44692357 39308727 Financial Planning for Individual Investor (1)

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A

PROJECT REPORT ON

³FINANCIAL PLANNING FOR INDIVIDUAL INVESTOR´

AT

KARVY STOCK BROKING LTD.

BRANCH YAVATMAL

[IN PARTIAL FULLFILLMENT OF

MASTER OF BUSINESS ADMINISTRATIVE]

SUBMITTED T0:

UNIVERSITY OF PUNE

BY:

Santosh Premdas Rathod

MBA 2nd

(Finance)

UNDER GUIDENCE OF:

Dr. F.C. Mahajan

SHRI. D.B. PAWAR COLLEGE OF MANAGEMENT

MANUR, KALWAN, NASHIK.

YEAR 2009-11.



2

ACKNOWLEDGEMENT

I would like to express my sincere thanks to my Director, Dr. F. C. Mahajan for giving

me the opportunity to be a part of an esteemed institution and without his support this project

would not have been possible.

A successful project can never be prepared by the single effort of the person to whom

project is assigned, but it also demand the help and guardianship of some conversant person whohelped the undersigned actively or passively in the completion of successful project .

In this context as a student of Shree Dhondu Baliram Pawar college of management, Manur,

Kalwan, Nashik. I would first of all like to express my gratitude to Mr.Shahezaad Pathan for as-

signing me such a worthwhile topic ³FINNANCIAL PLANNING FOR INDIVIDUAL INVES-

TOR´. During the actual project work, Mr. Shahezaad Pathan & Mr. Farukh Sheikh have been a

source of inspiration through their constant guidance; personal interest; encouragement and help.

I convey my sincere thanks to them.

Mr. Shahezaad Pathan (Branch Head), Mr. Farukh Sheikh, Mr. Abhijeet, Mr. Vishal

for their invaluable guidance, keen interest cooperation inspiration, and of course moral support

through my project session.

SANTOSH P. RATHOD

M.B.A



3

TABLE OF CONTENTS

Content Pg

No1. Company Profile 5

a. Introduction 6

b. Company Alliances

c. Company Achievement 8

d. Group of company 11

2. Need Of the Study

3. Financial System ± An Overview 16

4. Financial Instrument. 21a. Investment In Other Market 23

1.Tresury bills 24

2.Certificate of Deposits 24

3.Commercial Papers 25

4.Inter Corporate Deposit 25

5.Term Deposit 26

6.Govt. Securities 26

b. Investments in Capital Market 271.Bonds 28

2.Share Market 29

3.Portfolio Investments 31

4.Fixed Deposit 43

5.Insurance 44

6.Tax Planning 54

7.Mutual Fund 61

8.Commodity 715. Analysis & Interpretation 76

6. Conclusion 80

7. Recommendation 81

8. Bibliography 82



4

EXECUTIVES SUMMARY

The evaluation of financial planning has been increased through decades, which is best seen in

customer rise. Now a day¶s investment of saving has assumed great importance.

According to the study of the markets, it is being observed that markets are doing well

in Mutual fund & ULIP. In near future a proper financial planning is required to invest money in

all type of financial product because there is good potential in market to invest.

In this project the great emphasis is given to the investor¶s mind in respect to investment

in Mutual Fund & ULIP .The needs and wants of the client is taken into consideration.

I hope KARVY, Yavatmal will recognize this as well as take more references from this

project report. The main objective of this project is to know the Awareness of Mutual Fund

among investors and also to know the investing pattern of people in different Financial Project.

IT sector has been given more emphasis for the study of the project because it is the on-

ly sector where all type of Age group, Income class and different level of people are represented.

After analyzing the feedback the conclusion has been made that the Indian financial

market is having lots of potential customer the only thing is to give a proper guidance to the

prospective customers.



5

COMPANY PROFILE

KARVY, is premier integrated financial services provider, and ranked among the top five in the

country in all its business segments, services over 16 million individual investors in various ca-

pacities, and provides investor service to over 300 corporates, comprising the who is who of

Corporate India. KARVY covers the entire spectrum of Financial service such as Stock broking,

Depository Participants, Distribution of Financial products ± mutual funds, bonds, fixed deposit,

equities, Insurance Broking, commodities Broking, Personal Finance Advisory Services, Mer-

chant Banking & Corporate finance, placement of equity, IPOs, among others Karvy has profes-

sional Management team and ranks among the best in technology, operation and research of var-

ious industrial segments.



6

INTRODUCTION ABOUT COMPANY

In 1982, a group of Hyderabad-based practicing Chartered Accountants started Karvy Computer

share Private Ltd., with a capital of Rs.1, 50,000 offering auditing and taxation services initially.

Later, it forayed into the Registrar and Share Transfer activities and subsequently into financial

services. All along, Karvy's strong work ethic and professional background leveraged with In-

formation Technology enabled it to deliver quality to the individual.

A decade of commitment, professional integrity and vision helped Karvy achieve a

leadership position in its field when it handled the largest number of issues ever handled in thehistory of the Indian stock market in a year. Thereafter, Karvy made inroads into a host of capi-

tal-market services, - corporate and retail - which proved to be a sound business synergy.

Today, Karvy has access to millions of Indian shareholders, besides companies,

banks, financial institutions and regulatory agencies. Over the past one and half decades, Karvy

has evolved as a veritable link between industry, finance and people. In January 1998, Karvy

bthe first Depository Participant in Andhra Pradesh. An ISO 9002 company, Karvy's commit-

ment to quality and retail reach has made it an integrated financial services company.



7

COMPANY¶S ALLIANCES

Karvy has a strategic alliance with Jardine Fleming India Securities Limited (JFISL) - one of

Asia's most prestigious investment bankers - to leverage on the latter's investment banking exper-

tise. This would augment the retail distribution reach and provide the Indian investor access to

the best global and local insights on financial markets.

Jardine is a respected investment banker with a demonstrated track-record of delivering

value to its clients spread over 43 countries. It is ranked amongst the world's TOP 3 Foreign In-

stitutional Investors (FIIs).

Karvy Computershare Private Limited is a 50:50 joint venture of Karvy Consultants

Limited and Computershare Limited, Australia. Computershare Limited is world's largest -- and

only global -- share registry, and a leading financial market services provider to the global se-

curities industry.

The joint venture with Computershare, reckoned as the largest registrar in the world,

servicing over 60 million shareholder accounts for over 7,000 corporations across eleven coun-

tries spread across five continents. Computershare manages more than 70 million shareholder

accounts for over 13,000 corporations around the world.

Karvy Computershare Private Limited, today, is India's largest Registrar and Share

Transfer Agent servicing over 300 corporates and mutual funds and 16 million investors.



8

COMPANIES ACHEIVEMENTS

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Largest mobilized of funds as per PRIME DATABASE

First ISO - 9002 Certified Registrar in India

A Category- I -Merchant banker.

A Category- I -Registrar to Public Issues.

Ranked as " The Most Admired Registrar" by MARG.

Handled the largest- ever Public Issue - IDBI

Strategic tie-up with Jardine Fleming India Securities Ltd.

Handled over 500 Public issues as Registrars.



9

Handling the Reliance Account which accounts for nearly 10 million account holders First Deposi-

tory Participant from Andhra Pradesh.



10

KARVY MILESTONES:-



11

KARVY GROUP OF COMPANIES:-

Stock

Broking

Distribution Depository

NSE and BSEmembership

Equity, Deriva-tives and Debtmarket opera-tions

600+ terminals 220,000+ ac-

counts Around 4.5%

market share(NSE Cash)

Mutual Funds IPOs ± Equity,

Bonds Debt products Loans ± Hous-

ing, Personal, Auto

Participant withboth NSDL andCDSL

640,000+ ac-counts

Amongst thetop DPs in thecountry

KKaar r vvyy GGr r oouupp

Investment Banking

Category 1 Investment Banker registeredwith SEBI

Among top 10 Investment bankers in India IPOs, Debt placements, Corporate restruc-

turing etc.

Commodities

Insur ance Broking

Membership with 2 ex-changes ± NCDEX /

MCX

Direct broker ± IRDAregistration received in

Jan 2005

India¶s No.1 integr ated financial services group



12

NEED OF THE STUDY:-

The need of the study aimed at bringing about awareness in the public about the various

products and services provided by KARVY consultancy.

The study was basically undertaken to understand the financial needs of the

customer and to provide or suggest them products and services according to their financial needs.

The study was undertaken also to understand the investment pattern of profession-

als(software) and their behavioral aspects which affects their investment habits.

The study was undertaken to provide them investment solutions which are aligned to their

investment objective, the investment objective could be ± preserving principle, generating in-

come, child¶s education or it can be saving for retirement.

