Our Project Final

7/31/2019 Our Project Final

1/170


2/170


3/170


4/170

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.


5/170


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


6/170


7/170


8/170


9/170


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


10/170

K.S.SCHOOL OF BUSINESS MANAGEMENT

10

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.


11/170


12/170


13/170


13

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.


14/170


14

Major Players of Mutual Funds In

IndiaPeriod (Last&nbsp1 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=JM263


15/170


16/170


16

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=BE017


17/170


18/170


18

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)


19/170


20/170


21/170


21

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.


22/170


23/170


23

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.


24/170


25/170


26/170


27/170


27

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


28/170


28


29/170


30/170


31/170


32/170


33/170


34/170


34

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.


35/170


35

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.


36/170


37/170


37

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.


38/170


38

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.


39/170


39

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


40/170


40

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.


41/170


42/170


43/170


43

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


44/170


44

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


45/170


46/170


47/170


48/170


49/170


50/170


51/170


51

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


52/170


52

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


53/170


53

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


54/170


55/170


56/170


57/170


57

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


58/170


58

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.


59/170


59

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.


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.


60/170


61/170


61

Investor can buy a post office MIS at any post-office in India.


62/170


62

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.


63/170


63

(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.


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.


64/170


65/170


65

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.


66/170


67/170


67

(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.


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.


68/170


68

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.


BuyingInvestor can buy KVP by filling up the appropriate application form

available at post offices across the country.


69/170


69

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.


70/170


70

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.


71/170


71

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


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.


72/170


72

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.


73/170


74/170


74

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.


75/170


75

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.


76/170


77/170


77

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.


78/170


79/170


79

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.


80/170


80

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.


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.


81/170


81

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.


82/170


82

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.


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.


83/170


83

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.


84/170


84

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.


85/170


85

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 %


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


86/170


86

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


87/170


87

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.


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.


88/170


88

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.


89/170


89

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.


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.


90/170


90

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.


91/170


91

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.


BuyingCompany Fixed Deposits forms are available through various

broking agencies or directly with the companies. Similar is the case for

the NBFCs.


92/170


93/170


93

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.


94/170


94

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.html


95/170


95

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.html


96/170


96

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


97/170


97

(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


98/170


98

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%


99/170


99

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


100/170


100

rate

Secondary

Market

Yes Yes Yes No No

Mortgage No No Yes Yes Yes


101/170


102/170


102

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.


103/170


103

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


104/170


104

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

Documents

Our Project Final