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1.1 What is Investment/Investing?
The money we earn is partly spent and the rest saved for meeting future
expenses. Instead of keeping the
savings idle we may like to use
savings in order to get return on it
in the future. This is called
Investment.
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.
Investment is the investing of money or capital in order to gain
Profitable returns, as interest, income, or appreciation in value.
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. There are a number of definitions of
investment. While dealing with the various options of investment, the
defining terms of investment need to be kept in mind.
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Investing is a very exhaustive subject. It means different things to
different people. t some point of time we all are investing in
something. It may be relationships! it may be marriage or a career. "ife
is all about doing something to reap benefits in the future. #o all of us
are in the investment game. $owever, it means different things to
different people. %eople invest in&
"arge families so that when they grow old, their children can
take care of them.
'ducation, to ensure job security and comfortable life.
"and and crops, in order to fend for themselves and their
families.
#mall families, to provide a good standard of education and
living for their child.
Their health. (y exercising regularly and eating a balanced diet.
)haritable works, to serve the needy and the poor, and
'xternal assets like real estate, shares in listed companies, gold,
silver, etc., so that they can fall back upon them in tough times.
Thus we have a lot of people doing things in the name of investing. This
makes the subject of investment very complex.
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1.2 Why Should One Invest?
One needs to invest to:
a. 'arn return on your idle resources
b. *enerate a specified sum of money for a specific goal in life
c. +ake a provision for an uncertain future
ne of the important reasons why one needs to invest wisely is to meet
the cost of Inflation. Inflation is the rate at which the cost of living
increases. The cost of living is simply what it costs to buy the goods and
services you need to live. Inflation causes money to lose value because
it will not buy the same amount of a good or a service in the future as it
does now or did in the past. -or example, if there was a / inflation
rate for the next 01 years, a 2s. 311 purchase today would cost 2s. 403
in 01 years. This is why it is important to consider inflation as a factor
in any long5term investment strategy. 2emember to look at an
investment6s 6real6 rate of return, which is the return after inflation. The
aim of investments should be to provide a return above the inflation rate
to ensure that the investment does not decrease in value. -or example, if
the annual inflation rate is /, then the investment will need to earn
more than / to ensure it increases in value. If the after5tax return on
your investment is less than the inflation rate, then your assets have
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actually decreased in value! that is, they won6t buy as much today as
they did last year.
1.3 Investing Is a Plan
It is not a product or a procedure. It is a very personal plan. n
individual has to decide what his goals are and how he can go from one
level of comfort to another he would have certain resources coming to
him and certain commitments to be fulfilled. person is able to earn
when he is young. These earnings need to be invested wisely so that in
old age when a person7s capacity to earn diminishes, he can fall back
on his investments. Therefore, he needs to have a clear picture of his
financials before making an investment plan.
Example: Take the case of working couple, aged 41, with two school
going children5a son and a daughter. t present they live a very
comfortable life. (ut they need to plan for the future and a very
comfortable life. (ut they need to plan for the future expenses. The
children will want to go in for higher studies within next 8531 years.
They will need to be married. The family might need a bigger house or
there could be some major illness in the family.
ll these expenses will have to be met. The needs will increase but the
income may not keep the pace. If one does not plan for these expenses
one may not be able to achieve the milestones as and when they come.
#o this couple needs to estimate their income flow and visuali9e their
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expenses. n investment plan will help to plan for eventualities in the
future.
If one is at comfort level :7. -rom there one needs to go to a higher
comfort level :(7. to do that one would need different types of
investment vehicles like stocks, bonds, real estate, etc. one would
choose the investment vehicles according to one7s needs. -igure explain
this
Figure
1.6 Factos !""ecting Investment #ecisions
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&(!* (S+!+(
'O,,O#I+I(S
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,%+%!* F%$#S
S+O'S
A
B
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)O*#
&(!* (S+!+(
'O,,O#I+I(S
-O$#S
,%+%!* F%$#S
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A
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(efore you begin investing, it7s helpful to understand some of the
factors that will affect your investment decisions, such as&
2isk
"iquidity
Time $ori9on
Total 2eturn
;iversification
Tax )onsequences
2upee )ost veraging
Ris!
2isk in investments can take various forms.
"i#uidity:
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;ifferent investors have different time frames in which to achieve their
investment objectives. *enerally, young investors with long time
hori9ons should be able to assume greater risks because they have more
time to offset any losses with the higher return potential of
investments with greater risk. lder investors, however, often
choose to reduce risk because they have less time to recoup losses.
$otal Return!
ll investments provide one or a combination of two different types of
returns to investors 5 income or growth. Income is the dividend earnedfrom stocks. *rowth is the price appreciation of the security. The total
return of an investment is the combination of income and growth
reali9ed over a given time period. In selecting investments based
upon their expected total return, you should understand which portion
is generated from income and which from growth. =sually, the
greater the reliance on income, the lower the market risk but the
greater the long5term purchasing power >or inflationary? risk.
'iversification!
(uilding a diversified portfolio with securities spread across different
investment classes can help you avoid the risk of having all of your eggs
in one basket. (y mixing industries and types of assets, you spread your
risk. particular market condition may have less impact if your
portfolio consists of a wide assortment of securities than if you
purchase only one type of security. +ost beginning investors don6t
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have sufficient capital to properly diversify their portfolio by
purchasing individual securities. Investing in mutual funds allows
you to buy a professionally managed, diversified portfolio with
relatively small rupee amounts. In addition, many mutual funds allow
you to take advantage of rupee cost averaging by investing at regular
intervals.
(ote! )utual fund investing involves ris. *our principal and
investment return in a mutual fund +ill fluctuate in value. *our
investment, +hen redeemed, may be +orth more or less than the
original cost.
$ax onse#uences!
@ot all investment returns are subject to the same taxation. #hort term
and long term returns are taxed at different capital gains rates or even
taxed as business income. The taxation policy should be kept in mind
while deciding which investments to make.
Rupee ost -veraging!
2upee cost averaging, the practice of committing a fixed amount of
money to an investment program on a regular basis, is a popular
practice with many long5term investors. (y investing a set amount
regularly >usually monthly or quarterly?, investors are able to avoid
the pitfalls of trying to time market peaks and valleys. lso, because
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the amount of the investments is set, investors who practice rupee cost
averaging buy more shares of a stock or mutual fund when they are less
costly and fewer shares when they are more expensive. "ike any
investment strategy, rupee cost averaging doesn6t guarantee a profit or
protect against loss in a declining market. (ecause rupee cost
averaging requires continuous investment regardless of fluctuating
prices, you should consider your financial and emotional ability to
continue the program through both rising and declining markets.
1. What Investing Is $ot?
Investing is @T gambling.