The study was undertaken to find out whether depending upon their own investing expe-

rience do the professionals invest directly or through a broker-dealer.



13

BACKGROUND NOTE

The two key aspects of any investment are time and risk. The sacrifice takes place now and is

certain. The benefit is expected in future and tends to be uncertain. As an investor you have a

wide range of investment avenues available to you. Sacrificing some rigor, they may be classi-

fied into the following categories: on-marketable financial assets, equity shares, bonds, money

market instruments, mutual funds schemes, life insurance policies, real-estate, precious objects,

and financial derivatives.

For evaluating an investment avenue, the following attributes are relevant: rate of re-

turn, risk, marketability, tax shelter, and convenience. Investing in a mutual fund is slightly ex-

pensive than 'direct' form of investing. However, the decision-making and procedure of investing

is transferred to the mutual fund company.

Insurance, as an investment vehicle, works somewhat similar to mutual fund as far as

ULIPs (Unit-Linked Insurance Policies) are concerned. While traditional insurance plans invest

only in debt-based products and are not market linked, ULIP invests in debt, equity as well as acombination of the two.

The only difference in the case of insurance is that expenses charged by the insurance

company are much higher than most other investment vehicles.

PMS is usually tailor-made for your needs. Based on your financial goals, portfolio

managers create an investment portfolio for you. For creating and maintaining your portfolio, the

manager charges fees.

Also if your portfolio earns profit beyond a certain amount, then the portfolio manager

shares the profit. However, if there are losses then the same is charged to your account only.

While choosing any investment vehicle keep in mind your skills, time available with you to

create and maintain your investments and costs involved.



14

If you have the skills and time available with you then 'direct' form of investing is ideal

as it has least of costs amongst all other vehicles.

On the other hand, insurance is the most expensive investment vehicle and hence it

should be kept away from as far as possible.

PMS works better for wealthy (high net worth) individuals. Although profits have to be

shared, there is also the advantage of getting tailor-made portfolio. Only catch is to ensure that

portfolio created and maintained for you is tailor-made and that the PMS is not another mutual

fund scheme, where all investors get the same portfolio.

For small and medium investor -- who does not have the skills or the time -- mutual

funds seem the best option. Currently, in India, we have mutual funds which invest in two asset

classes, debt and equity. However, in the very near future there is a likelihood of having mutual

funds, which will invest in gold as well as real estate

Mutual fund as an investment vehicle is the most convenient vehicle for investing in

various assets classes. It gives benefit of professional management, option of investing in smaller

amount, quick liquidity and diversification benefit.





16

FINANCIAL SYSTEM- AN OVERVIEW

The financial system of any country consists of specialized and non-specialized financial institu-

tions, organized and unorganized financial markets, financial instruments and services that facili-

tate flow of funds from areas of surplus funds to the areas of deficit. Financial system is a com-

position of various institutions, markets, regulations, law practices, money managers, analysts,

etc. By making funds available, the financial system helps the growth of modern economics and

the increase in the standard of living among the citizens.

FINANCIAL INSTITUTIONS

Financial institutes are business organizations that act as mobilizes and depositaries of savings

and as purveyors of credit or finance. Financial institutions are classified as banking and non-

banking institutions, intermediaries and non-intermediaries. Banking institutions are the µcrea-

tors¶ of credit, where as non-banking institutions are µpurveyors¶ of credit. Banking system in In-

dia comprises of commercial and cooperative banks and non banking financial institutes are LIC,

UTI, IDBI, GIC, etc. Intermediaries like banking institutions lend as well as mobilizes savings,

where as non-intermediaries like NABARD gives loans but their resources are not directly ob-

tained from savers.



17

FINANCIAL MARKETS

A financial market can be defined as the market in which financial assets are created or trans-

ferred. Financial assets represents represent a claim to the payments of a sum of money some-

time in the future and/or periodic payment in the form of interest or dividend. Financial Market

performs an important function of mobilization of savings and channeling them into the most

productive uses. The participants in the financial markets are financial institutions, agents, bro-

kers, dealers, borrowers, lenders, savers and others who are inter-linked by the laws, contracts

and communication networks.

Financial markets consist of Primary and Secondary Markets. The Primarymarkets deal in new financial claims and securities and hence are known as new issue markets.

The secondary market deals in securities already issued, existing or outstanding. Financial mar-

kets are also classified as Money and Capital Markets. Money markets deals with transactions

in short-term instruments (with period of maturity one year or less, e.g. treasury bills), while cap-

ital market deals with transactions in long-term instruments (with period of maturity above one

year, e.g. corporate debentures and government bonds).

On the basis of the type of the financial claim, financial markets are classified as Debt

and Equity markets. By the timing of delivery, financial markets are classified as Cash or Spot

markets and Forward or Future markets.

The classification of Financial markets can be summarized as follows:

o Money Market

o Debt Market

o Forex Market

o Capital Market



18

MONEY MARKETS

Money markets can be defined as a market for short term money and financial assets that are

near substitutes for money (any financial assets that can be quickly converted into money with

minimum transaction cost). One more important function of this market is to channel savings in-

to short term productive investments like working capital. Money market aids banking, operates

as a medium of integration between sub markets, promotes maintaining of minimum reserve in

the form of cash and liquidity and controls the interest rates.

Money market is a collection of market for the instruments like Call money, Treasury

bills, Commercial papers, Certificate of deposits, Money Market Mutual Funds, etc. A certain

degree of flexibility in the regulatory framework exists and there are constant endeavors for in-

troducing a new instruments or innovating dealing techniques. It is a wholesale market and the

volume of funds or financial assets traded are very large i.e. in cores of rupees.

DEBT MARKET

Traditionally debt instruments are known for generating a predetermined income for a given pe-

riod of time, other than in cases of default. Hence they are also known as fixed income instru-

ments. The debt markets in advanced are significantly larger and deeper than equity markets. But

FINANCIAL

MARKET

Money

Market

Debt

Market

Forex

Market

Capital

Market



19

in India, the trend is just the opposite. The development of debt market in India has not been as

remarkable as in the equity market. However the debt markets in India have undergone a consi-

derable change in the last few years. Characterized by regulated interest rates, limited players

and lack of trading earlier, the markets have become more integrated and less regulated. The debt

market in India is divided into two categories:

1. Government securities market consisting of Central Government and State Government

securities.

2. Bond market consisting of FI bond, PSU bonds and Corporate bonds/debentures.

FOREIGN EXCHANGE MARKET

Every sovereign country in the world has a currency, which is a legal tender in its territory, and

which does not act as money outside its boundaries. Foreign exchange or Forex market is the one

where a country¶s currency is traded for another. The rate at which one currency is converted to

another is known as the rate of exchange. Forex market is the largest financial market in the

world having a daily turnover of couple of trillion dollars. The key participants in the forex mar-ket are importers (who need foreign currency to pay off their imports), exporters (who want to

convert their foreign currency receipts into domestic), traders (who make a market in the foreign

currency), foreign exchange brokers (who bring together buyers and sellers), speculators (who

tries to profit from exchange rate movements) and portfolio managers who buy and sell foreign

currency. Speculative transactions account for more than 95% of the turnover on the Forex mar-

kets.

In India, the key participants in the Forex markets are RBI, banks and business under-

takings. Business undertakings can participate in the Forex market only to the extent that they

need cover for the exchange exposure arising from a merchant transaction or a foreign currency

borrowing and cannot resort to speculative transaction.



20

One reason justified for the existence of the Forex market is that each nation has de-

cided to keep their sovereign right to have control on their own currency. If every country had

the same currency, then there will be no need for a foreign exchange market.

CAPITAL MARKET

Capital markets provide the resources needed by medium and large-scale industries for invest-

ment purposes unlike money markets that provide the resources for working capital needs. While

money markets deal in short-term claims (with a period of maturity 1 year or less) capital market

deals in long-term claims (with a period of maturity more than 1 year). Stock market and Gov-

ernment bond markets are example of capital markets.

Capital market consists of primary and secondary markets. The primary markets create

long-term instruments through which corporate entities borrow and the secondary market pro-

vides liquidity and marketability to these instruments. Companies can raise capital in the primary

market through the issue of shares and debentures for which prior approval of The SEBI is re-

quired. The secondary market that operates through the medium of stock exchanges is that seg-ment of the capital market where securities already issued are traded.



21

FINANCIAL

INSTRUMENTS



22

INVESTMENT AVENUES

Though there are various investment instruments in the market which are differently dealt in var-

ious market sectors, such as money market, debt market, capital market and forex market. Here I

have discussed different instruments though I have discussed instruments of capital market diffe-

rently, as my study was mainly on capital market. So to make it easy, Investment avenue can be

classified in to two type:-

y INVESTMENT IN MONEY MARKET

y INVESTMENT IN CAPITAL MARKET



23

INVESTMENTS IN MONEY

MARKETS

TREASURY BILLS



24

Treasury bills are short-term obligations of the government that are issued by the Central Gov-

ernment to tide over short-term liquidity shortfalls. Treasury Bills in India constitute the main in-

strument of short-term borrowings by the Government.

