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K.S.SCHOOL OF BUSINESS MANAGEMENT 4
Mutual funds are considered as one of the best available
investments as compare to others they are very cost efficient and also
easy to invest in, thus by pooling money together in a mutual fund,
investors can purchase stocks or bonds with much lower trading coststhan if they tried to do it on their own. But the biggest advantage to
mutual funds is diversification, by minimizing risk & maximizing
returns.
Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. The
flow chart below describes broadly the working of a mutual fund
Unit Trust of India is the first Mutual Fund set up under a separate
act, UTI Act in 1963, and started its operations in 1964 with the
issue of units under the scheme US-64.
Overview of existing schemes existed in mutual fund category.
Wide variety of Mutual Fund Schemes exists to cater to the needs
such as financial position, risk tolerance and return expectations etc. Thetable below gives an overview into the existing types of schemes in the
Industry.
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Type of Mutual Fund Schemes
BY STRUCTURE
1.Open Ended Schemes:An open-end fund is one that is available for subscription all
through the year. These do not have a fixed maturity. Investors can
conveniently buy and sell units at Net Asset Value ("NAV") related
prices. The key feature of open-end schemes is liquidity.
2.Close Ended Schemes:A closed-end fund has a stipulated maturity period which generally
ranging from 3 to 15 years. The fund is open for subscription only
during a specified period. Investors can invest in the scheme at the time
of the initial public issue and thereafter they can buy or sell the units of
the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the Mutual Fund through periodic
repurchase at NAV related prices. SEBI Regulations stipulate that at
least one of the two exit routes is provided to the investor.
3.Interval Schemes:Interval Schemes are that scheme, which combines the features of
open-ended and close-ended schemes. The units may be traded on the
stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices
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BY INVESTMENT OBJECTIVE
Growth Schemes: Growth Schemes are also known as equityschemes. The aim of these schemes is to provide capital
appreciation over medium to long term. These schemes normally
invest a major part of their fund in equities and are willing to bear
short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debtschemes. The aim of these schemes is to provide regular and
steady income to investors. These schemes generally invest in
fixed income securities such as bonds and corporate debentures.
Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide bothgrowth and income by periodically distributing a part of the
income and capital gains they earn. These schemes invest in both
shares and fixed income securities, in the proportion indicated intheir offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provideeasy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short-term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter-
bank call money.
OTHER SCHEMES
Tax Saving Schemes: Tax-saving schemes offer tax rebates to theinvestors under tax laws prescribed from time to time. Under
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Sec.88 of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes: Index schemes attempt to replicate the
performance of a particular index such as the BSE Sensex or theNSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the
total holding will be identical to the stocks index weightage. And
hence, the returns from such schemes would be more or less
equivalent to those of the Index.
Sector Specific Schemes: These are the funds/schemes whichinvest in the securities of only those sectors or industries as
specified in the offer documents. e.g. Pharmaceuticals, Software,
Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc.
The returns in these funds are dependent on the performance of the
respective sectors/industries. While these funds may give higher
returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those
sectors/industries and must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds
can be enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds.A fund pays out nearly all income it receives over the year to fund
owners in the form of a distribution.
If the fund sells securities that have increased in price, the fund hasa capital gain. Most funds also pass on these gains to investors in a
distribution.
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Mutual Funds Industry in India
The origin of mutual fund industry in India is with the introduction of
the concept of mutual fund by UTI in the year 1963. Though the growth
was slow, but it accelerated from the year 1987 when non-UTI players
entered the industry.
In the past decade, Indian mutual fund industry had seen dramatic
improvements, both quality wise as well as quantity wise. Before, the
monopoly of the market had seen an ending phase; the Assets under
Management (AUM) were Rs. 67bn. The private sector entry to the fund
family raised the AUM to Rs. 470 in in March 1993 and till April 2004,it reached the height of 1,540 bn.
Putting the AUM of the Indian Mutual Funds Industry into comparison,
the total of it is less than the deposits of SBI alone, constitute less than
11% of the total deposits held by the Indian banking industry.
The main reason of its poor growth is that the mutual fund industry in
India is new in the country. Large sections of Indian investors are yet to
be intellectuated with the concept. Hence, it is the prime responsibility
of all mutual fund companies, to market the product correctly abreast of
selling. The mutual fund industry can be broadly put into four phases
according to the development of the sector. Each phase is briefly
described as under.
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Major Players of Mutual Funds In
IndiaPeriod (Last 1 Week)
Rank Scheme Name Date NAV
(Rs.)
Last
1
Week
Since
Inception
1 JM Core 11 Fund
- Series 1 -
Growth
Mar
26 ,
2008
8.45 5.12 -94.64
2 Tata Indo-Global
Infrastructure
Fund - Growth
Mar
26 ,
2008
8.26 5.05 -40.42
3 Tata Capital
Builder Fund -
Growth
Mar
26 ,
2008
12.44 5.03 15.35
4 StandardChartered
Enterprise Equity
Fund - Growth
Mar26 ,
2008
14.07 5 20.92
http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM263http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM263http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM263http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=AZ222http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA183http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA388http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM263http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM263http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=JM2637/31/2019 Our Project Final
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Plan A - Preferred
Units
2008
12 ICICI Prudential
FMP - Series 33 -
Plan A - Growth
Mar
26 ,
2008
9.89 2.91 -7.88
13 Tata SIP Fund -
Series I - Growth
Mar
26 ,
2008
10.25 2.38 2.39
14 Sahara R.E.A.L
Fund - Growth
Mar
25 ,
2008
7.64 1.86 -49.52
15 Tata SIP Fund -
Series II -
Growth
Mar
26 ,
2008
9.93 1.58 -0.94
http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BE017http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BE017http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=Ta224http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=Ta224http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=FI037http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=FI037http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=FI037http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=FI037http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=Ta224http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=Ta224http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=PI500http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BE017http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=BE0177/31/2019 Our Project Final
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History of the Indian mutual fund industry:
The mutual fund industry in India started in 1963 with the formation of
Unit Trust of India, at the initiative of the Government of India and
Reserve Bank. The history of mutual funds in India can be broadly
divided into four distinct phases.
First Phase1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In
1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control
in place of RBI. The first scheme launched by UTI was Unit Scheme
1964. At the end of 1988 UTI had Rs.6,700 crores of assets under
management.
Second Phase1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund was the
first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund
(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90),
Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund
in June 1989 while GIC had set up its mutual fund in December 1990.Atthe end of 1993, the mutual fund industry had assets under management
of Rs.47,004 crores.
Third Phase1993-2003 (Entry of Private Sector Funds)
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monthly or weekly. Redemption of units can be made during
specified intervals. Therefore, such funds have relatively low
liquidity.
Based on their investment objective:Equity funds: These funds invest in equities and equity related
instruments. With fluctuating share prices, such funds show
volatile performance, even losses. However, short term
fluctuations in the market, generally smoothens out in the long
term, thereby offering higher returns at relatively lower volatility.
