CHAPTER – 3

AN OVERVIEW ON SAVING PREFERENCES AND

INVESTMENT HABITS

3.0 INTRODUCTION:
In this Chapter, saving preferences and investment habits among public is discussed.
Channelizing one's savings into investments is important for the growth of developing
economy. Investments are a great opportunity for people to get returns and earn more.
Without Investments cash flows in the economy are less and lead to a stagnant economy. The
research studies the saving preferences and investment habits of the public in Chennai. This
Research also includes the preference of saving schemes, Factors induce the size of their
savings, from where they get their saving and investment information from and about the
saving and investment schemes they are comfortable with. The topics to be discussed under
this study are:

3.1 INCOME, SAVING AND INVESTMENT:

To measure the growth of an economy there are three variables factor are as: Income, Savings
and Investment. There is a big hand of investment for the development of an economy, and
savings provides the basis for investment in broadest sense, Investment means the sacrifice of
certain present value for (possible uncertain) future value. The investment pattern and saving
habits of employee’s sector is determined by their expectations from the various preferred
avenues. Preference may vary due to various considerations i.e. Safety, Liquidity and
Marketability, returns, tax benefits, risk involved etc. Investment also depends upon the
awareness about investment opportunities, level of knowledge and how these investment
opportunities are evaluated and selected. The appropriate investment decisions require a
comprehensive understanding of various subjects like finance, tax, economics, accountancy,
business laws etc. However, employees owing to the lack of education are not able to
comprehend such subjects.

3.2 SAVINGS OPTIONS AVAILABLE:

3.2.1 Public Provident Fund (PPF)
The Public Provident Fund (PPF) scheme is one of the most popular and safest investment
options that is available in the country. Under Section 80C of the Income Tax Act,
contributions made towards the scheme as well as the interest that is generated from the
contributions are also tax exempt. The scheme can be opened at post offices and banks, and
the duration of the scheme is 15 years. Individuals are allowed to increase the duration of the
scheme by a further 5 years. The rate of interest for the FY 2018-2019 is 8% p.a. and the
interest is compounded on a yearly basis. Individuals must make a minimum contribution of
Rs.500 and can make a maximum contribution of Rs.1.5 lakh on a yearly basis towards the
scheme.

3.2.2 Employees’ Provident Fund (EPF)

The Employees’ Provident Fund Organisation (EPFO) launched the EPF scheme with the
main aim of helping employees save money for their retirement. It is mandatory for
organisations with more than 20 employees to contribute towards the EPF scheme. The
employee and employer each contribute 12% of the employee’s Dearness Allowance (DA)
and basic salary towards the scheme. Employees can withdraw funds from the scheme in case
of medical emergencies, construction of a house, buying a house or land, repayment of home
loan, etc. The rate of interest of the scheme for FY 2018-2019 is 8.65% p.a. The rate of
interest is decided by the EPFO on a yearly basis.
3.2.3 National Pension System (NPS)
The NPS was launched by the Central Government with the main aim of providing
individuals a regular income after their retirement. Employees can avail the benefits of the
scheme by paying a small amount of premium. Employees will receive a lump sum amount at
the time of their retirement as well as a certain percentage will be paid back as pension on a
monthly basis after their retirement.
3.2.4 Sukanya Samriddhi Yojana Account (SSY)
The Sukanya Samriddhi Yojana (SSY) scheme was launched by Prime Minister Narendra
Modi to help secure the future of a girl child. The current rate of interest offered by the
scheme is 8.5% and an SSY account can be opened at post offices or banks. The minimum
and maximum deposit that can be made in a year towards the scheme is Rs.1,000 and Rs.1.5
lakh, respectively. The account holder must make contributions towards the scheme for a
duration of 14 years and the maturity period of the scheme is 21 years. Individuals can
transfer the SSY account from banks to post offices and vice versa.
3.2.5 Atal Pension Yojana (APY)
The main aim of the scheme is to help individuals who are below the poverty line. The
scheme also benefits people who work in the unorganised sector and require financial support
from the government. Individuals pay a very low premium towards the scheme and receive a
pension after their retirement. However, it is mandatory that individuals have an active
savings account in order to avail benefits from the scheme. Citizens between the ages of 18
years and 40 years can apply for the Atal Pension Yojana scheme. Contributions towards the
scheme must be made for a minimum duration of 20 years. Individuals must make very low
contributions towards the scheme, however, if the contributions that are being made are high,
the pension that is received will also be high. However, in case individuals opt for the Atal
Pension Yojana scheme, they cannot opt for any other savings scheme.
3.2.6 Voluntary Provident Fund (VPF)
Employees can opt for the VPF scheme on a voluntary basis. Under the VPF scheme,
employees are allowed to contribute their entire basic salary towards the scheme, unlike the
EPF scheme, where only 12% of the basic salary can be contributed. Any contributions made
towards the VPF scheme will impact the EPF scheme and vice versa. The rate of interest that
is generated from contributions made towards the scheme for the FY 20182019 is 8.65% p.a.

