assingment on alternative investment option

7/28/2019 Assingment on Alternative Investment Option

1/23

1

ASSINGMENT ON ALTERNATIVE

INVESTMENT OPTION

SUB: INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT

SUBMITTED

TO

PROF. HARDIK GANDHI

SUBMITTED

BY

DARSHAN PATIL

ID NO: (030301039)


2/23

2

INTRODUCTION :

There are a variety of different types of investments available today... there are short-terminvestments, long-term investments, and as many different investment strategies as there areinvestors. If you find yourself a bit overwhelmed by the prospect of investing and are unsure of

whether you should invest in short-term or long-term plans, don't let yourself get bent out ofshape.

By simply taking the time to compare the benefits and drawbacks of both short-term and long-term investments, you can determine which type is best for you and your current financial needs.Remember, your first step should be defining your financial goals, and then you will be able todecide what investment strategies will better support your goals.In this module, in addition to providing you with the drawbacks and advantages of short- and

long-term investments, we will provide you with pertinent information that can assist you in

making decisions about your finances... both for now, and in the future.

Obviously, there are differences between short-term and long-term investments. Short-terminvestments are designed to be made only for a little while, and hopefully show a significantyield, whereas long-term investments are designed to last for years, showing a slow but steadyincrease so that there is a significant yield at the end of the term.

Advantages of Short-Term Investments :

The main advantages to short-term investments are the potential for fast growth and the fact thatthe term may only last a few weeks to a few months. These short-term investments allow morecontrol over your money and it usually isn't out of your possession for very long.

Disadvantages of Short-Term Investments :

As mentioned above, short-term investments sometimes tend to be a bit riskier and show a muchhigher rate of fluctuation than their long-term counterparts. While there is a good chance thatyou'll make money with a short-term investment, there is also a chance that you'll lose money.This is especially the case when dealing with the stock market, since many of the short-terminvestments made with stocks and bonds involve precision timing to sell when the stocks orbonds are at their peak just before they begin to drop.

Advantages of Long-Term Investments :

Just the opposite of short-term investments, long-term investments have the ability to gain smallamounts of money over a longer period of time. The slow but steady pace of long-terminvestments allow for a much greater degree of stability and a much lower risk than short-terminvestments. They are also ideal for making your savings or retirement fund grow. Theinvestments usually continue to grow over the years, maturing just as you need them.


3/23

3

Disadvantages of Long-Term Investments:

Of course, the main disadvantage of long-term investments is that they increase in value slowlyand can take years to mature.For those individuals who need a high yield in a short period of time, long-term investments are

might not be the way to go... between the fees that are associated with some types of investmentand the small fluctuations that any investment will experience, many long-term investments

might actually go down in value before they begin to climb over time. Additionally, with many

of the long-term investments that you'll find, you tend to have much less control over your

money until the investment matures... there are usually penalties or fines for early withdrawal or

selling stocks and bonds through long-term investment programs.


4/23

4

BONDS :

Bonds can be defined as debts, which a company or the government undertakes, by borrowingmoney from the public, when it is in need of funds. There are different types of bonds issued tothe public today, such as U.S. Government bonds, municipal bonds, corporate bonds, andmortgage-backed bonds, to name a few. The funds that are raised through corporate bonds mightbe needed to invest in further growth of the company or to invest in new ventures. When thegovernment issues bonds and raises money, it is usually used to finance various public workssuch as building roads, maintaining street lighting, keeping up the government buildings andparks, etc. In exchange for these borrowings, the company/government pays the investors a fixedrate of interest, which is paid at a stipulated time, for a fixed period. This makes bonds a reliablesource of investment.

Advantages of investing in bonds:

Bonds are predictable. You know how much interest you can expect to receive, how oftenyou'll receive it, and when your principal (the bond's face value) will be repaid (maturitydate).

Bonds are more steady then stocks (which can fluctuate wildly short-term). Nervousinvestors usually sleep better by buying bonds instead of equity investments.

People on a fixed income and/or in retirement will receive a predictable amount ofregular income from bonds.

The interest rates paid by bonds typically exceed those paid by banks on savingsaccounts, especially short-term bonds.


