70645711 factor influencing the investment decision making of investors
TRANSCRIPT
1 RES EA RC H METH OD OL OGY
OBJECTIVE OF THE STUDY:
To know the investment option available in the india and also the
return and risk associate with it.
To analyze the pattern of investment objectives.
To identify the factors influencing in the individual investment
decisions.
To study the consumer preference for the investment scheme
selection.
To analyse the factor this should be affect in selection of
investment plans and evaluate suitable alternative available for
solving through other investment options.
To knowledge of the Valsad city investors, how many are
interested in investment and what is the investment portfolio of the
investors?
To comparative study of the equity, debt and hybrid sector
investment.
Research design: -
For study of factor influencing the investment decision making of investors, a
primary survey was undertaken so as to know as to which factor should be
affect while selecting the investment option for financial requirement, how
much knowledge do they have about investment schemes. For this purpose,
a questionnaire was designed and analyzed on the basis of the responses
given by the investors of Valsad. Further, to complete the other objectives
data was provided by Marwadi group in form of personal portfolios of various
investors of Valsad and their potential customer.
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Data Collection: -
For the purpose of the research, data has been collected from following two
ways:
Primary data: - for studying perceptions of financial investors, a primary
survey was undertaken so as to know as to which factor should be affect
while selecting the investment option for financial requirement, how much
knowledge do they have about investment schemes. For the purpose, a
questionnaire was designed and analyzed on the basis of the responses
given by about 100 potential investors of Valsad. A detailed discussion about
the primary research done and data collected has been under the heading
“STUDY OF FACTOR INFLUENCING THE INVESTMENT DECISION
MAKING OF INVESTORS”.
Secondary data: - The secondary data was collected from the various
books, magazines, investment plan brochure and various financial
investment websites. The secondary data was collected to know the
theoretical aspect of the investment options and also for the performance
evaluation of return and risk associate with the investment options.
Sampling frame: -
Universe: all the citizens in the city of Valsad of Valsad District.
Population: all the 10,000 (approx) citizens of Valsad city of Valsad district
interested in planning for financial requirements.
Sampling unit: citizen of Valsad city
Types of sampling: Non – random convenience sampling.
Sample size: 100
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Scope of the study: -
Investment is the sources of savings. Now a day’s, the investment
proportion will be increase in the financial market. The primary objective
of the project is to gain detailed insight into the investment industry.
I have tried to systematically and objectively look into all – important
aspects. A combination of primary and secondary data has been used.
The former, through limited, has helped us give first hand information on
company and investor sentiments. The latter has been used to
understand the theoretical aspects.
Strategic importance has been given to both current and past trends and
we have tried to correlate both in a manner to gain maximum insight.
This document has been designed to serve a two-fold purpose. The first,
which is also the main objective of the project, is to reflect our
understanding of this industry. The second is to provide the reader similar
detailed knowledge.
The prime objective of the research was to determine the perception of
the Indian investor towards mutual funds and this is demonstrated in the
later part of this report.
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Limitations of the study: -
The study focuses only on the investors associated with the Valsad
city.
In the survey may people not responding proper manner.
The data is collected which sample size is limited only 100 samples.
The Valsad city survey data has been not represent the whole country
or metro – city.
Most of the data about the companies and investment options are
collected from the concerned company’s website or directly through
the concerned companies, which can be manipulated or exaggerated
by the company.
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2 INDU STR Y PR OF IL E
Broking industry: -Introduction
Stock markets refer to a market place where investors can buy and sell
stocks. The price at which each buying and selling transaction takes is
determined by the market forces (i.e. demand and supply for a particular
stock).
Let us take an example for a better understanding of how market forces
determine stock prices. ABC Co. Ltd. enjoys high investor confidence and
there is an anticipation of an upward movement in its stock price. More and
more people would want to buy this stock (i.e. high demand) and very few
people will want to sell this stock at current market price (i.e. less supply).
Therefore, buyers will have to bid a higher price for this stock to match the
ask price from the seller which will increase the stock price of ABC Co. Ltd.
On the contrary, if there are more sellers than buyers (i.e. high supply and
low demand) for the stock of ABC Co. Ltd. in the market, its price will fall
down.
History of the Indian Stock Market - The Origin
One of the oldest stock markets in Asia, the Indian Stock Markets have a 200
years old history.
18th
Century
East India Company was the dominant institution and by end of the
century, business in its loan securities gained full momentum
1830's Business on corporate stocks and shares in Bank and Cotton
presses started in Bombay. Trading list by the end of 1839 got
broader
1840's Recognition from banks and merchants to about half a dozen
brokers
1850's Rapid development of commercial enterprise saw brokerage
business attracting more people into the business
1860's The number of brokers increased to 60
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1860-61 The American Civil War broke out which caused a stoppage of
cotton supply from United States of America; marking the beginning
of the "Share Mania" in India
1862-63 The number of brokers increased to about 200 to 250
1865 A disastrous slump began at the end of the American Civil War (as
an example, Bank of Bombay Share which had touched Rs. 2850
could only be sold at Rs. 87)
Pre-Independence Scenario - Establishment of Different Stock Exchanges
1874 With the rapidly developing share trading business, brokers used to
gather at a street (now well known as "Dalal Street") for the purpose
of transacting business.
1875 "The Native Share and Stock Brokers' Association" (also known as
"The Bombay Stock Exchange") was established in Bombay
1880's Development of cotton mills industry and set up of many others
1894 Establishment of "The Ahmedabad Share and Stock Brokers'
Association"
1880 - 90's Sharp increase in share prices of jute industries in 1870's was
followed by a boom in tea stocks and coal
1908 "The Calcutta Stock Exchange Association" was formed
1920 Madras witnessed boom and business at "The Madras Stock
Exchange" was transacted with 100 brokers.
1923 When recession followed, number of brokers came down to 3 and
the Exchange was closed down
1934 Establishment of the Lahore Stock Exchange
1936 Merger of the Lahoe Stock Exchange with the Punjab Stock
Exchange
1937 Re-organization and set up of the Madras Stock Exchange Limited
(Pvt.) Limited led by improvement in stock market activities in South
India with establishment of new textile mills and plantation
companies
1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange
Limited was established
1944 Establishment of "The Hyderabad Stock Exchange Limited"
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1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi
Stocks and Shares Exchange Limited" were established and later on
merged into "The Delhi Stock Exchange Association Limited"
Post Independence Scenario:
The depression witnessed after the Independence led to closure of a lot of
exchanges in the country. Lahore E-stock Exchange was closed down after the
partition of India, and later on merged with the Delhi Stock Exchange. Bangalore
Stock Exchange Limited was registered in 1957 and got recognition only by
1963. Most of the other Exchanges were in a miserable state till 1957 when they
applied for recognition under Securities Contracts (Regulations) Act, 1956. The
Exchanges that were recognized under the Act were:
1. Bombay
2. Calcutta
3. Madras
4. Ahmedabad
5. Delhi
6. Hyderabad
7. Bangalore
8. Indore
Many more stock exchanges were established during 1980's, namely:
1. Cochin Stock Exchange (1980)
2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
3. Pune Stock Exchange Limited (1982)
4. Ludhiana Stock Exchange Association Limited (1983)
5. Gauhati Stock Exchange Limited (1984)
6. Kanara Stock Exchange Limited (at Mangalore, 1985)
7. Magadh Stock Exchange Association (at Patna, 1986)
8. Jaipur Stock Exchange Limited (1989)
9. Bhubaneswar Stock Exchange Association Limited (1989)
10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
11. Vadodara Stock Exchange Limited (at Baroda, 1990)
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12. Coimbatore Stock Exchange
13. Meerut Stock Exchange
Mutual fund industry: -
Current scenario of MF industry
The Indian Mutual fund industry has witnessed considerable growth since its
inception in 1963. The assets under management (AUM) have surged to Rs
4,173 billion in Mar-09 from just Rs 250 million in Mar-65. In a span of 10 years
(from 1999 to 2009), the industry has registered a CAGR of 22.3%, albeit
encompassing some shortfalls in AUM due to business cycles.
The impressive growth in the Indian Mutual fund industry in recent years can
largely be attributed to various factors such as rising household savings,
comprehensive regulatory framework, favourable tax policies, and introduction of
several new products, investor education campaign and role of distributors.
In the last few years, household’s income levels have grown significantly, leading
to commensurate increase in household’s savings. Household financial savings
(at current prices) registered growth rate of around 17.4% on an average during
the period FY04-FY08 as against 11.8% on an average during the period FY99-
FY03. The considerable rise in household’s financial savings, point towards the
huge market potential of the Mutual fund industry in India.
Besides, SEBI has introduced various regulatory measures in order to protect
the interest of small investors that augurs well for the long term growth of the
industry. The tax benefits allowed on mutual fund schemes (for example
investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax
deductions under section 80C of the Income Tax Act) also have helped mutual
funds to evolve as the preferred form of investment among the salaried income
earners.
Besides, the Indian Mutual fund industry that started with traditional products like
equity fund, debt fund and balanced fund has significantly expanded its product
portfolio. Today, the industry has introduced an array of products such as
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liquid/money market funds, sector-specific funds, index funds, gilt funds, capital
protection oriented schemes, special category funds, insurance linked funds,
exchange traded funds, etc. It also has introduced Gold ETF fund in 2007 with
an aim to allow mutual funds to invest in gold or gold related instruments.
Further, the industry has launched special schemes to invest in foreign
securities. The wide variety of schemes offered by the Indian Mutual fund
industry provides multiple options of investment to common man.
With a strong growth in the AUM of domestic Mutual fund industry, the ratio of
AUM to GDP increased gradually from 4.7% in 2001 to 8.5% in 2009. The share
of mutual funds in households’ financial savings also witnessed a substantial
increase to 7.7% in 2008 as against 1.3% in 2001.
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Banking industry: -
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the
main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone
are days when the most efficient bank transferred money from one branch to
other in two days. Now it is simple as instant messaging or dials a pizza. Money
has become the order of the day.
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The first bank in India, though conservative, was established in 1786. From 1786
till today, the journey of Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase
II and Phase III.
Phase I:
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians,
Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of
India came in 1935.
During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100
banks, mostly small. To streamline the functioning and activities of commercial
banks, the Government of India came up with The Banking Companies Act,
1949 which was later changed to Banking Regulation Act 1949 as per amending
Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in india as the Central Banking
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Authority.
During those day’s public has lesser confidence in the banks. As an aftermath
deposit mobilization was slow. Abreast of it the savings bank facility provided by
the Postal department was comparatively safer. Moreover, funds were largely
given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale specially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalization was carried out. It was the
effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in the country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out
in 1980 with seven more banks. This step brought 80% of the banking segment
in India under Government ownership.
The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
1949 Enactment of Banking Regulation Act.
1955 Nationalization of State Bank of India.
1959 Nationalization of SBI subsidiaries.
1961 Insurance cover extended to deposits.
1969 Nationalization of 14 major banks.
1971 Creation of credit guarantee corporation.
1975 Creation of regional rural banks.
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1980 Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank
India rose to approximately 800% in deposits and advances took a huge
jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit
faith and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
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3 C OMPAN Y PR OF IL E
"Marwadi is a Gujarat based financial service group dealing in equities /
commodities broking and portfolio management services. In the last 17 years we
have grown into a network of more than 73 branches with a 1000+ committed
professional people and 750+ channel partners across India. We've kept the
faith of over 3.10 +lakhs investors and it's growing. After establishing supremacy
in Gujarat, we now expanding nationwide and to fuel our growth plans raised
capital from UK-based investment companies."