*ambling is putting money at
risk by betting on an uncertain
outcome with the hope that you
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might win money. %art of the confusion between investing and
gambling, however, may come from the way some people use investment
vehicles.
-or example, it could be argued that buying a stock based on a
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ne may invest in!
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I$(S+,($+
!($%(S
P45SI'!*
!SS(+S
FI$!$'I!*
!SS(+S
REAL ESTATE
GOLD
COMMODITIES
OTHERS
SHORT TERM LONG TERM
S!I$) -!$ !/'
,O$(5 ,!&(+
FI(# #(POSI+
WI+4 -!$S
POS+ OFFI'(
S!I$)S
P%-*I'
P&OI#($+
F%$#
'O,P!$5 FI(#
#(POSI+
,%+%!* F%$#S
-O$#S
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Physical assets like real estate, goldBjeweler, commodities
etc. andBor
Financial assets such as fixed deposits with banks, small saving
instruments with post offices, insuranceBprovidentBpension fund
etc. or securities market related instruments like shares, bonds,
debentures etc.
/hat are various 0hort1term financial options available for
investment2
(roadly speaking, savings bank account, money marketBliquid funds
and fixed deposits with banks may be considered as short5term financial
investment options&
0avings 3an -ccount
#avings (ank ccount is often the first banking product people use,
which offers low interest >C/ 5 D/ p.a.?, making them only marginally
better than fixed deposits.
)oney )aret or "i#uid Funds
+oney +arket or "iquid -unds are a speciali9ed form of mutual funds
that invest in extremely short5term fixed income instruments and
thereby provide easy liquidity. =nlike most mutual funds, money market
funds are primarily oriented towards protecting your capital and then,
aim to maximi9e returns. +oney market funds usually yield better
returns than savings accounts, but lower than bank fixed deposits.
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Fixed 'eposits +ith 3ans
-ixed ;eposits with (anks are also referred to as term deposits and
minimum investment period for bank -;s is 41 days. -ixed ;eposits
with banks are for investors with low risk appetite, and may be
considered for 530 months investment period as normally interest on
less than months bank -;s is likely to be lower than money market
fund returns.
/hat are various "ong1term financial options available for
investment2
%ost ffice #avings #chemes, %ublic %rovident -und, )ompany -ixed
;eposits, (onds and ;ebentures, +utual -unds etc.
Post ffice 0avings!
%ost ffice +onthly Income #cheme is a low risk saving instrument,
which can be availed through any post office. It provides an interest
rate of E/ per annum, which is paid monthly. +inimum amount, which
can be invested, is 2s. 3,111B5 and additional investment in multiples of
3,111B5. +aximum amount is 2s. 4, 11,111B5 >if #ingle? or 2s., 11,111B5
>if held jointly? during a year. It has a maturity period of years.
%remature withdrawal is permitted if deposit is more than one year old.
deduction of D/ is levied from the principal amount if withdrawn
prematurely.
Public Provident Fund!
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long term savings instrument with a maturity of 3D years and interest
payable at E/ per annum compounded annually. %%- account can
be opened through a nationali9ed bank at anytime during the year and
is open all through the year for depositing money. Tax benefits can be
availed for the amount invested and interest accrued is tax5free.
withdrawal is permissible every year from the seventh financial year of
the date of opening of the account and the amount of withdrawal will be
limited to D1/ of the balance at credit at the end of the Cth year
immediately preceding the year in which the amount is withdrawn or at
the end of the preceding year whichever is lower the amount of loan if
any.
ompany Fixed 'eposits!
These are short5term >six months? to medium5term >three to five years?
borrowings by companies at a fixed rate of interest which is payable
monthly, quarterly, semi5annually or annually. They can also be
cumulative fixed deposits where the entire principal along with the
interest is paid at the end of the loan period. The rate of interest varies
between 5F/ per annum for company -;s. The interest received is
after deduction of taxes. (onds& It is a fixed income >debt? instrument
issued for a period of more than one year with the purpose of raising
capital. The central or state government, corporations and similar
institutions sell bonds. bond is generally a promise to repay the
principal along with a fixed rate of interest on a specified date, called
the +aturity ;ate.
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)utual Funds!
These are funds operated by an investment company which raises
money from the public and invests in a group of assets >shares,
debentures etc.?, in accordance with a stated set of objectives. It is a
substitute for those who are unable to invest directly in equities or debt
because of resource, time or knowledge constraints. (enefits include
professional money management, buying in small amounts and
diversification. +utual fund units are issued and redeemed by the -und
+anagement )ompany based on the fund6s net asset value >@G?,
which is determined at the end of each trading session. @G is
calculated as the value of all the shares held by the fund, minus
expenses, divided by the number of units issued. +utual -unds are
usually long term investment vehicle though there some categories of
mutual funds, such as money market mutual funds which are short term
instruments.
3ond!
(ond is a negotiable certificate evidencing indebtedness. It is normally
unsecured. debt security is generally issued by a company,
municipality or government agency. bond investor lends money to the
issuer and in exchange, the issuer promises to repay the loan amount on
a specified maturity date. The issuer usually pays the bond holder15 | P a g e
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periodic interest payments over the life of the loan. The various types of
(onds are as follows&
7eo 'ouon -ond: (ond issued at a discount and repaid at a
face value. @o periodic interest is paid. The difference between
the issue price and redemption price represents the return to the
holder. The buyer of these bonds receives only one payment, at
the maturity of the bond.
'onvetile -ond: bond giving the investor the option to
convert the bond into equity at a fixed conversion price.
+easuy -ills: #hort5term >up to one year? bearer discount
security issued by government as a means of financing their cash
requirements.
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FIXED
DEPOSITS
MUTUAL
FUNDS
BONDS
COMMODITY
GOLD
STOCKS
REAL
ESTATE
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E#uities....$oday4s home for tomorro+4s money
2.1 What !e Shae / Stoc8 / (9uity?
share is one of a finite number of equal portions in the capital
of a company, mutual fund or limited partnership, entitling the owner
to a proportion of distributed, non5reinvested profits known as
dividends and to a portion of the value of the company in case of
liquidation. ;ividends are not guaranteed. They may be increased if the
company performs well, but they may also be reduced or
eliminated if the company performs poorly. #o when you purchase
shares, you become part owner of a company. s an owner, you are
usually entitled to voting rights on the board of directors and corporate
policy.
2.2 Why Should One Invest In (9uities?
lthough past performance cannot guarantee
future market results, #tocks, historically have
outperformed all other long5term financial
assets. They are the only the financial asset that
has significantly outpaced inflation over time.