At the same time, such funds can yield great capital appreciation
as, historically, equities have outperformed all asset classes in thelong term. Hence, investment in equity funds should be considered
for a period of at least 3-5 years. It can be further classified as:
i)Index funds: In this case a key stock market index, like BSE Sensex
or Nifty is tracked. Their portfolio mirrors the benchmark index both
in terms of composition and individual stock weight ages.
ii)Equity diversified funds
: 100% of the capital is invested in equitiesspreading across different sectors and stocks.
iii) Dividend yield funds: it is similar to the equity diversified funds
except that they invest in companies offering high dividend yields.
iv)Thematic funds: Invest 100% of the assets in sectors which are
related through some theme.
e.g. -An infrastructure fund invests in power, construction, cementssectors etc.
v)Sector funds: Invest 100% of the capital in a specific sector. e.g. - A
banking sector fund will invest in banking stocks.
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market. Funds are allocated to equities, derivatives and money markets.
Higher proportion (around 75%) is put in money markets, in the absence
of arbitrage opportunities.
v)Gilt funds LT: They invest 100% of their portfolio in long-termgovernment securities.
vi)Income funds LT: Typically, such funds invest a major portion of
the portfolio in long-term debt papers.
vii)MIPs-:Monthly Income Plans have an exposure of 70%-90% to debt
and an exposure of 10%-30% to equities.
viii)FMPs: fixed monthly plans invest in debt papers whose maturity is
in line with that of the fund.
Investment strategies
1. Systematic Investment Plan: under this a fixed sum is invested each
month on a fixed date of a month. Payment is made through post datedcheques or direct debit facilities. The investor gets fewer units when the
NAV is high and more units when the NAV is low. This is called as the
benefit of Rupee Cost Averaging (RCA)
2. Systematic Transfer Plan: under this an investor invest in debt
oriented fund and give instructions to transfer a fixed sum, at a fixed
interval, to an equity scheme of the same mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a
mutual fund then he can withdraw a fixed amount each month.
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than if they tried to do it on their own. But the biggest advantage to
mutual funds is diversification, by minimizing risk & maximizing
returns.
Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. The
flow chart below describes broadly the working of a mutual fund
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3. Balanced funds: As the name suggest they, are a mix of both equity
and debt funds. They invest in both equities and fixed income securities,
which are in line with pre-defined investment objective of the scheme.
These schemes aim to provide investors with the best of both the worlds.
Equity part provides growth and the debt part provides stability in
returns.
Further the mutual funds can be broadly classified on the basis of
investment parameter viz,
Each category of funds is backed by an investment philosophy, which is
pre-defined in the objectives of the fund. The investor can align his own
investment needs with the funds objective and invest accordingly.
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BY INVESTMENT OBJECTIVE
Growth Schemes: Growth Schemes are also known as equityschemes. The aim of these schemes is to provide capital
appreciation over medium to long term. These schemes normally
invest a major part of their fund in equities and are willing to bear
short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debtschemes. The aim of these schemes is to provide regular and
steady income to investors. These schemes generally invest in
fixed income securities such as bonds and corporate debentures.Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide bothgrowth and income by periodically distributing a part of the
income and capital gains they earn. These schemes invest in both
shares and fixed income securities, in the proportion indicated in
documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provideeasy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short-term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter-
bank call money.
OTHER SCHEMES
Tax Saving Schemes: Tax-saving schemes offer tax rebates to theinvestors under tax laws prescribed from time to time. Under
Sec.88 of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate.
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Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that,
they are professional managed, by well qualified professional. Investors
purchase funds because they do not have the time or the expertise to
manage their own portfolio. A mutual fund is considered to be relatively
less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying
individual stocks or bonds, the investors risk is spread out and
minimized up to certain extent. The idea behind diversification is to
invest in a large number of assets so that a loss in any particular
investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of
securities at a time, thus help to reducing transaction costs, and help to
bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows
investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy,
compare to other available instruments in the market, and the minimum
investment is small. Most AMC also have automatic purchase plans
whereby as little as Rs. 2000, where SIP start with just Rs.50 per month
basis.
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Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesnt perform in neither
the market, as their management is not dynamic enough to explore the
available opportunity in the market, thus many investors debate over
whether or not the so-called professionals are any better than mutual
fund or investor himself, for picking up stocks.
2. Costs The biggest source of AMC income, is generally from the
entry & exit load which they charge from an investors, at the time of
purchase. The mutual fund industries are thus charging extra cost under
layers of jargon.
3. Dilution - Because funds have small holdings across different
companies, high returns from a few investments often don't make much
difference on the overall return. Dilution is also the result of a successful
fund getting too big. When money pours into funds that have had strong
success, the manager often has trouble finding a good investment for all
the new money.
4. Taxes - when making decisions about your money, fund managers
don't consider your personal tax situation. For example, when a fund
manager sells a security, a capital-gain tax is triggered, which affects
how profitable the individual is from the sale. It might have been more
advantageous for the individual to defer the capital gains liability.
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COMPARISON OF OTHER INVESTMENT &
MUTUAL FUNDS
Investment
Investment is the employment of funds with the aim of achieving
additional income or growth in value. The essential quality of an
investment is that it involves waiting for a reward. It involves the
commitment of resources, which have been saved or put away from
currant consumption in the hope that some benefits will accrue in future.
The term Investment, does not appear to be as simple as it has been
defined. Financial experts and economists have further categorizedinvestment. Investment is the allocation of monetary resources to assets
that are expected to yield some gain or positive return over a given
period of time. These assets range from safe investments to risky
investments. Investments in these form are call Financial Investments.
From the above definitions we can say that main intention of investment
any financial return.
The nature of investment in the financial sense differs from its use
in the economic sense. To the economist, Investment means the net
additions to the economys capital stock, which consists of goods, and
services that are used in production of other goods and services.
The financial and economic meanings of investment are related to each
other because investment is a part of the savings of individuals, which
flow into the capital market directly or through institutions, dividend innew and secondhand capital financing. Investor as suppliers and
investors as users of long-term funds find a meeting place in the
market. In this book however, investment will be used in its financial
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sense and investment will include those instruments and institutional
media into which savings are placed.
Reasons for Investments
Investments are both important and useful in the context of
present-day conditions. Some factors that have made investment
decisions increasingly important are:
(a) Longer life expectancy:Investment decisions have become significant as most people in
India retire between the ages of 55 to 60 years. Also, the trend shows
longer life expectancy. The earning from employment should, thereforebe calculated in such a manner that a portion should be put away as a
savings. Savings by themselves do not increase wealth; these must be
invested in such a way that the principal and income will be adequate for
a greater number of retirement years.
The importance of investment decisions is further enhanced by the
fact that there are an increasing number of women working in
organizations. These women will be responsible for planning their owninvestments during their working in organizations. These women will be
responsible for planning their own investments during their working life
so that after retirement, they are able to have a stable income.
Increasing in the working population, proper planning for life span
and longevity have ensured the need for balanced investments
(b) Increasing Rate of Taxation:Taxation is one of crucial factors in any country, which introducesan element of compulsion in a persons savings. There are various forms
of savings outlets in our country in the form of investments which helps
in bring down the tax level by offering deductions in personal income.
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Investment OptionsMany types of investment Options or channels for making investment
are available. A sound investment program can be constructed if the
investor familiarizes himself with the various alternative investmentsavailable. Investment Options are of several kinds- some are simple
and direct, other present complex problems of analysis and
investigation. Some are familiar; others are relatively new and
unidentified. Some investments are appropriate for one type of
investor and another may be suitable to another person.