Our values VISION & MISSION:
"To be a world-class financial services provider by arranging all conceivable
financial services under one-roof at affordable costs through cost effective
delivery systems, and achieve organic growth in business by adding newer lines
of business."
Our Core Competency: -
Building Business Partnerships:
we believe in building long-term relationships. Lasting association is directly
proportional to client satisfaction rate. We listen, we lead and we communicate
with honesty and integrity.
Broad Reach:
We have an extended web of experts from various domains like law, marketing,
economics which we draw upon from time-to-time, in order to effectively meet
the specific requirements of clients' assignments.
Our broad and varied clientele spans several industries:
Some of them are in the Fortune 500 list. Our rich experience, in diversified
industries, helps us offer our clients practical solutions for their specific business
needs.
Organized Approach:
The working of the entire firm is webbed through efficient communication,
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documentation, written systems and procedures along with a yearly calendar of
meetings and training schedules.
History of Marwadi group: -
Marwadi Group was incorporated in 1992 with the vision of providing superior
standards of Financial Services focusing on professionalism, speed and ethics to
a wider Corporate Services in India and proposed to start its operations in the
subcontinent & overseas. The foundation is on "Value" Systems - "Value"
addition to Corporate, Retails and HNI Individuals through superior Wealth
Creation Practices. All actions are based on stringent "Values" - integrity,
confidentiality & commitment. "True Value" for money through a holistic business
practice. Finally, "Value" for client satisfaction, predominates our relationship
criteria.
"The company is 5th Leading retail broking house.*(D&B “India’s Leading equity
Broking Houses 2008” Report). Ranked amongst top 10 performers in BSE in
the equity segments during the year 2007-08. In 17 years, the company has
emerged as one of India’s fastest growing retail broking houses with retail
market share at 2.73%. The company has 73 branches and over 750+ channel
partners operating over 7000+ trading terminals spread across 184 cities and
servicing more than 3000+ pin codes in India.
The company is having a new state of the art with world class infrastructure
corporate office of 90,000 square feet located in the prime location of the Rajkot,
Gujarat.
The company is rated at P2+ and BBB+/stable by Crisil ratings for the bank
facilities for 200 crores. The company has 1000+ employees strength is very
talented, young and dynamic to take on any challenges in future."
The company crossed the following milestones to reach its present position as
the leading retail broking house in India.
1992 Marwadi Shares And Finance Pvt. Ltd. was incorporated by first
generation Entrepreneurs Shri Ketan Marwadi, Shri Deven Marwadi and Shri
Sandeep Marwadi.
1996 Became a corporate member of National Stock Exchange of India - (NSE)
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1998 Became a member of Saurashtra Kutch Stock Exchange (SKSE)
1999 Launched Depository services of Depository Participant under National
Depository Security Ltd. (NSDL)
2000 Commenced Derivative Trading after obtaining registration as Clearing
and Trading Member in NSE.
2003 Marwadi commodity broker pvt ltd became a corporate member of the
National Commodity and Derivatives Exchange of India Ltd. (NCDEX)
2003 Marwadi Commodity broker pvt ltd became a corporate member of The
Multi Commodity Exchange of India Ltd. (MCX)
2004 Became a corporate member of Bombay Stock Exchange Ltd. (BSE)
2004 Launched Depository Services of Depository Participant under Central
Depository Services (India) Ltd.
2005 Launched Portfolio Management Services
2006 MSFPL converted to Limited co. (Marwadi Shares And Finance Limited)
The Company raised private equity from ICGU Limited, a wholly owned
subsidiary of India Capital Growth Fund.
2007 Attracted Private Equity Investment from Reputed Investors Caledonia &
ICGI
2008 Adjudged the 5th Largest Broking House by Dun & Bradstreet
2009 Growing Institutional Business
2009 Moves in to 90000 Square Feet State of Art Infrastructure
At Marwadi Group we consider your reputation, confidentiality and our esteemed
status of paramount importance. This is why we design and deliver our services
on a foundation of best-in-class compliance procedures and established
internationally recognized jurisdictional regulation.
Founded on the belief that fiduciary services are not simply a product, but rather
a unique opportunity to work with our clients and build long-term relationships,
we, the companies which collectively form the MARWADI GROUP of
Companies, understand the qualities our clients are looking for in their fiduciary
service provider. And it is on our commitment to those qualities that our business
now stands. Marwadi Group is a forward looking company and encourages
associations with efficacious people. Accordingly, it invites entrepreneurs who
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have a positive approach and attitude to culminate success. Marwadi Group
offers you a gamut of products, services and support to help you meet client
needs, shape a more profitable business and execute your goals.
This is what a business needs to be successful! At Marwadi Group, your success
matters. When you team with Marwadi Group, you team with the best - the best
offerings, the best skills and knowledge to help you win, and the best partners to
help you with full range of skills, expertise, applications and services required to
manage their funds.
But the best loses its significance if it doesn’t comply with your values -
innovation that matters; client success; trust and personal responsibility. These
are the core values that drive Marwadi Group - and the values we share with
Marwadi Group stake holders.
Marwadi Group focuses on customer orientation aiming and maintaining returns
to our various stakeholders. Our Range of Products and Services offering
Includes:
Trading in Equities, Commodities & Currency Derivatives Trading with Marwadi
Group truly empowers you for your investment needs. Provide hassle free and
broking parentage of Trading and Services of Equity, Commodity and Currency
Derivatives through Participation in the domestic exchanges like NSE, BSE,
MCX, NCDEX, NMCE, MCX-SX, NSE-FX, BSE- CDS, and NATIONAL SPOT
EXCHANGES ETC…. We ensure you have a superlative trading experience
through - A highly process driven, diligent approach Powerful Research &
Analytics and One of the "best-in-class" dealing rooms.
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Product & Services:
Equities & Derivatives
Commodity
Internet Trading
Depository Participant
IPO
Mutual Funds
PMS
Research Insurance
New Pension Scheme
Client Attention
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REGISTERED & CORPORATE OFFICE Marwadi Financial Plaza,
Nana Mava Main Road,
Off 150 Feet Ring Road,
Rajkot-360005,
Gujarat(India)
Ph: 0281-3011000,2332001
Email:
bu s i ness . h e l pdes k @mar w a d i o n li n e . ne t ,
p i y ush . mar w a d i @ma r w ad i on l i ne . net
Valsad Branch:
Marwadi shares and Finance Limited
209/210, royal corner, 2nd floor,
Opp. Doctor House, halar road, Valsad – 396 001
(Gujarat) India.
Phone: 02632 – 222079
E-mail: gj.valsad . m a i n@ma r w ad i on l i ne . net
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4 F A CT O R I NF L UNC I N G TH E I N V EST M E T D E C I S IO N
MAK IN G OF INV EST OR S
Investment is the commitment of money or capital to purchase financial
instruments or other assets in order to gain profitable returns in the form of
interest, income, or appreciation of the value of the instrument. Investment is
related to saving or deferring consumption.
An investment involves the choice by an individual or an organization such as a
pension fund,
after some analysis or thought, to place or lend money in a vehicle, instrument or
asset, such as property, commodity, stock, bond, financial derivatives (e.g.
futures or options), or the foreign asset denominated in foreign currency, that
has certain level of risk and provides the possibility of generating returns over a
period of time. When an asset is bought or a given amount of money is invested
in the bank, there is anticipation that some return will be received from the
investment in the future.
Investment is a term frequently used in the fields of economics, business
management and finance. It can mean savings alone, or savings made through
delayed consumption. Investment can be divided into different types according
to various theories and principles.
While dealing with the various options of investment, the defining terms of
investment need to be kept in mind.
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Investment in terms of Economics:
According to economic theories, investment is defined as the per-unit production
of goods, which have not been consumed, but will however, be used for the
purpose of future production. Examples of this type of investments are tangible
goods like construction of a factory or bridge and intangible goods like 6 months
of on-the-job training. In terms of national production and income, Gross
Domestic Product (GDP) has an essential constituent, known as gross
investment.
Investment in Terms of Business Management:
According to business management theories, investment refers to tangible
assets like machinery and equipments and buildings and intangible assets like
copyrights or patents and goodwill. The decision for investment is also known as
capital budgeting decision, which is regarded as one of the key decisions.
Investment in Terms of Finance:
In finance, investment refers to the purchasing of securities or other financial
assets from the capital market. It also means buying money market or real
properties with high market liquidity. Some examples are gold, silver, real
properties, and precious items.
Financial investments are in stocks, bonds, and other types of security
investments. Indirect financial investments can also be done with the help of
mediators or third parties, such as pension funds, mutual funds, commercial
banks, and insurance companies.
Person al Finan ce:
According to personal finance theories, an investment is the implementation of
money for buying shares, mutual funds or assets with capital risk.
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Personal finance and the steps involved
Financial planning is a key component of personal finance which is a dynamic
process and requires regular monitoring, reviewing and reevaluation. It normally
has five steps:
1. Assessment:
A person's financial situation can be assessed through the financial balance
sheets and income statements. A personal balance sheet lists down the
values of all the personal assets such as stocks, car, house, clothes, or bank
account along with the personal liabilities like mortgage, credit card debt, and
bank loan. The personal income statement lists personal income as well as
expenses.
2. Setting goals:
One can have several financial goals. These can be short term e.g. buying a
house in a few months and some long term goals like planning for children's
education and marriage or even planning for one's retirement. Setting
financial goals helps a great deal in direct financial planning process.
3. Formulating a plan:
Once the goals have been listed, the next step is to create a financial plan
which details how to accomplish these goals. It may include, for example,
increasing one's income, curtailing unnecessary expenses, or may be
investing in the stock market.
4. Execution:
The next step is execution of one's personal financial plan that needs
discipline and perseverance. For this purpose, lots of people rely on the
assistance from professionals like financial planners, investment advisers,
accountants, and lawyers.
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5. Monitoring & reassessment:
Over a period of time, it is necessary to monitor one's personal financial plan
for possible adjustments and/or reassessments.
Key areas of Personal Finance Planning
The 6 key areas of personal financial planning, as recommended by the
Financial Planning Standards Board, are as follows:
1. Financial Position:
It is concerned with understanding the available personal resources by
investigating net worth and the household cash flow. Net worth is nothing but
a person's balance sheet that is calculated by adding together all assets of a
person, and subtracting all liabilities of the household, at one point in time.
The household cash flow adds up all the expected income sources within a
year, minus all the expected expenses within the same year. Through this
analysis, a financial planner can determine the degree and time required to
accomplish the personal goals.
2. Adequate Protection:
This analysis is done in order to understand how to protect a household from
all unforeseen risks. These risks include liability, death, property, disability,
health as well as long term care. Some risks may be self-insurable, while
others may require the acquisition of an insurance contract. As insurance
enjoys some tax benefits, investing in insurance may be an important area of
the overall investment planning.
3. Tax Planning:
Income tax is generally the single largest expense of a household. Managing
taxes when and how much tax should an individual pay. Government
provides many incentives in the form of tax deductions & credits that can be
used to reduce the lifetime tax burden. Most of the modern governments use
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a progressive tax; meaning that as income grows, you need to pay a greater
marginal rate of tax. Tax planning if understood and planned properly can
make a significant impact upon your success in the financial planning
process.