Investors buy stock to potentially increase their
return on investment in one or both of two ways&
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'ividend Payments - +any companies pay portions of their
annual profits to stockholders in the form of dividends. #tocks
with consistent track record of paying attractive dividends are
known as income stocks because investors often buy these
stocks to receive the income by way of dividends in addition to
being invested in the company6s future growth prospects.
3y 0elling the stoc for more than they originally paid 5
#ome companies reinvest most of their profits back into the
business in order to expand. #tocks of companies with sales
and earnings that are expanding faster than the general
economy and faster than the average company are called
growth stocks because investors expect the company to grow
and expect the stock price to grow with it. When such
increase in the stock price is witnessed, investors can sell their
shares for an amount greater than their purchase price, thus
pocketing the difference as profit.
2.3 4o One 'an ,a8e Po"its -y Investing (9uities?
'very year, when the company draws up its accounts, the company
profit for the year will become apparent. The directors of the company
will decide how much of the profit to plough back into the company, and
how much to distribute to the owners of the equity 5 i.e. the
shareholders. The profit is then distributed as an amount per share 5
called a dividend. )ompanies like to increase their dividend year on
year.
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s well as the profit from the dividends, equity share owners will also
benefit if the share price rises. This means that the shareholders can
sell their equity shares at a higher price than they were bought
originally.
#o the investment return from equity shares comes from two sources& 5
the dividends paid from the profits of the company, and the rise in the
equity share price. This return, combining these two sources of profit,
has comfortably exceeded the rate of inflation in the pas
2. +yes o" (9uity
There are a number of types of equity, each with different
characteristics.
ommon stoc or ordinary shares
)ommon stock, as it is known in the =nited #tates, or ordinary shares,according to (ritish terminology, is the most important form of equity
investment. n owner of common stock is part owner of the enterprise
and is entitled to vote on certain important matters, including the
selection of directors. )ommon stock holders benefit most from
improvement in the firm6s business prospects. (ut they have a claim on
the firm6s income and assets only after all creditors and all preferred
stock holders receive payment. #ome firms have more than one class of
common stock, in which case the stock of one class may be entitled to
greater voting rights, or to larger dividends, than stock of another class.
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This is often the case with family owned firms which sell stock to the
public in a way that enables the family to maintain control through its
ownership of stock with superior voting rights.
Preferred stoc
lso called preference shares, preferred stock is more akin to bonds
than to common stock. "ike bonds, preferred stock offers specified
payments on specified dates. %referred stock appeals to issuers because
the dividend remains constant for as long as the stock is outstanding,
which may be in perpetuity. #ome investors favour preferred stock overbonds because the periodic payments are formally considered dividends
rather than interest payments, and may therefore offer tax advantages.
The issuer is obliged to pay dividends to preferred stock holders before
paying dividends to common shareholders. If the preferred stock is
cumulative, unpaid dividends may accrue until preferred stock holders
have received full payment. In the case of non cumulative preferred
stock, preferred stock holders may be able to impose significant
restrictions on the firm in the event of a missed dividend.
onvertible preferred stoc
This may be converted into common stock under certain conditions,
usually at a predetermined price or within a predetermined time period.
)onversion is always at the owner6s option and cannot be required by
the issuer. )onvertible preferred stock is similar to convertible bonds.
/arrants
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Warrants offer the holder the opportunity to purchase a firm6s common
stock during a specified time period in future, at a predetermined price,
known as the exercise price or strike price. The tangible value of a
warrant is the market price of the stock less the strike price. If the
tangible value when the warrants are exercisable is 9ero or less the
warrants have no value, as the stock can be acquired more cheaply in
the open market. firm may sell warrants directly, but more often they
are incorporated into other securities, such as preferred stock or bonds.
Warrants are created and sold by the firm that issues the underlying
stock. In a rights offering, warrants are allotted to existing stock
holders in proportion to their current holdings. If all shareholders
subscribe to the offering the firm6s total capital will increase, but each
stock holder6s proportionate ownership will not change. The stock
holder is free not to subscribe to the offering or to pass the rights to
others. In the =H a stock holder chooses not to subscribe by filing a
letter of renunciation with the issuer.
Issuing shares
-ew businesses begin with freely traded shares. +ost are initially
owned by an individual, a small group of investors >such as partners or
venture capitalists? or an established firm which has created a new
subsidiary. In most countries, a firm may not sell shares to the public
until it has been in operation for a specified period. #ome countries bar
firms from selling shares until their business is profitable, a
requirement that can make it difficult for young firms to raise capital.
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Flotation
-lotation, also known as an initial public offering >ipo?, is the process
by which a firm sells its shares to the public. This may occur for a
number of reasons. The firm may require additional capital to take
advantage of new opportunities. #ome of the firm6s original investors
may want it to buy them out so they can put their money to work
elsewhere. The firm may also wish to use shares to compensate
employees, and a public share listing makes this easier as the value of
the shares is freely established in the market place. The flotation need
not involve all or even the majority of the firm6s shares.
Private offering
2ather than selling its shares to the public, a firm may raise equity
through a private offering. nly sophisticated investors, such as money
management firms and wealthy individuals, are normally allowed to
purchase shares in a private offering, as disclosures about the risks
involved are fewer than in a public offering. #hares purchased in a
private offering are common equity and are therefore entitled to vote on
corporate matters and to receive a dividend, but they usually cannot be
resold in the public markets for a specified period of time.
0econdary offering
secondary offering occurs when a firm whose shares are already
traded publicly sells additional shares to the public called a follow on
offering in the =H or when one or more investors holding a large
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proportion of a firm6s shares offers those shares for sale to the public.
-irms that already have publicly traded shares may float additional
shares to increase their total capital. If this leaves existing shareholders
owning smaller proportions of the firm than they owned previously, it is
said to dilute their holdings. If the secondary offering involves shares
owned by investors, the proceeds of a secondary offering go to the
investors whose shares are sold, not to the issuer.
2.0 !dvantages O" Investing In (9uity Funds:
The main advantageso e!"it# sha$es a$e: -
Investment!
The funding is committed to your business and your intended projects.
Investors only reali9e their investment if the business is doing well,
E.g.through flotation or a sale to new investors.
Resources!
2esources for your business. The right business angels and venture
capitalists can bring valuable skills, contacts and experience to your
business and can assist with strategy and key decision making.
3usiness 0uccess!
In common with you, investors have a vested interest in the business6
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success, i.e. its growth, profitability and increase in value. Investors
are often prepared to provide follow5up funding as the business
grows.
2.6 #isadvantages O" Investing In (9uity Funds:
The %$in&i%a' disadvantages o e!"it# sha$es a$e: -
Raising E#uity Finance!
