between the two.

There is a tendency for investors to be speculative when the markets are bullish and buoyant. However,
for long term and profitable survival in the markets we must try and control this urge to speculate. After
all, we are here to learn and apply investment management and not speculation management.

parameter investor speculator

Planning horizon Relatively long, holding period of at least Very short, holding period a few
1 year. days or months.

Risk disposition Moderate, rarely high risk. Normal to assume high risk

Return Moderate returns at limited risk. High return at high risk exposure.
expectation
 Basis for Fundamental factors, careful Relies on hearsay, tips and market
.
decisions evaluation of proposed investment. psychology

To be part of the speculative herd in a bull market situation has been the waterloo of many participants
in the financial markets across the globe. This participant maybe an individual investor, a NBFC, a
financial institution, a pension fund, a bank, or a brokerage. Some are responsible corporate citizens
while others are not.

AVENUES OF INVESTMENT:

EQUITY SHARES

equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities
are paid. If valuations placed on assets do not exceed liabilities, negative equity exists. In an accounting
context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or
similar terms) represents the remaining interest in assets of a company, spread among individual
shareholders of common or preferred stock.

At the start of a business, owners put some funding into the business to finance operations. This creates
a liability on the business in the shape of capital as the business is a separate entity from its owners.
Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the
accounting equation. After liabilities have been accounted for, the positive remainder is deemed the
owner's interest in the business.

This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the
secured creditors are paid against proceeds from assets. Afterward, a series of creditors, ranked in
priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or
residual claim against assets, paid only after all other creditors are paid. In such cases where even
creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity.
Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital or
simply, equity.

FEATURES OF EQUITY SHARES

1. They don't have no preferential right in respect of payment of dividend or in the repayment of capital
at the time of winding of the company.

2. Equtiy shares are risk bearing shares because they are the actual owners of the company when ever
company run into losses they have to bear the losses.

3. Equity share holders enjoys voting right whenever there is a meeting they will enjoy their voting
power, enjoys voting power in electing board of directors.
4. Equity capital is the permanent capital for the company. The company needs not to return capital.
Company has to repay the capital only at the time of winding up.

5. Equity shares are easily transferred from one person to another at the stock exchange according to
the procedure laid down in the article of association of the company.

6. Company gives the bonus shares to the equity shareholders at a free cost on account of reserves .
Undistributed profits and accumulated profit

7. Equity shareholder are give first priority when ever company want to raised fresh capital .

Stock Market Classification of Equity Shares

Stock market classification of Equity Shares

Blue chip shares: Shares of large, well-established, and financially strong companies with an impressive
record of earnings and dividends.

Growth shares: Shares of companies that have a fairly entrenched position in a growing market and
which enjoy an above average rate of growth as well as profitability.

Income shares: Shares of companies that have fairly stable operations, relatively limited growth
opportunities, and high dividend payout ratios.

Cyclical shares: Shares of companies that have a pronounced cyclicality in their operations.

Defensive shares: Shares of companies that are relatively unaffected by the ups and downs in general
business conditions.

Speculative shares: Shares that tend to fluctuate widely because there is a lot of speculative trading in
them.

Note that the above classification is only indicative. It should not be regarded as rigid and straight
jacketed. Often you can't pigeonhole a share exclusively in a single category. In fact, many shares may
fall into two (or even more) categories.

DEBT SECURITIES

Any debt instrument that can be bought or sold between two parties and has basic terms defined, such
as notional amount (amount borrowed), interest rate and maturity/renewal date. Debt securities
include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized
securities zero-coupon securities.
The interest rate on a debt security is largely determined by the
  perceived repayment ability of the borrower;

 higher risks of payment default

Almost always lead to higher interest rates to borrow capital. Also known as "fixed-income securities."

Most debt securities are traded over-the-counter, with much of the trading now conducted
electronically. The total dollar value of trades conducted daily in the debt markets is much larger than
that of stocks, as debt securities are held by many large institutional investors as well as governments
and non-profit organizations. Debt securities on the whole are safer investments than equity securities,
but riskier than cash. Debt securities get their measure of safety by having a principal amount that is
returned to the lender at the maturity date or upon the sale of the security. They are typically classified
and grouped by their level of default risk, the type of issuer and income payment cycles.

Why should one invest in fixed income securities?

Fixed Income securities offer a predictable stream of payments by way of interest and repayment of
principal at the maturity of the instrument. The debt securities are issued by the eligible entities against
the moneys borrowed by them from the investors in these instruments. Therefore, most debt securities
carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety by way
of the security of the fixed and/or movable assets of the company.