There are two types of Treasury Bills: Ordinary and Adhoc. Ordinary Treasury Bills

are issued to the public and RBI but on the contrary Adhoc Bills are issued only to the RBI. They

can be issued by tender (when required by the government) or by Tap (any time). They have ma-

turities like 91-days, 182-days and 364-days and do not carry an explicit interest rate (or coupon

rate). They are instead sold at a discount and redeemed at par value. Hence the implicit interest

rate is a function of the size of the discount and period of maturity.

Though the yield on the Treasury Bills is low and taxable. They are virtually risk free.

CERTIFICATE OF DEPOSITS

Certificate of deposit was introduced in India in 1991. It is a scheme of raising funds by com-

mercial banks, except rural banks and is a negotiable receipt of funds. Due to their negotiable na-

ture, they are also called Negotiable Certificate of Deposit (NCD). It may be in a registered form

or a bearer form. The later is more popular as it can be transacted more readily in secondary

markets. Unlike Treasury bills, this carries an explicit rate of interest. Subscribers to the Certifi-

cate of Deposits are Individuals, Corporations, Companies, Trusts, Funds and Associations etc.

The conventional deposits though have a fixed maturity, the depositors can withdraw

them prematurely, where as in case of Certificate of Deposits the investors have to wait till they

mature. Though interest on certificate of deposits is taxed, it is still a popular form of short-term

investments for companies due to following reasons:

o These certificates are fairly liquid.



25

o They are generally risk free.

o They offer a higher yield as compared to conventional deposits.

COMMERTIAL PAPER (CP)

Commercial papers was introduced in India in 1990 with a view to enabling highly rated corpo-

rate borrowers to diversify their sources of short-term borrowings and to provide as additional

instruments to investors. Commercial paper is a short-term unsecured promissory note issued to

financially strong and high credit rating companies at a discount to face value by well-known.

They are issued in multiples of Rupees 5 Lakhs and for maturities between a minimum of 15

days and a maximum up to one year from the date of issue. They have a buy-back facility and no

prior approval of RBI is needed for the issue of Commercial Paper. The main advantage of in-

vesting in Commercial Paper is that it offers return as per the prevailing market rate. But they are

not liquid and are taxed, hence not a very lucrative investment avenue.

INTER-CORPORATE DEPOSIT (ICD)

A deposit made by one company with another, normally for a period of up to six months is re-

ferred to as an Inter-Corporate Deposit.

The cost of funds for a corporate is much higher than a bank. Hence the rates in this

market are higher than those in the other markets. Inter-Corporate Deposits are unsecured, and

hence the risk inherent is high. The Inter-Corporate Deposit market is not well organized with

very little information available publicly about transaction details. Also the interests from these

are taxed.



26

TERM DEPOSIT

Banks accept term deposits for periods ranging from 7 to 5 years. The interest rates on the Term

Deposits vary from 3.5% (on deposit for 7 days) to 5.75% (on deposits of 5 years). The interestrate rises sharply as the period of deposits increases from 30 days to 180 days. Most banks cur-

rently offer about 5.5% for a one year deposit. Beyond one year the interest rate tapers off.

Investing in Term Deposits provides security of Principal along with assured returns.

But, with the declining interest rates they are less attractive. Also, the post tax returns are also

low.

GOVERNMENT SECURITIES

The Government securities comprise securities issued by the Government of India and the State

Governments. These are the lowest risk category instruments in the economy. These securities

are issued through auctions conducted by The RBI, where the Central Bank decides the coupon

rate based on the response received. Most of these securities are issued as fixed interest bearing

securities, though the government sometimes issues zero coupon instruments and floating rate

securities also.

The main advantage of investing in G-sec¶s is that they guarantee the security of prin-

cipal along with assured returns as per the coupon rate of the underlying security. Also, they are

highly liquid and there is no Tax deducted at source. But, trading in G-sec¶s requires an SGL ac-

count. Also, it requires constant tracking of the price vis-à-vis yield to maximize returns.



27

INVESTMENT IN CAPITAL

MARKET



28

BONDS

The corporate bond market consists of issues of three different categories- government owned fi-nancial institutions, government owned public sector units and private corporate. The financial

institutions that do not have access to retail deposits like banks, depends on bond issue for rais-

ing funds. They are highly rated and hence quote the lowest rate of funds. Next in line are public

sector units, due to their poor financial conditions, only the better managed public sector units

approach the markets to raise the funds. The public sector units are also given advantage in terms

of tax breaks for the investors on investments in specified public sector unit bonds. These bonds

referred to as, tax-free bonds get traded at lower yields. Investments in rest of public unit bonds

are taxed like any other bonds. Private corporate also accesses the bond market to raise funds.

The rates in these markets differ from different issuer categories. While top rated private corpo-

rate and public sector units are treated on par, financial institutions pay fewer coupons on their

issues.

The advantage of bonds is that, even though over the long run Stocks outperform

bonds, bonds perform well when stocks lag, hence diversifying the portfolio helps keep returns

high during bad times. Also, bonds provide a secure and predictable income.

Contrary to popular belief, bonds do appreciate, which helps to make money above the

interest. The trading price of a bond is its par value. As the outlook on interest rates change, the

par value fluctuates on a daily basis. If rates decline, bonds will increase in value, and they can

be sold at a premium. But, if interest rates rise, the bond loses value.



29

STOCK MARKET

Indian stock market marks to be one of the oldest stock market in Asia. Stock Market which is a

market where the trading of company stock, both listed company securities and unlisted takes

place. It is different from stock exchange because it also put all stock indices and stock index

movements on the same platform. For example, we use the term, "the stock market was up to-

day" or "the stock market bubble.

Indian Stock Market (Stock Indices)

MARKET OPEN 6TH Sep,2010

SHARE MARKET

As it is well known about the share market that it is very complicated and moreover it is unpre-



30

dictable. Infect one afternoon while I was trying to convince a customer to invest in the shares,

unaware about what happened to the Sensex that day, it was him who said, ³The Sensex has dip-

ped mare than 1000 points and is closed for the day.´ After this he started walking and I was un-

able to stop him and explain further, he was not willing to invest in the share market.

So to be more precise about share market here it will just explain that the market con-

sists of two sectors:

o PRIMARY MARKET.

o SECONDARY MARKET.

PRIMARY MARKET

Primary market bring together buyers and sellers either directly or through intermediaries by

providing an arena in which seller¶s investment proposition can be priced, brought to the market

place and sold to the buyers. In this context, the seller is called the issuer and the price of what is

sold is called the issue price.

It is the initial market for any item or service. It also signifies an initial market for a

new stock issued. The jargon also means a firm, trading market held in a security by a trader who

performs the activity of a specialist by being ready to execute orders in that stock.

SECONDARY MARKET

Secondary markets are the stock exchanges and the-over-the market. Securities are first issued as

the primary offering to the public. When the securities are traded from that first holder to anoth-

er, the issues are traded in these secondary markets.



31

PORTFOLIO INVESTMENT

Portfolio is a combination of assets, the outcome of which cannot be defined with certainty.These assets could be physical assets, real estate, lands, buildings, gold, etc. or financial assets

like stocks, equity, debentures, deposits etc.

When investors have established their overall financial plan and are interested in man-

aging and enhancing their wealth by investing in an optimal combination of financial assets.

Wealth should be evaluated and managed within the context of a portfolio, which consists of the

assets holding of an investor.

For e.g. if a person holds 17 stocks, some municipal bonds, some certificates of depo-

sits (CD¶s), for him it is the portfolio of financial assets.

People are interested in portfolio investments due to following objectives:-

Safety of Fund

Liquidity

Reasonable returns

Appreciation in Capital

Tax planning

MEANING OF PORTFOLIO

As mentioned in the Rule(2), clause(d) of SEBI (portfolio management ) as per the Rules estab-

lished in 1993 defines the term ³Portfolio´ as ³total holding of securities belonging to any per-

son.´



32

As a matter of fact, portfolio is a combination of assets, the outcome of which cannot

be defined with certainty. These assets could be physical assets, real estate, land, building, gold

etc or financial assets like stocks, equity, debenture, deposits etc. my concern is this project is to

discuss the topic with reference to financial assets only.

Portfolio management refers to managing efficiently the investments in the security

held by professionals for others. Portfolio managers render the service of portfolio management

with a view to ensure maximum return by investments with minimum risk of loss on return on

the money invested in securities held by their clients.