The ultimate objective of the investor is to derive a variety of
investments that meet this preference for risk and expected return. Theinvestor will select the portfolio, which will maximize his utility.
Security presents a wide range of risk from risk-free instruments to
highly speculative shares and debentures. From this board spectrum, the
investor will have to select those securities that maximize his utility. The
investor, in other words, has a optimization problems. He has to choose
the security, which will maximize his expected returns subject to certain
considerations. The investment decision is an optimization problem butthe objective function varies from investor to investor. It is not only the
construction of a portfolio that will promise the highest expected return
but also it is the satisfaction of the need of the investor. For instance, one
investor may face a situation when he requires extreme liquidity. He
may also want safety of securities. Therefore, he will have to choose a
security with low returns, another investor would not mi9nd risk because
he dose not have financial problems but he would like a high return.Such an investor can put his savings in growth shares, as he is willing to
accept risk. Another important consideration is the temperament and
psychology of the investor. Some investors are temperamentally suited
to take risks, there is other who is not willing to invest in risky securities
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even if the return to take risks, there are others who are not willing to
invest in risky securities even if the return is high. One investor may
prefer safe government bonds whereas another may be willing to invest
in blue chip equity shares of a company.
Investment Options
Direct Investment
Alternatives
A
Fixed Principal
Investment
(i) Cash
(ii) Savings Account
(iii) Savings Certificates
(iv) Government Bonds
(v) Corporate Bonds
B
Variable Principal
Securities
(i) Equity Share
(ii) Convertible Bonds
Debenture
(iii) Preference Shares
C Non-Secured Investments
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3.Portfolio ConstructionPortfolio construction requires knowledge of the different aspects of
securities. These are briefly recapitulated here, consisting of safety andgrowth of principal, liquidity of assets after taking into account the stage
involving investment timing, selection of investment, and allocation of
savings to different investments and feedback of portfolio.
While evaluating securities, the investor should realize that
investments are made under conditions of uncertainty. There cannot be a
magic formula, which will always work. The investor should be
concerned with concepts and applications that will satisfy his investmentobjectives and constantly evaluate the performance of his investments. It
need be, the investor may consider switching over to alternative
proposals.
Categories of Investments
Individual invest his savings in many sources. In once portfolio
there is more then one category of investment. Normally a person wantsto invest in life insurance. Because it gives safety to investors that after
his/her death his/her familial will get financial sport. Then individual
investor likes to invest in any highly safe category of investment like
government securities and postal savings schemes. Then individual may
think for any little beat risky investments like Equity Share, Derivatives,
Commodities, Mutual Funds, Bank Fix Deposits and Debentures. Here
are some categories of investment with their brief details.1. Postal Investments Schemes:
In India, Post office has best network. Each village, town and cities
are having post office. So we can say that post office can connect all the
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citizens in allover the country. This is the reason why post office is best
source savings and investments. In India Post offices saving schemes are
most popular. These schemes include Term Deposit, National Savings
Certificate, Kishan Vikas Patra, Recurring Deposit, Monthly IncomeScheme and Bachat Khata (Savings Account).
a) Time Deposit:
A Time Deposit is an investment option that pays annual interest rates
between 6.25 and 7.5 per cent, compounded quarterly, and is available
through post-offices across the country.
Investment Objectives
SuitabilityTime Deposits are suitable for capital appreciation in the sense that
investors money grows at a pre-determined rate. Unlike certain other
investment options, where returns are commenAhmedabade with the
risks, the rate of growth is also high; Time Deposits return a lower, but
safer, growth in investment. Therefore, Time Deposits are one of the
better ways to get a relatively high interest rate for investors savings.The only condition is that they are bound for some specific period of
time.
Regular Income:Time Deposits are not meant for regular income. Since Time
Deposits, as their name suggests, are time-bound, investor get a lump
sum (principal + interest) at the maturity of the deposit.
Over Taking InflationTime Deposits are not the ideal investment option if the rate of
inflation is either too high or is fluctuating beyond a limit. Since the rate
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of return in case of a Time Deposit is fixed, they cannot guard investor
against a high rate of inflation.
Borrow AgainstInvestor can borrow against a Time Deposit. The balance in
inventors account can be pledged as a security for a loan.
Risk Considerations
Safety of PrincipleWith Government of India-backing, Investors principal is as assured
as it is in any other post office account.
Safety of ReturnWith backing from the Government of India, Investors interest
income from Time Deposits is assured.
Unique RiskThere are no risks unique to this investment option. Only, if the rate
of inflation is higher than Investors rate of returns, or in case the
inflation is fluctuating too much, Investors real returns may be just
modest. With a low coupon, Investors real returns will simply disappear
during high inflation. So, while investing in a Time Deposit, keep in
mind the prevailing inflation rate and calculate Investors real returns
before opting for one.
Credit RatingTime Deposits, like any other post-office investment instrument, are
not commercially rated since they are backed by the GOI and areextremely safe.
Buying, Selling and Holding
Buying
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Safety of ReturnInterest income is assured at the prescribed rate of interest. As
mentioned earlier, this scheme has the backing of the Government of
India, and is deemed to be risk-free.
Unique RiskThe post office RDA is a very safe investment channel, and there are
no risks associated with Investors investment in it. However, high
inflation is a cause of concern as this diminishes the real rate of return
on Investors post office RDA.
Credit RatingThe RDA scheme does not require any commercial rating as it has the
backing of the Government of India. It is deemed to be risk-free.
Buying, Selling, and Holding
BuyingA post-office RDA can be opened at any post office in the country by
filling up the appropriate forms.
Minimum Investment and RangeThe minimum investment in a post-office RDA is Rs 10. There is no
prescribed upper limit on Investors investment. The advantage with
post-office deposits is that it offers a fixed rate of return at 7.5 percent while banks constantly change their recurring deposit rates
depending on their demand supply position. The only disadvantage is
that Investor will have to visit the post office every month whereas in
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the case of banks, the amount will be automatically deducted from
Investors account.
DurationThe post-office RDA scheme has tenure of five years. This can be
extended for a further five years if Investor so desire.
Secondary MarketThere are no provisions for a post office RDA to be traded in the
secondary market. It is also not transferable.
LiquidityOnly one withdrawal is allowed after one year of opening a post-
office RDA. Investor can withdraw up to half the balance lying to
Investors credit. On premature closure (after one year), interest is
payable as per the rate for the Post Office Savings Bank Account.
Market ValueSince a recurring deposit is not traded in the secondary market, it
does not have a market value. Investors can get regular updates fromtheir post office on the accumulated sum.
Mode of HoldingAn individual adult as a single person account can open an RDA, two
adults in a joint mode, or by a guardian on behalf of the minor who has
attained the age of 10 years in his own name. RDA can also be held by a
HUF, Trust, regimental fund, welfare fund, company, banking company,
corporation, association, institution, registered society, or local
authority. Accounts can also be opened in the name of a minor or a
person of unsound mind.
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Tax Implications
Although the investment in post-office RDA is itself not subject to
tax benefits, interest income up to Rs 9,000 per annum is exempt
from tax under Section 80L of the Income Tax Act, 1961.