2aising equity finance is demanding, costly and time5consuming. Aour
business may suffer as you devote time to the deal. %otential investors
will seek background information on you and your business 5 they will
closely scrutini9e past results and forecasts and will probe the
management team. $owever, many businesses find this discipline
useful regardless of any funding.
'epending n the Investors!
;epending on the investor, you will be subject to varying degrees of
influence over the management of your business and making of major
decisions.
)anagement $ime!
Aou will have to invest management time to provide regular
information for the investor to monitor.
'iluted:
Aour share in the business will be diluted. $owever, your share may
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be of a much larger business because of the funding.
"egal and Regulatory Issues!
There can be legal and regulatory issues to comply with when raising
finance, e.g.when promoting investments.
2.; &is8 !ssociated With (9uity ,a8et
Ris( in investments &an )e o the o''o*ing t#%es:
)aret Ris or 5olatility& This refers to
the fluctuation in the value of
investments due to changes in the price of
the stocks included in an investor7s
portfolio which could be caused by a
variety of factors such as performance ofthe company, policy announcements,
political factors etc. 'ven a portfolio of
well5diversified assets cannot escape all risk.
Inflationary ris&
lso known as purchasing power risk, this is the decline in the
purchasing power of money over time, so that even the
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eroded that 2s.311 so that it is worth only 2s.E.
Investment or credit ris&
This is the possibility that a company in which an investor is invested
in may not be sufficiently profitable to remain in business.
2.< &etuns !ssociated With (9uity ,a8et
#ince 3FF1 till date, Indian stock market has returned about 38/ toinvestors on an average in terms of increase in share prices or capital
appreciation annually. (esides that on average stocks have paid 3.D/
dividend annually. ;ividend is a percentage of the face value of a share that
a company returns to its shareholders from its annual profits. )ompared to
most other forms of investments, investing in equity shares offers the highest
rate of return, if invested over a longer duration.
3.1 What Is ,utual Fund?
mutual fund is just the
connecting bridge or a financial
intermediary that allows a group
of investors to pool their money
together with a predetermined
investment objective. The mutual
fund will have a fund manager
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who is responsible for investing the gathered money into specific
securities >stocks or bonds?. When you invest in a mutual fund, you are
buying units or portions of the mutual fund and thus on investing
becomes a shareholder or unit holder of the fund.
+utual funds are considered as one of the best available investments as
compare to others they are very cost efficient and also easy to invest in,
thus by pooling money together in a mutual fund, investors can
purchase stocks or bonds with much lower trading costs than if they
tried to do it on their own. (ut the biggest advantage to mutual funds is
diversification, by minimi9ing risk maximi9ing returns.
There are various investment avenues available to an investor such as
real5estate, bank deposits, post office deposits, shares, debentures,
bonds etc. mutual fund is one more type of Investment venue
available to investors. There are many reasons why investors prefer
mutual funds. (uying shares directly from the market is one way of
investing. (ut this requires spending time to find out the performance of
the company whose share is being purchased, understanding the future
business prospects of the company, finding out the track record of the
promoters and the dividend, bonus issue history of the company etc. n
informed investor needs to do research before investing. $owever,
many investors find it cumbersome and time consuming to pore over so
much of information, get access to so much of details before investing inthe shares. Investors therefore prefer the mutual fund route. They
invest in a mutual fund scheme which in turn takes the responsibility of
investing in stocks and shares after due analysis and research. The
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investor need not bother with researching hundreds of stocks. It leaves
it to the mutual fund and its professional fund management team.
nother reason why investors prefer mutual funds is because mutual
funds offer diversification. n investor7s money is invested by the
mutual fund in a variety of shares, bonds and other securities thus
diversifying the investor7s portfolio across different companies and
sectors. This diversification helps in reducing the overall risk of the
portfolio. It is also less expensive to invest in a mutual fund since the
minimum investment amount in mutual fund units is fairly low >2s. D11
or so?. With 2s. D11 an investor may be able to buy only a few stocks
and not get the desired diversification. These are some of the reasons
why mutual funds have gained in popularity over the years.
'iversification f Funds
;iversification is nothing but spreading out your money across available or
different types of investments. (y choosing to diversify respective
investment holdings reduces risk tremendously up to certain extent. The
most basic level of diversification is to buy multiple stocks rather than just
one stock. +utual funds are set up to buy many stocks. (eyond that, you
can diversify even more by purchasing different kinds of stocks, then adding
bonds, then international, and so on. It could take you weeks to buy all
these investments, but if you purchased a few mutual funds you could be
done in a few hours because mutual funds automatically diversify in a
predetermined category of investments >i.e. 5 growth companies, emerging
or mid si9e companies, low5grade corporate bonds, etc?.
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3.2 Who ,anages Investo=s ,oney?
This is the role of the sset +anagement )ompany >the Third tier?.
Trustees appoint the sset +anagement )ompany >+)?, to manage
investor7s money. The +) in return charges a fee for the services
provided and this fee is borne by the investors as it is deducted from the
money collected from them. The +)7s (oard of ;irectors must have
at least D1/ of ;irectors who are independent directors. The +) hasto be approved by #'(I. The +) functions under the supervision of its
(oard of ;irectors, and also under the direction of the Trustees and
#'(I. It is the +), which in the name of the Trust, floats new schemes
and manages these schemes by buying and selling securities. In order to
do this the +) needs to follow all rules and E regulations prescribed
by #'(I and as per the Investment +anagement greement it signs with
the Trustees.
If any fund manager, analyst intends to buyB sell some securities, the
permission of the )ompliance fficer is a must. compliance fficer is
one of the most important persons in the +). Whenever the fund
intends to launch a new scheme, the +) has to submit a ;raft ffer
;ocument to #'(I. This draft offer document, after getting #'(I
approval becomes the offer document of the scheme. The ffer
;ocument >;? is a legal document and investors rely upon the
information provided in the ; for investing in the mutual fund scheme.
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The )ompliance fficer has to sign the ;ue ;iligence )ertificate in the
;. This certificate says that all the information provided inside the
; is true and correct. This ensures that there is accountability and
somebody is responsible for the ;. In case there is no compliance
officer, then senior executives like )', )hairman of the +) has to
sign the due diligence certificate. The certificate ensures that the +)
takes responsibility of the ; and its contents.
3.3 Who Is ! 'ustodian?
custodian7s role is safe keeping of physical securities and also
keeping a tab on the corporate actions like rights, bonus and dividends
declared by the companies in which the fund has invested. The
)ustodian is appointed by the (oard of Trustees. The custodian also
participates in a clearing and settlement system through approved
depository companies on behalf of mutual funds, in case of
demateriali9ed securities. In India today, securities >and units of mutual
funds? are no longer held in physical form but mostly in demateriali9ed
form with the ;epositories. The holdings are held in the ;epository
through ;epository %articipants >;%s?. nly the physical securities are
held by the )ustodian. The deliveries and receipt of units of a mutualfund are done by the custodian or a depository participant at the
instruction of the +) and under the overall direction and
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responsibility of the Trustees. 2egulations provide that the #ponsor and
the )ustodian must be separate entities.