5/23

5

Disadvantages of bonds:

Companies and municipalities can and do go bankrupt, and if they do, your bonds willlose value and possibly even become worthless.

Long-term bonds will have your money tied up in low yielding bonds should interestrates go up.

Unlike stocks, bonds don't offer the possibility of high long-term returns. Youngerinvestors and those with several years to go until retirement would be better served bylimiting their bond purchases and opting for equity buys instead.

When should you buy bonds?

Bonds are a good option for those who need a steady and relatively dependable source ofincome, including the elderly and disabled. After retirement, bonds will provide a regular

interest check to live on.

As you progress from middle age and get within a few years of retirement, you shouldstart gradually switching your assets from equity holdings (stocks) into bonds. As you getcloser to retirement you want to reduce your investment risk.

Many people buy bonds for reasons other than the investment potential. For example, thealumni of a university might buy the school's bonds to help out the old alma mater. Andmany people consider buying US Savings Bonds to be a patriotic duty.

Characteristics

Principal

Nominal, principal, par or face amount the amount on which the issuer pays interest, andwhich, most commonly, has to be repaid at the end of the term. Some structured bonds can havea redemption amount which is different from the face amount and can be linked to performanceof particular assets such as a stock or commodity index, foreign exchange rate or a fund. Thiscan result in an investor receiving less or more than his original investment at maturity.


6/23

6

Maturity

The issuer has to repay the nominal amount on theMaturitydate. As long as all payments havebeen made, the issuer has no more obligations to the bond holders after the maturity date. Thelength of time until the maturity date is often referred to as the term or tenor or maturity of abond. The maturity can be any length of time, although debt securities with a term of less than

one year are generally designated money market instruments rather than bonds. Most bonds havea term of up to thirty years. Some bonds have been issued with maturities of up to one hundredyears, and some do not mature at all. In the market for U.S. Treasury securities, there are threegroups of bond maturities:

short term (bills): maturities between one to five year; (instruments with maturities less thanone year are called Money Market Instruments)

medium term (notes): maturities between six to twelve years; long term (bonds): maturities greater than twelve years.Coupon

Thecouponis the interest rate that the issuer pays to the bond holders. Usually this rate is fixedthroughout the life of the bond. It can also vary with a money market index, such as LIBOR, or itcan be even more exotic. The name coupon originates from the fact that in the past, physicalbonds were issued which had coupons attached to them. On coupon dates the bond holder wouldgive the coupon to a bank in exchange for the interest payment. Coupons can be paid at differentfrequencies. These coupon dates are generally semi-annual, i.e. every 6 months, or annual.

Yield

The yield is the rate of return received from investing in the bond. There are various means ofmeasuring it. The most simple example is thecurrent yield, which is (annual interest payment/clean price). Closer to reality is to use theyield to maturity(YTM), which takes into account:

all remaining coupon payments thetime value of money capital gains until maturityCredit Quality

The "quality" of the issue refers to the probability that the bondholders will receive the amountspromised at the due dates. This will depend on a wide range of factors.High yield bondsarebonds that are rated below investment grade by thecredit rating agencies. As these bonds aremore risky than investment grade bonds, investors expect to earn a higher yield. These bonds arealso calledjunk bonds

Price

The price of a bond is influenced amongst others by the above mentioned factors like maturity,quality, but as well as interest rates, demand for the bond. The price can be statedcleanordirty.The issue price at which investors buy the bonds when they are first issued, which will typicallybe approximately equal to the nominal amount. The net proceeds that the issuer receives are thusthe issue price, less issuance fees. Later on bonds often trade at a premium.
http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Current_yieldhttp://en.wikipedia.org/wiki/Current_yieldhttp://en.wikipedia.org/wiki/Current_yieldhttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Yield_to_maturityhttp://en.wikipedia.org/wiki/Yield_to_maturityhttp://en.wikipedia.org/wiki/Yield_to_maturityhttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Dirty_pricehttp://en.wikipedia.org/wiki/Dirty_pricehttp://en.wikipedia.org/wiki/Dirty_pricehttp://en.wikipedia.org/wiki/Dirty_pricehttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Junk_bondshttp://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/High-yield_bondhttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://en.wikipedia.org/wiki/Yield_to_maturityhttp://en.wikipedia.org/wiki/Clean_pricehttp://en.wikipedia.org/wiki/Current_yieldhttp://en.wikipedia.org/wiki/LIBORhttp://en.wikipedia.org/wiki/Coupon_(bond)http://en.wikipedia.org/wiki/Maturity_(finance)