4. Investment and Accumulation Goals:
Some of the main reasons to accumulate assets is for purchasing a house,
buying a car, starting a business, paying for education expenses,
accumulating money for retirement, to create a stream of income in order to
cover one’s lifestyle expenses. A major risk to the household in achieving
these accumulation goals is the rate of price increase over time, or inflation.
In order to deal with the inflation, one needs to have a financial planner who
can manage the portfolio taking into consideration the net present value and
proper asset allocation, so as to diversify the investment risk and generate
maximum returns over a period of time.
5. Retirement Planning:
Retirement planning is the process of allocation of finances for retirement while
understanding how much it will cost to live at retirement. This generally means
setting aside of money and/or other assets in order to obtain a steady income at
retirement. The objective of retirement planning is to achieve financial
independence and arriving at a plan to distribute assets so as to meet any
shortfall in income.
6. Estate Planning:
Estate planning is a process by which an individual makes arrangement for
the transfer of assets to legal heirs incase of death or disability of the
individual. This includes the distribution of real as well as personal property of
an individual to the legal heirs. Protecting the needs of loved ones during
lifetime and even after death can be achieved through estate planning by
distribution of assets among the beneficiaries.
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Factors Involved in Investment Decision: -
The motive behind our investments is to make money and increase our
monetary wealth. With so many factors involved, investment decision is a
complex one. Small investors often go with their gut feelings when trying to
choose among numerous alternatives to invest. Big investors use various
analyzing techniques. Globalization and the growth of internet have introduced
many new opportunities and threats to ponder upon. When investing, you are
committing your assets for some time that is why you need to cover all aspects
before making an investment decision.
Expected Return:
The most basic investment decisions revolve around the comparison of expected
return and risk involved. No investor will take on higher risk if there is no chance
of equally higher returns. Investors strive to reach on the best trade-off point
between risk and return which go well with their financial requirements. These
expected returns are not always equal to what an investor actually gets after
some time. The possibility that actual return will not be the same what they
expect is called risk.
Risk Factor:
There is hardly some form of investment which doesn't involve risk. Government
securities come close to be called risk free; but even they have some risks
attached to them. Risk actually is the balancing factor of the financial markets.
Various types of investment risk exist, such as financial risk, currency risk,
inflation risk or capital risk are the most common one. Different investors react
differently to these risks. While majority of the investors are risk averse, there are
some investors who are seeking more risky ones with expectations of higher
yields.
Investor's Hunch:
Every investor will finish off with a different conclusion although the market,
economy and all statistical facts and figures are same for everyone. This
26
difference comes from the investor's intuition. Some will start from research; by
collecting lots of information and then analyzing to decide, others start from
defining their objectives and then going for opportunities that suit their needs.
Globalization Factor:
Investors have slowly started to realize the advantages of international
investments. Some emerging markets present better returns while other stable
markets provide lesser risks. Investors have often conquered risk by
diversification, and an international market provides more opportunities to
achieve portfolio diversification as compared to a local market. Ignoring global
markets for investment is turning your back on a whole new world of
opportunities.
Sources of financial investments: -
1. Mutual funds
2. Fixed deposit
3. Insurance (ULIPs)
4. Post office saving
5. PPF
Choosing the Right Investment Options:-
27
4.1 MU TUA L F UN D
4.1.1 INTRODUCTION:
Mutual Funds over the years have gained immensely in their popularity Apart
from the many advantages that investing in mutual funds provide like diversification,
professional management, the ease of investment process has proved to be a major
enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse
options, investors needs to choose a mutual fund that meets his risk acceptance and his
risk capacity levels and has similar investment objectives as the investor.
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realized is shared by its
unit holders in proportion to the number of units owned by them. 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:
Definition- A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
28
market instruments such as shares, debentures and other securities. The income
earned through these investments and the
Capital appreciation realized is shared by its unit holders in proportion to the number of
units owned by them. 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:
4.1.2 Type of
Mutual Fund
In the investment market, one can find a variety of investors with different needs,
objective and risk taking capacities. The types of mutual fund as follow:
On the Basis of Execution and Operation
Close Ended Funds
Open Ended Funds
On the Basis of Yield and Investment Pattern
Income Fund
Growth Fund
Balance Fund
Specialized Mutual Fund
Money Market
Taxation Fund
(A) Close-ended Funds
Under this scheme, the corpus of the fund and its, duration are prefixed. In other words,
the corpus of the fund and the number of units are determined in advance. Once the
subscription reaches the pre-determined level, the entry of investors is closed. After the
expiry of the fixed period, the entire corpus is disinvested and the proceeds are
distributed to the various unit holders in proportion to their holding. Thus, the fund
29
ceases to be a fund, after the final distribution. Features: The main features of the close-
ended funds are:
(i) The period and/or the target amount of the fund are definite and fixed
beforehand.
(ii) Once the period is over and/or the target is reached, the door is closed
for the investors. They cannot purchase any more units.
(iii) These units are publicly traded through stock exchange and generally,
there is no repurchase facility by the fund.
(iv) The main objective of this fund is capital appreciation.
(v) If the market condition is not favorable, it may also affect the investor
since he may not get the full benefit of capital appreciation in the value of the
investment.
(vi) Generally, the prices of closed-end scheme units are quoted at a
discount of up to 40 per cent below their Net Asset Value (NAV).
(B) Open-ended Funds: -
It is just the opposite of close-ended funds. Under this scheme, the size of the fund
and/or the period of the fund are not pre-determined. Te investors are free to buy and
sell any number of units at any point of time. For instance, the unit scheme (1964) of the
Unit Trust of India is an open ended one, both in terms of period and target amount.
Anybody can buy this unit at any time and sell it also at any time at his discretion. The
Main Features of the Open-Ended Funds are:
(i) There is complete flexibility with regard to one’s investment or disinvestment.
In other words, there is free entry and exit of investors in an open-ended fund.
There is no time limit. The investor can join in and come out from the Fund as
and when he desires.
(ii) These units are not publicly traded but, the Fund is ready to repurchase
them and resell them at any time.
(iii) The investor is offered instant liquidity in the sense that the units can be sold
on any working day to the Fund. In fact, the Fund operates just like & bank
account wherein one can get cash across the counter for any number of units
sold.
(iv) The main objective of this fund is income generation.
30
On the Basis of Income: -
(A) Income Funds:
As the very name suggests, this Fund aims at generating and distributing regular
income to the members on a periodical basis. It concentrates more on the distribution of
regular income and it also sees that the average return is higher than that of the income
from bank deposits. The main features of the Income Funds are:
(i) The investor is assured of regular income at periodic intervals, say half-
yearly or yearly and so on.
(ii) The main objective of this type of Fund is to declare regular dividends and
not capital appreciation.
(iii) The pattern of investment is oriented towards high and fixed income yielding
securities like debentures, bonds etc.
(iv) It concerns itself with short run gains only.
(B) Pure Growth Funds (Growth Oriented Funds):
Unlike the income funds, Growth Funds concentrate mainly on long run gains i.e.,
capital appreciation. They do not offer regular income and they aim at capital
appreciation in the long run. Hence, they have been described as “Nest Eggs”
investments. The Main features of the Growth Funds are:
(i) The growth oriented Fund aims at meeting the investors’ need for capital
appreciation.
(ii) The investment strategy therefore, conforms to the Fund. Objective by investing the
funds predominantly on equities with high growth potential.
(iii) The Fund tries to get capital appreciation by taking much risks and investing on
risk bearing equities and high growth equity shares.
(v) The fund may declare dividend, but its principal objective is only capita]
appreciation.
(C) Balanced Funds:
This is otherwise called “income-cum-growth” fund. It is nothing but a combination of
both income and growth funds. It aims at distributing regular income as well as capital
31
appreciation. This is achieved by balancing the investments between the high growth
equity shares and also the fixed income earning securities.
(D) Specialized Funds:
Besides the above, a large number of specialized funds are in existence abroad. They
offer special schemes so as to meet the specific needs of specific categories of people
like pensioners, widows etc. There are also funds for investments in securities of
specified areas. For instance, Japan Fund, South Korea fund etc. In fact, these funds
open the door for foreign investors to invest on the domestic securities of these
countries.
(E) Money-Market Mutual Funds (Mommas):
These funds are basically open ended mutual Funds and as such they have all the
features of the Open ended Fund. But, they invest in highly liquid and safe securities
like commercial paper, banker’s acceptances, certificates of deposits, Treasury bills etc.
These instruments are called money market instruments. They take the place of shares,
debentures and bonds in a capital market. They pay money market rates of interest.
These funds are called ‘money funds’ in the U.S.A. and they have been functioning
since 1972. Investors generally use it as a “parking place” stop gap arrangement” for
their cash resources till they finally decide about the proper avenue for their investment
i.e., long term financial assets like bonds and stocks.
(F) Taxation Funds:
A taxation fund is basically a growth oriented fund. But, it offers tax rebates to the
investors either in the domestic or foreign capital market. It is suitable to salaried people
who want enjoy tax rebates particularly during the month of February and March. In
India, at present the law relating to tax rebates is covered under Sec.88 of the Income
Tax Act, 1961. An investor is entitled to get 20% rebate in Income Tax for investments
made under this fund subject to a maximum investment of Rs.10,000/- per annum. The
Tax Saving Magnum of SBI Capital Market Limited is the best example for the domestic
type. UTI’s US $60 million India Fund, based in the USA, an example for the foreign
type.
4.1.3 How to Invest In Mutual Fund?
Step one - Identify your Investment needs: -
Your financial goals will vary, based on your age, lifestyle, financial
32
independence, family commitments, and level of income and expenses
among many other factors. Therefore, the first step is to assess your
needs. You can begin by defining your investment objectives and needs
which could be regular income, buying a home or finance a wedding or
educate your children or a combination of all these needs, the quantum of
risk you are willing to take and your cash flow requirements.
Step Two - Choose the right Mutual Fund: -
The important thing is to choose the right mutual fund scheme which suits
your requirements. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of
other schemes managed by the same Fund Manager. Some factors to
evaluate before choosing a particular Mutual Fund are the track record of
the performance of the fund over the last few years in relation to the
appropriate yardstick and similar funds in the same category. Other
factors could be the portfolio allocation, the dividend yield and the degree
of transparency as reflected in the frequency and quality of their
communications. For selecting the right scheme as per your specific
requirements.
Step Three - Select the ideal mix of Schemes: -
Investing in just one Mutual Fund scheme may not meet all your
investment needs. You may consider investing in a combination of
schemes to achieve your specific goals.
Step Four - Invest regularly: -
The best approach is to invest a fixed amount at specific intervals, say
every month. By investing a fixed sum each month, you buy fewer units
when the price is higher and more units when the price is low, thus
bringing down your average cost per unit. This is called rupee cost
33
averaging and is a disciplined investment strategy followed by investors
all over the world. You can also avail the systematic investment plan
facility offered by many open end funds.
Step Five- Start early: -
It is desirable to start investing early and stick to a regular investment
plan. If you start now, you will make more than if you wait and invest later.
The power of compounding lets you earn income on income and your
money multiplies at a compounded rate of return.
Step Six - The final step: -
You may reap the rewards in the years to come. Mutual Funds are
suitable for every kind of investor - whether starting a career or retiring,
conservative or risk taking, growth oriented or income seeking.