3. What Is +he &ole O" +he !,'?
The role of the +) is to manage investor7s money on a day to day
basis. Thus it is imperative that people with the highest integrity are
involved with this activity. The +) cannot deal with a single broker
beyond a certain limit of transactions. The +) cannot act as a Trustee
for some other +utual -und. The responsibility of preparing the ;
lies with the +). ppointments of intermediaries like independent
financial advisors >I-s?, national and regional distributors, banks, etc.
is also done by the +). -inally, it is the +) which is responsible for
the acts of its employees and service providers.
s can be seen, it is the +) that does all the operations. ll activities
by the +) are done under the name of the Trust, i.e. the mutual fund.
The +) charges a fee for providing its services. #'(I has prescribedlimits for this. This fee is borne by the investor as the fee is charged to
the scheme, in fact, the fee is charged as a percentage of the scheme7s
net assets. n important point to note here is that this fee is included in
the overall expenses permitted by #'(I. There is a maximum limit to
the amount that can be charged as expense to the scheme, and this fee
has to be within that limit. Thus regulations ensure that beyond a
certain limit, investor7s money is not used for meeting expenses.
/oring of )utual Fund
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Regulatory -uthorities
To protect the interest of the investors, #'(I formulates policies and
regulates the mutual funds. It notified regulations in 3FF4 >fully revised in
3FF? and issues guidelines from time to time. +- either promoted by
public or by private sector entities including one promoted by foreign
entities is governed by these 2egulations.
#'(I approved sset +anagement )ompany >+)? manages the funds by
making investments in various types of securities. )ustodian, registered
with #'(I, holds the securities of various schemes of the fund in its custody.
ccording to #'(I 2egulations, two thirds of the directors of Trustee)ompany or board of trustees must be independent.
The ssociation of +utual -unds in India >+-I? reassures the investors in
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units of mutual funds that the mutual funds function within the strict
regulatory framework. Its objective is to increase public awareness of the
mutual fund industry.
+-I also is engaged in upgrading professional standards and in
promoting best industry practices in diverse areas such as valuation,
disclosure, transparency etc.
3.0 !ltenative Way +o Investment In ,utual Funds > SIP
#I% is a way of investing in +utual -unds where you pay a fixed amount
each month for a fixed tenure.
"ike If you take an #I% of D,111 for 3 year on Jan 3, 011E, you will be
paying 2s D,111 per month for next 30 months.
%lease understand that it7s not a financial instrument, but a way of
investing in mutual funds, some people confuse #I% with %%-, @#), and
mutual funds, they think they can invest in K#I%L, it7s just a mode of
investment.
/hen to invest in mutual funds through 0IP2
Investment through #I% must be done only when markets are uncertain or
very volatile, when you don7t know which side they are headed to.
#I% will be beneficial only if markets really are volatile or going down after
you invested. If it happens that markets turns bullish and starts going up, in
that case #I% will not be beneficial and will give less return compared to
lump sum investment in start.
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-'5-($-6E0
+akes you a disciplined Investor
The other advantage of #I% is that it makes you a disciplined investor. nce
you start #I%, each month you have to contribute certain money in mutual
fund and that habit is cultivated.
'I0-'5-($-6E0:
5 It will not work in bullish markets or when market goes up over time
When market goes up and keeps growing over time , the units bought every
time will be at high price then the previous one, which will ultimately
bring the average cost up , compared to the lump sum investment at the
start.
1 In case of tax saving fund, the loc in period gets extended for every
investment.
Tax saver mutual funds lock your money for 4 yrs, When you invest
through #I%, each of your investment is locked separately for 4 yrs from
the date of investment. #o if you pay your first installment on Jan 0118 , it
will locked till Jan 3 0131 , then the installment paid on -eb 3 , 0118 will
be locked till -eb 3 , 0131 and like this each installment will be locked
with the gap of 3 month
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3.6 +yes O" ,utual Funds Schemes In India
Wide variety of +utual -und #chemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. thus mutual
funds has Gariety of flavors, (eing a collection of many stocks, an investors
can go for picking a mutual fund might be easy. There are over hundreds of
mutual funds scheme to choose from. It is easier to think of mutual funds in
categories, mentioned below.
verview of existing schemes existed in mutual fund category& (A
#T2=)T=2'
pen 1 Ended 0chemes!
n open5end fund is one that is available for subscription all through
the year. These do not have a fixed maturity. Investors can
conveniently buy and sell units at @et sset Galue >
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the net asset value >@G? of the scheme on account of demand and
supply situation, expectations of unit holder and other market factors.
lternatively some close5ended schemes provide an additional option
of selling the units directly to the +utual -und through periodic
repurchase at the schemes @G! however one cannot buy units and
can only sell units during the liquidity window. #'(I 2egulations
ensure that at least one of the two exit routes is provided to the
investor.
Interval 0chemes!
Interval #chemes are that scheme, which combines the features ofopen5ended and close5ended schemes. The units may be traded on the
stock exchange or may be open for sale or redemption during pre5
determined intervals at @G related prices.
Thus investors choose mutual funds as their primary means of investing, as
+utual funds provide professional management, diversification,
convenience and liquidity. That doesn7t mean mutual fund investments risk
free. This is because the money that is pooled in are not invested only in
debts funds which are less riskier but are also invested in the stock markets
which involves a higher risk but can expect higher returns. $edge fund
involves a very high risk since it is mostly traded in the derivatives market
which is considered very volatile.
vervie+ of existing schemes existed in mutual fund category! 3*
(-$7RE
E#uity fund!
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These funds invest a maximum part of their corpus into equities holdings.
The structure of the fund may vary different for different schemes and the
fund manager7s outlook on different stocks. The 'quity -unds are sub5
classified depending upon their investment objective, as follows&
;iversified 'quity -unds
+id5)ap -unds
#ector #pecific -unds
Tax #avings -unds >'"##?
'quity investments are meant for a longer time hori9on, thus 'quity funds
rank high on the risk5return matrix.
'ebt funds!
The objective of these -unds is to invest in debt papers. *overnment
authorities, private companies, banks and financial institutions are some of
the major issuers of debt papers. (y investing in debt instruments, these
funds ensure low risk and provide stable income to the investors. ;ebt funds
are further classified as&
6ilt Funds! Invest their corpus in securities issued by *overnment,
popularly known as *overnment of India debt papers. These -unds
carry 9ero ;efault risk but are associated with Interest 2ate risk.