7/23

7

Investment in life insurance

Life Insurance is one of the most widely available and used financial products being used by

people. But before buying various types of life insurance such as variable ,term life insurance not

many people do a pros and cons analysis. This is quite sad since it is one of the biggest yearly

expenses and is one of the most important security assets for our family in case of death or

serious injury. Life Insurance has different meanings in different countries as well. In India Life

Insurance is mostly looked upon as an investment product. Most people buy insurance as aninvestment product leading to the wide prevalence of hybrid insurance investment products like

ULIPs ,Child Plans etc.It is easily found that these hybrid products are wasteful since it would

be cheaper to buy separate investment and insurance products.The main reason for the misselling

is the financial illiteracy and ignorance about the advantages and disadvantages of life insurance

and its products.Life Insurance Companies also dont do a very good job in educating people

about the right type of product as it is more profitable for them to sell the products which are

disadvantageous to the customers.So we have a case where Life Insurance products advantages

and disadvantages are not known and understood by most people around the world.

Advantages and Disadvantages of Investing in LifeInsurance

Advantages

Provides financial security Used for retirement purposes Tax advantages

Disadvantages

Difficult to decide what to do with the money received Long period of time taken to accumulate savings Inflation effect


8/23

8

Investment in Real Estate :

Real estate that generates income or is otherwise intended for investment purposes rather than asa primary residence. It is common for investors to own multiple pieces of real estate, one ofwhich serves as a primary residence, while the others are used to generate rental income andprofits through price appreciation. The tax implications for investment real estate are oftendifferent than those for residential real estate.

Involves land and structures built on the land

Types of land:

Residential Propertiesdwelling for personal living or rental purposes Agricultural landfor crop planting, dairy farming, animal farming and orchards Commercial properties made up of shop houses, banks and other financial services,

hotels, urban centers and shopping complexes Industrial properties used for manufacturing and warehousing of industrial and

consumer products, include factories, warehouses, industrial parks estates Recreational properties used for leisure activities like golf courses, amusement parks,

resorts Investment Management (FIN 310) 17 Physical Characteristics of Real Properties Immobilitycan never be changed from its geographic location Long Lifemay contain considerable varying age at any time Indestructibility durable and stable investment since it does not depreciate in value

Investment Management (FIN 310) 18 Economic Characteristics of Real Properties

Scarcity Appreciation in valuein good economic conditions real properties are sought after Fixed investmentinvesting involve large sums of money and long period of time


9/23

9

Characteristics

NO FIXED MATURITY:Unlike a bond which has a fixed maturity date, an equity real estate investment does not

normally mature. In Europe, it is not uncommon for investors to hold property for over100 years. This attribute of real estate allows an owner to buy a property, execute abusiness plan, then dispose of the property whenever appropriate. An exception to thischaracteristic is an investment in fixed-term debt; by definition a mortgage would have afixed maturity.

TangibleReal estate is, well, real! You can visit your investment, speak with your tenants, andshow it off to your family and friends. You can see it and touch it. A result of thisattribute is that you have a certain degree of physical control over the investment - ifsomething is wrong with it, you can try fixing it. You can't do that with a stock or bond.

Requires ManagementBecause real estate is tangible, it needs to be managed in a hands-on manner. Tenantcomplaints must be addressed. Landscaping must be handled. And, when the buildingstarts to age, it needs to be renovated.

Inefficient MarketsAn inefficient market is not necessarily a bad thing. It just means that informationasymmetry exists among participants in the market, allowing greater profits to be madeby those with special information, expertise or resources. In contrast, public stockmarkets are much more efficient - information is efficiently disseminated among market

participants, and those with material non-public information are not permitted to tradeupon the information. In the real estate markets, information is king, and can allow aninvestor to see profit opportunities that might otherwise not have presented themselves.