4.1.4 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. The professional fund managers
34
who supervise fund’s portfolio take desirable decisions viz., what scripts are to be
bought, what investments are to be sold and more appropriate decisions
2. Diversification of Risk: -
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. Mutual funds units can either be sold in the share market as
SEBI has made it obligatory for closed-ended schemes to list themselves on stock
exchanges. For open-ended schemes investors can always approach the fund for
repurchase at net asset value (NAV) of the scheme. Such repurchase price and NAV is
advertised in newspaper for the convenience of investors as to timings of such buy and
sell. They have extensive research facilities at their disposal, can spend full time to
investigate and can give the fund a constant supervision.
5. Simplicity: -
Investments in mutual fund are 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.
6 Safety of Investments: -
Besides depending on the expert supervision of fund managers, the legislation in a
country (like SEBI in India) also provides for the safety of investments. Mutual funds
have to broadly follow the laid down provisions for their regulations, SEBI acts as a
watchdog and attempts whole heatedly to safeguard investor’s interests.
7 Tax Shelter: -
35
Depending on the scheme of mutual funds, tax shelter is also available. As per the
Union Budget-2003, income earned through dividends from mutual funds is 100% tax-
free at the hands of the investors. Close ended schemes ELSS schemes with a
minimum of 3 years lock in period also provide tax exemption to the investor. Long term
Capital gains are also exempted from tax for equity funds.
8 The concept of Systematic Investment plan and Rupee cost
Averaging: -
Unlike other equity linked product and shares or stocks Mutual funds provide the added
benefit of Systematic Investment plan. Here the money may be invested over a longer
horizon of time in equal installments. Our natural instinct might be to stop investing if the
price starts to drop—but history suggests that the best time to invest may be when you
are getting good value. Rupee-cost averaging can be an effective strategy with funds or
stocks that can have sharp ups and downs, because it gives you more opportunities to
purchase shares less expensively. The benefit of this approach is that, over time, you
may reduce the risk of having bought shares when their cost was highest.
4.1.5 Disadvantages of Investing Mutual Funds:
1. Professional Management: -
Some funds don’t perform 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 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.
36
4. Taxes: -
When making decisions, fund managers don't consider investor’s 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.
37
4.2 F IXE D DEP OS IT
4.2.1 Definition: -
Depository institution (such as a bank, credit union, or a finance or insurance
company) account that pays higher than savings account interest rates but
imposes conditions on the amount, frequency, and/or period of
withdrawals. A certificate of deposit (CD) is normally issued only for time
deposits. Also called fixed deposit. Variant of time deposit.
A fixed deposit is a bank deposit that a customer makes for a predetermined
period of time at a given interest rate. There is likely to be a penalty
involved if you withdraw your money before the expiry of the deposit term.
The term fixed deposit is used in India, and this is similar to a certificate of
deposit in the United States.
4.2.2 Basic features of a fixed deposit: -
There are several features of a fixed deposit that set it apart from various other
investment options present in the market. These features determine the nature
of the entire investment and how it will behave under different circumstances.
Here are the important features that need attention:
1. Debt investment:
A fixed deposit is a debt investment. This means the amount is invested with the
feature considering that this will be returned to the investor once the specified
time period is over. This is different from an equity investment where there is a
chance of a risk with regard to the amount invested because the investor
becomes the owner of the company. In case of a fixed deposit, the investor is
only lending the money to the bank or the institution.
2. Lender:
The investor who buys a fixed deposit takes on the role of a lender in the entire
transaction. In this case, the bank or financial institution taking the money is the
38
borrower. Once the position of the lender is established, it means that the bank
has to pay back the amount that has been borrowed from the investor. In that
sense there is a responsibility of the bank to return the money to the investor.
This also impacts the feature of the investment, which underlines that there is
meant to be safety of the capital invested unlike an equity investment where
even this might be lost.
3. Specified interest:
There is a return that is earned by the investor when he/she gives a fixed deposit
to the bank. The return here is measured by using the term ‘interest’. Interest is
nothing but the amount calculated at a specified rate of return on the amount
invested. There is an element of surety for the investor because the person
knows the interest rate at the time of making the deposit itself and due to this
reason he/she also knows the amount of money that will be earned from the
investment. The important thing is that even if economic conditions are very
good or very bad the investor will keep earning the same rate of interest, so this
becomes like a fixed figure that is earned by the investor.
4. Time of repayment:
Another important feature of the fixed deposit is that the investment is for a
specified period of time that is already known to the investor at the time of
making the investment. At the end of the specified period, the investment will
come to an end and the amount will be returned to the investor. This means that
the investor knows the return for the specified time and hence he/she is able to
know precisely what he/she is earning and also how the cash flow will be present
in the future.
All types of entities can make FDs and the minimum amount of deposits
specified by various banks varies from Rs. 1000 to Rs. 10000 with additional
deposits in multiples as stipulated in that particular scheme.
Banks are supposed to deduct tax from the interest paid on FDs if the amount of
interest paid to a customer at any branch exceeds Rs. 10000 in a financial year.
This is applicable to both interests payable or reinvested per customer / per
branch.
39
4.2.3 Types of Fixed Deposits: -
A fixed deposit, as its name implies, is a fixed sum of money that is held in a
savings account for a pre-decided period of time--earning a fixed rate of interest.
The time period for a fixed deposit varies from 15 days to 1,095 days (three
years) and its interest rate varies between 3 percent and 7.5 percent. A fixed
deposit account typically yields a greater interest rate than a regular account,
owing to its fixed time period. Fixed deposits are also called time or term
deposits.
Certificate of Deposit
A certificate of deposit (CD) is a type of fixed deposit account that can be
purchased in varying amounts from a credit union, traditional bank or other
depository institution. A CD is a commercial paper that confirms the monetary
value of the deposit made its maturity date and the interest applicable on the
amount loaned. Certificates of deposit mature in one month, three months, six
months, 12 months (one year), 36 months (three years) and 60 months (five
years). Interest rates accrued on certificates of deposit are quoted on a yearly
(annual) basis.
Revolving Bank Term Deposit
A revolving term deposit renews itself automatically for another term of an equal
length after its loan period expires. Depositors can put money in a revolving term
account through a cashless transfer from an existing account or by direct
transfer. The terms on revolving fixed deposits range between 1 week to 12
months.
40
Unchanging Term Deposit: -
An unchanging term deposit, also called a single term deposit, does not
renew automatically after its maturity date. An unchanging fixed term
deposit can be opened from one month, three months, six months, 12
months, 24 months and 36 months.
Factors in Investing Fixed Deposits: -
Dividing your investment assets into different categories is a good way to grow
your wealth without taking undue risk. Fixed deposit investments are a good
choice if you expect to need the money within the next five years, since
those fixed deposit investments can keep your money safe and ensure it will
be there when you need it.
Interest Rate: -
No matter how much or how little you have to invest, you want to get the best
possible return on your money. Always shop for the best interest rate when
seeking out a new fixed deposit, since even a small increase in the interest
rate can boost your earnings over time. If you are looking for a CD,
consider shopping not only at local banks but credit unions as well. You
can also look to Internet banks, which can often provide a higher rate of
interest due to their lower administrative and overhead costs.
Length of Term: -
Whether you choose a CD, a bond or another type of fixed deposit investment,
you are essentially loaning your money to the institution you are investing in. The
length of that loan term will vary, and if you are willing to tie your money up for a
longer period, you might be able to get a higher interest rate. For instance, the
interest rate on a five-year CD is generally higher than the interest rate on a one-
year CD. The tradeoff, of course, is that the five-year CD requires you to tie your
money up for a longer period.
41
Safety of Principal: -
The return on your money is important, but the return of your money is even
more critical. Consider the safety of the investment before putting any money
into a fixed deposit. If absolute safety is your main goal, investments like
certificates of deposit and government bonds can give you a secure return on
your money with no risk of loss. If you are comfortable with a bit more risk,
corporate and municipal bonds can give you a higher return, albeit with more risk
as well. Even with high-grade corporate and municipal bonds, there is always a
small risk that something will go wrong and the bond issuer will not be able to
pay back your investment.
Minimum Deposit: -
The best fixed deposit investment in the world will do you no good if you cannot
meet the minimum balance requirements. Always check the minimum
balance requirements for any CD, bond fund or government bond you plan
to invest in. Knowing how much you have to invest will help you find the best
investment for your needs.
Security: -
If you have money in a fixed deposit, it is more likely to be securing than money
in riskier investments such as stocks, bonds and mutual funds. These
deposits provide a lower return than riskier investments, but you do get
additional safety of your money. Compared with less riskier savings
accounts, these deposits offer a higher return since you are tying up your
money for a specific period in a fixed deposit. In a period of economic
uncertainty, there is more likely to be a preference for fixed deposits
because of the security they provide.
42
Liquidity
If you have money in a savings account, you can withdraw it whenever you want.
If it is in a fixed deposit account, you can withdraw it before the expiry of
the deposit term but you will likely pay a penalty to do so. The higher the
penalty a bank imposes for premature withdrawals on fixed deposits, the
less attractive the option will be to you.
43
4.3 IN SU RA NC E
4.3.1 Introduction: -
Insurance is a form of risk management that is primarily used to hedge the risk of
a contingent loss. Insurance is defined as the equitable transfer of the risk of a
loss, from one entity to another, in exchange for a premium, and can be thought
of as a guaranteed and known small loss to prevent a large, possibly devastating
loss.
An insurer is a company that sells insurance; insured or the policyholder is a
person or entity buying the insurance. The insurance rate is a factor that is used
to determine the amount which is to be charged for a certain amount of
insurance coverage, and is called the premium
Insurance in India
Insurance has been a federal subject in India. The insurance sector has gone
through many phases and changes. Since 1999, when the government started
with the insurance sector by allowing private companies to solicit insurance &
also allowing FDI up to 26%, the insurance sector has been observed to be a
booming market. However, the largest life-insurance company in India is still
very much owned by the government.
4.3.2 History of Insurance
44
In 1818, Anita Bhavsar started the Oriental Life Insurance Company in Kolkata to
cater to the needs of the European community. The pre-independent era in India
was seen to have discrimination among the life of foreigners (English) and that of
Indians with higher premiums being charged for the Indians. In 1870, the
Bombay Mutual Life Assurance Society became the first Indian insurance
company that covered Indian lives at normal rates.
At the dawn of the 20th century, large numbers of insurance companies were
founded. In 1912, two acts were passed to regulate the insurance business - the
Life Insurance Companies Act and the Provident Fund Act. As per the Life
Insurance Companies Act, 1912 the premium-rate tables as well as periodical
valuations of companies had to be certified by an actuary. However, the
discrimination still existed between Indian and foreign companies.
National Insurance Company Ltd is the oldest existing insurance company in
India which was founded in 1906. It is still in business. Before that, the industry
consisted of only 2 state insurers: Life Insurers [Life Insurance Corporation of
India, LIC] and General Insurers [General Insurance Corporation of India, GIC].
GIC had 4 subsidiary companies which became de-linked from the parent
company from December 2000 & were set up as independent insurance
companies. These are United India Insurance Company Limited, Oriental
Insurance Company Limited, and National Insurance Company & New India
Assurance Company Limited.