When investors have established their overall financial plan and are interested in man-

aging and enhancing their wealth by investing in an optimal combination of financial assets. The

idea of an ³optimal combination´ is important because of our wealth which we hold in various

assets , should be evaluated and managed as a unified whole. Wealth should be evaluated and

managed within the context of a Portfolio, which consists of the assets holding of an investor.

For e.g. if you own four and three mutual funds, that is your portfolio.

For e.g. if a person holds 17 stocks, some municipal bonds, some certificates of depo-

sits (CD¶s), for that is their portfolio of financial assets.

PORTFOLIO MANAGEMENT

The major component of the decision process is portfolio management. After securities have

been evaluated, a portfolio should be selected. It involves managing group of assets (i.e. a portfo-

lio) as a unit. Portfolio must be managed regardless of whether an investor is active or passive.

PASSIVE INVESTMENT STRATEGY

It involves determining the desired investment proportions and assets in a portfolio and maintain-

ing these proportions and assets making few changes.



33

ACTIVE INVESTMENT STRATEGY

It involves specific decisions to change the investment proportions chosen, or the assets in a par-

ticular category, based on the belief that an investor earn profit by doing so.

OBJRCTIVE OF PORTFOLIO MANAGEMENT

y SAFETY OF FUND:-

The investment should be preserved, not be lost and remain in the returnable position in

cash or kind.

y LIQUIDITY:-

Portfolio must consists of such securities which could been cashed without any difficulty or

involvement of time to meet urgent need for funds.

y REASONABLE RETURN:-

The investment should earn a reasonable return to up keep the declining value of money and

must be compatible with opportunity cost of money in terms of current income in the form of in-

terest or dividend.

y APPRECIATION IN CAPITAL:-

The money invested in portfolio must grow and result into capital gain.

y TAX PLANNING:-

Efficiently portfolio management is concerned with composite tax planning covering in-

come tax, capital gains tax , wealth tax, and gift tax.



34

y MINIMIZE RISK:-

Risk avoidance and minimization are important are most important objectives of portfolio

management. Portfolio managers must ensure these objectives by effective investment planning

and periodical review of market, economy etc.

y MARKETABILITY:-

The investment made in securities made in securities should be marketable that means , the

securities must be listed and traded in stock exchange so as to avoid risk and difficult in their en-

cashment . Marketability ensures liquidity to the portfolio.

CONCEPTS OF RETURN AND RISK:-

We all know that risk and returns are directly related. Higher the risk, higher will be the returns.

As a portfolio manager one must understand the concept of risk and return, because determining

a portfolio of a particular client it is necessary to know how much risk he can bear and how

much returns he is expecting.

COMPONENTS OF RETURNS:

Return on typical portfolio consist of two components

1. YIELD:-

It is the income composed of a security¶s return.

2. CAPITAL GAINS:-

Change or appreciation of a price of a security over a period of time is called capital gains.

Returns = yield + capital gains ( price change )

Therefore returns = ( Any cash payments received ) + (price changes over a period)/

( price at which assets is purchased)



35

3. RISK :-

The chance that the actual return on an investment will be different from expected return is

known as risk. It can also be defined as uncertainty of future outcomes or probability of an ad-

verse outcome.

SOURCES OF RISK:-

What makes financial asset risky? It is the various sources of risk. The following are

the modern portfolio sources of risk.

a) INTEREST RATE RISK:-

The risk which arises due to variability in securities returns resulting from changes in

interest rate. This type affects bonds more directly than common stocks but affects both.

b) MARKET RISK:-

The variability in returns resulting from fluctuations in the overall market ± i.e. the ag-

gregate stock market is referred to as market risk. All securities are exposed to market risk , al-

though it has major impact on common stocks.

c) INFLATION RISK:-

A factor which affects all components of a portfolio is purchasing power risk, or the

chance that the purchasing of invested dollars will decline with uncertain inflation the real (infla-

tion- adjusted) returns involves risk even if nominal return is safe.

d) BUSINESS RISK:-

The risk of doing business in a particular industry or environment is called business risk.

e) FINANCIAL RISK:-

Financial risk is associated with the use of debt financing by companies. Financial risk

involves the concept of financial leverage.



36

f) LIQUIDITY RISK:-

Liquidity risk is the risk associated with particular secondary market in which a security

trades. The more uncertainty about the time element and the price concession, the greater the li-

quidity risks.

g) EXCHANGE RATE RISK:-

It refers to the variability in returns due to currency fluctuations.

h) COUNTRY RISK:-

Country risk is also referred to as political risk. With more investors investing interna-

tionally, both directly and indirectly, the economic stability and reliability is to be considered.

TYPES OF RISK

1. SYSTEMATIC RISK :-

It is the risk attributable to a road macro- factors affecting all securities.

2. NON SYSTEMATIC:

Risk attributable to factors unique to the security.

Total risk Systematic risk + Non Systematic risk

For minimizing the risk it is necessary to diversify over investments.

For measuring portfolio risk is measured by the variance ( or standard deviation) of its

return. Although the expected return on portfolio is the weighted average of the expected returns

on individual securities in the portfolio, portfolio risk( measured by the variance or standard dev-

iation) is not the weighted average of the risks of individual securities in the portfolio ( except

when the returns from the securities are uncorrelated)

In symbols: E (Rp) = � Wi E ( Ri )



37

Types of Portfolio:-

n

Variance (W 2) = 7 [ Ri - E(Ri) ]2 Pi

i=1



38

AGGRESSIVE PORTFOLIO:-

Objective: Growth. This strategy might be appropriate for investor who seek High

growth and who can tolerate wide fluctuations in market values, over the short term.

GROWTH PORTFOLIO:-

Objective: Growth. This strategy might be appropriate for investors who have a prefe-

rence for growth and who can withstand significant fluctuations in market value.

85%

15%

Aggressive Portfolio

Stock

Bonds

70%

25%5%

Growth Portffolio

Stock

Bonds

Short-Term



39

BALANCED PORTFOLIO:-

Objective: Capital appreciation and income. This strategy might be appropriate for inves-

tors who want the potential for capital appreciation and some growth, and who can withstand

moderate fluctuations in market values.

CONSERVATIVE PORTFOLIO:-

Objective: Income and capital appreciation. This strategy may be appropriate

for investors who want to preserve their capital and minimize fluctuations in market value.

50%

40%

10%

Balanced PortfolioStocks

Bomds

Short-Term

20%

50%

30%

Conservative Portfolio

Stock

Bonds

Short-Term





41

ADVANTAGE OF PORTFOLIO MANAGEMENT SERVICE:-

CUSTOMIZED PORTFOLIOS:-

Tailor-made investment strategies to suit individual requirements

INDIVIDUALU MANAGED ACCOUNTS:-

Provides a flexible format for optimizing returns through better information sup-

port/client servicing: Regular investments disclosures make the investor feel comfortable and in

control of his money

SUPPORTIVE TAX STRUCTURE:-

Tax changes support rise in equity

There is a cut in Capital gains tax on listed equities:-

NIL for holdings > 12mths

10% (from 30%) for holding <12mths

SEBI regulated:

A Regulated industry makes the investor feel comfortable with the investment tech-

niques adopted to optimize returns.



42

INVESTMENT STRATEGY IN PORTFOLIO MANAGEMENT:-

y FOCUS ON SELECT/CLEAR STOCK OPPORTUNITIES:

Investments in stocks where there is a clear earnings visibility

y RELATIVELY CONCENTRETED PORTFOLIO:

A Portfolio composition of not more than 25-30 stocks of what there are compelling oppor-

tunities

y USAGE OF DERIVATIVES AS A TOOL:

One must have a selective use of derivatives in various options to enhance returns / portfo-

lio protection

y FLEXIBLE CASH ALLOCATION STRATEGY:

We have an efficient allocation among assets with flexibility to sit on 100% cash

PRODUCT OFFERING IN PORTFOLIO MANAGEMENT:-

ABSOLUTE FREEDOM OPTION:

A highly flexible investment option that exploits investment opportunities across the broad

spectrum of large cap, mid cap and small cap stocks.

LARGE-CAP OPTION:

A protective investment option with predominant investments in large cap stocks that ensures

liquidity and lower impact costs

³MID/SMALL-CAP OPTION:

An aggressive option that harnesses potential of companies in the mid cap/small cap segment



43

COMPONENTS OF PORTFOLIO:-

Bonds

Mutual Funds

Insurance

Tax Planning

Commodities

Stocks

A long-term investment strategy requires more than a passive ³invest±and±forget´ ap-

proach. Once you¶ve created an investment strategy and built your portfolio, you¶ve taken the

first steps toward reaching your financial goals. As time passes, you will need to review your

portfolio regularly to make sure you stay on track.