High Transaction CostsPrivate market real estate has high purchase costs and sale costs. On purchases, there arereal-estate-agent-related commissions, lawyers' fees, engineers' fees and many other coststhat can raise the effective purchase price well beyond the price the seller will actuallyreceive. On sales, a substantialbrokeragefee is usually required for the property to beproperly exposed to the market. Because of the high costs of trading real estate, longerholding periods are common and speculative trading is rarer than for stocks.

Lower LiquidityWith the exception of real estate securities, no public exchange exists for the trading ofreal estate. This makes real estate more difficult to sell because deals must be privatelybrokered. There can be a substantial lag between the time you decide to sell a propertyand when it actually is sold - usually a couple months at least.
http://www.investopedia.com/terms/b/broker.asphttp://www.investopedia.com/terms/b/broker.asphttp://www.investopedia.com/terms/b/broker.asphttp://www.investopedia.com/terms/b/broker.asp


10/23

10

Underlying Tenant QualityWhen assessing an income-producing property, an important consideration is the qualityof the underlying tenancy. This is important because when you purchase the property,you're buying two things: the physical real estate, and the income stream from thetenants. If the tenants are likely todefaulton their monthly obligation, the risk of the

investment is greater.

Variability among RegionsWhile it sounds clich, location is one of the important aspects of real estate investments;a piece of real estate can perform very differently among countries, regions, cities andeven within the same city. These regional differences need to be considered when makingan investment, because your selection of which market to invest in has as large an impacton your eventual returns as your choice of property within the market.

Advantages and Disadvantages of Investing in

Real Estates

Advantages

Financing is fairly easy to obtain Normally appreciates in value Provides direct rental income Value tends to increase with general price level Safe investment, secured return

Disadvantages

Involves great sums of capital Time and energy consuming to manage real properties Involves large sum of money to maintain Changes in loan arrangements may be time

consuming a Renting risks
http://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/d/default2.asp


11/23

11

Fixed Deposits

A Fixed Deposit (also known as FD) is a financial instrument provided by Indian banks whichprovides investors with a higher rate of interest than a regular savings account, until the givenmaturity date . It may or may not require the creation of a separate account. It is known as a TermDeposit in the Canada, Australia, New Zealand and the US and as Bond in United Kingdom they areconsidered to be very safe investments. Term Deposits in India is used to denote a larger class ofinvestments with varying levels of liquidity. The defining criteria for a Fixed Deposit is that themoney cannot be withdrawn for the FD as against Recurring deposit orDemand depositbeforematurity. Some banks may offer additional services to FD holders such as loans against FD

certificates at competent interest rates. Its important to note that banks may offer lesser interest ratesunder uncertain economic conditions. The interest rate varies between 4 and 11 percent.The tenureof an FD can vary from 10, 15 or 45 days to 1.5 years and can be as high as 10 years. Theseinvestments are safer than Post Office Schemes as they are covered under Deposit Insurance &Credit Guarantee Scheme of India. They also offer Income tax and Wealth tax benefits

Types of FDs

There are mainly two kinds of FDs, but generally when an individual mentions about FDs we

consider it to be a fixed deposit issued by a bank. The other kind of fixed deposit is provided by

the corporates.

Bank FDs are offered by banks or non-banking finance companies. Both these institutions areregulated by the RBI, and the deposits up to INR 1 lakh per account are guaranteed by RBI.

Corporate FDs are offered by corporates who are looking to raise money from the open market.

Corporate FDs pay a higher rate of interest because they carry a higher risk than bank FDs, since

they are not guaranteed.

Advantages and Disadvantages of Investing in

Fixed Deposits :Advantages

Interest earned on fixed deposits is higher than savings account Safe Low risk

Disadvantages Need to be withdrawn after the maturity period, if not, no interest is earned
http://en.wikipedia.org/wiki/Recurring_deposithttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Demand_deposithttp://en.wikipedia.org/wiki/Recurring_deposit


12/23

12

FIXED MATURITY PLAN

This is a relatively new concept as an instrument of investment about which the awareness isrestricted. These primarily debt mutual funds which are close ended and have typical maturityperiods of one to five years. These plans are created by fund managers who purchase debtinstruments that are oriented with the maturity period of the plans. By this method the investment is

kept secured while market expectations are also met simultaneously.