(c) Monthly Income Scheme
The post-office monthly income scheme (MIS) provides for monthly
payment of interest income to investors. It is meant for investors who
want to invest a lump-sum amount initially and earn interest on a
monthly basis for their livelihood. The scheme is, therefore, a boonfor retired persons.
The post-office MIS gives a return of 8 per cent plus a bonus of 10
per cent on maturity. However, this 10 per cent bonus is not available
in case of premature withdrawals.
Investment Objectives
SuitabilityThe MIS is not suitable for an increase in Investors investment. It is
meant to provide a source of regular income on a long-term basis.
Suitable For Regular Income
The Monthly Income Scheme, as its name suggests, is best suited
to provide regular income. Interest is payable on a monthly basis at the
pre-specified rate.
Over Take InflationWith a fixed rate of return, the MIS does not provide adequate
safeguards against high inflation rates.
Borrow AgainstDepends if the banker accepts it as a security.
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Investor can buy a post office MIS at any post-office in India.
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Minimum Investment and RangeThe minimum investment in a Post-Office MIS is Rs 6,000 for both
single and joint accounts. The maximum investment for a single
account is Rs 3 lakh and Rs 6 lakh for a joint account. Duration
The duration of the MIS is six years.
Secondary MarketInvestor cannot trade Investors MIS in the secondary market.
LiquidityInvestors can withdraw money before three years, but at a discount of5 per cent. No such deduction will be made if an account is closed
after three years. Premature closure of the account is permitted any
time after the expiry of a period of one year of opening the account.
Deduction of an amount equal to 5 per cent of the deposit is to be
made when the account is prematurely closed.
Market ValueAs mentioned earlier, post-office MIS cannot be traded in thesecondary market. Therefore, the question of market value of MIS
does not arise.
Mode of HoldingPost office MIS is held physically in the form of a certificate issued
by the post office. In addition, the investor is provided with a
passbook to record his transactions against his MIS.
Tax Implications
The interest income accruing from a post-office MIS is exempt from
tax under Section 80L of the Income Tax Act, 1961. Moreover, no
TDS is deductible on the interest income. The balance is exempt from
Wealth Tax.
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(d) National Savings Certificates
National Savings Certificates (NSC) is an assured return scheme,
armed with powerful tax rebates under Section 88 of the Income Tax
Act, 1961. Interest is payable at 8 per cent, compounded half-yearlyfor a duration of 6 years.
Investment Objectives
Suitability for InvestmentNSC combines growth in money with reductions in tax liability as per
the provisions of the Income Tax Act, 1961. The scheme offers a
coupon of 8 per cent, compounded semi-annually. So, Rs 1,000invested in NSCs become Rs 1,610 on maturity after 6 years.
Suitable for Regular IncomeNSCs are not meant to provide a regular income flow. They are an
instrument for facilitating long-term savings.
Over Take InflationWith a fixed rate of return, the NSC cannot provide adequate
safeguards against the risk of a high inflation rate.
Borrow AgainstInvestor can borrow against Investors NSC by pledging it after the
permission of the concerned post-master.
Investor can pledge Investors NSC to any of the following:
1. The President of India or Governor of a State in his official capacity.
The RBI or a scheduled bank or a co-operative society (including a co-
operative bank).
2. A corporation or a government company.
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This can be issued to:
i) An adult for himself or on behalf of a minor.
ii) A Trust.
(2) Joint 'A' Type Certificate: This may be issued jointly to two adultspayable to both holders jointly or to the survivor.
(3) Joint 'B' Type Certificate: This may be issued jointly to two adults
payable to either of the holders or to the survivor.
Payment for purchase of NSC can be made by either of the following:
(a) Cash
(b) Cheque, pay order, or demand draft drawn in favor of the post-
master
(c) Surrender of a matured old certificate duly discharged
(d) Presenting a duly signed withdrawal form or cheque, together
with the pass-book for withdrawal from the post-office savings
account standing at the credit of the purchase at the same post office
Minimum Investment and Range Of Investment
NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs5,000 and Rs 10,000. There is no prescribed upper limit on
investment in NSCs.
DurationThe maturity period (duration) of a NSC scheme is 6 years.
Secondary MarketNSCs cannot be traded in the secondary market. But they can betransferred from one person to another through the post office on
payment of a prescribed fee.
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(e) Kisan Vikas Patra
Kisan Vikas Patra (KVP) doubles Investors money in 8 years and 7
months with the advantage of premature withdrawal. KVP is sold
through all Head Post Offices and other authorized post officesthroughout India. The rate of return is 8 per cent, compounded
annually.
Investment Objectives
SuitabilityKVP accumulates money at a fixed rate, and Investors money
doubles in 8 years and 7 months. Suitable for Regular Income
KVP is not meant for regular income. It is for those looking for a safe
avenue of investment without the pressing need for a regular source
of income.
Overtake InflationWith a fixed rate of return, KVP does not provide safeguards against
the perils of high inflation rates.
Borrow AgainstDepending on whether the finance company or the bank from where
Investor are raising the loan accepts it or not. Some banks accept it
for raising house loans.
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Risk Considerations
Safety of PrincipalThe KVP has the backing of the Government of India and, hence, the
principal is assured and it is deemed to be a safe avenue for investingInvestors money.
Safety of ReturnIncome is assured at the prescribed rate of interest. As mentioned, this
is a risk-free investment channel as the KVP comes with the backing
of the Government of India.
Unique RiskThere are no risks associated with Investors investment in the Kisan
Vikas Patra. It is a good option if Investor is looking for hassle-free
investment as it assures a certain sum of money at the expiry of the
duration of Investors investment.
Interest rates affect the decision to buy, hold, or sell (encase
prematurely) relating to KVP. The Government of India has reduced
the interest rates on KVP and other post office schemes in 2001.
Consequently, the tenure of this "Double Investors Money" scheme
has been increased from 6.5 years to 7 years and 3 months. Currently
it is 8 years and 7 months. In future it may be increased.
Credit RatingSince the KVP has the backing of the Government of India and is,
therefore, extremely safe, it does not require any commercial rating.
Buying, Selling, and Holding
BuyingInvestor can buy KVP by filling up the appropriate application form
available at post offices across the country.
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Minimum Investment And Range Of InvestmentThe minimum investment in KVP is Rs 100. Certificates are available
in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000
and Rs 50,000. The denomination of Rs 50,000 is sold through headpost offices only. There is no limit on holding of these certificates.
Any number of certificates can be purchased. A KVP is sold at face
value; the maturity value is printed on the Certificate.
DurationThe KVP has tenure of 7 years and 3 months, in which time
Investors principal investment doubles in value. However, there are
options for premature encashment, subject to certain rules and loss ofinterest.
Secondary MarketKVP is not a bearer certificate, and is not easily transferable.
Permission of the postmaster is required for any transfer. These
cannot be traded in the secondary market.
LiquidityIf the premature encashment takes place within a period of one yearfrom the date of purchase of the certificate, only the face value of the
certificate shall be payable. No interest is payable in this case.
After the expiry of one year, but before two years and six months
from the date of the issue of the certificate, the face value of the
certificate together with simple interest at the specified rate for the
completed months for which the certificate has been held, shall be
payable.