•The investors benefit by investing in fixed income securities as they preserve and increase their
invested capital and also ensure the receipt of regular interest income.

•The investors can even neutralize the default risk on their investments by investing in Govt. securities,
which are normally referred to as risk-free investments due to the sovereign guarantee on these
instruments.

•The prices of Debt securities display a lower average volatility as compared to the prices of other
financial securities and ensure the greater safety of accompanying investments.

•Debt securities enable wide-based and efficient portfolio diversification and thus assist in portfolio risk-
mitigation.

Who can issue fixed income securities?

Fixed income securities can be issued by almost any legal entity like Central and State Govts., Public
Bodies, Banks and Institutions, statutory corporations and other corporate bodies. There may be legal
and regulatory restrictions on each of these bodies on the type of securities that can be issued by each
of them

A. What are the different types of instruments, which are normally traded in this market?

The instruments traded can be classified into the following segments based on the characteristics of the
identity of the issuer of these securities:
 Market Segment Issuer Instruments
Government Central Government Zero Coupon Bonds, Coupon Bearing Bonds, Treasury
Securities Bills, STRIPS
State Governments Coupon Bearing Bonds.

Public Sector Government Agencies / Govt. Guaranteed Bonds, Debentures

Bonds Statutory Bodies
Public Sector Units PSU Bonds, Debentures, Commercial Paper

Private Sector Corporates Debentures, Bonds, Commercial Paper, Floating Rate

Bonds Bonds, Zero Coupon Bonds, Inter-Corporate Deposits
  Banks Certificates of Deposits, Debentures, Bonds
  Financial Institutions Certificates of Deposits, Bonds

The G-secs are referred to as SLR securities in the Indian markets as they are eligible securities for the
maintenance of the SLR ratio by the Banks. The other non-Govt securities are called Non-SLR securities.

Classification of Indian Debt Market

Indian debt market can be classified into two catagories:

Government Securities Market (G-Sec Market):

It consists of central and state government securities. It means that, loans are being taken by the central
and state government. It is also the most dominant category in the India debt market.

Bond Market:

It consists of Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units
bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove
uncertainty in financial costs.

Advantages: The biggest advantage of investing in Indian debt market is its assured returns. The returns
that the market offer is almost risk-free (though there is always certain amount of risks, however the
trend says that return is almost assured). Safer are the government securities. On the other hand, there
are certain amounts of risks in the corporate, FI and PSU debt instruments. However, investors can take
help from the credit rating agencies which rate those debt instruments. The interest in the instruments
may varies depending upon the ratings.

Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to the
investors against government securities.

Disadvantages:As there are several advantages of investing in India debt market, there are certain
disadvantages as well. As the returns here are risk free, those are not as high as the equities market at
the same time. So, at one hand you are getting assured returns, but on the other hand, you are getting
less return at the same time. Retail participation is also very less here, though increased recently. There
are also some issues of liquidity and price discovery as the retail debt market is not yet quite well
developed

MONEY MARKETS

The money market is a component of the financial markets for assets involved in short-term borrowing
and lending with original maturities of one year or shorter time frames. Trading in the money markets
involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds,
and short-lived mortgage- and asset-backed securities.[1] It provides liquidity funding for the global
financial system.

The money market consists of financial institutions and dealers in money or credit who wish to either
borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months.
Money market trades in short-term financial instruments commonly called "paper." This contrasts with
the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each other, using commercial
paper, repurchase agreements and similar instruments. These instruments are often benchmarked to
(i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and
currency. Money market comprises of several sub markets which collectively constitute money markets.
They are Call money market , bill market or discount market, Acceptance market and Treasury market.

Money Market Instruments

The company is an active player in the short term money market instruments.

Treasury Bills

The Treasury bills are short-term money market instrument that mature in a year or less than that. The
purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the
full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the
treasury bills comes at the cost of very low returns.

Call/ Notice/ Term Money

Call money market is that part of the national money market where the day to day surplus funds, of
banks and primary dealers, are traded in.Call/ Notice/ term money market ranges between one day to
15 days borrowing and considered as highly liquid. Other key feature is that the borrowings are
unsecured and the interest rates are very volatile depending on the demand and supply of the short
term surplus/ defeciency amongst the interbank players.

Repo/ Reverse Repo

It is a transaction in which two parties agree to sell and repurchase the same security. Under such an
agreement the seller sells specified securities with an agreement to repurchase the same at a mutually
decided future date and a price. Similarly, the buyer purchases the securities with an agreement to
resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is
called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and
Reverse Repo when described from the point of view of the supplier of funds. Thus, whether a given
agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction.