These schemes are safer as they invest in papers backed by
*overnment. Income Funds!Invest a major portion into various debt instruments
such as bonds, corporate debentures and *overnment securities. )IPs:Invests maximum of their total corpus in debt instruments
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while they take minimum exposure in equities. It gets benefit of both
equity and debt market. These scheme ranks slightly high on the risk5
return matrix when compared with other debt schemes.
0hort $erm Plans 80$Ps9!+eant for investment hori9on for three to
six months. These funds primarily invest in short term papers like
)ertificate of ;eposits >);s? and )ommercial %apers >)%s?. #ome
portion of the corpus is also invested in corporate debentures.
"i#uid Funds:lso known as +oney +arket #chemes, These funds
provides easy liquidity and preservation of capital. These schemes
invest in short5term instruments like Treasury (ills, inter5bank call
money market, )%s and );s. These funds are meant for short5term
cash management of corporate houses and are meant for an
investment hori9on of 3day to 4 months. These schemes rank low on
risk5return matrix and are considered to be the safest amongst all
categories of mutual funds.
3alanced funds!
s the name suggest they, are a mix of both equity and debt funds. They
invest in both equities and fixed income securities, which are in line with
pre5defined investment objective of the scheme. These schemes aim to
provide investors with the best of both the worlds. 'quity part provides
growth and the debt part provides stability in returns.
-urther the mutual funds can be broadly classified on the basis of
investment parameter vi9! 'ach category of funds is backed by an
investment philosophy, which is pre5defined in the objectives of the fund.
The investor can align his own investment needs with the funds objective
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and invest accordingly.
3y investment ob:ective!
6ro+th 0chemes!*rowth #chemes are also known as equity
schemes. The aim of these schemes is to provide capital appreciation
over medium to long term. These schemes normally invest a major
part of their fund in equities and are willing to bear short5term
decline in value for possible future appreciation.
Income 0chemes!Income #chemes are also known as debt schemes.The aim of these schemes is to provide regular and steady income to
investors. These schemes generally invest in fixed income securities
such as bonds and corporate debentures. )apital appreciation in
such schemes may be limited.
3alanced 0chemes!(alanced #chemes aim to provide both growth
and income by periodically distributing a part of the income and
capital gains they earn. These schemes invest in both shares and fixed
income securities, in the proportion indicated in their offer
documents >normally D1&D1?.
)oney )aret 0chemes! +oney +arket #chemes aim to provide
easy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short5term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter5
bank call money.ther schemes
$ax 0aving 0chemes!
Tax5saving schemes offer tax rebates to the investors under tax laws
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prescribed from time to time. =nder #ec.EE of the Income Tax ct,
contributions made to any 'quity "inked #avings #cheme >'"##? are
eligible for rebate.
Index 0chemes!Index schemes attempt to replicate the performance of a particular index
such as the (#' #ensex or the @#' D1. The portfolio of these schemes will
consist of only those stocks that constitute the index. The percentage of each
stock to the total holding will be identical to the stocks index weight age.
nd hence, the returns from such schemes would be more or less equivalent
to those of the Index.
0ector 0pecific 0chemes!
These are the fundsBschemes which invest in the securities of only those
sectors or industries as specified in the offer documents. '.g.
%harmaceuticals, #oftware, -ast +oving )onsumer *oods >-+)*?,
%etroleum stocks, etc. The returns in these funds are dependent on the
performance of the respective sectorsBindustries. While these funds may give
higher returns, they are more risky compared to diversified funds. Investorsneed to keep a watch on the performance of those sectorsBindustries and
must exit at an appropriate time.
Pros ; cons of investing in mutual funds!
-or investments in mutual fund, one must keep in mind about the %ros and
cons of investments in mutual fund.
3.; !dvantages O" Investing ,utual Funds:
Professional )anagement> The basic advantage of funds is that, they
are professional managed, by well qualified professional. Investors
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purchase funds because they do not have the time or the expertise to
manage their own portfolio. mutual fund is considered to be
relatively less expensive way to make and monitor their investments.
'iversification >%urchasing units in a mutual fund instead of buying
individual stocks or bonds, the investors risk is spread out and
minimi9ed 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 minimi9ed by gains in others.
Economies of 0cale >+utual fund buy and sell large amounts of
securities at a time, thus help to reducing transaction costs, and help tobring down the average cost of the unit for their investors.
"i#uidity 1Just like an individual stock, mutual fund also allows
investors to liquidate their holdings as and when they want.
0implicity >Investments in mutual fund is considered to be easy,
compare to other available instruments in the market, and the
minimum investment is small. +ost +) also have automatic purchase
plans whereby as little as 2s. 0111, where #I% start with just 2s.D1 per
month basis.
3.< #isadvantages O" Investing ,utual Funds:
Professional )anagement- #ome funds don7t perform in neither the
market, as their management is not dynamic enough to explore theavailable opportunity in the market, thus many investors debate over
whether or not the so5called professionals are any better than mutual
fund or investor himself, for picking up stocks.
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ostsM The biggest source of +) 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.
'ilution- (ecause funds have small holdings across different
companies, high returns from a few investments often don6t make much
difference on the overall return. ;ilution is also the result of a
successful fund getting too big. When money poursinto funds that have
had strong success, the manager often has trouble finding a good
investment for all the new money. $axes- when making decisions about your money, fund managers
don6t consider your personal tax situation. -or example, when a fund
manager sells a security, a capital5gain 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.
3. +he +yes O" &is8s !ssociated With ,utual Funds:
2isk is an inherent aspect of every form of investment. -or mutual fund
investments, risks would include variability, or period5by5period
fluctuations in total return. The value of the scheme6s investments may
be affected by factors affecting capital markets such as price and
volume volatility in the stock markets, interest rates, currency exchange
rates, foreign investment, changes in government policy, political,
economic or other developments.
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)aret Ris&t times the prices or yields of all the securities in
a particular market rise or fall due to broad outside influences.
When this happens, the stock prices of both an outstanding,
highly profitable company and a fledgling corporation may be
affected. This change in price is due to
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Investment Riss!In the sect oral fund schemes, investments will
be predominantly in equities of select companies in the particular
sectors. ccordingly, the @G of the schemes are linked to the
equity performance of such companies and may be more volatile
than a more diversified portfolio of equities.
"i#uidity Ris: Thinly traded securities carry the danger of not
being easily saleable at or near their real values. The fund
manager may therefore be unable to quickly sell an illiquid bond
and this might affect the price of the fund unfavorably. "iquidity
risk is characteristic of the Indian fixed income market.
hanges in the 6overnment Policy: )hanges in *overnment
policy especially in regard to the tax benefits may impact the
business prospects of the companies leading to an impact on the
investments made by the fund.