Insurance and tax
1. U/s 10(10A) (iii) of the Income Tax Act, any payment received by way of
commutations of pension is exempt from tax
2. U/s 10(10D), any sum received under a Life Insurance policy (not being a
Key Man policy) is also exempt from taxation. But it is wise to remember
that Pensions received from Annuity plans are not exempted from Income
Tax.
3. U/s 10(13), following are exempt from tax. Payments received from an
approved Annuation Fund made
45
On death of a beneficiary
To an employee in lieu of an annuity on his retirement or after a
specified age
In form of refund of contributions on the death of a beneficiary, etc
4. Section 80 CCC gives a deduction of up to Rs.10, 000/- to any individual
assesses for any amount paid to effect or keeping in force any annuity
plan of LIC for receiving pension.
4.3.3 Principles of Insurance
Insurance - Definition
The contract of Insurance is a promise of compensation for certain potential
future losses in exchange for a periodic payment [known as premium]. Insurance
is intended to protect the financial well-being of an individual or a company or
any other entity in case of unexpected loss. An agreement to the terms of an
insurance policy creates a contract between the insured and the insurer. In
exchange for the premiums paid by the insured, the insurer agrees to pay the
policy holder a certain sum of money upon the occurrence of a specific event or
on maturity. In most cases, the policy holder pays part of the loss (called the
deductible), while the insurer pays the rest. Examples include health insurance,
car insurance, life insurance, disability insurance, and business insurance.
Main principles of Insurance:
Utmost good faith
Indemnity
Subrogation
Contribution
Insurable Interest
Proximate Cause
Utmost Good Faith
46
It is the duty of the client to disclose all material facts relating to the risk being
covered. A material fact is a fact that would influence the mind of a prudent
underwriter while deciding whether or not to accept a risk for insurance and on
what terms. This duty to disclose operates at the time of inception, at renewal as
well as at any point mid-term.
Indemnity
When the event that is insured against occurs, the Insured will be placed in the
same monetary position that he/she occupied immediately before the happening
of the event.
In the event of a claim the insured must:
Prove that the event occurred
Prove that a monetary loss has also occurred
Transfer any rights that he/she may be having for the recovery from
another source to the Insurer, if he/she is fully indemnified.
Subrogation
With regards to insurance, subrogation is a feature of principle of indemnity and
therefore only applies to contracts of indemnity and hence does not apply to life
assurance or personal accident policies. It aims to prevent an insured to recover
more than the indemnity that he receives under his insurance (where that
represents the full amount of his loss) and enables the insurer to recover or
reduce the loss.
Contribution
The right of an insurer to call on other insurers similarly, but not necessarily
equally, liable to the same insured to share the loss of an indemnity payment i.e.
a travel policy might have an overlapping cover with the contents section of a
47
household policy. The principle of contribution permits the insured to make a
claim against one insurer. The insurer then has the right to call on any other
insurers liable for the loss in order to share the claim settlement
Insurable Interest
If an insured wants to enforce an insurance contract before the Courts he must
have an insurable interest in the subject matter of the insurance, which means
that he benefits from its preservation and suffers from its loss. In case of non-
marine insurances, it is necessary for the insured to have insurable interest
when the policy is taken out and also at the date of loss giving rise to a claim
under the policy.
Proximate Cause
An insurer is liable to pay a claim under an insurance contract only if the loss
that gave rise to the claim was proximately caused by an insured peril. This
means that the loss should be directly credited to an insured peril without any
break in the chain of causation.
4.3.4 What is Life Insurance?
Life Insurance is a contract for payment of a sum of money to the person
assured (or failing him/her, to the person entitled to receive the same) on the
happening of the event insured against. Usually the contract provides for the
payment of an amount on the date of maturity or at specified dates at periodic
intervals or at unfortunate death, if it occurs earlier. Among other things, the
contract also provides for the payment of premium periodically to the Corporation
by the assured. Life insurance is universally acknowledged to be an institution
which eliminates 'risk', substituting certainty for uncertainty and comes to the
timely aid of the family in the unfortunate event of death of the breadwinner. By
and large, life insurance is civilization’s partial solution to the problems caused
by death. Life insurance, in short, is concerned with two hazards that stand
across the life-path of every person: that of dying prematurely leaving a
dependent family to fend for itself and that of living to old age without visible
means of support.
48
Life Insurance in India
Life insurance made its debut in India well over 100 years ago. Its salient
features are not as widely understood in our country as they ought to be. What
follows is an attempt to acquaint readers with some of the concepts of life
insurance, with special reference to life insurance. It should, however, be clearly
understood that the following narration is by no means an exhaustive description
of the terms and conditions of a life insurance policy or its benefits or privileges.
For more details, please contact our Branch or Divisional Office. Any life
insurance Agent will be glad to help you choose the life insurance plan to meet
your needs and render policy servicing.
Life Insurance sector is the fastest growing sector in India since 2000 when the
Government allowed Private players and FDI [Foreign Direct Investment] up to
26%. Life Insurance in India was nationalized by incorporating Life Insurance
Corporation (LIC) in 1956. All private life insurance companies at that time were
taken over by LIC.
In 2000, the legislation amending the Insurance Act of 1938 and legislating the
Insurance Regulatory and Development Authority Act of 2000 was passed,
where in the newly appointed insurance regulator - Insurance Regulatory and
Development Authority [IRDA] started to issue licenses to private life insurers.
4.3.5 Superior to other forms of Savings: -
Protection: -
Savings through life insurance guarantee full protection against risk of
death of the saver. In life insurance, on death, the full sum assured is payable
(with bonuses wherever applicable) whereas in other savings schemes, only the
amount saved (with interest) is payable.
Aid to Thrift: -
Life insurance encourages 'thrift'. Long term saving can be made in a
relatively 'painless' manner because of the 'easy installment' facility built into the
49
scheme (method of paying premium either monthly, quarterly, half yearly or
yearly). Take, for example, our Salary Saving Scheme popularly known as SSS.
This scheme provides a convenient method of paying premium each month by
deduction from one's salary. The deducted premium is remitted by the employer
to the LIC. The Salary Saving Scheme can be introduced in an institution or
establishment subject to specified terms and conditions.
Liquidity: -
Loans can be raised on the sole security of a policy which has acquired
loan value. Besides, a life insurance policy is also generally accepted as security
for even a commercial loan.
Tax Relief: -
Tax relief in Income Tax and Wealth Tax is available for amounts paid by
way of premium for life insurance subject to Income Tax rates in force.
Assessees can avail themselves of provisions in the law for tax relief. In such
cases the assured in effect pays a lower premium for his insurance than he
would have to pay otherwise.
Money When You Need It: -
A suitable insurance plan or a combination of different plans can be taken
out to meet specific needs that are likely to arise in future, such as children's
education, start-in-life or marriage provision or even periodical needs for cash
over a stretch of time. Alternatively, policy moneys can be so arranged to be
made available at the time of one's retirement from service to be used for any
specific purpose, such as for the purchase of a house or for other investments.
Subject to certain conditions, loans are granted to policyholders for house
building or for purchase of flats.
4.3.6 ULIPs- (Systematic Insurance cum Investment Plan)
50
A ULIP is nothing but a market-linked insurance plan. There is a difference
between a ULIP and other insurance plans viz the way in which the premium
money is invested. Premium from traditional insurance plan or an endowment
plan is invested mainly in risk-free instruments like government securities (G-
secs) and AAA rated corporate paper, while in case of ULIP, the premiums can
be invested in stock markets in addition to corporate bonds and/or G-secs. This
option makes ULIPs an attractive investment for an individual. The following few
reasons make ULIPs irresistible as an investment option -
Transparency
ULIPs provide a transparent option to customers for planning their various life
stage needs through market-led investments as compared to the traditional
investment plans.
Insurance cover plus savings
ULIPs serve 2 main purposes - of providing life insurance along with savings at
market-linked returns. Hence, ULIPs can be termed as a two-in-one plan in
terms of offering an individual the twin benefits of life insurance plus savings.
This option is not available in comparable instruments such as mutual fund for
instance, that does not offer a life cover.
ULIPs offer a variety of investment options unlike traditional life insurance plans.
ULIPs generally come in 3 broad variants:
Aggressive ULIPs (invest 80%-100% in equities and the balance in debt)
Balanced ULIPs (invest about 40%-60% in equities)
Conservative ULIPs (invest up to 20% in equities)
Such allocation of debt/equity varies according to insurance companies. An
investor also has the option of choosing various options/funds available
according to his risk appetite and return expectation.
Flexibility
51
Individuals may switch between the ULIP fund options in order to capitalize on
investment opportunities across the debt and equity markets. Some insurance
companies also allow a certain number of free switches. This is an extremely
important feature which allows the investor to benefit from the vagaries of
stock/debt markets. Switching also helps individuals as they can shift from an
aggressive to a balanced or conservative ULIP as they are approaching
retirement based on their risk appetite.
Works like a SIP
Rupee cost-averaging is an important benefit associated with ULIPs. The mutual
fund industry offer SIP options to investors where in individuals invest their
monies regularly over a period of time and in intervals of a month/quarter and
don't need to be worried about `timing' the stock markets. It is important to note
that these benefits are not peculiar to mutual funds only. Not many realize that
ULIPs also tend to work in the same manner, albeit on a quarterly or half-yearly
basis.
4.3.7 ULIP- Important considerations
When buying a ULIP, one must select the plan that best suits your needs. The
important thing is to look for and understand the nuances that can considerably
alter the manner in which the product works for you. Consider the following:
Charges: -
A complete charge structure includes the initial charges, fixed administrative
charges, fund management charges, mortality charges and spreads, and that
too, not only in the first year but throughout the term of the policy.
Fund Options and Management: -
One need to understand the various fund options available and the fund
management objectives of the scheme. Facts like who manages the funds,
52
how much experience do they have, are there sufficient controls need to be
taken into consideration.
Features: -
Most ULIPs are 4really good in providing features such as allowing one to
top-up and/or switch between funds, increase or decrease the protection
level, or also premium holidays. The conditions and charges associated for
such features should be understood. For instance, is there any minimum
amount that must be switched? Are there any charges on the same?
Company: -
Another important consideration is the brand that you are insuring with. The
company must be trustworthy and should be in a position to honor its
commitments as per your needs.
4.3.8 Charges, fees and deductions in a ULIP: -
ULIPs offered by different insurers have varying charge structures. Broadly, the
different types of fees and charges are given below. However it may be noted
that insurers have the right to revise fees and charges over a period of time.
Premium Allocation Charge
This is a percentage of the premium appropriated towards charges before
allocating the units under the policy. This charge normally includes initial and
renewal expenses apart from commission expenses.
Mortality Charges
These are charges to provide for the cost of insurance coverage under the plan.
Mortality charges depend on number of factors such as age, amount of
coverage, state of health etc
Fund Management Fees
53
These are fees levied for management of the fund(s) and are deducted before
arriving at the Net Asset Value (NAV).
Policy/ Administration Charges
These are the fees for administration of the plan and levied by cancellation of
units. This could be flat throughout the policy term or vary at a pre-determined
rate.
Surrender Charges
A surrender charge may be deducted for premature partial or full encashment of
units wherever applicable, as mentioned in the policy conditions.
Fund Switching Charge
Generally a limited number of fund switches may be allowed each year without
charge, with subsequent switches, subject to a charge.