FIXED DEPOSITS:-

As the name suggests, it is the deposit of money for a fixed period with a specific interest rate. In

this the amount of money deposited cannot be withdrawn before the period of maturity and if in

case the amount or the part of amount is withdrawn before the period of maturity then a specific

fees is deducted from the total amount and the rest amount is handed over to the depositor.

In the context of investment, it is considered to be the safe investment as the return is

assured but the rate of return is a bit low. Moreover less people are attracted towards Fixed De-

posits as they can¶t withdraw the money before the maturity period and because of low rate of in-

terest as compared to other investments.



44

INSURANCE:-

People buy insurance policies for the safety of their family members and their products.

Insurance is necessary to ensure that the basic necessities of life, comfort and pleasure derived by

all of us from our living continue to be available for us.

People buy life insurance policy because they realize the need of protection for their

families after their death or of a reserve for emergencies and of additional income for later years.

Life insurance protects against loss of income of an individual. Life insurance does not

protect the asset. It also does not prevent its loss.

So it can be said that insurance covers the risk of one¶s life and property.

A fundamental principle of insurance is to put you in the same financial condition after

the loss or injury as you were before it. The aim of all insurance is to compensate the owner

against loss arising from a variety of risks, which he anticipates, to his life, property and busi-

ness. All insurance contracts are based on the information provided by the insured in the propos-

al form.

Types Of Insurance Available:-

Auto Insurance

o Two Wheeler Insurance

o Car Insurance

o Commercial Vehicle Insurance

Commercial Insurance



45

o Agriculture Insurance

o Fire Insurance

o Industrial Insurance

o Marine Insurance

o Shop Insurance

y Home Insurance

y Life Insurance

o Accident Insurance

NRI Accident Insurance

Personal Accident Insurance

o Health Care Insurance

Medical Insurance

Critical Illness Insurance

Travel Insurance



46

LIFE INSURANCE:-

Life Insurance policy is the most popular and taken by the most number of people. Many of us

buy life insurance policies, because we want to make sure our loved ones remain financially se-

cure after we die. Insurance companies offer both individual as well as group insurance policies.

Calculation of Life Insurance Amount/Premium:-

Individuals getting a life insurance cover have to pay the monthly/quarterly/half yearly/yearly

premium/life insurance rate, which depends on the amount insured. The premium amount also

increases or decreases with different life insurance plans, age of the individual etc. The company pays the full insurance amount either on the death of the individual or the expiry of the policy

whichever is earlier. Life insurance policy can be renewed after the expiry. Some insurance

companies offer a discount while renewing the policies of existing clients. The insurance is done

after a medical examination of the individual being insured.

Benefits of Life Insurance Policy:-

y Life insurance Policy can be used to avail loans from banks.

y Individuals/ groups can also avail tax benefit by investing in it.

y Life insurance policy also acts a good saving to meet with the future

needs.



47

LIFE INSURANCE CLAIM PROCEDURE:-

The insured can notify the company that the payment is due under the terms of the policy. This

can be done at the expiry of the life insurance policy. In case of the death of the person insures,

the beneficiary, receives the amount of life insurance. In case of death of insured, insurance

companies can repudiate the claim. This is done to ensure the protection of the client. The proce-

dure generally takes from 7-15 days.

INSURANCE COMPANIES:-

Life Insurance Non-Life Insurance

LIC

ICICI Prudential

HDFC Standard Life

Tata AIG Birla Sun

Life

Om Kotak

AMP Sanmar

MetLife India

AVIVA

ING Vysaya

Max New York

The New India

Assurance

Tata AIG

Royal Sundaram

Cholamandalam

Reliance



48

ROLE OF LIFE INSURANCE:-

Role 1: Life insurance as ³Investment´

Role 2: Life insurance as ³Risk cover´

Role 3: Life insurance as ³Tax planning´

UNIT LINK INSURANCE POLICIES (ULIPs):-

Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life insurance

products are those where the benefits are expressed in terms of number of units and unit price. They can be

viewed as a combination of insurance and mutual funds. The number of units, which the customer would get,

would depend on the unit price when he pays his premium. The daily unit price is based on the market value of

the underlying assets (equities, bonds, government securities etc.) and computed from the net asset value.

The advantages of Unit linked plans are that they are simple, clear, and easy to under-

stand. Being transparent the policyholder gets the entire upside on the performance of his fund.

Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient

utilization of capital.

According to the IRDA, a company offering unit linked plans must give the investor an

option to choose among debt, balanced and equity funds. If you opt for a unit-linked endowment

policy, you can choose to invest your premiums in debt,



49

Balanced or equity plans. If you choose a debt plan, the majority of your premiums will

get invested in debt securities like gilts and bonds. If you choose equity, then a

Major portion of your premiums will be invested in the equity market. The plan you

choose would depend on your risk profile and your investment need. The ideal time to buy a

unit-linked plan is when one can expect long-term growth ahead. This is especially so if one also

believes that current market values (stock valuations) are relatively low. So if you are opting for

a plan that invests primarily in equity, the buzzing market could lead to windfall returns. Howev-

er, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say 25, one can afford to take the

risk associated with equities, at least in the plan's initial stages. However, as one approaches re-

tirement the quantum of returns should be subordinated to capital preservation. At this stage, in-

vesting in a plan that has an equity tilt may not be a good idea. Onside ring that unit-linked plans

are relatively new launches, their short history does not permit an assessment of how they will

perform in different phases of the stock market. Even if one views insurance as a long-term

commitment, investments based on performance over such a short time span may not be appro-

priate.

WORKING OF ULIP:-

THE UNIT-LINKED PLANS WORK AS UNDER:-

The premium paid by the client, less any charges to be deducted, is used to buy units in

the fund selected by the client at the day¶s unit price. So, more units are added to the client¶s ac-

count each time he pays a premium. If he unit price on that day is relatively high, the client gets



50

less number of units and if the unit price is relatively low, then he gets more number of units.

In order to pay the regular monthly costs an equivalent numbers of units are cancelled

and are computed as cost to be deducted divided by unit price on that day.

The value of the fund depends on the unit price, which in turn is determined from the

market value of the underlying assets as seen earlier.

Thus, Fund Value = Unit Price x Number of units

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead.

This especially so if one also believes that current market values (stock valuations) are relatively

low. BSLI has given superior returns on all its investment funds.

ADVANTAGES OF UNIT-LINKED PLANS VIS-A-VIS TRADITIONAL PLANS:-

Unit-linked plans enjoy several advantages as under:-

1. Simple, clear and easy to understand.

2. Transparent and visible for customers to take decisions

3. Flexible and adaptable

4. Puts the policyholder in control

5. Policyholder gets the entire upside on the performance of his fund



51

ULIPs: DOES THE MARRIAGE WORK?

Unit-linked insurance plans (ULIPs) have become something of a rage with their 'promise' of

market-linked returns combined with the dual benefit of insuring your life from eventualities.

To put it simply, ULIPs attempt to fulfill investment needs of an investor with protec-

tion/insurance needs of an insurance seeker. ULIPs work on the premise that there is class of in-

vestors who regularly invest their savings in products like fixed deposits (FDs), coupon-bearing

bonds, debt funds, diversified equity funds and stocks. There is another class of individuals who

take insurance to provide for their family in case of an eventuality. So typically both these cate-

gories of individuals (which also overlap to a large extent) have a portfolio of investments as

well as life insurance. ULIP as a product combines both these products (investments and life in-

surance) into a single product. This saves the investor/insurance-seeker the hassles of managing

and tracking a portfolio of products.

Novel and noble as it appears, investor/insurance-seekers rarely understand the cost im-

plications of the marriage between investments and life insurance. To be sure, it is intricate and

not everyone is able to unravel it. Abhishek Bhatia (Head ± Marketing ICICI Prudential Life In-

surance) explains, µUnit-linked products are designed to put control in the hands of the customer.

While some customers are comfortable with this, there are others who require some more expla-

nation about the features. This is provided by the insurance agent. All the charges are clearly dis-

closed in the product brochures that are given to customers. Moreover, customers get a benefit il-

lustration, which clearly illustrates the up-front, investment and mortality charges that are levied

on the premium, and shows how the monies will grow over time, under a certain set of assump-

tions.¶

In this backdrop let¶s understand the costs of owning a ULIP. For illustration purpose, we

have taken ULIPs of ICICI Prudential and HDFC Standard Life, two leading private insurers. In-

vestors need to understand that this should only give them an indicative idea about the costs as-

sociated with a ULIP as different insurers have varying cost structures. We will start with the in-

vestment costs. Since ULIPs manage a portfolio of investments for clients, they incur a cost

known as the fund management cost. This is similar to a mutual fund that incurs costs on manag-



52

ing the equity and debt portfolio for investors. In this regard, ICICI Prudential ULIP has a three-

tier cost structure.