Key Benefits of FMPsThere are several benefits of the FMPs which make them a lucrative option available in the

market. The most important advantage of the FMPs is that for tax purpose they are treated at parwith fixed deposits. Since they are basically debt funds they also enjoy all the benefits of the debtfunds in terms of short terms capital gains as well as long term capital gains. For the short termcapital gains, the income from FMDs as in the case of any debt oriented fund is added to the annualincome and the taxation is done as income tax. In case of the long term capital gains, the incomefrom FMPs, as in the case of all debt oriented funds, is taxed as the higher among the two 10%without indexation and 20 per cent with indexation.

Comparing the FMPs with Bank Fixed DepositsIn order to understand the basic advantages of investing in fixed maturity plans as againstconventional bank fixed deposits we will have to compare the returns from both these instrumentsboth pre tax as well as post tax. Assuming an initial investment of Rs. 10000/-, let us study thevariations in returns in different options.

Instrument Bank Fixedosit

FMP

idend)FMP (Growth

year)FMP (Growth

year non

xed)

FMP (Growth

year indexed)

Returns 10% 10% 10% 10% 10%

Tax 33% 14.2% 33% 10% 20%

Pre Taxrns

Rs.1000 Rs.1000 Rs.1000 Rs.1000 Rs.1000

Indexed Prereturns

Rs.1000 Rs.1000 Rs.1000 Rs.1000 Rs.1000

Tax Rs.330 Rs.142.40 Rs.330 Rs.100 Rs.87.48

Net Returns Rs.670 Rs.857.60 Rs. 670 Rs.900 Rs.912.52


13/23

13

In this table the various tax implications in different schemes of FMPs as compared to the taximplication in a bank fixed deposit is illustrated on an initial investment of Rs. 10000/- with ainterest rate of 10%. Important derivations from the above table of comparison are as follows:

The net returns from FMPs far exceed that by any bank fixed deposit.

The dividend option is better when buying FMPs for less than a year. The growth option is better when buying FMP for more than a year. Maximum double indexation benefit can be achieved by buying a FMP towards the very

end of a financial year which is eligible for redemption at the commencement of a futurefinancial year.


14/23

14

Mutual funds can be defined as the money-managing systems that are introduced to professionallyinvest money collected from the public. The Asset Management Companies (AMCs) managedifferent types of mutual fund schemes. The AMCs are supported by various financial institutions orcompanies.

Investment in mutual funds in India means pooling money in bonds, short-term money market,financial institutions, stocks and securities and dishing out returns as dividends. In India, FundManagers manage the mutual funds. They are also referred to as portfolio managers. The mutualfunds in India are regulated by the Securities Exchange Board of India.

Types of Mutual Funds

Closed-end mutual funds Open end funds Equity mutual funds Mid cap funds Large cap funds Growth funds Balanced funds Exchange Traded Funds (ETFs) Load mutual funds and No-Load mutual funds Value funds International mutual funds Money market funds Sector mutual funds Fund of funds (FoF) Index funds Regional mutual funds


15/23

15

What are the advantages and disadvantages of mutual

funds?

Advantages

What are the key advantages of mutual fund investing?

Diversification

Using mutual funds can help an investor diversify their portfolio with a minimum investment.When investing in a single fund, an investor is actually investing in numerous securities.Spreading your investment across a range of securities can help to reducerisk. A stock mutualfund, for example, invests in many stocks - hundreds or even thousands. This minimizes the riskattributed to a concentrated position. If a few securities in the mutual fund lose value or becomeworthless, the loss maybe offset by other securities that appreciate in value. Furtherdiversification can be achieved by investing in multiple funds which invest in different sectors orcategories. This helps to reduce the risk associated with a specific industry or category.Diversification may help to reduce risk but will never completely eliminate it. It is possible tolose all or part of your investment.

Professional Management:

Mutual funds are managed and supervised by investment professionals. As per the statedobjectives set forth in the prospectus, along with prevailing market conditions and other factors,the mutual fund manager will decide when to buy or sell securities. This eliminates the investorof the difficult task of trying to time the market. Furthermore, mutual funds can eliminate thecost an investor would incur when proper due diligence is given to researching securities. Thiscost of managing numerous securities is dispersed among all the investors according to theamount of shares they own with a fraction of each dollar invested used to cover the expenses ofthe fund. What does this mean? Fund managers have more money to research more securitiesmore in depth than the average investor.