3.2.7 Kisan Vikas Patra (KVP)

The Kisan Vikas Patra certificate scheme is offered by post offices in India. The rate of
interest that is offered by the scheme at the moment is 7.7% and it is compounded on an
annual basis. The minimum contribution that must be towards the scheme is Rs.1,000 and
there is no maximum limit. Over the course of 112 months, the amount invested towards the
scheme doubles. Individuals are allowed to add nominees to the scheme and the certificate
can be transferred from one individual to another and from one post office to another.
Individuals are also allowed to encash the certificate after 30 months from when the
certificate was issued.
3.2.8 Senior Citizens Savings Scheme (SCSS)
The SCSS was launched with the aim of helping individuals who are 60 years and above.
Individuals who are between the ages of 55 years and 60 years and have chosen for Voluntary
Retirement Scheme (VRS) can also avail the benefits of the SCSS.The duration of the SCSS
is 5 years and the rate of interest under the scheme is 8.7% p.a. Individuals must invest a
minimum of Rs.1,000 towards the scheme and the maximum investment that can be made is
Rs.15lakh. Individuals can also transfer their SCSS accounts from a post office to a bank and
vice versa. Under Section 80C of the Income Tax Act, tax deductions are available for
investments made towards the scheme.

3.2.9 National Savings Certificate (NSC)

The NSC scheme is one of the most popular schemes in India. Since the scheme is backed
by the Indian Government, guaranteed returns and tax benefits are provided. The duration of
the scheme is 5 years and individuals can invest in the scheme at post offices. The Indian
Government decides the interest rates of the scheme on a quarterly basis.
The rate of interest of the scheme for FY 2018-2019 is 8.0%. The interest that is generated is
compounded on an annual basis. The minimum contribution that must be made towards the
scheme is Rs.100 and there is no limit to the amount of contribution that can be made. Under
Section 80C of the Income Tax Act, individuals are eligible for tax benefits on the
contribution they make towards the scheme. Individuals are also allowed to transfer the
certificate to another person’s name. However, this can be done only once.

3.2.10 Post Office Savings Scheme

The various savings schemes that are offered by India Post are very popular as the risks are
very minimal and most of the schemes provide guaranteed returns. The process to open any
saving schemes accounts at the post office is simple and quick. The many good features
offered by the schemes also make them popular.