Service Tax Deductions
Before allotment of the units the applicable service tax is deducted from the risk
portion of the premium.
54
4.3.9 Advantages and disadvantages of the ULIPS
Advantages DisadvantagesFlexibility – you can choose your term,
insurance cover, pay premiums for a
limited period
Flexibility – this can act a disadvantage
since the person may use the
withdrawal and may not end up
building a huge corpusTransparency – you know what is the
amount you are paying for the various
benefits
Initially heavy costs – You pay around
15-20% for the first year and then
around 5%for the next two yearsTax free returns – 100% tax free since
they are received from insurance and it
is a contract
No control on costs
Switch between various options One may try to time the market and
may make errorsTax benefits when investing under Sec
80C
4.3.10 ULIPs or Mutual Funds: -
Mutual funds and Unit Linked Insurance Policies [ULIPs] are quite similar in
terms of their structure and functioning. In both the cases, investors are allotted
units and a net asset value (NAV) is declared for the same on a daily basis.
Just as in the case of mutual funds, ULIP investors have the option of investing
across various schemes such as diversified equity funds or balanced funds or
55
debt funds to name a few. Hence we can say that ULIPs are mutual fund
schemes having an insurance component.
Comparison of ULIPs and Mutual Funds
1. Mode of investment & investment amounts
In case of mutual funds, investors have 2 options - either to make a lump
sum investment or take a systematic investment plan (SIP).The fund house
lays down the minimum investment amounts.
In ULIPs also investors have the option of investing in a lump sum (single
premium) or make periodic payments using different modes of premium
payment such as annual, half-yearly, quarterly or monthly basis. In ULIPs,
calculating the premium to be paid is often the starting point for the
investment activity.
ULIP investors have the flexibility to alter the premium amounts during the
policy's tenure. This freedom to modify premium payments as per one's
needs definitely gives ULIP investors an edge over their mutual fund
counterparts.
2. Expenses
Mutual fund investments are subject to pre-determined upper limits for
expenses charged for different activities such as administration, fund
management, sales and marketing among others. These are prescribed by
the Securities and Exchange Board of India [SEBI]
56
For example in case of equity-oriented funds investors are charged a
maximum of 2.5% per annum on a recurring basis for all their expenses. Any
expense above this prescribed limit is borne by the fund house and not the
investors.
Mutual funds also charge investors entry and exit loads (in most cases, either
is applicable) which are charged at the timing of making an investment and at
the time of sale respectively.
However in ULIP products insurance companies can levy expenses on
investors with no upper limits being prescribed by the insurance regulator, i.e.
the Insurance Regulatory and Development Authority [IRDA]. This explains
the complex and at times a very high expense structures on ULIP products.
Expenses can have far-reaching consequences on investors as higher
expenses translate into lower amounts being actually invested and therefore
a smaller corpus being accumulated.
3. Portfolio disclosure
Incase of Mutual funds, the mutual fund houses that actually require to
statutorily declare portfolios on a quarterly basis, do so on a monthly basis;
and hence investors can study their portfolios to see where their monies are
being invested and how they have been managed by the fund house/fund
manager.
In case of ULIPs, there is lack of consensus on whether they are required to
disclose their portfolios. Some insurers believe that disclosing portfolios on a
quarterly basis is mandatory while others hold the opinion that there is no
legal obligation to do so unless it is demanded by the investor.
4. Flexibility in altering the asset allocation
Offerings available in both the mutual funds segment and ULIPs segment are
quite similar. For instance diversified equity funds (plans that invest their
entire corpus in equities), balanced funds (60:40 allotment in equity and debt
57
instruments) and debt funds (plans investing only in debt instruments) are
found both in ULIPs as well as mutual funds.
In case of mutual funds, if the investor wants to shift his corpus from a
diversified equity fund to a debt from the same fund house, he will have to
bear an exit load and/or entry load.
Where as in the case of ULIPs, most insurance companies permit investors
to shift investments across various plans or asset classes either at a very
nominal fee or no cost (generally, a couple of switches are allowed free of
charge every year. Cost has to be borne only for additional switches).
5. Tax benefits
Under Section 80C of the Income Tax Act, ULIP investments qualify for
certain deductions irrespective of the nature of the plan chosen by the
investor. In case of mutual funds, only investments made in tax-saving funds
(also referred to as equity-linked savings schemes or ELSS) are eligible for
tax benefits as per Section 80C.
In case of ULIPs, the maturity proceeds are tax free. In case of equity-
oriented funds (such as diversified equity funds or balanced funds), if the
investments are held for a period more than 12 months, the gains are tax
free; conversely investments that are sold within a 12-months attract short-
term capital gains tax @ 10%.
Similarly, debt-oriented funds also attract a long-term capital gains tax @
10%, and short-term capital gain is taxed at the investor's marginal tax rate.
So we can see that in spite of having seemingly similar structures, both
mutual funds and ULIPs have a unique set of advantages to offer. Hence, it is
vital for investors to be aware of the benefits and nuances in both offerings
before making any investment decisions.
58
ULIPs vs. Mutual Funds
ULIPs Mutual Funds
Investment
amounts
Determined by the
investor and can be
modified as well
Minimum investment amounts are
determined by the fund house
Expenses
No upper limits,
expenses
determined by the
insurance company
Upper limits for expenses
chargeable to investors have been
set by the regulator
Portfolio
disclosureIs Not mandatory
Quarterly disclosures are
mandatory
Modifying
asset
allocation
Generally permitted
for free or at a
nominal cost
Entry/exit loads have to be borne
by the investor
Tax
benefits
Under Section 80C
benefits are
available on all ULIP
investments
Section 80C benefits are available
only on investments in tax-saving
funds
59
4.4 PU BL IC PR OV IDE NT FU ND S (PPF )
The Public Provident Fund Scheme is a statutory scheme of the Central
Government of India.
4.4.1 Features: -
The Scheme is for 15 years.
The rate of interest is 8% compounded annually.
The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial
year.
One deposit with a minimum amount of Rs.500/- is mandatory in each
financial year.
The deposit can be in lumpsum or in convenient installments, not more
than 12 Installments in a year or two installments in a month subject to total
deposit of Rs.70,000/-.
It is not necessary to make a deposit in every month of the year. The
amount of deposit can be varied to suit the convenience of the account
holders.
The account in which deposits are not made for any reasons is treated as
discontinued account and such account cannot be closed before maturity.
The discontinued account can be activated by payment of minimum
deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
Account can be opened by an individual or a minor through the guardian.
Joint account is not permissible.
Those who are contributing to GPF Fund or EDF account can also open a
PPF account.
A Power of attorney holder can either open or operate a PPF account.
The grandfather/mother cannot open a PPF behalf of their minor
grand son/daughter.
The deposits shall be in multiple of Rs.5/- subject to minimum amount of
Rs.500/-.
The deposit in a minor account is clubbed with the deposit of the account
of the Guardian for the limit of Rs.70, 000/-.
60
No age is prescribed for opening a PPF account.
Interest is not contractual but rate is notified by Ministry of Finance, Govt.
of India, at the end of each year.
The facility of first withdrawal in the 7th year of the account subject to a
limit of 50% of the amount at credit preceding three year balance. Thereafter
one Withdrawal in every year is permissible.
Pre-mature closure of a PPF Account is not permissible except in case of
death.
Nominee/legal heir of PPF Account holder on death of the account holder
cannot continue the account, but account had to be closed.
The account holder has an option to extend the PPF account for any
period in a block of 5 years on each time.
The account holder can retain the account after maturity for any period
without making any further deposits. The balance in the account will continue
to earn interest at normal rate as admissible on PPF account till the account
is closed.
One withdrawal in each financial year is also admissible in such account.
The PPF scheme is operated through Post Office and Nationalized banks.
PPF account can be opened either in Post Office or in a Bank.
Account is transferable from one Post office to another and from Post
office to Bank and from Bank to Post office.
Account is transferable from one Bank to another bank as well as within
the bank to any branch.
Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
The interest on deposits is totally tax free.
Deposits are exempt from wealth tax.
The balance amount in PPF in PPF account is not subject to attachment
under any order or decree of court in respect of any debt or liability.
Nomination facility available.
Best for long term investment.
61
4.4.2 Public Provident Fund (PPF) Advantages & Disadvantages: -
Public provident fund scheme is normally of 15 years but can be extended
for 1 or more terms of 5 years while the individual holds the rights to
terminate the PPF funds at any time.
PPF or Public Provident Fund is a public growth scheme under which
people can contribute a part of their income and claim a income tax rebate.
PPF scheme was introduced by the Government of India in 1968 with the
aim to include more and more individuals to the scheme and get profit.
62
4.5 P OS T OFF IC E SAV IN G
4.5.1 Post office saving attracts toward investment for following
attributes:
Safe, secure and risk-free investment options.
No Tax Deduction at Source (TDS).
Nomination facility is available.
Nomination can be changed at any time
The instruments are transferable to any Post Office anywhere in India.
Attractive rates of interest.
4.5.2 Post Office Savings Schemes in India
The main financial services offered by the Department of Posts are the Post
Office Savings Bank. It is the largest and oldest banking service institution in the
country. The Department of Posts operates the Post Office Savings Scheme
function on behalf of the Ministry of Finance, Government of India. Under this
scheme, more than 20.50 crores savings account are operated. These accounts
are operated through more than 1,54,000 post offices across the country.
The Post offices provide a number of savings schemes like the Savings Account
Schemes, Recurring Deposit Schemes, Time Deposit Schemes, Public
Provident Fund Schemes, Monthly Income Schemes, National Savings
Certificates, Kisan Vikas Patras, and Senior Citizens Savings Scheme. A brief of
the various schemes is as follows:
SchemeInterest
RatesTenure
Investment
Denominations
and limits
Salient
FeaturesTax rebate
63
Post
Office
Savings
Account
3.5% p.a. On
individual
and joint
account
No
specific
or fix
tenure
Min: Rs. 50
Max: Rs. 1 Lakh
for individual
and 2 lakhs for
joint account
Cheque facility
available
Interest is
tax-free u/s
80L
5-Year
Post
Office
Recurring
Deposit
Account
7.5%
compounded
quarterly
5 years.
Can be
renewed
for
another
5 years
Min: Rs. 10 per
month or
multiples of Rs.
5 Max: No limit
One withdrawal
up to 50% of
the balance is
allowed after
one year. Full
maturity value
allowed on R.D.
6 & 12 months
advance
deposits earn
rebate.
No tax
rebate
Post
Office
Time
Deposit
Account
6.25% 1 year
Min: Rs. 200
and its multiple
thereof Max: No
limit
Long-term
accounts could
be closed after
1 year for
discounted
interest.
Accounts could
be closed after
6 months but
before a year
for no interest.
Interest is
calculated
quarterly but
payable yearly.
Investment
qualifies
for
deduction
u/s 80C.
Interest is
tax-free u/s
80L
6.50% 2 years
7.25% 3 years
7.50% 5 years
Post
Office
8% p.a. 6 years Min: Rs. 1500
per month or
Account if
closed after 1
Interest is
tax-free u/s
64
Monthly
Income
Account
multiples of it.
Max: Rs. 4.5
lakhs for
individual
account and Rs.
9 lakhs for joint
account
year but before
3 years will
suffer a
deduction of 2%
of the deposit.