Convenience:

With most mutual funds, buying and selling shares, changing distribution options, and obtaininginformation can be accomplished conveniently by telephone, by mail, or online.

Although a fund's shareholder is relieved of the day-to-day tasks involved in researching, buying,and selling securities, an investor will still need to evaluate a mutual fund based on investmentgoals and risk tolerance before making a purchase decision. Investors should always read theprospectus carefully before investing in any mutual fund.
http://www.open-ira.com/About_Mutual_Funds/2_Why_invest.htm?#Risk%20is%20associated%20with%20volatility#Risk%20is%20associated%20with%20volatilityhttp://www.open-ira.com/About_Mutual_Funds/2_Why_invest.htm?#Risk%20is%20associated%20with%20volatility#Risk%20is%20associated%20with%20volatilityhttp://www.open-ira.com/About_Mutual_Funds/2_Why_invest.htm?#Risk%20is%20associated%20with%20volatility#Risk%20is%20associated%20with%20volatilityhttp://www.open-ira.com/About_Mutual_Funds/2_Why_invest.htm?#Risk%20is%20associated%20with%20volatility#Risk%20is%20associated%20with%20volatility


16/23

16

Liquidity:

Mutual fund sharesare liquid and orders to buy or sell are placed during market hours.However, orders are not executed until the close of business when the NAV (Net Average Value)of the fund can be determined. Fees or commissions may or may not be applicable. Fees and

commissions are determined by the specific fund and the institution that executes the order.

Minimum Initial Investment:

Most funds have a minimum initial purchase of $2,500 but some are as low as $1,000. If youpurchase a mutual fund in an IRA, the minimum initial purchase requirement tends to be lower.You can buy some funds for as little as $50 per month if you agree to dollar-cost average, orinvest a certain dollar amount each month or quarter.

Disadvantages

Risks and Costs:

Changing market conditions can create fluctuations in the value of a mutual fund investment.

There are fees and expenses associated with investing in mutual funds that do not usually occurwhen purchasing individual securities directly.

As with any type of investment, there are drawbacks associated with mutual funds.

No Guarantees. The value of your mutual fund investment, unlike a bank deposit, couldfall and be worth less than the principle initially invested. And, while a money marketfund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. Inaddition, mutual funds are not insured or guaranteed by an agency of the U.S.government. Bond funds, unlike purchasing a bond directly, will not re-pay the principleat a set point in time.

The Diversification "Penalty." Diversification can help to reduce your risk of loss fromholding a single security, but it limits your potential for a "home run" if a single securityincreases dramatically in value. Remember, too, that diversification does not protect youfrom an overall decline in the market.

Costs. In some cases, the efficiencies of fund ownership are offset by a combination ofsales commissions, 12b-1 fees, redemption fees, and operating expenses. If the fund ispurchased in a taxable account, taxes may have to be paid on capital gains. Keep track ofthe cost basis of your initial purchase and new shares that are acquired by reinvestingdistributions. It's important to compare the costs of funds you are considering. Always

look at "net" returns when comparing fund performances. Net return is the bottom

line; an investment's true return after all costs are deducted.
http://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htmhttp://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htmhttp://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htmhttp://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htmhttp://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htmhttp://www.open-ira.com/About_Mutual_Funds/3a_tips_A_B_C_shares.htm


17/23

17

DERIVATIVES

Derivatives are nothing but a kind of security whose price or value is determined by the value of the

underlying variables. It is more like a contract of future date in which two or more parties areinvolved to alleviate future risk. Usually, derivatives enjoy high leverage. Its value is affected by thevolatility in the rates of the underlying asset. Some of the widely known underlying assets are:

Indexes (consumer price index (CPI), stock market index, weather conditions or inflation) Bonds Currencies Interest rates Exchange rates Commodities Stocks (equities)Types of Derivatives

The range of derivatives is really wide. But some of the most commonly known derivatives are:

Forwards-This is a tailor-made contract between two parties. In case of this contract, a

settlement is done on a scheduled future date at today's pre-decided rate.