3.3 INVESTMENT OPTIONS AVAILABLE:

There are a large number of investment instruments available today. To make our lives easier
we would classify or group them. In India, numbers of investment avenues are available for
the investors. Some of them are marketable and liquid while others are non-marketable and
some of them also highly risky while others are almost risk less. The people have to choose
Proper Avenue among them, depending upon his specific need, risk preference, and return
expected Investment avenues can broadly categories under the following heads.
1. Insurance policies
2. Mutual Funds
3. Shares
4. Bonds
5. Bank Fixed Deposits
6. Public provident fund
7. Post office savings.
8. Direct Equity
9. Gold/Silver
10. Real Estate
11. Debt Security

3.3.1 Insurance policies:

Insurance companies offer many investment schemes to investors. These schemes promote
saving and additionally provide insurance cover. L1C is the largest life insurance company in
India. Some of its schemes include

 Life policies
 Convertible whole life assurance policy,
 Endowment assurance policy,
 Jeevan Saathi,
 Money back policy
 Unit linked plan
 Term assurance
 Immediate annuity
 Deferred annuity
 Riders etc.
Insurance policies, while catering to the risk compensation to be faced in the future by
investor, also have the advantage of earning a reasonable interest on their investment
insurance premiums.
3.3.2 Mutual Funds:
This is an emerging area for investment and there is a large variety of schemes in the market
to suit the requirements of a large number of people. In finance, in general, you can think of
equity as ownership in any asset after all debts associated with that asset are paid off. For
example, a car or house with no outstanding debt is considered the owner's equity because he
or she can readily sell the item for cash. Stocks are equity because they represent ownership
in a company.

3.3.3 Shares:
Shares are units of equity ownership in a corporation. For some companies, shares exist as a
financial asset providing for an equal distribution of any residual profits, if any are declared,
in the form of dividends. Shareholders of a stock that pays no dividends do not participate in
a distribution of profits. Instead, they anticipate participating in the growth of the stock price
as company profits increase. Shares represent equity stock in a firm, with the two main types
of shares being common shares and preferred shares. As a result, "shares" and "stock" are
commonly used interchangeably.

3.3.4 Bonds:
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower
(typically corporate or governmental). A bond could be thought of as an I.O.U. between the
lender and borrower that includes the details of the loan and its payments. Bonds are used by
companies, municipalities, states, and sovereign governments to finance projects and
operations. Owners of bonds are debt-holders, or creditors, of the issuer. Bond details include
the end date when the principal of the loan is due to be paid to the bond owner and usually
include the terms for variable or fixed interest payments made by the borrower.
3.3.5 Bank Fixed Deposits:
A fixed deposit, also known as an FD, is an investment instrument offered by banks, as well
as non-banking financial companies (NBFC) to their customers to help them save money.
With an FD account, you can invest a sizeable amount of money at a predetermined rate of
interest for a fixed period. At the end of the tenure, you receive the lump sum, along with an
interest, which is a good money-saving plan. Banks offers different rates of interest for a
fixed deposit account. You can choose a fixed deposit for a period ranging from minimum 7-
14 days to maximum 10 years. This is why an FD is sometimes called a term deposit. When
you open a fixed deposit account at a specific interest rate, it is guaranteed, for the rate of
interest remains the same, irrespective of any changes, which happen due to market
fluctuations. The interest you earn is either paid at maturity or on periodic basis depending on
your choice. You are not allowed to withdraw the money before the maturity. If you want to,
you have to pay a penalty.

3.3.6 Public provident fund:

The PPF account or Public Provident Fund scheme is one of the most popular long-term
saving-cum-investment products, mainly due to its combination of safety, returns and tax
savings. The PPF was first offered to the public in the year 1968 by the Finance Ministry’s
National Savings Institute. Since then it has emerged as a powerful tool to create longterm
wealth for investors. Investors use the PPF as a tool to build a corpus for their retirement by
putting aside sums of money regularly, over long periods of time (PPF has a 15-year
maturity, and the facility to extend the tenure). With its attractive interest rates and tax
benefits, the PPF is a big favourite with a small saver.

3.3.7 Post office savings:

The post office savings account is a deposit scheme provided by the post office throughout
India. The account provides a fixed interest rate on the account balance. It is a beneficial
scheme for individual investors who wish to earn a fixed rate of interest by investing a
significant portion of their financial assets. Post office savings account is also a very helpful
scheme for those residing in rural parts of India. Since the nationwide reach of the post
offices is much greater as compared to banks, a large number of unprivileged people have
been able to get access to savings accounts through post offices.