If a certificate is encased any time after expiry of two-and-a-half
years, the amount payable is as specified by the government from
time to time.
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Market ValueAs mentioned earlier, KVP cannot be traded in the secondary market
and, hence, the question of its market value does not arise.
Mode of HoldingKVP is held physically in the form of certificates that are issued to
the investors by the post office. The option of holding KVP in demat
form is not available.
Tax Implications
Although no TDS is applicable on the interest income from KVP,
there are no tax incentives as per the provisions of the Income Tax
Act, 1961.
2) Public Provident Fund
A Public Provident Fund (PPF) is a long-term savings plan with
powerful tax benefits. Investors money grows at 8 per cent per
annum, and the Government of India (GOI) guarantees this. Investor
may consider this option if investor are not looking for short-term
liquidity or regular income. Normal maturity period is 15 years fromthe close of the financial year in which the initial subscription was
made.
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Maturity values for investors PPF account depending on what investor
invest each year
How Investors Money grows In a PPF Account
Amount
Invested Per
Annum (Rs)
Total Amount
Invested within
15 Years (Rs)
Amount
Received After
15 Years*(Rs)
100 1,500 2,715
5,000 75,000 1,35,760
10,000 1,50,000 2,71,520
15,000 2,25,000 4,07,280
30,000 4,50,000 8,14,560
45,000 6,75,000 12,21,840
60,000 9,00,000 16,29,120
*Note: - Return offered is 8% per annum so compounded value factor ofannuity of 1 Rupee for 15 years is 27.152 Rupees
Investment Objectives
SuitabilityA PPF account is not aimed at generating capital appreciation since it
has no secondary market. It is mainly suitable for long-term saving
and for availing of tax incentives. The lump-sum amount that investorreceive on maturity (at the end of 15 years) is completely tax-free.
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Suitable For Regular IncomePPF does not provide any avenues for regular income. It provides for
accumulation of interest income over a 15-year period, and the lump-
sum amount (principal + interest) is payable on maturity. Overtake InflationA PPF account does not provide protection against high inflation. In
certain years when the inflation rate is high, the real rate of return on
investors PPF may be marginal. This depends on the prevailing rate
of interest on investors PPF at any given time. These rates are
notified by the GOI in the Official Gazette from time to time, and are
calculated in such manner as is specified in the scheme. Borrow AgainstLoans can be availed of from the third to sixth year at 1 per cent per
annum if repaid within 36 months. Else, interest on loan is set at 6 per
cent per annum. Amount of such loans will not exceed 25 per cent of
the amount that stood to investors credit at the end of the second year
immediately preceding the year in which the loan is applied for.
Investor will continue to earn interest at the specified rate oninvestors balance in the PPF Account after availing of the loan
facility.
Risk Considerations
Safety of PrincipalInvestors principal is assured. The PPF Scheme has the backing of
the GOI, and is considered completely risk-free.
Safety of IncomeSince the PPF Scheme is backed by the GOI, investors interest
income is assured.
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account will mature on April 1, 2017. Even after the expiry of 15
years, the PPF Account can be extended for duration of five years at a
time.
Secondary MarketPPF account cannot be traded in the secondary market.
LiquidityOn expiry of five financial years from the end of the financial year in
which the initial subscription was made, investors have the facility of
one withdrawal every year. The maximum amount available for
withdrawal is 50 per cent of the balance at the end of the year
immediately preceding the year of withdrawal or the fourth year
immediately preceding the year of withdrawal, whichever is lower.
For instance, if investor has Rs 50,000 at the end of the fifth financial
year, and Rs 90,000 at the end of the eighth financial year, investor
can withdraw up to Rs 25,000 (50 per cent of Rs 50,000).
Importantly, there are no penalties for availing of the withdrawal
facility.
Market ValueAs mentioned earlier, since a PPF Account does not have a secondary
market, it cannot be traded. Therefore, the question of market value of
a PPF Account does not arise. However, investors can get updates on
their account balances from the bank where the PPF account is held.
Mode of HoldingA PPF Account passbook is issued to the depositor by the bank where
the account is held, which can be updated from time to time.
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Tax Implications
Besides long-term savings, the most attractive feature of PPF is the
tax incentives it offers. The interest income earned in PPF and the
lump-sum amount received on maturity or premature withdrawal iscompletely tax-free as per the pro-visions of the Income Tax Act,
1961. The scheme also offers tax benefits at 20 per cent of the amount
invested every year. Thus, on an annual investment of Rs 60,000, an
investor can reduce his total tax outgo by Rs 12,000.
Rebate is calculated at 30 per cent if investors gross annual salary is
up to Rs 1,00,000. This also helps to reduce the actual amount
invested over a 15-year period. Investor can also open an account inthe name of investors spouse or children including married daughters
and claim the tax rebate if the contribution is made out of investors
personal taxable income.
3) Resave Bank of Indias Relief Bond
Some bonds have a special provision that allows the investor to save
on tax. These are termed as Tax-Saving Bonds, and are widely used
by individual investors as a tax-saving tool.
Examples of such bonds are:
a) Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b) Capital Gains Bonds under Section 54EC of the Income Tax Act,
1961
c) RBI Tax Relief Bonds
RBI Relief Bonds are instruments that are issued by the RBI, and
currently carry an 8 per cent rate of interest, which was reduced from
9 per cent early this year. The interest is compounded half-yearly.
Maturity period of RBI Bonds is five years, and interest received is
tax-free in the hands of the investor.
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Risk Considerations
Safety of PrincipalRBI Bonds are issued by the country's central bank, the Reserve
Bank of India. These are among the safest instruments available forinvestment, and investor can be assured of getting back the full amount
of investors investment.
Safety of Income
Investors income from RBI bonds is assured. Since the issuing entity
is the country's central bank, the risk on this investment is nil. In case
of the half-yearly interest payment option, the rate of return is 8 percent. In case of the Cumulative Scheme, where investor receives the
total interest at the end of the tenure of 5 years, the simple interest
works out to 10.32 per cent at the end of the tenure.
Unique RiskNo, there are no risks associated with investors investment in RBI
bonds. This is one of the safest investments investor can make. Inflation
and fluctuations in interest rates affect investment decisions in RBIRelief Bonds. An increase in the interest rates result in a decrease in
bond prices, and vice-versa, if investor want to sell them in the
secondary market.
Credit RatingNo, since the issuing party is the country's central bank-the RBI-these
bonds are extremely safe, and require no commercial ratings.
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LiquidityWhile RBI Bonds cannot be redeemed prematurely and must be held
for the entire duration of 5 years, investor can always exercise the
option of selling RBI Bonds in the secondary market if investor sodesire.
Market ValueMarket value of RBI Relief Bonds is determined on the basis of
prevailing (8 %) interest 7rates and market conditions.
Mode of HoldingRBI Relief Bonds can be held at the credit of the holder in an account
called BLA or in the form of PN. The bond can be held in dematform, i.e., a certificate of holding will be issued to the holder of bonds
in the BLA. The bonds in the form of BLA are issued and held with
the public debt offices of the RBI or any branch of a scheduled bank
authorized by the RBI. The bonds in the form of PN are issued only at
the offices of RBI. However, bonds issued in one form will not be
eligible for conversion into the other.