The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the
counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a
particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the
seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the
counterparties independently of the coupon rate or rates of the underlying securities and is influenced
by overall money market conditions.

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and
in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Uses of Repo

It helps banks to invest surplus cash

It helps investor achieve money market returns with sovereign risk.

It helps borrower to raise funds at better rates

An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR
positions simultaneously.

RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system.

Inter Corporate Deposits

For short term cash management of the rich corporates, the company offers to borrow through Inter
corporate deposits. The company has P1+ credit rating (Highest Rating in its category) for an amount of
Rs. 250 crores.

The company offers two variables of the Inter Corporate Deposits:

Fixed Rate ICD : the quantum/ rates/ term to maturity of the ICD are negotitaed by the two parties at
the beginning of the contract and remains same for the entire term of the ICD. As per the RBI guidelines
the minimum period of the ICD is 7 days and can be extended to peiod of 1 year. The rates are generally
linked to Interbank Call Money Market Rates.

Floating Rate ICD : Corporates interested in using the daily volatility of the call money market are offered
Floating Rate ICD which may be benchmarked/ linked to either NSE Overnight Call/ Reuters Overnight
Call rates. The corporates are also given Put/ Call option after 7 days for managing their funds in the
event of uncertainity of availability of idle funds.

Commercial Paper
It is a short term money market instrument comprising of unsecured, negotiable, short term usance
promissory note with fixed maturity, issued at a discount to face value. CPs are issued by corporate to
mart flexibility in raising working capital resources at market determined rates. CPs are actively traded in
the secondary market since they are issued in the form of Promissory Notes and are freely transferable
in demat form.

Certificate of Deposit

Certificates of Deposit (“CD”) were introduced in 1989 following the acceptance of the Vaghul Working
Group of Money Market. These are also usance promissory notes issued at a discount to the face value
and transferable in demat form. They attract stamp duty. CDs are issued by scheduled commercial banks
and it offers them an opportunity to mobilise bulk resources for better fund management. To the
investors they offer better cash management opportunity with market related yield and high safety.

Bills Rediscounting

The bills rediscounting scheme was introduced by RBI in November 1970 under which all licensed
scheduled commercial banks were eligible to rediscount with RBI genuine trade bills arising out of sale/
purchase of goods. In November 1981 RBI stopped rediscounting bills but permitted banks to rediscount
the bills with one another as well as with approved Financial institutions. To augment facilities for this
activity and also make a larger pool of resources available, RBI has been progressively enlarging the
number of institutions eligible for bills rediscounting including primary dealers.

Bankers Acceptance

It is a short term credit investment created by non financial firm. Guaranteed by bank to make
payment. Acceptances are traded at discount rate in secondary market.BA acts as negotiable time draft
for financing exports and imports or other transactions in goods. This is especially useful when the credit
worthiness of the foreign partner is unknown.

INVESTMENTS IN REAL ASSETS:

Real assets mean investment in real estate and precious metals and objects.

REAL ESTATE:

1. Residential house:
 The total return from a house is satisfactory.(rental savings + capital appreciation)
 Loans are available from various sources for buying and constructing building
  For Wealth tax purpose ,the value of residential properties is rekoned at its historical
cost and not at its market price.
 Interest on loan taken for buying / constructing house is tax deductable at a certain
limit.
 Ownership of residential property provides psychological satisfaction.

2. Commercial property:

 It means buying a constructing commercial complex or buying a office space in commercial

complex.
 The appeal of such an investment would be mainly in the regular rental income which can
be revised upward periodically.
 It can enjoy even capital appreciation over a period of time.
 Only disadvantage is….. it requires a large outlay and may require time and effort in
managing it.

3. Agricultural land:

This appeals to be an attractive investment for ever due to many factors.

 Ag income is not taxable. Agricultural land is exempt from wealth tax.

 Loans are available for agricultural operations at a concessional rate.
 Capital gains arising from the sale of agricultural land may be exempt in some cases.

4. Suburban land

 Land within the city limits is often very costly. So one can afford to buy a residential plot in
suburban areas with a reasonable investment and can enjoy a good appreciation over a
period of time.

PRECIOUS OBJECTS:

Precious objects include investment in metals like gold ,silver and platinum.it also includes
investment in precious stones as well as precious stones like diamonds, jaeds ,ruby, sapphires etc
etc.Precious objects also include investment in Art objects, paintings and antiques.

Precious objects are generally small in size but highly valuable in monetary terms.Reasons for
investments in this appeal attractive are

Gold and siver: Of the all metals gold and silver are held precious metals, and attract almost all kind
of investors for the following reasons

 Historically, they have been good hedges against inflation.