Account if
closed after 3
years will suffer
a deduction of
1% of the
deposit. On
maturity, bonus
of 5% on
principal
amount is
admissible
80L
15-year
Public
Provident
Fund
Account
8% p.a.
compounded
yearly
15 years
tenure
Min: Rs. 500 in
1 year Max: Rs.
70000 in 1 year
Deposits can be
made in lump-
sum or 12
installments
Withdrawal can
be made every
year after the
7th financial
year. From the
3rd financial
year, loan can
be availed
against PPF.
No attachment
under court
decree order.
Investment
qualifies
for
deduction
u/s 80C.
Interest is
tax-free u/s
80L
Kisan
Vikas
Patra
8.4%
compounded
yearly.
Money
doubles in 8
--- No limits.
Investment
denominations
available are of
Rs. 100, Rs.
A single holder
certificate can
be purchased
by an adult. A
certificate can
No tax
benefits
65
years and 7
months
500, Rs. 1000,
Rs. 5000, Rs.
10,000, in all
Post Offices
and Rs. 50,000
in all Head Post
Offices.
also be
purchased
jointly by two
adults.
National
Savings
Certificate
(VIII
issue)
8% p.a.
compounded
half-yearly
but payable
after maturity
6 years
Min: Rs. 100.
Also available in
denominations
of Rs. 100/-,
500/-, 1000/-,
5000 & Rs.
10,000/-. Max:
no limit
A single holder
certificate can
be purchased
by an adult.
Investment
as well as
the interest
deemed to
be re-
invested
qualifies
for
deduction
u/s 80C.
Senior
Citizens
Savings
Scheme
9% p.a. 5 years Only 1 deposit
allowed in
multiple of Rs.
1000. Max is
Rs. 15 lakhs
Age should be
above 60 years
or 55 years
above if retired
under
superannuation.
Account if
closed after 1
year will suffer a
deduction of
1.5% interest
and after 2
years will suffer
a deduction of
1% interest.
TDS is made on
Investment
qualifies
for
deduction
u/s 80C
66
interest if it
exceeds Rs.
10000 p.a.
4.5.3 Kisan Vikas Patra: -
Minimum Investment Rs. 500/- No maximum limit.
Rate of interest 8.40% compounded annually.
Money doubles in 8 years and 7 months.
Two adults, Individuals and minor through guardian can purchase.
Companies, Trusts, Societies and any other Institution not eligible to
purchase.
Non-Resident Indian/HUF are not eligible to purchase.
Facility of encashment from 2 ½ years.
Maturity proceeds not drawn are eligible to Post office Savings account
interest for a maximum period of two years.
Facility of reinvestment on maturity.
Patras can be pledged as security against a loan to Banks/Govt.
Institutions.
Patras is encashable at any Post office before maturity by way of transfer
to desired Post office.
Patras is transferable to any Post office in India.
Patras are transferable from one person to another person before maturity
Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced
Patras.
Nomination facility available.
Facility of purchase/payment of Kisan Vikas Patras to the holder of Power
of attorney.
Rebate under section 80 C not admissible.
Interest income taxable but no TDS
Deposits are exempt from Wealth tax.
4.5.4 Senior Citizen's Saving Scheme - 2004
Objective of the scheme
67
We are all well aware that interest rate on Small Saving Scheme has been
reduced to 5% in the last four years. The decline in interest rate was initiated
from 1t January 2000. The interest rate on 31-12-1999 in Monthly Income
Scheme was 13% which has come down to 8% with effect from 1.3.2003. The
decrease in the interest rate has negative impact on the life of Senior Citizens.
The dwindling interest income was cause of concern and hardship for them on
the living conditions of the Senior Citizens. The interest income is a life time
benefit for the senior citizens. The Budget for 2004-2005 presented in
Parliament had two beneficiary aspects, as for as small Saving Schemes are
concerned. The first one is that rats of interest on small savings which were
unlikely to be expected to be reduced have been kept stable with no change in
rate of interest in any Post Office scheme. The second beneficiary aspect was
the introduction of Senior Citizen Saving Scheme-2004 with a higher rate of
interest to any other small savings scheme which has come into operation from
2nd August 2004. The main objective of the scheme is to provide a relief to the
senior citizens and to check the further decline in their interest income.
4.5.5 POST OFFICE SAVINGS BANK
Minimum amount Rs20/- in case of non- cheque account, Rs.500/- in
case of cheque account.
Minimum balance of Rs.500/- is to be maintained for a cheque account.
Account is opened with cash only.
Maximum balance permissible Rs. 1, 00,000/- in a single account and
2,00, 000/- in Joint account.
Two/Three adults, individuals, minor through guardian.
A Minor having 10 years of age can also open an account directly.
One individual account and one joint account can only be opened at a
post office.
4.5.6 National Savings Certificate
Minimum investment Rs. 500/- No maximum limit.
Rate of interest 8% compounded half yearly.
Rs. 1000/- grow to Rs. 1601/- in six years.
68
Two adults, Individuals, and minor through guardian can purchase.
Companies, Trusts, Societies and any other Institutions not eligible to
purchase.
Non-resident Indian/HUF cannot purchase.
No pre-mature encashment.
Annual interest earned is deemed to be reinvested and qualifies for tax
rebate for first 5 years under section 80 C of Income Tax Act.
Maturity proceeds not drawn are eligible to Post Office Savings account
interest for a maximum period of two years.
Facility of reinvestment on maturity.
Certificate can be pledged as security against a loan to banks/ Govt.
Institutions.
Facility of encashment of certificates through banks.
Certificates are encashable any Post office in India before maturity by way
of transfer to desired post office.
Certificates are transferable from one Post office to any Post office.
Certificates are transferable from one person to another person before
maturity.
Duplicate Certificate can be issued for lost, stolen, destroyed, mutilated or
defaced certificate.
Nomination facility available.
Facility of purchase/payment to the holder of Power of attorney.
Tax Saving instrument - Rebate admissible under section 80 C of Income
Tax Act.
Interest income is taxable but no TDS
Deposits are exempt from Wealth tax.
4.5.7 Post Office Monthly Income Scheme
Interest rate of 8% per annum payable monthly.
Maturity period is 6 years.
Minimum investment amount is Rs.1000/- or in multiple thereof.
Maximum amount is Rs. 3 lakhs in single account and Rs. 6 lakhs in a
joint account.
69
Account can be opened by an individual, two/three adults jointly and a
minor through a guardian.
A minor having attained 10 years of age can open an account in his/her
own name directly.
Non-Resident Indian / HUF cannot open the Account.
Minor has a separate limit of investment of Rs. 3 lakhs and the same is
not clubbed with the limit of guardian.
A separate account is opened for each deposit.
Any number of accounts can be opened subject to the maximum
prescribed limit.
Facility of automatic credit of monthly interest to saving account if
accounts are at the same post office.
Facility of premature closure of account after one year @ 3.50% discount.
No deduction of 3.5% if account is closed on completion of three years.
Facility of reinvestment on maturity of an account.
Interest not with-drawn does not carry any interest.
Maturity proceeds not drawn are eligible to saving account interest rate for
a maximum period of two years.
Account is transferable from one post office to any Post office in India free
of cost.
Nomination facility available.
Rebate under section 80 C not admissible.
Interest income is taxable, but no TDS
Only scheme in Post office where monthly interest is payable.
Most suitable scheme for senior citizens and for those who need regular
monthly income.
Deposits are exempt from Wealth Tax
5 DA TA AN ALYS IS
Investment proportion in gender: -
70
Gender Percentage
Male 86
Female 14
Percentage
Female14%
Male
Female
Male86%
Interpretation: -
Here analysis of survey the investment portion in gender males are
investing 86 percent and females are investing 14 percent.
71
Proportion of age: -
Age (Year) Percentage
20 – 30 28
30 – 40 35
40 – 50 17
Above 50 20
Percentage
Above 5020%
40 – 5017%
20 – 3028%
30 – 4035%
20 – 30
30 – 40
40 – 50
Above 50
Interpretation: -
In this analysis of survey the age proportion of investors are investing age
criteria of 20 – 30 years, 30 – 40 years, 40 – 50 years, and above 50 years are
respectively 28 percentages, 35 percentages, 17 percentages, 20 percentages.
In that age 30 – 40 years are more investing the money because they are
responsible for family so they more invest for future.
72
Proportion of occupation: -
Occupation Percentage
Job 55
Business 28
Student 7
Others 10
Percentage
others10%
Student7%
Business28%
Job55%
Job
Business
Student
others
Interpretation: -
The above pie chart gives the picture of investors proportion in occupation job,
Business, students, others are respectively 55 percentage, 28 percentage, 7
percentage, 10 percentage. In that more investors are occupation in job because
these investors are more conscious about tax benefits and savings.
73
Inv
esto
r
1. What is the way of your investment?
Age DurationMonthly Quarterly Yearly
20 – 30 26 3 230 – 40 27 4 240 – 50 10 1 5Above 50 17 1 2
way of investment
30
25
20
15
10
5
0
20 – 30 30 – 40 40 – 50 Above 50
age
Duration Monthly
Duration Quarterly
Duration Yearly
Interpretation: -
In the first factors investors way monthly, quarterly and yearly. In that most of
investors invest in monthly because the most of the investors are salaried
persons. So it gives the result that the age criteria is not affect but only
occupation criteria is affect in way of investment.
74
2. Do you take tax benefits into consideration while
investing?
Tax benefit PercentageYes 87No 13
P e rc e nt a g
N o13 %
Y e s
N o
Y e s8 7%
Interpretation: -
75
Here, 87% of investors are considering the tax benefit while investing and 13%
are not considering tax benefit.
3. What is your total annual investment?
Annual
investment
Occupation
Job Business Student othersLess than 15000 29 10 4 615000 – 40000 22 8 1 340000 – 60000 4 8 - 1More than 60000 2 2 - -Total 57 28 5 10
76
Inv
esto
rs
Annual investment
30
25
20
15
10
5
0
Job Business Student others
Occupation
Less than 15000
15000 – 40000
40000 – 60000
More than 60000
Interpretation: -
Here the total annual investment of occupation wise in job, business, student,
others are respectively investing 57, 28, 5, and 10.
The investors have lower annual compensation of investors have
low annual investment in job and vice versa
The business occupation investor is dependent on his scale of
business. The low scale of businessman is invested in low proportion of
annual investment.
4. What is the purpose behind the financial investment?
Purpose of
investment
Gender
Male Female
Safety 42 9
Liquidity 11 3
77
Higher return 33 2
purpose of investment
45
40
35
30
25
20
15
10
5
0
Safety Liquidity Higher return
Male
Female
Interpretation: -
The above figure has been showing the results of the investor which have been invest in the different investment for the specific purpose. There is 55% investors are invest for the purpose of safety and 14% in liquidity and 35% in higher return.
Investor are most prefer the safety for the investment because of the they are only invest for the future and some return and take low risk on investment.
5. Since how long you have been investing in different
investment?
Time period
(Year)
Age
78
20 – 30 years 30 – 40 years 40 – 50 years More than 50
years
Less than 1 1 - - -
1 – 2 5 6 2 3
2 – 3 7 15 10 9
More than 3 14 11 5 8
16
14
12
10 Les s than
1 – 28
2 – 36 M ore than
4
2
0
20 – 30 y ears 30 – 40 y ears 40 – 50 y ears M ore t han 50 y ears
Interpretation: -
From the result there is maximum investors are more investing before 2 to 3
years ago but last 2 years investment proportion will be going down because of
last 2 years inflation was high and there saving was less and expense was high
so the investors investments was goes down.