Tax Implications
Interest received on RBI Relief Bonds is completely exempt from
income tax as per the provisions of the Income Tax Act, 1961. RBI
Relief Bonds are also exempt from Wealth Tax. However, there is no tax
benefit on the amount invested in these bonds.
4) Infrastructure Bond
Infrastructure bonds are available through issues of ICICI and IDBI,
brought out in the name of ICICI Safety Bonds and IDBI Flexi bonds.
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These provide tax-saving benefits under Section 88 of the Income
Tax Act, 1961, for the investor. Investor can reduce investors tax
liability by up to Rs 100,000 per annum
For instance, the tax-saving bond from ICICI for the month of July2001 provides two options:
a) Face value of Rs 5,000 for 3 years @ 8% interest payable annually.
b) Deep Discount Bonds: Carrying a face value of Rs 6,600, these
bonds are available for Rs 5,000, and are issued for 3 years and 4
months, after which they are redeemed at their face value, i.e., Rs
6,600, the difference being the interest investor entitled to.
The terms for the IDBI Bonds are similar. According to the July 2001bond issue from ICICI, the yield to investors (including tax benefits)
works out to approximately 18.5 per cent per annum in the first
option and approximately 16.7 per cent per annum in the second.
Investment Objectives
SuitabilityDeep Discount Bonds are suitable for an increase in investors
investment. These bonds, which are sold at a discount on their face
value, are redeemed at their face value on maturity of the instrument,
the difference being investors gain.
Suitable For Regular IncomeYes, interest on Infrastructure bonds is payable at 8 per cent annually.
Overtake InflationInfrastructure bonds do not offer any protection against high inflation
since the rate of interest they offer is pre-determined, and is not
indexed for inflation.
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Borrow AgainstYes, investor can borrow against infrastructure bonds by pledging
them with a bank. The amount depends on the market value of the
bond and the credit quality of the instrument.
Risk Considerations
Safety of PrincipalAlthough Infrastructure Bonds are considered to be pretty safe,
investor cannot be assured of getting investors full investment back
as bonds such as ICICI and IDBI bonds are unsecured instruments.
The value of the bond is subject to market forces, if investors want to
sell them before their maturity. Also, in the rare case of the company
issuing the bonds going under, investor can not sell the company's
assets to recover investors investments. Hence, investor should check
the credit rating of such instruments before taking an investment
decision.
Safety of IncomeSince both ICICI and IDBI are considered to be financially healthy
institutions, income from bonds issued by these institutions is
generally assured.
Unique RisksIf the bonds have a Call option, it implies that the issuer has the right
to pre-maturely redeem the bonds if it so desires. Thus, look out for
this in the offer document carefully.
Inflation and interest rate movements are the two significant
economic factors that play a vital role in the investment decisions of
Infrastructure Bonds.
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Credit RatingYes, they are. In fact, CARE, CRISIL, and Fitch rate both ICICI
Safety Bonds and IDBI Flexi bonds AAA. This means that both the
aforementioned bonds belong to the highest safety category.
Buying, Selling, and Holding
BuyingBoth ICICI Safety Bonds and IDBI Flexi bonds have regular issues.
Application forms can be obtained directly from these institutions or
through brokers and intermediaries. Also, IDBI Bonds are listed onthe stock exchange, and can be purchased from there too.
Minimum Investment and Range Of InvestmentBoth these bonds can be purchased at Rs 5,000 each. Investor has to
apply for a minimum of 1 bond. There are no upper ceilings imposed
upon the purchase of such bonds.
DurationThe duration of the ICICI Safety Bonds vary according to the optionchosen by the investor. Under the first option (mentioned earlier), the
duration of is 3 years; under the second option, the duration is 3 years
and 4 months. IDBI Flexi Bonds are of similar duration.
Secondary MarketIf listed, bonds can be sold in the secondary debt market. IDBI Bonds
are listed on both the BSE and the NSE, and can be sold in the
secondary debt market. However, to avail of the tax benefits underSection 88 of the Income Tax Act, 1961, investors investment in the
bond must hold good for at least 3 years.
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LiquidityICICI offers ''Anytime Facility'' on its Safety Bonds whereby the
bonds can be sold back to ICICI directly at the prevailing market
price. An investor holding IDBI Bonds can exercise the option ofearly redemption of the instrument subject to the options available on
a specified instrument as spelt out in the offer letter.
Market ValueThe market value of a bond is linked to its yield on maturity and the
prevailing interest rates. Price of a bond will fall if interest rates rise
and vice-versa. If the credit rating of the issuer changes, the market
price of such bond may be affected. ICICI provides regular updateson the market value of its various bonds on its Website,
http://www.icici.com/.
Mode Of HoldingBoth ICICI Safety Bonds and IDBI Flexi bonds provide investors the
option of purchasing and holding the instruments either as physical
certificates or in the demat form.
Tax Implications
According to Section 88 of the Income Tax Act, 1961, 20 per cent of
the amount invested in Infrastructure Bonds qualifies for tax rebates.
For instance, if investor buys Rs 40,000 worth of tax-saving bonds,
and investors tax liability is Rs 10,000, then 20 per cent of Rs
40,000, i.e., Rs 8,000 will be deducted from investors tax liability. In
that case, instead of paying Rs 10,000, investor will now pay Rs
2,000 only to the Income Tax Department.
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The maximum investment on which investor can claim a rebate is Rs
80,000, i.e., maximum rebate allowed is Rs 16,000. If investors are an
author, playwright, artist, musician, actor, or sportsman, the rebate is
calculated at 25 per cent instead of the usual 20 per cent. As perUnion Budget 2001, the rebate will be calculated at 30 per cent for
salaried individuals whose salary is up to Rs 1,00,000.
5) Bank Fixed Deposits
When investor deposit a certain sum in a bank with a fixed rate of
interest and a specified time period, it is called a bank Fixed Deposit(FD). At maturity, investor are entitled to receive the principal
amount as well as the interest earned at the pre-specified rate during
that period. The rate of interest for Bank Fixed Deposits varies
between 4 and 11 per cent, depending on the maturity period of the
FD and the amount invested. The interest can be calculated monthly,
quarterly, half-yearly, or annually, and varies from bank to bank.
They are one the most common savings avenue, and account for a
substantial portion of an average investor's savings. The facilities vary
from bank to bank. Some services offered are withdrawal through
cheques on maturity, break deposit through premature withdrawal,
and overdraft facility etc.
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Duration Interest rate (%) per
annum
15-30 days 5-7 %
30-45 days 5-8 %
46-90 days 6-8 %
91-180 days 6.5-9.5 %
181-365 days 7-9.5 %
1-1.5 years 8.5-10.25 %
1.5-2 years 8.5-10.5 %
2-3 years 9-10.5 %
3-5 years 9.5-10.5 %
5 years 9.5-11 %
Investment Objectives
SuitabilityWhile a Bank FD does provide for an increase in investors initial
investment, it may be at a lower rate than other comparable fixed-
return instruments. Since capital appreciation in any investment
option depends on the safety of that option, and banks being among
the safest avenues, the increase in investment is modest.