 They are highly liquid with low trading commissions.
  They are aesthetically attractive.
 They possess high degree of moneyness.

Normally an substance is said to possess moneyness when it is

 A store of Value
 Durable
 Easy to own anonymously
 Easy to subdivide into small pieces that are also valuable.
 Easy to authenticate
 Interchangeable that is “homogeneous or fungible”
 Available Scarcily

Precious stones:

Because of their aesthetic appeal and rarity, they attract many investors. Of course to many
investors they donot appeal to be attractive due to following reasons:

 Illiquidity, not many investor aware of its grading hence they don’t find a wide market for
trading
 Grading process and fixing value for them is highly subjective.
 Huge investment required to hold positions.
 Do not earn a return during the period they are held.contrary investor has to incur cost of
insurance and storage.

ART Objects:

The objects which requires skill taste, creativity , talent and imagination may be referred to as art
objects.According to this definition, paintings ,sculptures etc may be regarded as art objects.

The value of the object is a function of its aesthetic appeal , rarity, reputation of the creator, physical
condition and fashion. The market value of the paintings antiques are grown considerably as a
result of historical interest.

This is all about investment in Real assets and the reasons explained above wd narrate the reasons
for why these platforms are considered to be attractive for investment.

MUTUAL FUNDS

A mutual fund is a professionally managed type of collective investment scheme that pools money
from many investors and invests typically in investment securities (stocks, bonds, short-term money
market instruments, other mutual funds, other securities, and/or commodities such as precious
metals).[1] The mutual fund will have a fund manager that trades (buys and sells) the fund's
investments in accordance with the fund's investment objective.
 Over the last ten years the mutual fund industry has seen manifold growth. The reasons for this kind
of hyper growth are not very hard to imagine: investors find that mutual funds are a great way of
multiplying their money.

The five main reasons why one should invest in mutual funds are as under:

1. Professional fund managers

All the mutual funds are managed by professional fund managers. These fund managers have in-depth
knowledge about:

The companies they are investing funds in;

The general market conditions;

The macro economic situation, and

What's happening in the global markets.

The holistic view, which these managers take, has an edge over others. They invest funds into
companies/stocks, based on their assessment of how fundamentally sound a decision is. They are
not usually influenced by the general market sentiment.

2. Diversified risk

All mutual funds, be they equity-oriented or debt-oriented ones, invest in a number of either companies
stock or bonds. This way the performance of the fund is not depended on the performance of any one
particular investment decision but depends on the overall performance of all the decisions.

This way the risk is spread over a large number of stocks or bonds. Besides, the number of unitholders is
fairly large, due to which the risk is borne by a large number of investors.

3. Sound investment strategy

The performance of any mutual fund cannot be measured over a short period (i.e. on a weekly or
fortnightly basis) of time. This has done over a reasonable length of time (i.e. on a 3-month or 6-month
basis).

The main reason for this is that the mutual funds do not indulge in speculative transactions and
hence the corpus of the fund remains intact. Their investment decisions are based on sound and
fundamental reasoning.

A lot of research and reasoning takes place before any investment is decision is taken.
4. Reshuffling of the portfolio

Fund managers monitor the markets on a daily basis, which may not be possible for a retail investor.

This way the managers keep on entering in to new counters (i.e. buying new stocks) which they feel are
good for the fund and keep on exiting from those counters which they feel are either now overvalued or
due to some other factors because of which staying invested in that counter may not be desirable for
the fund.

This way the managers keep on reshuffling their portfolio on a continuous basis because of which they
are able to maximise their profits by spotting the right opportunity at the right time.

5. Ease with which one can enter and exit the fund

Most of the schemes launched by the fund houses today are all open-ended schemes. Hence an investor
can enter and exit the fund at any time he so wishes.

As a result mutual fund becomes a good investment options even for those who have short-term
liquidity.

Once the investor is sure that his investment through the mutual fund route is relatively much safer
than he himself investing it elsewhere, the next step for him is to identify the right fund house with an
appropriate scheme which suits his investment need.

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk
tolerance and return expectations etc. The table below gives an overview into the existing types of
schemes in the Industry.

Types of Mutual Funds Scheme in India

By Structure
1. Open - Ended Schemes
2. Close - Ended Schemes
3. Interval Schemes

By Investment Objective
1. Growth Schemes
2. Income Schemes
3. Balanced Schemes
 4. Money Market Schemes

Other Schemes
1. Tax Saving Schemes
2. Special Schemes
3. Index Schemes
4. Sector Specfic Schemes