SO INVESTORS OPT FOR ULIPs?

First and foremost, investors need to understand that a ULIP is a bundled product of their in-

vestments and their insurance proceeds. So if you have a ULIP invested in equities, you are ex-

posing your life insurance monies as well as your investible surplus to the vagaries of equity

markets. While it is fine and even sensible to let your investible assets get an equity flavor, the

same cannot be said about your life insurance monies, which to a large extent should be sacred.

The volatility in equity markets can disturb the calmest of minds and the last thing you want to

see is your nest egg being eroded by the latest slide in equity markets. Abhishek Bhatia elabo-

rates, µA ULIP policyholder has the option to invest in a variety of funds, depending on his risk

profile. If one does not have the appetite to invest in equity, they can choose a debt or balanced

fund.¶

However, the structure of a ULIP takes care of quite a bit of the uncertainty in the mar-

kets. Insurance companies understand the need to give insurance-seekers the flexibility to rethink

their investment strategy in view of market histrionics. There is an option for the insurance-

seeker to switch to another plan with a lower or zero equity component to stem the loss in a fall-

ing equity market. Abhishek points out, µthe switch option allows customers to switch between

fund options, thereby making adjustments to any perceived risks.¶ ICICI Pru allows policyhold-

ers to make this switch four times a year at no cost, with Rs 100 at every additional switch after

that. HDFC Standard Life allows policyholders to make as many switches as they like. However,

for investors to make the right switch they need to track markets actively and be well informed,

which is actually the job of the investment advisor/consultant.

ULIPs are suitable for individuals who are already adequately insured and are reasonably

well-informed and savvy to take active investment decisions by using the µswitch option¶ that is

provided to a ULIP policyholder. Also policyholders with regular endowment plans who are not

satisfied with the 4-6% returns can consider taking a ULIP with a lower equity component. It is



53

best if insurance-seekers tread the middle path and choose balanced plans (with about 50-60%

equity component). Ideally they need to avoid taking the aggressive 100% equity ULIP, which

could needlessly expose their assets to market volatility. So if insurances-seekers/investors play

their cards right, they can make this marriage work.

AWARENESS OF THE RISK IN ULIPs:-

Unit Linked Insurance Plans (ULIPs) all of sudden became a popular investment vehicle with in-

vestors in the past one year. The reason: perhaps the bull phase or the lure of market-linked re-

turns that insurance companies have been advertising. But with the markets now having cor-

rected significantly, many investors are wondering whether they should have opted for a ULIP in

the first place.

A single cornerstone advantage ULIPs offer is that they leave the asset allocation deci-

sion in the hands of investors themselves. You are in control of how you want to distribute your

money across the broad asset classes and how and when you want to reallocate. You can with-

draw from these plans (after the initial lock in period) without any tax implication as withdrawals

and death claim proceeds under ULIPs qualify for (capital gains) tax exemption under Section 10

(10D) of the Income Tax Act.

But such flexibility can be a big disadvantage if you are not µan expert¶. You could choose to be

more in equities (like you probably did late last year or early this year), when the time is proba-

bly right to go into low risk debt. Or vice versa. The impact of such incorrect decisions could be

significant.



54

TAX PLANNING

TAX SAVING SCHEME:-

NATIONAL SAVING CERTIFICATES (NSC)

PUBLIC PROVIDENT FUND (PPF)

KISAN VIKAS PATRA (KVP)

POST OFFICE SCHEME (POS)

SPECIAL SCHEME FOR RETIRING PERSON

POSTAL LIFE INSURANCE

NATIONAL SAVING CERTIFICATE (NSC)

National Saving Certificate (NSC) is one of the popular Income Tax Saving schemes which is

available throughout the year. It can be operated by single, joint, or minor with his/her parent or

guardian. There is a return on this scheme at interest rate of 8%. The minimum investment limi-

tation of the scheme is Rs.100/- and with no upper limit. Other investments can be done in mul-

tiple of Rs. 100/-. This scheme has a maturity period of 6 years. It is transferable and also there is

a provision of loan on the basis of this scheme. Under section 88 of the Income Tax Act, 1961

any person can take benefit in income tax on amount invested in this scheme and under section

80L of Income Tax Act, 1961 there is a provision of benefit on interests coming from scheme.



55

PUBLIC PROVIDENT FUND (PPF)

Under this scheme, there is a return at the interest rate of 8% p.a. The minimum investment limitis Rs. 500/- and maximum limitation is Rs. 70,000/-. It can be opened any t ime throughout the

year. It can be operated either single or jointly. In case of minor, with parent/guardian. There is

also a facility of nomination in this scheme. This scheme has a maturity period of 15 years. The

first loan can be taken in the third

Financial year from the date of opening of the account, or up to 25% of the amount at credit at

the end of the first financial year. Loan amount can be returned in maximum of 36 installments.

A person can withdraw an amount (not more than 50% of the balance) every year. Under Section

88 of Income Tax Act, 1961 there is a provision of tax benefit by investing in this scheme. Inter-

est on this scheme is tax free.

KISAN VIKAS PATRA(KVP)

Money invested in this scheme doubles in 8 years. There is a minimum investment limitation of

Rs.100/- with no upper limit. This scheme is available throughout the year. It can be operated ei-

ther single or jointly. In case of minor, with parent/ guardian. Facility for nomination is also

available under this scheme. Currently there is no tax benefit on investment under this scheme.

POST OFFICE SCHEME (POS)

It is one of the best Income Tax Saving Scheme. It can be operated by either single or jointly. In

case of minor, with parent/guardian. It is available throughout the year. There are several types

of post office schemes depending upon the type of investment and maturity period. Post office

schemes can be divided into following categories:



56

y Monthly Deposit

y Saving Deposit

y Time Deposit

y Recurring Deposit

Special Schemes For Retiring Person

Government Employees:-

There is a return at the rate of 8% per annum. The minimum investment is Rs.1000/-

and maximum, amount equal to the total retirement benefit. Maturity period of this scheme is 3

years. According to Income Tax Act, 1961 interest on this scheme is tax free.

Public Sector Employees: Under this scheme there is a return of 9.5% payable half-yearly on

30th June and 31st December respectively. There is a minimum investment limitation of

Rs.1000/- and the maximum limitation is the amount equal to total retirement benefit. It can be

operated by retired PSU employees in his/her own name or with the spouse, jointly. In this

scheme, there is a facility of premature encashment.

Entire balance or part thereof can be withdrawn after the expiry of three years from the

date of deposit. Maturity period of this scheme is 3 years. According to Income Tax Act, 1961

interest on this scheme is tax free.

DIVIDEND

According to Income Tax Act,1961 there is a provision benefit in Income Tax if assessed has an

income as a dividend on investment in any of the following:

y Shares

y Mutual Funds

y Unit of UTI



57

TAX SLABS

The Income Tax slabs announced by our honorable Finance Minister, Mr. Pranav Muk-

harji in his Union Budget for the Financial Year 2011 ± 12 are as under:

Income tax slab for ay 11-12

New Income Tax Slabs for ay 11-12 for Resident Senior Citizens (FY 2010-11)

S. No. Income Range Tax percentage

1 Up to Rs 2,40,000 No tax / exempt

2 2,40,001 to 5,00,000 10%

3 5,00,001 to 8,00,000 20%

4 Above 8,00,000 30%

Income Tax Slabs for ay 11-12 for Resident Women (below 65 years) (FY 2010-11)


2 1,90,001 to 5,00,000 10%

3 5,00,001 to 8,00,00 20%

4 Above 8,00,000 30%

New Income Tax Slabs for ay 11-12 Others & Men (FY 2010-11)


2 1,60,001 to 5,00,000 10%

3 5,00,001 to 8,00,000 20%

4 Above 8,00,000 30%

* A surcharge of 10% on income tax is levied where taxable income exceeds Rs. 1 million which

makes it effective 33% including surcharge

Note: -



58

y Surcharge of 10% for t hose whose t axable income is Rs 10 lakh s or more.

y A surcharge of 10% on income t ax is levied where t axable income exceed s Rs. 1 mill ion which

make s it e ff ective 33% includ in g surcharge.

y T ax exemption on int ere st in Non- Re sident ( ext er nal) Account and on int ere st payable by a

scheduled bank to Non- Re sident Ind ians (NRI's ).

y T ax exemption on t he int ere st payable by a scheduled bank to a non-re sident or a per son who

is not ord inar ily re sident on de posits in forei g n currency where t he acce pt ance of such de posits

by t he bank is a ppr oved by t he RBI.

y S t andard deductions, a s well a s Section 88 and 80L have been abol ished .