Suitable for Regular IncomeA Bank FD does not provide regular interest income, but a lump-
sum amount on its maturity. Since the lump-sum amount depends on
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the rate of interest, currently between 4 and 11 per cent, Bank FDs
are not suitable for regular income.
Overtake InflationWith a fixed return, which is lower than other assured return
options, banks cannot guard against inflation. In fact, this is the main
problem with Bank FDs as any return has to be calculated keeping
inflation in mind.
Borrow AgainstYes, in some cases, loans up to 90 per cent of the deposit amount
can be taken from the bank against fixed deposit receipts.
Risk Considerations
Safety of PrincipalAlmost 100 per cent. Bank Deposits are the safest investment option
after post-office schemes since the banks function according to the
parameters set by the Reserve Bank of India (RBI), which frames
regulations keeping in mind the interest of the investors.
Safety of IncomeThere is no regular income in this option as the payment is made in
one lump sum after the expiry of the tenure of the Bank Fixed Deposit.
Unique RisksNot really. Since all the banks operating in the country, irrespective
of whether they are nationalized, private, or foreign, are governed
by the RBI's rules and regulations, which give due weight age to the
interest of the investor, there is little chance of an investment in a
bank deposit going under. In fact, till recently, all bank deposits
were insured under the Deposit Insurance & Credit Guarantee
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Scheme of India, which has now been made optional. Nevertheless,
bank deposits are still among the safest modes of investment. The
thing to consider before investing in a FD is the rate of interest and
the inflation rate. A high inflation rate can simply chip awayinvestors real returns. So, it is critical to take the inflation rate into
consideration to arrive at the real rate of interest.
Credit RatingNo, Bank FDs are not commercially rated. Since Bank FDs are
extremely secure, the only thing to check out while investing in one
is the interest rate being offered and investors convenience.
Buying, Selling, and Holding
Opening AccountInvestor can get a bank FD at any bank, be it nationalized, private,
or foreign. Investor has to open a FD account with the bank, and
make the deposit. However, some banks insist that investor maintain
a savings account with them to operate a FD.
Minimum Investment and Range Of InvestmentMinimum investment in an FD varies from bank to bank. It could be
as low as Rs 500 in case of nationalized banks, and could go up to
Rs 10,000 in private banks and Rs 50,000 in some foreign banks.
Banks are free to offer interest rates on their FDs, depending on the
interest rate scenario, the government's monetary policy, and their
own money supply position.
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DurationBank FDs have varying duration: from 15 days to more than 5 years.
Depending on their duration, the interest also varies.
Secondary MarketNo, a bank FD can only be encased from the bank it was taken from.
LiquidityBank FDs are liquid to the extent that premature withdrawal of a
bank FD is allowed. However, that involves a loss of interest.
Market ValueSince Bank FDs cannot be sold in the market, they do not have a
market value. The interest on a Bank FD is determined by individual
banks, keeping the market forces in mind.
Banks periodically mail to investor account statements or issue
passbooks through which investor can track investors account status
Mode of HoldingWhen a depositor opens an FD account with a bank, a passbook or
an account statement is issued to him, which can be updated from time
to time, depending on the duration of the FD and the frequency of the
interest calculation.
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Tax Implications
Interest income from a Bank FD qualifies for exemption under section
80L, which means that interest income up to Rs 9,000 is tax-exempt.
6) Debentures/ Corporate Fixed Deposits
Fixed deposits in companies that earn a fixed rate of return over a
period of time are called Company Fixed Deposits. Financial institutions
and Non-Banking Finance Companies (NBFCs) also accept such
deposits. Deposits thus mobilized are governed by the Companies Act
under Section 58A. These deposits are unsecured, i.e., if the company
defaults, the investor cannot sell the company to recover his capital, thusmaking them a risky investment option.
NBFCs are small organizations, and have modest fixed and
manpower costs. Therefore, they can pass on the benefits to the investor
in the form of a higher rate of interest.
NBFCs suffer from a credibility crisis. So be absolutely sure to check
the credit rating. AAA rating is the safest. According to latest RBI
guidelines, NBFCs and companies cannot offer more than 14 per cent
interest on public deposits.
Investment Objectives
SuitabilityA Company/NBFC Fixed Deposit provides for faster appreciation
in the principal amount than bank fixed deposits and post-office
schemes. However, the increase in the interest rate is essentially due to
the fact that it entails more risk as compared to banks and post-office
schemes.
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Suitable for IncomeYes, Company/NBFC Fixed Deposits are suitable for regular
income with the option to receive monthly, quarterly, half-yearly, and
annual interest income. Moreover, the interest rates offered are higherthan banks.
Overtake InflationA Company/NBFC Fixed Deposit provides investor with limited
protection against inflation, with comparatively higher returns than other
assured return options.
Borrow AgainstYes, investor can borrow against a Company/NBFC Fixed Deposit
from banks, but it depends on the credit rating of the company investor
have invested in. Moreover, some NBFCs also offer a loan facility on
the deposits investors maintain with them.
Risk Considerations
Safety of PrincipalCompany Fixed Deposits are unsecured instruments, i.e., there are
no assets backing them up. Therefore, in case the company/NBFC goes
under, chances are that investor may not get investors principal sum
back. It depends on the strength of the company and its ability to pay
back investors deposit at the time of its maturity. While investing in an
NBFC, always remember to first check out its credit rating. Also,
beware of NBFCs offering ridiculously high rates of interest.
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Safety of IncomeNot at all secured. Some NBFCs have known to default on their
interest and principal payments. Investor must check out the liquidity
position and its revenue plan before investing in an NBFC. Unique Risks
If the Company/NBFC goes under, there is no assurance of
investors principal amount. Moreover, there is no guarantee of
investors receiving the regular-interval income from the company.
Inflation and interest rate movements are one of the major factors
affecting the decision to invest in a Company/NBFC Fixed Deposit.
Also, investor must keep the safety considerations and thecompany/NBFCs credit rating and credibility in mind before investing
in one.
Credit RatingYes, Company/NBFC Fixed Deposits are rated by credit rating
agencies like CARE, CRISIL and ICRA. A company rated lower by
credit rating agency is likely to offer a higher rate of interest and vice-
versa. An AAA rating signifies highest safety, and D or FD means thecompany is in default.
Buying, Selling, and Holding
BuyingCompany Fixed Deposits forms are available through various
broking agencies or directly with the companies. Similar is the case for
the NBFCs.
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Tax Implications
Interest from a Company/NBFC Fixed Deposit is fully taxable, and
is not covered under Section 80L of the Income Tax Act. Therefore no
deductions are allowed from interest income.