3.3.8 Direct Equity:

Direct equity investments refer to those investments made by investors directly in the stock
market for buying the company shares/stocks. In other words, the money invested in the
shares of the company is termed equity. In legal terms, the investor is buying partial
ownership of the company to get the voting rights. Investors require a demat account for
trading in shares. This account can be a personally managed account, or a broker/dealer can
manage it.Some investors who understand the working of equity markets can directly
purchase stocks/shares of the company and plan their investment portfolio. Also, they can
find the right balance between risk and returns. On the other hand, some investors can find it
difficult to understand business fundamentals and technical. Hence, they should invest in
direct equity under an expert’s guidance.

3.3.9 Gold/Silver:
The bullion offers investment opportunity in the form of gold, silver, art objects
(paintings ,antiques), precious stones and other metals (precious objects), specific categories
of metals are traded in the metal exchange.
3.3.10 Real Estate:
Investment in real estate also made when the expected returns are very attractive. Buying
property is an equally strenuous investment decision. Real estate investment is often linked
with the future development plans of the location. At present investment in real assets is
booming there are various investment source are available for investment which are directly
or indirectly investing real estate. In addition to this, the more affluent investors are likely to
be interested in other type of real estate, like commercial property, agricultural land, semi
urban land, and resorts.

3.3.11 Debt security:

A debt security is a debt instrument that can be bought or sold between two parties and has
basic terms defined, such as the notional amount (the amount borrowed), interest rate, and
maturity and renewal date. Examples of debt securities include a government bond, corporate
bond, certificate of deposit (CD), municipal bond, or preferred stock. Debt securities can also
come in the form of collateralized securities, such as collateralized debt obligations (CDOs),
collateralized mortgage obligations (CMOs), mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), and zero-coupon securities.

3.4 Key Differences between Savings and Investment:

The differences between savings and investment are explained in the following points:

3.4.1. Savings means to set keep aside a part of your earned income for future use.
Investment is often defined as the act of putting funds into the productive uses, i.e. investing
in such investment vehicles which can reap money over a period of time.
3.4.2. People often save money, to fulfil their unexpected and sudden expenses or urgent
money requirements. Conversely, investments are made or done to generate returns over the
period so that it can help in capital formation of an individual.
3.4.3. With an investment, there is follows always a risk of losing money. Unlike savings,
there are comparatively fewer chances of the losing the hard-earned money.
3.4.4. Investment provides higher returns than savings, as there is a assured and nominal rate
of interest on savings. However, the investments in turn can earn money more than the
invested amount, if invested wisely.
3.4.5. You can have easily have access to your savings, any time because they are highly
liquid and flexible, but in the case of investment you cannot have easy access to money as
compared , because the process of selling the investments and making liquid takes some time.

3.5 Significance of Savings:

3.5.1 Earn Interest
A savings account helps you earn interest on the deposited amount. To attract new customers,
banks now offer higher interest rates and a host of other benefits such as discounts on locker
rentals, unlimited ATM transactions, and more. Moreover, some of the banks also offer many
different types of savings account to meet the different needs of the customers.
3.5.2 Safest Investment Option
One of the biggest advantages of saving account is unlike most other investment options, a
savings bank account does not invest your money but still offers modest returns. All you need
to do is to deposit money in your savings account to take advantage of this feature.
3.5.3 Minimum Investment Amount
Browse through the different investment options and you’ll see that a savings account is also
the most affordable. You are simply required to keep the minimum balance in your account to
keep earning interest. This minimum deposit amount can be different for every bank.