Futures-When two entities decide to purchase or sell an asset at a given time in the future at a

given price, it is called futures contract. Futures contracts can be said to be a special kind of

forward contracts, as they are customized exchange-traded agreements.

Options-It is of two different kinds such as calls and puts. Those who take calls option, they are

not obligated to purchase given quantity of the underlying variable, at a mentioned price on or

prior to a scheduled future date. On the other hand, buyers in case of puts option may not

necessarily sell a mentioned quantity of the underlying variable at a mentioned price on

Swaps-These are private contracts between two entities to deal in cash flows in the future

following a pre-decided formula. They are somewhat like forward contracts' portfolios. Swaps

are also of two types such as interest rate swaps and currency swaps.

Interest rate swaps-in this case, only interest related cash flows can be exchanged between the

entities in one currency.


18/23

18

Currency swaps-in this case of swapping, principal and interest can be exchanged in one

currency for the same in other form of currency.

Importance of Derivatives

Financial transactions are fraught with several risk factors. Derivatives are instrumental in

alienating those risk factors from traditional instruments and shifting risks to those entities that

are ready to take them. Some of the basic risk components in derivatives business are:

Credit Risk: When one of the two parties fails to perform its role as per the agreement,this is called the credit risk. It can also be referred to as default or counterparty risk. Itvaries with different sources.

Market Risk: This is a kind of financial loss that takes place due to the adverse pricemovements of the underlying variable or instrument.

Liquidity Risk: When a firm is unable to devise a transaction at current market rates, itcan be referred to as liquidity risk. There are two kinds of liquidity risks involved in thescenario. First is concerned with the liquidity of separate items and second is related to

supporting the activities of the organization with funds comprising derivatives.

Legal Risk:Legal issues related with the agreement need to be scrutinized well, as one candeal in derivatives across the different judicial boundaries.


19/23

19

Public Provident Fund :Public Provident Fund (PPF) is a savings-cum-tax-saving instrument inIndia. It also serves asa retirement-planning tool for many of those who do not have any structured pension plancovering them.

The account can be opened in designated post offices, State Bank of India branches and branchesof some nationalised banks.ICICI Bankwas the first private sector bank which was authorizedto open PPF accounts

Investment and Returns

A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account, and amaximum deposit of Rs. 100,000 can be made in a PPF account in any given financial year. Theinvestments can be made in multiples of Rs. 5, either as a whole sum, or in installments (notexceeding 12 in a year, though more than one deposit can be made in a month). The credit to thePPF account is made on the date of the presentation of the cheque, not on the date of itsclearance.

Every subscription should be made in cash or through a crossed check or draft or postal order, infavor of the accounts office, at the place at which that office is situated. In case of any cheque,draft or postal order should be drawn at a bank or post office at that place. It is also possible totransfer funds online using net banking in a PPF account opened with SBI.[1]

Rate of Return on PPF is 8.8 % p.a. (Compounded annually). Interest is calculated on the lowestbalance between the close of the fifth day and the last day of every month. Till March 2010,cheques deposited for clearing, up to 5th of the month were eligible for that month's interest.Since 29 March 2010, only the amounts which are actually cleared on or before the 5th of themonth are eligible for that month's interest.

The minimum tenure of the PPF account is 15 years, which can be further extended in blocks of

5 years each for any number of blocks. The extension can be with or without contribution. Anaccount holder, continuing with fresh subscription, can withdraw up to 60% of the balance to hiscredit at the commencement of each extended period in one or more installments but only oncein a year.

Nomination facility is available. In the case of joint nominees, it is possible to allocate thepercentage of benefits to each nominee.
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/Public_Provident_Fund_(India)#cite_note-0http://en.wikipedia.org/wiki/Public_Provident_Fund_(India)#cite_note-0http://en.wikipedia.org/wiki/Public_Provident_Fund_(India)#cite_note-0http://en.wikipedia.org/wiki/Public_Provident_Fund_(India)#cite_note-0http://en.wikipedia.org/wiki/ICICI_Bankhttp://en.wikipedia.org/wiki/India


20/23

20

FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, orcurrency market) is a form ofexchange for theglobal decentralized trading of international currencies. Financial centers around the world functionas anchors of trading between a wide range of different types of buyers and sellers around the clock,with the exception of weekends. The foreign exchange market determines the relative values of

different currencies

Advantages of Forex markets:

1. Minimal or no commissions - There are no clearing fees, no exchange fees, no governmentfees and no brokerage fees.

2. Easy access if you compare the money you need on the market in comparison with theamount needed for entering the stock, options or futures market, its a huge difference. Theamount of capital is very low and it allows numerous types of people to easily enter the foreign

exchange market.