The number of tax saving options on offer not only serve the purpose of saving tax but also offer

other benefits such as risk coverage, capital appreciation, retirement savings etc. In this section,

we have attempted to give a comparison of the various tax-saving investments, which should

help you make an informed and intelligent decision regarding your tax investments. The compar-

ison is done in a group of two on the parameters of safety, returns, tenure and tax benefits. The

argument behind grouping of those avenues is not very complicated; we just want to address the

dilemma of much talked groups. For instance, one can ask whether investment in NSC is better

when compared to Infrastructure bond. The grouping has not been addressed. In this section, we

suggest those readers to compare in their own for these kind of grouping after taking a look at the

arguments of the available grouping.



59

IMPORTANT FEATURES OF ALL THE TAX SAVING SCHEMES AT A GLANCE

Investment

avenuesSafety Returns Tenure Tax benefits

PPF Safe

9% p.a.

compounded

annually

15

years

Tax rebate on a

maximum invest-

ment of Rs.60,000/-,

u/s 88. Interest is to-

tally exempt from

tax and there is noTDS on interest.

NSC Safe

9% p.a.

compounded

half-yearly

6

years

Tax rebate on a

maximum invest-

ment of Rs.60,000/-,

u/s 88. No TDS on

interest. Interest

amount reinvested is

eligible for Section

88 benefit.

Infrastructure

bonds

Safety

indicated

by

credit

rating.

Varies from

9.00% to

9.5% p.a.

3

years

A tax rebate u/s 88

on a maximum in-

vestment of

Rs.80,000/-.

Life insur-

ance polic-

es

Safe Around 10%

20 ±

25

years

Premiums paid on

life insurance poli-

cies, up to a maxi-

mum of Rs.60,000/-



60

qualifies for tax re-

bate u/s 88.

ELSS

schemes

Carry

risk asthey in-

vest in

stock

market.

Depends onthe perfor-

mance of the

stock market

3

years

Tax rebate u/s 88 ona maximum in-

vestment of

Rs.10,000/-.

Pension

plans of mu-

tual funds

3 years

to age

of 58

years.

Tax rebate u/s 88 on a maxi-

mum investment of

Rs.60,000/-.

.



61

MUTUAL FUND

History of Mutual Funds in India and role of SEBI in mutual funds industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s,

Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The

objectives of SEBI are ± to protect the interest of investors in securities and to promote the de-

velopment of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual

funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in

1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the

capital market. The regulations were fully revised in 1996 and have been amended thereafter

from time to time. SEBI has also issued guidelines to the mutual funds from time to time to pro-

tect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including

those promoted by foreign entities are governed by the same set of Regulations. There is no dis-

tinction in regulatory requirements for these mutual funds and all are subject to monitoring and

inspections by SEBI. The risks associated with the schemes launched by the mutual funds spon-

sored by these entities are of similar type. It may be mentioned here that Unit Trust of India

(UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).



62

WHAT DO YOU MEAN BY MUTAL FUND?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and in-

vesting funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus

the risk is reduced. Diversification reduces the risk because all stocks may not move in the same

direction in the same proportion at the same time. Mutual fund issues units to the investors in ac-

cordance with quantum of money invested by them. Investors of mutual funds are known as unit

holders.

A mutual fund, also called an investment company, is an investment vehicle which pools

the money of many investors. The fund's manager uses the money collected to purchase securi-

ties such as stocks and bonds. The securities purchased are referred to as the fund's portfolio.

When you give your money to a mutual fund, you receive shares of the fund in return.

Each share represents an interest in the fund's portfolio. The value of your mutual fund shares

will rise and fall depending upon the performance of the securities in the portfolio. Like a share-

holder in a corporation, you will receive a proportional share of income and interest generated by

the portfolio. You can receive these distributions either in cash or as additional shares of the

fund. As a shareholder, you also have certain shareholder voting rights.

A mutual fund's portfolio is managed by a professional money manager. The manager's

business is to choose securities which are best suited for the portfolio. Be aware, however, that

even a professional money manager cannot insure against a loss of principal.

The mutual fund manager will invest in many different securities. This diversification

of portfolio assets means that you as an investor have not pinned all your hopes on one compa-

ny's success. Also, because the portfolio holds many securities, the negative impact that any one

company may have on the fund is diminished. While diversification is a benefit of mutual fund



63

investing, a mutual fund is still impacted, either favorably or unfavorably, by the ups and downs

of the market in general.

Mutual funds provide a relatively easy way to invest. Most funds have a minimum in-

vestment of $1000. In addition, a mutual fund stands ready to buy back, or redeem, your shares

at any time. This liquidity allows you to get your money when needed. There is no guarantee,

however, that your shares at the time of redemption will not have decreased in value.

WHAT IS NET ASSET VALUVE (NAV) OF A SCHEME?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In

simple words, Net Asset Value is the market value of the securities held by the scheme. Since

market value of securities changes every day, NAV of a scheme also varies on day to day basis.

The NAV per unit is the market value of securities of a scheme divided by the total number of

units of the scheme on any particular date. For example, if the market value of securities of a mu-

tual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to

the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the

mutual funds on a regular basis - daily or weekly - depending on the type of scheme.



64

BENFITS OF MUTUAL FUND

UNIVERSAL BENEFIT

AFFORDABILITY:-

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon

the investment objective of the scheme. An investor can buy in to a portfolio of equities, which

would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfo-lios with an investment as modest as Rs.500/-. This amount today would get you less than quar-

ter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of invest-

ments through a mutual fund rather than investing directly in the stock market.



65

DIVERSIFICATION:-

The nuclear weapon in your arsenal for your fight against Risk. It simply means that

you must spread your investment across different securities (stocks, bonds, money market in-

struments, real estate, fixed deposits etc.) and different sectors (auto, textile, information tech-

nology etc.). This kind of a diversification may add to the stability of your returns, for example

during one period of time equities might underperform but bonds and money market instruments

might do well enough to offset the effect of a slump in the equity markets. Similarly the informa-

tion technology sector might be faring poorly but the auto and textile sectors might do well and

may protect your principal investment as well as help you meet your return objectives.

VARIETY:-

Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two

ways: first, it offers different types of schemes to investors with different needs and risk appe-

tites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes,

both debt and equity. For example, an investor can invest his money in a Growth Fund (equity

scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a ba-

lanced portfolio easily or simply just buy a Balanced Scheme.

PROFESSIONAL MANAGEMENT:-

Qualified investment professionals who seek to maximize returns and minimize risk

monitor investor's money. When you buy in to a mutual fund, you are handing your money to an

investment professional that has experience in making investment decisions. It is the Fund Man-

ager's job to (a) find the best securities for the fund, given the fund's stated investment objec-

tives; and (b) keep track of investments and changes in market conditions and adjust the mix of

the portfolio, as and when required.





67

BY STRUCTURE:-

OPEN-END FUNDS:-

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.

CLOSED-END FUNDS:-

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.

INTERVAL FUND:-

Interval funds combine the features of open-ended and close-ended schemes. They are

open for sale or redemption during pre-determined intervals at NAV related prices.

BY INVESTMENT OBJECTIVE:-

GROWTH FUNDS:-

The aim of growth funds is to provide capital appreciation over the medium to long

term. Such schemes normally invest a majority of their corpus in equities.

It has been proved that returns from stocks, have outperformed most other kind of in-

vestments held over the long term. Growth schemes are ideal for investors having a long term

outlook seeking growth over a period of time.



68

INCOME FUNDS:-

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate debentures and

Government securities. Income Funds are ideal for capital stability and regular income.

BALANCED FUNDS:-

The aim of balanced funds is to provide both growth and regular income. Such schemes

periodically distribute a part of their earning and invest both in equities and fixed income securi-

ties in the proportion indicated in their offer documents. In a rising stock market, the NAV of

these schemes may not normally keep pace, or fall equally when the market falls. These are ideal

for investors looking for a combination of income and moderate growth.

MONEY MARKET FUNDS:-

The aim of money market funds is to provide easy liquidity, preservation of capital and

moderate income. These schemes generally invest in safer short-term instruments such as trea-sury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these

schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal

for Corporate and individual investors as a means to park their surplus funds for short periods.



69

OTHER SCHEME:-

TAX SAVING SCHEME:-

These schemes offer tax rebates to the investors under specific provisions of the Indian

Income Tax laws as the Government offers tax incentives for investment in specified avenues.

Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed

as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to inves-

tors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds.

SPECIAL SCHEME:-

y INDUSTRY SPECIFIC SCHEME:-

Industry Specific Schemes invest only in the industries specified in the offer document.