6. Which factor more attract towards investment?
Factors Gender
79
Male Female
High return 15 2
Low risk 27 8
Prestige of company 2 1
Market trend 39 -
Liquidity 3 3
45
40
35
30
25
20
15
10
5
0
High return Low ris k P res tige of c om pany
M ark et t rend Liquidity
M ale
Fem ale
Interpretation: -
In the above results mentions that indicate the investors attracting towards the
investment market trends and lower risk will be more attract. Market trends are
fluctuating so investors are diversified his or her investment portfolio.
7. In which sector you prefer to invest most?
80
Sector Occupation Total
Job Business Student Others
Equity 31 17 3 5 46
Debt 38 20 3 9 70
Hybrid 52 27 7 10 96
60
50
40E quity
30 Debt
Hy brid20
10
0
Job B us ines s S t udent Others
Oc c upation
Interpretation: -
For the investment sector, there is 96 investors prefer the hybrid sector, 70
prefer debt and 46 investors are prefer equity sector for the investment. Because
of, in hybrid sector there is moderate risk happen than the equity sector and
higher return compare to the debt sector bur not much than the equity sector.
81
8. In which trend would you like to invest (Equity sector)?
Market
trend
Age
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
Bullish 14 14 6 9
Bearish 2 5 4 3
16
14
12
10
B ullis h8
B earis h6
4
2
0
20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r
Interpretation: -
In equity sector, there is a higher proportion of the bullish trend investor
compare to the bearish trend in trend preference. Because of Investor’s
behaviour for the market trend is very conscious about the bull changes.
82
9. Which of the following do you invest (Debt sector)?
Investment option Gender
Male Female
Saving account 71 9
Fixed deposit 54 7
PPF 20 2
80
70
60
50
M ale40
Fem ale30
20
10
0
S aving ac c ount Fix ed depos it P P F
Interpretation: -
Here the debt factor affect in savings account male is 71 and female is 9, in fixed
deposits male have 54 and female have 7 and PPF male have 20 and female
have 2. In PPF the investors done the government job and they invest for tax
savings.
83
10. Which of the following would you select (Hybrid sector)?
Investment
option
Age Total
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
Mutual funds 12 19 9 9 49
Insurance
(ULIPs)
17 25 9 18 69
Direct equity 2 1 2 - 5
Others 1 1 - - 2
30
25
20 M ut ual funds
Ins uranc e (ULIP s15
Direc t equity
10 Others
5
0
20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r
Interpretation: -
There are the investors are investing more in insurance because investors safety
they invest in insurance. The investors are not aware of the mutual fund so the
mutual fund compare to the insurance proportion is low.
11. Which fund will you select (Mutual funds)?
84
Fund Age
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
Debt 2 - - 1
Growth 10 15 6 6
Balance 2 4 3 2
MIP 5 3 1 1
16
14
12
10 D ebt
G ro wt h8
B alanc e6 M IP
4
2
0
1 2 3 4
Interpretation: -
The above table given the mutual fund scheme in that the growth scheme is very
good because the growth fund have good return given and it takes a risk also.
That is the reason behind the proportion of age of 20 – 30, 30 -40 is very high
investors is investing in that.
12. What is mode of your investment in mutual funds?
Mode of investment Gender
85
Male Female
SIP 42 5
MIP 10 -
STP 3 -
BULK 20 2
45
40
35
30
25
20
15
10
5
0
S IP M IP S TP B ULK
M ale
F em ale
Interpretation: -
In that above table the mode of mutual fund proportion of SIP, MIP, STP,
BULK in male 42, 10, 3 ,and 20 respectively and in female 5, 0, 0, and 2 are
respectively.
13. Which AMC or Financial Institution you will prefer for
investment?
AMC or Financial Institution Investors
Marwadi 33
86
Religare 10
Angel Broking 8
Reliance 24
Share khan 22
LIC 26
Others 3
LIC21%
Others
2%
Investors
Marw adi27%
Share khan
17%
Reliance19%
Religare8%
Angel Broking
6%
Marw adi
Religare
Angel Broking
Reliance
Share khan
LIC
Others
Interpretation: -
The AMC or financial institution of the prefer for the investors are Marwadi,
Religare, Angle broking, Reliance, Share khan, LIC, and other are proportion 33,
10, 8, 24, 22, 26 and 3 are respectively.
14. Why you have selected the broker (AMC)?
Factors Gender
Male Female
87
Intra Limit 6 1
Delivery Limit 15 -
Low brokerage 35 1
Tips 49 6
Others 1 2
60
50
40
M ale30
Fem ale
20
10
0
Intra Lim it Delivery Lim it Low brok erage Tips Others
Interpretation: -
In the above table result shows Intra limit, Delivery limit, low brokerage and tips
factors are affect the AMC. In that mostly that 55 investors are select AMC on
the basis of tips, 36 investors are low brokerage and 15 investors are delivery
limit.
15. How do you select your investment proposal?
Medium Occupation
Job Business Student Others
By Advisor 25 12 - 6
By Relatives 4 5 6 2
88
By Own Opinion 14 7 1 2
By Market Trend 10 5 - -
30
25
20 B y A dvis or
B y Relatives15
B y Own Opinio
10 B y M ark et Tren
5
0
Job B us ines s S tudent Others
Interpretation: -
There is a 43 investors select the investment proposal by advisors. By relatives,
by own opinion, by market trend through select investment proposal by the
investor is respectively 17, 24 and 15 out of the 100 sample size.
16. What is your expected return on your investment?
Expected Return Age
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
3% - 10% 2 4 1 3
11% - 20% 19 14 12 14
21% - 40% 4 9 8 3
89
Above 40% - 4 3 -
20
18
16
14
12
10
8
6
4
2
0
20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r
3% - 10%
11% - 20%
21% - 40%
A bove
40%
Interpretation: -
From the result, the investors most probably expected returns are 11 – 20
percentage, I years 20 – 30, 30 – 40, 40 – 50, above 50 years investors
proportion are 19, 14, 12, 14 are respectively.
17. How much risk you are able to take?
Risk Age
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
1% - 5% 18 23 14 15
6% - 10% 8 6 2 5
11% - 15% - 4 5 -
Above 15% - - - -
90
25
20
1% - 5%15
6% - 10%
11% - 15%10
A bove 15%
5
0
20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r
Interpretation: -
From the above results investors are taking risk mostly 1 – 5 percentages.
Investors proportion are 18, 23, 14, 15 in related to years 20 – 30, 30 – 40, 40 –
50, above 50 are respectively.
18. What is time horizon your investment?
Time Horizon Age
20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr
Less than 1 yr - - - -
1 – 3 yr 3 2 2 4
3 - 5 yr 8 11 10 8
Above 5 yr 15 18 9 10
91
20
18
16
14
12
10
8
6
4
2
0
20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r
Les s than 1 y
1 – 3 y r
3 - 5 y r
A bove 5 y r
Interpretation: -
From the survey, the most of the investors are willingness to investment more
than 5 years. Because of the market has been very volatile within a short time so
they cannot take any higher risk for the hybrid sector. In the debt sector investor
has to be select the investment time horizon is more than 5 years.
92
6 F IND IN GS
To know the investment option available in the India and also
the return and risk associate with it.
Many investment objectives available in India so investors are preferred high
risk; high return and some investors want safety so they are investing in
saving fund & insurance.
To analyze the pattern of investment objectives.
To surveyed investing the potential investors in savings account 29 percent,
fixed deposits 22 percentage, Mutual fund 14 percentage, PPF 8 percentage,
and Insurance (ULIPS) 25 percentage and Direct equity 2 percentage.
To identify the factors influencing in the individual investment
decisions.
Factors affect individual investment decision should be age,
occupation, and tax benefit and investment purpose.
To study the consumer preference for the investment scheme
selection.
Investor’s preference for the investment schemes are 17 investors preferred
higher return, 35 investor’s low risk. 3 investors prefer prestige of company,
39 investors preferred market trends, and 5 investors preferred only liquidity.
To knowledge of the Valsad city investors, how many are
interested in investment and what is the investment portfolio of the
investors?
From the survey, there is 86 percentage of male and 14 percentage of female
are interested in investment from Valsad city.
To comparative study of the equity, debt and hybrid sector
investment.
The investor’s comparative study of equity, debt and hybrid are 25
percentages, 32 percentages, and 43 percentages respectively.
93
7 SU GGEST ION S
Systematic Transfer Plan (STP) is one of the innovative products
launched by Assets Management Company (AMC) very recently in industry.
Though most of the prospects and potential investors are not aware about
the STP. There is a large scope for the company to tap the business man.
The Marwadi has not arranged for the investment awareness. So
they should arrange the program for the investors.
From the survey, In selection of investment proposal the advisor
not aware to the student for the selection. So they should advice them.
The female are not investing in Monthly Investment Plan (MIP). So
they influence or encourage for investing in MIP.
94
7 B IBL IOGRA PH Y
I.M.Pandey, Finance Management, 9th Edition, Vikas
Publication, New Delhi
www.amf ind ia.co m
www.g oog le.co m
www.marwad ion lin e.co m
95
8 APP END IX
A Study of Factor
Influencin g the Investment D ecision Making of Investor s
Name :
Age :
Gender :
Male
Female
Occupation :
Job
Student
Contact no :
1. Do you plan your financial requirement?
Yes
No
2. What is the way of investment?
Monthly
Quarterly
Yearly
Business
Others
3. Do you take tax benefits into consideration while investing?
Yes
96
No
4. What is your total annual investment?
Less then 15000
15000 – 40000
40000 – 60000
More than 60000
5. What is the purpose behind the financial investment?
Safety
Liquidity
Higher return
6. Since how long have you been investing in different investment?
Less than 1 year
1 to 2 year
2 to 3 year
More than 3 years
7. Which factor more attract towards investment?
High return
Low risk
Prestige of company
Market trend
Liquidity
8. In which sector you prefer to invest most?
Equity
Debt
Hybrid
If Equity,
9. In which trend would you like to invest?
97
Bullish
Bearish
If Debt,
10. Which of the following do you invest?
Saving account
Fixed deposit
If Hybrid,
PPF
11. Which of the following would you select?
Mutual funds
Insurance (ULIPs)
Direct equity
Others
If Mutual funds,
12. Which fund will you select?
Debt
Growth
Balance
MIP
13. What is mode of your investment in mutual funds?
SIP
MIP
STP
Bulk
14. Which AMC or Financial Institution you will prefer for investment?
Marwadi
98
Religare
Angel broking
Reliance
Share khan
Others, Please specify
15. Why you have selected the above broker?
Intra limit
Delivery limit
Low brokerage
Tips
Others
16. How do you select your investment proposal?
By advisor
By relatives
By own opinion
By market trend
17. What is your expected return on your investment?
3% - 10%
11% - 20%
21% - 40%
Above 40%
18. How much risk you are able to take?
1% - 5%
6% - 10%
11% - 15%
99
More than 15%
19. What is time horizon of your investment?
Less than 1 year
1 – 3 year
3 – 5 year
Above 5 years
20. Would you like to have advice from us based on your requirement?
Yes
No
21. Give your recommendation for selecting investment
plans a) -
b)
c)
100