3.1@ &etuns "om ,utual Funds:
*enerally, +utual -unds do not offer guaranteed returns to investors.
lthough, #'(I regulations allow +utual -unds to offer guaranteed
returns subject to the -und meeting certain conditions, most -unds do
not offer such guarantees. In case of a guaranteed return scheme, the
sponsor or the +), guarantees a minimum level of return and makes
good the difference if the actual returns are less than the guaranteed
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minimum. The name of the guarantor and the manner in which the
guarantee shall be met must be disclosed in the offer document by the
+utual -und. Investments in mutual funds are not guaranteed by the
*overnment of India, the 2eserve (ank of India or any other
government bodies.
$here are three +ays, +here the total returns provided by mutual
funds can be en:oyed by investors!
Income is earned from dividends on stocks and interest on bonds.
fund pays out nearly all income it receives over the year to fund
owners in the form of a distribution.
If the fund sells securities that have increased in price, the fund
has a capital gain. +ost funds also pass on these gains to
investors in a distribution.
If fund holdings increase in price but are not sold by the fund
manager, the fund6s shares increase in price. Aou can then sell
your mutual fund shares for a profit. -unds will also usually give
you a choice either to receive a check for distributions or to
reinvest the earnings and get more shares.
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The most unusual characteristic of a fixed deposit is that the funds cannot
be withdrawn for a specified period of time. In most cases, fixed
deposits carry duration of five years. ;uring that time, the money remainsin the account and cannot be withdrawn for any reason. Individuals,
corporate entities, and even non5profitorgani9ations that wish to set aside
funds and limit their access to the funds for a period of time often find
that fixed deposits are a simple way to accomplish this goal. s an added
benefit, the monies in the account will earn a fixed rate of interest
regardless of any fluctuations in interest ratesthat apply to other types of
accounts.
$owever, both these benefits can also turn into disadvantages under
certain circumstances. (ecause the money cannot be withdrawn until the
duration is complete, the funds cannot be used even in emergency
situations. )hanges in the going interest ratemay also rise to a point
above and beyond the interest rate applied to existing deposits. This meansaccount holders are actually earning less interest with fixed deposits than
with other types of loans and accounts.
While the interest rate on fixed deposits cannot be changed, there is
sometimes a way to work around the issue of obtaining use of funds in an
emergency situation. t times, the lending institution where
the fixed deposit is placed may be willing to extend a separate loan to the
account holder, using the fixed account as collateral. While not ideal, this
can at least make it possible to deal with the current financial crunch.
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-ixed deposits are a credible way to make a return on investmentthat is
somewhat higher than a standardsavings account. The use of
fixed deposits can also be helpful when working with various types ofcurrency. (y establishing what is known as a -oreign )urrency -ixed
;eposit or -)-;, it is possible to choose the type of currency involved in
the deposit and lock in a rate of interest. If the choice of currency is a
good one, this means the investor can enjoy a healthy fixed deposit
currency rate for the duration of the deposit and earn more than with a
standard fixed deposit strategy. $owever, going with an -)-; does
contain a slightly higher amount of risk, since the funds deposited must be
converted to the currency of choice and then converted back when the
deposit is fulfilled. If the currency did not fare well in the interim, there is
some chance of obtaining a loss, due to the changes in the rate of
exchange from the time the fixed deposit was activated until the time the
deposit is considered complete.
.2 !dvantages O" FiAed #eosits:
0afety
-;s have conventionally been the premier choice for investors with
a low risk appetite! assured returns is the key factor which attracts
investors towards deposits. #tick to -;s of the highest credit ratingi.e. those with a KL rating even if their rates seem modest vis5O5
vis those offered by company deposits.
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)ompany deposits are unsecured in nature and investing in them
would imply taking on disproportionately higher risk. If as an
investor you are open to investing in instruments involving higherrisk levels, market linked instruments like mutual funds may not be a
bad deal.
$enure
#hort tenured fixed deposits continue to be your best bet. With
interest rates on the ascent, a further hike in rates offered by fixed
deposits cannot be ruled out. "ocking your investments in longer
tenured instruments may lead to an opportunity loss. 'ven if a 45Ar
-; looks like a lucrative proposition as compared to one which
runs over a year or so, pick the short tenured one. In a rising rate
scenario, you could be more than compensated for the lower returns
at present.
"i#uidity
-ind out how your -; fares on the pre5mature encashment front i.e.
how easily can your investment be liquidated. lso enquire about
the penalty clauses, e.g. do you suffer a loss of interest andBorprincipal amount. )ompare how various -;s rank on this
parameter and pick the best deal! thereby try to minimi9e the impact
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of illiquidity which is typically associated with -;s.
Flexible investment periods!
To suit your personal needs, you can choose from an investment
period of between 3 and 1 months for fixed deposit, or between 3
week to 30 months for foreign currencies deposit. If you need your
deposit to mature on a specific date
-ccessibility!
(anks offer you access to a wide range of the world7s major
currencies to help you achieve your investment goals. Aou can even
switch from one currency to another by simply giving us your
instructions. Aour deposit can also be remitted either by draft or
telegraphic transfer.
-utomatic rene+als!
To ensure continued growth, your matured deposit will
automatically be renewed for the same period of time at the bank7s
prevailing rate. This allows you to enjoy uninterrupted interest
earnings on your principal amount invested. Aou will also have the
choice of issuing specific standing instruction regarding the renewal
of your deposit and the disposal of interest earned. In the event that
you decide to change your renewal instruction, you will need to
inform us at least 0 working days before maturity.
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Early payment of interest!
If you place your savings in -ixed ;eposit account for at least 0C
months, you can enjoy early interest payments. n receipt of yourinstructions, the interest will be credited to your operating account
on a yearly basis.
Pre1approved overdraft!
To ensure that your investment continues to grow, whilst giving you
the flexibility to satisfy any unexpected financial needs, (anks offer
you a pre5approved overdraft worth up to F1/or 311/ ;eposit
value.
redit ard!
'njoy the benefits of recognition, payment flexibility, attractive
reward points, worldwide accessibility to cash at over 11,111
T+s and many more simply by carrying a credit card. To qualify,
all you need is to maintain at least (PD,111 in your -ixed ;eposit
ccount over a 4 months period.
.3 #isadvantages O" Investing O" FiAed #eosits:>
person can withdraw money only when hisBher maturity period is
over.
person suffers a loss if heBshe try to withdraw money before
maturity period
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s compared to other investment instruments percentage of return is
less.