The investment of these funds is limited to specific industries like InfoTech, FMCG, and Phar-maceuticals etc.

y INDEX SCHEMES:-

Index Funds attempt to replicate the performance of a particular index such as the BSE

Sensex or the NSE 50

y SECT ORAL SCHEMES:-

Sect oral Funds are those which invest exclusively in a specified sector. This could be

an industry or a group of industries or various segments such as 'A' Group shares or initial public

offerings.



70

HOW TO INVEST IN MUTUAL FUND

Step One - Identify your Investment needs

Step Two - Choose the right Mutual Fund

Step Three - Select the ideal mix of Schemes

Step Four - Invest regularly

Step Five- Start early

Step Six - The final step

THE RISK RETURN GRAPH FOR VARIOUS FUNDS.

Liquid Funds

Income Funds

Balanced Funds

Equity Funds

Sector Funds

RISKS

R

E

T

U

R

N

S



71

COMMODITIES:-

Commodity Futures are contracts to buy specific quantity of a particular commodity at a future

date. It is similar to the Index futures and Stock Futures but the underlying happens to be com-

modities instead of Stocks and Indices.

Major Commodity Exchanges

The Government of India permitted establishment of National-level Multi-Commodity

exchanges in the year 2002 and accordingly three exchanges come in picture. They are:

y Multi-Commodity Exchange in India Ltd, Mumbai ( MCX ) .

y National Commodity and Derivative Exchange of India, Mumbai ( NCDEX ).

y National Multi Commodity Exchange, Ahmadabad (NMCE).

However there are regional commodities exchanges functioning all over the country.

Karvy Commodities Broking Pvt Ltd, has got membership of both the premier commodity ex-

changes i.e. MCX and NCDEX.

Some Basics Of Commodity Trading:-

1. FCRA ( Forward Contracts Regulation Act,1952 ) recognizes all agricultural, mineral &

fossil products as goods allowed for commodity trading.

2. .List includes metals, cereals, pulses, cotton, rubber, jute, oils, potatoes, onions, sugar,

coffee, tea, spices, etc.

3. Commodities are traded through special exchanges called commodity exchanges. There

are 3 national multi-commodity exchanges in India which made commodity trading more

accessible to average investors.



72

At international level there are major commodity exchanges in USA, Japan and UK.

Major commodities traded in Most popular Exchanges of the world are:

Exchange Major Commodities Traded

New York Mercantile Exchange

(NYMEX)

Crude Oil, Heating Oil

Chicago Board of Trade(CBOT) Soy Oil, Soy Beans, Corn

London Metals Exchange (LME) Aluminum, Copper, Tin, Lead

Chicago Board Option Exchange

(CBOE)

Options on Energy, Interest Rate

Tokyo Commodity Exchange (TCE) Silver, Gold, Crude Oil, Rubber

Malaysian Derivatives Exchange

(Mdex)

Rubber, Soy Oil, Palm Oil

Commodity Exchange (COMEX) Gold ,Silver, Platinum

WHO REGULATES THE COMMODITY EXCHANGE?:-

Commodity exchanges are regulated by forward Market Commission ( FMC ); Forward market

Commission works under the purview of the ministry of food, Agriculture and Public Distribution.



73

ADVANTAGES IN DEALING COMMODITIES FUTURES ARE :-

If you are an Investor, commodities futures represent a good form of investment because of the

following reasons.

DIVERSIFICATION:-

The returns from commodities market are free from the direct influence of the equity

and debt market, which means that they are capable of being used as effective hedging instru-

ments providing better diversification.

LESS MANIPULATION: ±

Commodities markets, as they are governed by international price movements are less

prone to rigging or price manipulations by individuals.

HIGH LEVERAGE:-

The margins in the commodity futures market are less than the F & O section of the

Equity market.



74

HOW RISKY ARE THESE MARKETE COMPARED TO STOCK& BONDS MARKET?

Commodity prices are generally less volatile than the stocks and this has been statistically prov-

en. Therefore it¶s relatively safer to trade in commodities.

Also the regulatory authorities ensure through continuous vigil that the commodity

prices are market- driven and free from manipulations.

TRADING PLACE:-

A list of the commodities, which shows when the contracts usually terminate & an indication of

ruling prices.

Commodity

Commodity Ask Change Change% NY

Gold 1247.60 -4.70 -0.38% 09/03

Silver 19.87 0.20 1.02% 09/03

Platinum 1561.00 8.00 0.52% 09/03

Palladium

533.00 6.00 1.15% 09/03

Copper 3.4835 0.00 0.13% 09/03

Nickel 9.9065 0.01 0.12% 09/03

Aluminum 0.9544 -0.00 -0.24% 09/03

Zinc 0.9717 0.00 0.24% 09/03



75

Lead 0.9819 0.00 0.47% 09/03

Uranium 45.00 -1.00 -2.17% 08/30

Gold Futr 1251.100 -2.300 -0.18% 09/03

Silver Futr 19.949 0.277 1.41% 09/03

Copper Futr 350.000 0.450 0.13% 09/03

Nat Gas Futr 3.939 0.188 5.01% 09/03

Brent Crude Fut 76.670 -0.260 -0.34% 09/03

WTI Crude Futr 74.600 -0.420 -0.56% 09/03

Heating oil futr 205.730 -0.500 -0.24% 09/03

Corn Future 464.500 17.000 3.80% 09/03

Wheat Future 741.250 27.500 3.85% 09/03

Cocoa Future 2772.000 37.000 1.35% 09/03

Soybean Futr 1035.000 26.000 2.58% 09/03

Soybean Oil Fut 40.860 0.660 1.64% 09/03

Coffee C Futr 186.950 2.100 1.14% 09/03

Sugar #11 20.600 -0.210 -1.01% 09/03

Cotton #2 Fut 89.450 -0.040 -0.04% 09/03

Live Cattle Fut 98.450 0.000 0.00% 09/03

lean Hogs Fut 77.200 0.775 1.01% 09/03





77

35%

20%3%

18%

6%

8%8%

2%

Analysis & Interpretation

MUTUAL FUND

SHARE MARKET

BONDS/DEBENTURE

INSURANCE

REAL ESTATE

COMMODITIES

NSC

OTHER



78

0%

10%

20%

30%

40%

50%

60%

Tax Saving Capital

58%43%

Factors Considered For Bonds

0%

20%

40%

60%

80%

Tax Saving safety High Returns

63%

30%

7%

Factors Considered For Insurance Sector



79

0%

20%

40%

60%

80%

Tax Saving Safety

75%

25%

Factors Considered For Tax planning



80

CONCLUSION

Instead of concluding anything, It would like to show the comparisons of the various investments

opportunities concerning their safety, interest rate, liquidity, etc. through following table:

INSTRU-

MENTS

RE-

TUR

N

SAF

ETY

VOLATIL-

ITY

LI-

QUIDI-

TY

STOCKS HI LO HI HI / LO

BONDS MO

D

HI MOD MOD

FIXED

DEPOSITS

LO HI LO HI

MUTUAL

FUNDS

HI HI MOD HI

Where;

HI= High,

LO= Low,

MOD= Moderate.

Now it depends from person to person what they predict from the above table and what are their

likings.



81

RECOMMENDATIONS

Mutual funds could provide better advice to their investors through the Net and through the

traditional investment routes where there is an additional channel to deal with the Brokers. Direct

dealing with the fund could help the investor with their financial planning.

In India , brokers could get more Net savvy than investors and could help the investors with

the knowledge through get from the Net.

New investors would prefer online : Mutual funds can target investors who are young indi-

viduals and who are Net savvy, since servicing them would be easier on the Net.

India has around 1.6 million net users who are prime target for these funds and this could just

be the beginning. The Internet users are going to increase dramatically and mutual funds aregoing to be the best beneficiary. With smaller administrative costs more funds would be mobi-

lized .A fund manager must be ready to tackle the volatility and will have to maintain sufficient

amount of investments which are high liquidity and low yielding investments to honor redemp-

tion.

Net based advertisements: There will be more sites involved in ads and promotion of mutualfunds. In the U.S. sites like AOL offer detailed research and financial details about the function-

ing of different funds and their performance statistics. a is witnessing a genesis in this area .

There are many sites such as ind ia fn.com that are doing something similar and providing advice

to investors regarding their investments.



82

BIBLIOGRAPH

BOOKS REFERED:

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

BY:- PRASANNA CHANDRA

(Published By Tata McGraw-Hill Education Private Limited.

Edition Third)

WEBSITES REFERED

www.mutualfundsindia.com

www.indiacapital.com

www.moneypore.com

www.valueresearchonline.com

www.amfi.com

www.indiafn.com



Documents

44692357 39308727 Financial Planning for Individual Investor (1)