3. No middlemen spot currency trading is decentralized and eliminates middlemen, allowingyou to trade directly.

4. Lots of free courses and demo possibilities On the internet you can find huge opportunitiesfor learning how the Forex market works and what you need to become a good trader. Also, mostonline Forex brokers offer demo accounts to practice trading and build your skills, using real-time charts and news feeds. They are more valuable than you could even imagine and, beforestarting your real money on the market, try to see if you are built and ready for it by practicingwith these types of software.

5. Time and location flexibility the market is open 24 hours each day, so you dont have tomatch your schedule with the one of the market. It doesnt require a full -time engagement andyou can choose the hours that suit your best. Also, you can operate from any corner of the world,as long as you have an Internet connection.

6. Low transaction coststhe transaction cost, determined by the bid/ask spread, is usually lessthan 0.1%, and it can go even lower in the case of large dealers.
http://en.wikipedia.org/wiki/Exchange_(organized_market)http://en.wikipedia.org/wiki/Exchange_(organized_market)


21/23

21

7. A high liquidity marketthe market is huge, so is extremely liquid. Around 4 trillion dollarsare exchanged every day, according to the latest figures released by the Bank of InternationalSettlements (BIS). That becomes an advantage, as you dont have to struggle so much until youwill find someone who wants to buy your currency or sell you one. You cant get stuck and, byusing features like stop lose, you will close your position automatically, while not even being in

front of the computer.

8. Leveragewith a little investment you can move large amounts of money. Leverage gives thetrader the ability to make nice profits and keep risk capital to a minimum.

9. No forced deadlinesno one and no rule is forcing you to close a position. You can stay openas long as you consider necessary.

10. No fixed lot size requirements your contract size its your decision and you are the onlyone who determines your own lot.

11. Transparency - due to multi-day market movement, its size and the high number ofparticipants, it is virtually impossible to market manipulation.

These are all huge advantages, which you wont encounter on other markets, like the stock

or futures. But it doesnt mean that Forex trading doesnt carry risks and doesnt have

disadvantages. To create a broad picture of what it means,

check its disadvantages also:

1. Differences between retail and wholesale pricing around two-thirds of the trades are madebetween dealers and large organizations such as hedge funds and banks. They trade at wholesale

prices, while the investor trades at a retail price. Like this it can become a challenge to competeagainst bigger organization that start with a lower entry point and sell more profitably.

2. Risk of choosing an inexperienced brokeryou can find on the internet many people who aretargeting fraud so be careful when choosing the broker.

3. Where there is a winner, there is also a looserdont expect necessarily to win lots ofmoney.Remember that for someone to get rich, another has to lose money on the Forex market.

4. Requires knowledge and time Without completely knowing the markets rules and withouthaving patience, your investment might very well soon vanish.

When you enter Forex market, you have to be fully aware of its advantages, but alsodisadvantages. Dont count only on the benefits of this investment to think that you will succeed.

Study, practice, improve your skills, keep an eye on all the news and factors that influence themarket, and always stick to your established system.


22/23

22

Investment in SecuritiesTreasury Bills

A money market instrument issued by the Government To raise short term funds to finance the government Usually at denominations and multiples of RM10,000, with maturity of

between 91 to 270 days

Advantages & Disadvantages of T-Bills

Advantages

Low risk as it is issued by the government Secured income in the form of interest payment

Disadvantages

Significant amount of money required to invest as it is in largedenominations


23/23

23

Investment in SavingsSavings Account

A form of deposit account Money kept in account earn interest or bonus

Interest rate depends on the discretion of individual bank

Advantages and Disadvantages ofInvesting in Savings Account

Advantages

Money saved in kept in custody of banks Income earninginterest Easily withdrawn Convenience

Disadvantages

Earn low income Savers need to be disciplined

assingment on alternative investment option

Documents