3.6 Issues relating of Savings:

3.6.1 Interest Rates Can Change
One important disadvantage of a savings bank account is that the interest rates offered by the
bank are variable. This means that the bank has the right to make changes to the interest rate.
While the changes are generally minimal, it is possible that the interest rate of a savings
account now can be lower 6 months down the line.
3.6.2 Easy Access
While easy access to funds is seen as one of the most important features of savings account,
it can also work as a disadvantage for some people. As these accounts allow you to access
your funds any time you like, people are more tempted to spend. This can make long-term
savings challenging.
3.6.3 Minimum Balance Requirement
When you open a savings bank account, you’ll be required to maintain a minimum average
balance in your account. If you fail to maintain this balance, the bank charges a penalty for
the same. So, before opening an account, make sure that you check the minimum balance
requirements of the bank and always maintain this balance to avoid the penalty.

3.7 Significance of Investment:

3.7.1. Potential for long-term returns:
While cash is undoubtedly safer than shares, it’s unlikely to grow much, or find opportunities
to grow, in the long run. In the past, investors have found rewards over longer terms with
investments that come with a level of capital risk. That means the risk that you might lose
some or all of the amount you initially invested. Of course, these rewards are not guaranteed.
Volatility in the stock market, when stock prices change rapidly over a short period of time,
isn’t necessarily a bad thing. In fact, volatility can sometimes offer investment managers the
opportunity to buy attractive shares at a cheaper price and get better returns in the long term.
3.7.2. Outperform inflation:
In order for your savings to grow in real terms over time, they need to earn a rate of return
after tax that’s greater than the rate of inflation. With today’s low interest rates, it can be
difficult to find a savings account that can give you a return above the current inflation rate.
So it’s worth considering investments which have the potential to outperform inflation.
3.7.3. Provide a regular income:
If you’re retired or approaching retirement, you’ll probably be looking for something can
give you a regular income to cover day-to-day living expenses. There’s a range of
investments, including equities, bonds and property that can provide you with regular income
that’s often higher than the rate of inflation.
3.7.4. Tailor to your changing needs:
You or an Investment Manager can design your investment portfolio to achieve different
goals as you go through life, e.g. you may prefer less risky options as you get older. With
careful planning you can tailor your portfolio to reflect your changing goals and priorities. If
you plan on investing over a long time period, you may want to invest in funds that have
growth potential, risky sectors such as emerging markets, or private equity where your
savings can ride out short term market changes. If you’re approaching retirement, you may
want to invest in more income-focused options.
3.7.5. Invest to fit your financial circumstances:
As your financial circumstances change over time, you can change how you invest to suit
your needs. You can invest lump sums as and when you can, or smaller regular amounts in a
monthly investment plan. If you have the money available, you can start investing straight
away. The sooner you invest, the longer your investment has to grow. Alternatively, investing
a regular amount each month can help iron out fluctuations in the stock market, particularly
in a volatile market.

3.8 Issues in Investment:

3.8.1. Risk:
You could lose your entire investment. If a company does poorly, investors will sell, sending
the stock price plummeting. When you sell, you will lose your initial investment.
If you can't afford to lose your initial investment, then you should buy bonds.
3.8.2. Common stockholders paid last:
Preferred stockholders and bondholders or creditors get paid first if a company goes broke.
But that happens only if a company goes bankrupt. A well-diversified portfolio should keep
you safe if any company goes under.
3.8.3. Time:
If you are buying stocks on your own, you must research each company to determine how
profitable you think it will be before you buy its stock. You must learn how to read financial
statements and annual reports and follow your company's developments in the news. You
also have to monitor the stock market itself, as even the best company's price will fall in a
market correction, a market crash, or bear market.
3.8.4. Taxes:
If you sell your stock for a loss, you may be able to get a tax break. However, if you sell your
stock for a profit, you'd be liable to to pay capital gains taxes.
3.8.5. Emotional Roller Coaster:
Stock prices rise and fall second by second. Individuals tend to buy high out of greed, and sell
low out of fear. The best thing to do is not constantly look at the price fluctuations of stocks,
and just check in on a regular basis.