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3.3 Comparison of Deferent Investment Categories
Table 1
Investme
nt
Inc
om
e
Capit
al
Appr
eciati
on
Tax
Benef
its
Safet
y
Liquid
ity
Inflatio
n
Protect
ion
Can
bor
ro
w
aga
inst
Cred
it
Ratin
g
BankFixed
Deposits
No Yes ~ Yes No No Yes No
Recurring
Bank
Deposits
No Yes ~ Yes Yes No Yes No
CompanyFixed
Deposits
Yes Yes No ~ Yes No Yes Yes
Bonds/De
benturesYes Yes Yes Yes Yes No Yes Yes
Infrastruc
ture
Bonds
No No Yes Yes No No Yes Yes
http://in.savings.yahoo.com/banks.htmlhttp://in.savings.yahoo.com/banks.htmlhttp://in.savings.yahoo.com/banks.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/bonds.htmlhttp://in.savings.yahoo.com/bonds.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/infrastructure.htmlhttp://in.savings.yahoo.com/bonds.htmlhttp://in.savings.yahoo.com/bonds.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/companyfd.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/recurring.htmlhttp://in.savings.yahoo.com/banks.htmlhttp://in.savings.yahoo.com/banks.htmlhttp://in.savings.yahoo.com/banks.html7/31/2019 Our Project Final
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RBI
Relief
Bonds
No No Yes Yes No No Yes No
National
Savings
Certificat
es
No Yes Yes Yes No No Yes No
National
Savings
Scheme
No Yes Yes Yes No No No No
Kisan
Vikas
Patra
No Yes ~ Yes ~ No Yes No
Post
Office
Monthly
Income
Scheme
Yes No ~ Yes ~ No Yes No
Post
Office
Recurring
Deposits
No Yes ~ Yes ~ No No No
TimeDeposits
No Yes ~ Yes ~ No Yes No
Mutual
Fund~ Yes Yes ~ Yes May be Yes Yes
http://in.savings.yahoo.com/rbibond.htmlhttp://in.savings.yahoo.com/rbibond.htmlhttp://in.savings.yahoo.com/rbibond.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/timedeposit.htmlhttp://in.savings.yahoo.com/timedeposit.htmlhttp://in.savings.yahoo.com/timedeposit.htmlhttp://in.savings.yahoo.com/timedeposit.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postrecurring.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/postmonthly.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/savingskvp.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingsnss.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/savingsnsc.htmlhttp://in.savings.yahoo.com/rbibond.htmlhttp://in.savings.yahoo.com/rbibond.htmlhttp://in.savings.yahoo.com/rbibond.html7/31/2019 Our Project Final
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Table 2
Investment
Risk Return Maturity Mini-Max(1) Postal
Savings
MIS Nil 8% 6 y
3,00,000
Max
KVP Nil 8% 8 y 7 m No Limit
NSC Nil 8% 6 y No Limit
Time
Deposit:-
One year Nil 6.25% 1 y No Limit
Two Year Nil 6.50% 2 y No Limit
Three Year Nil 7.25% 3 y No Limit
Five Year Nil 7.50% 5 y No Limit
Recurring
Deposit Nil 7.50% 5 y No Limit
(2) PPF Nil 8% 15 y
500 to
70000
(3) RBI Bond Nil 8% 6 y No Limit
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(4) Equity
Share Highly Flucating NA No Limit
(5) Debenture Partly Fixed
As per
Scheme No Limit
(6) Bank FD:-
15-45 Days Partly 4% 15-45 Days No Limit
46-90 Days Partly 5.50% 46-90 Days No Limit
90-180 Days Partly 5.75% 90-180 Days No Limit
180 D to 12 M Partly 6.25%
180 D to 12
M No Limit
13 M to 24 M Partly 7.50%
13 M to 24
M No Limit
25 M to 36 M Partly 8%
25 M to 36
M No Limit
more then 36
M Partly 8.50%
more then
36 M No Limit
(7) Mutual
Fund Uncertainty
12 to
15% NA No Limit
(8)Real Ested Highly Rent NA No Limit
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Bank & Mutual Funds
ATTRIBUTES BANKS MUTUAL FUNDS
Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation
Minimum balance between
10th. & 30th. Of every
month
Everyday
GuaranteeMaximum Rs.1 lakh on
depositsNone
3.3.1 Stock Market Related Investments
Shares Compa
ny
Debentu
re
Publ
ic
Sect
or
Bon
ds
Mutual
Funds-
Debt
oriente
d
Mutual
Funds-
Equity
oriented
Safety No Yes Yes Yes Yes
Returns Varies Varies Vari
es
5-6% 15-18%
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Lock-in
Period
Infinite 5 & 7yrs 5 &
7yrs
No No
Liquidity Yes No No Yes Yes
Tax
Benefit
L.T.C.G.=
0%
S.T.C.G.=
10%
u/s 80C u/s
80C
u/s 80C L.T.C.G.=
0%
S.T.C.G.=
10%
Transferab
ility
No Yes Yes Yes Yes
Min.
Investment
No 5000 or
10000
6000
or
1000
0
1000 500
Max.
Investment
No Limit No
Limit
No
Limi
t
No
Limit
No Limit
Convenien
ce
No No No Yes Yes
Transpare
ncy
No No No Yes Yes
Can Beat
Inflation
Yes No No No Yes
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rate
Secondary
Market
Yes Yes Yes No No
Mortgage No No Yes Yes Yes
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3.3.2 Reasons for preference of mutual funds score over stocks
To be sure, mutual funds are a great way to invest in equities, but there
are some reasons for the same, more fundamental than just soaring
investor interest. For retail investors, who have money, but don't havetime and expertise, mutual funds are perhaps the only way to invest in
stock markets. Also the mutual fund route is certainly a lot more 'surer'
and less risky than investing directly in stocks.
1. Power of Knowledge
When you don't have it, outsource it - that is a mantra a lot of
corporate are chanting. There is no reason why investors should not do
the same. Investing in equities requires a fair understanding of global
and domestic economics, interest rates, political events, stock market
among a host of other factors. If you don't have a view on these factors,
then you must find someone who has one. That's where mutual funds
come in.
2. Diversification
A lot of investors take to stocks because they find them very
exciting. During a rally, stocks move up a lot faster than mutual funds.
They clock blistering growth and set the cash registers ringing, so to
speak. Mutual funds on the other hand are steady and therefore
perceived as boring. The point investors miss out on is that mutual funds
work towards risk mitigation before they work towards clocking growth.
By diversifying across a number of stocks and sectors, investors lower
the risk during a market downturn that usually follows a blistering
market rally. Let's understand this in light of what actually happened in
the stock markets some years ago.
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Mutual funds save the day
01-Jan-99 14-Feb-00 17-Oct-00
IndicesBSE Sensex 100.00 193.58 119.75
Diversified Equity Funds
Sundaram Growth (G) 100.00 246.30 153.70
Templeton India Growth (D) 100.00 225.50 164.22
HDFC Equity (G) 100.00 301.18 192.47
Stocks
Wipro 100.00 359.76 115.56
Infosys 100.00 366.26 219.59
Mphasis BFL 100.00 316.45 58.13
It was 1999- early 2000. On display was one of the most scorching
stock market rallies the country had ever seen until then. Technology,
media and telecom were the leading lights of the new economy. Then
the stock market collapsed burning a big hole in investor portfolios.
However, as is evident from the above table, mutual funds did a better
job at safeguarding the investor's portfolio than stocks.
Consider the performance of the leading software stocks in that rally.
While they did hit the roof at the peak of the rally, their fall from grace
is just as well-documented. At the end (in October 2000 when the
market fall stemmed) the diversified equity funds in our sample were in
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much better shape than the BSE Sensex and the stocks except Infosys.
The mutual funds did better than the stocks mainly due to prudent fund
management based on the virtues of dive
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