Ris and returns
. $o &is8 ,eans FiAed Instuments
If you want to begin investing but are not ready to take any risk, you still
have plenty of choices available in the market. -rom your traditional
bank fixed deposit, to fixed maturity plans >-+%s? of mutual funds there
are a number of instruments to choose from. #ince these instruments offera fixed return on your investment, they are known as fixed income
instruments.
#ome traditional fixed income assets are bank fixed deposits, money5back,
whole5life and endowment policies of life insurance companies, post office
saving schemes, government endorsed saving schemes like Hisan Gikas
%atra and -+%s.
-ixed income assets broadly offer an annual return of eight to nine percent
on your investment. 'xcept public provident fund >%%-?, returns from all
other instruments are subject to tax that reduces the returns of these
instruments and if you take inflation into consideration, your returns come
down even further.
That is why, when compared to equity, fixed income assets are not
considered a wealth5building tool but their strength lies in the safety of
your money. 'xperts advise that if you are looking at generating regular
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and fixed income on your investment, these assets are best suited for you.
These funds are particularly well suited for senior citi9ens, retired people
and people without a regular source of income.
Though bank fixed deposits are widely considered a safe option, however,
there have been instances when depositors have lost their savings. This is
why one must look for a bank7s track record and credibility before
investing. In case a bank goes bust, depositors can claim a maximum
compensation of 2s. 3"akh irrespective of their actual deposits.
-ixed income assets could be used to balance your portfolio as well. If you
invest a part of your funds in these instruments, you can reduce the overall
risk on your portfolio substantially. With a prudent mix of fixed income
assets and equity, you can create a robust portfolio that enhances your
wealth significantly.
.0 &etuns !ssociated With FiAed #eosits
(anks are luring customers to park their excess funds with the banks6 fixed
deposits by offering striking interest rates. $owever they are emphasi9ing
on fixed deposits with short term maturities in order to escape from giving
high interest rates in future when low interest regime is expected to
prevail. -or now the banks are offering high interest rates on short term
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deposits as compared to their long term deposits and this factor is
attracting customers to park their excess cash in short term deposits. -or
instance a 3,1115day fixed deposit with #tate (ank of India would earn31/ and a three5year fixed deposit which is only FD days more in maturity
would fetch only F/. This might look strange but banks are following an
accurate policy considering the further cuts in policy rates to be
announced by the 2(I soon. 2eserve (ank of India is likely is cut the key
policy rates in the coming few days.
RE-" E0$-$E
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0.1 Intoduction to &eal (state
2eal 'state +arket Investment involves the buying and selling of 2eal
'state for sheer profit. %rofits are
piled up slowly by renting out
2eal 'state %roperties in a cash
flow method or are generally
improved upon and resold for a
financial gain. 2eal 'state +arket
Investment makers can also
wholesale properties in order to
make profits. =sually real estate
market has a 6laggard effect6 to the
equity markets. What it means is a few monthsByear after equity markets
have rallied the real estate markets also start moving up.
The %roperty +arket in India has shown a substantial development in the
last few years and is bustling with many investors looking forward to gain
more from this apparently risk free sector. If we compare 2eal 'state to
other types of investment like mutual funds and equities, then it definitely
emerges as a safer option. The chief reason for generation of such interest
from buyers is due to the several measures taken by the government to
expand 2ealty +arket and make it attractive for buyers from India as well
as the world.
Investors sell their stocks at a profit in equity markets and invest the
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money into real estate. (ut before making investments an investor should
analy9e the market thoroughly.
$he factors an investor should loo into before investing are!
The current demand of the 2eal 'state +arket.
The future trend of the 2eal 'state +arket.
It is also important to know whether the demand is increasing,
decreasing or remaining constant.
2eal 'state +arket Investment has advantages and disadvantages at the
same time. Though it looks like the advantages are more in numbers but
the disadvantages if not taken care of can prove to be fatal.
0.2 +yes O" &eal (state:
Residential real estate
The most common form of real estate investment as it includes the property
purchased as other people6s houses. In many cases the (uyer does not
have the full purchase price for a property and must engage a lender such
as a (ank, -inance company or %rivate "ender. $erein the lender is the
investor as only the lender stands to gain returns from it. ;ifferent
countries have their individual normal lending levels, but usually they will
fall into the range of 815F1/ of the purchase price. gainst other types of
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real estate, residential real estate is the least risky.
ommercial real estate
)ommercial real estate is the owning of a small building or large
warehouse a company rents from so that it can conduct its business. ;ue
to the higher risk of )ommercial real estate, lending rates of banks and
other lenders are lower and often fall in the range of D1
0.3 !dvantages O" Investing In &eal (state:
The real advantage in the Real Estate )aret Investment is that
theoretically this business has an ever growing tendency because of the
growing population and the demand for 2eal estate7s both for residential
and office usages.
s all the things in this field are very expensive and every time one sells it
the profit becomes more.
The ability to borrow based on the value of the 2eal estate %roperty, is
another advantage. It is easier to finance 2eal 'state than any other
product. While investing other pluses requires the buyer to have the entire
buying price available for the pluses. (ut in Real Estate )aret
Investment,one just needs to have a fraction of the buying price available
as the down payment. That is why, 2eal 'state, in spite of being extremely
expensive, is much easier to buy than a piece of industrial instrument of
the very same price.
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0. #isadvantages O" Investing In &eal (state
2eal 'state +arket Investment is something that needs to be maintained
and taxes to be submitted from time to time. small mistake in this
procedure can bring a major loss to the investor.
;uring the real estate booms, investors can be attracted to buy 2eal 'state
properties without calculating the expenditures attached in the purchase
and for the existing expenditures of the property. The 2eal 'state +arket
can then suddenly flow against them instead of flowing for them makingthe investor face a major loss.
0.0 &is8 !ssociated With &eal (state
2eal 'state Investment is now
treated as a major case of
capital budgeting by usingstate5of5the5art investment
analysis which incorporates
the future stream of income it
may generate and the
associated risk adjustments. It
has been the highlight of the investment literature since the 3F817s when
investment theorists extended techniques such as probability, time value of
money and utility into its analysis.
2eal estate is basically defined as immovable property such as land and
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everything permanently attached to it like buildings. 2eal property as
opposed to personal or movable property is characteri9ed by the right to
transfer the title to the land whereas title to personal property can beretained. The investment in real estate essentially depends on the risks
associated with it, that is to say, even if the venture succeeds when the
future stream of income will accrue to the investor and the alternative
investment opportunities. 2eal estate investment can be attractive if viewed
as a business opportunity! it can generate rental income, using it as
collateral to secure a loan for a business venture, to offset otherwise
taxable income through cash savings on tax5deductible interest rate losses,
or simply from the profits garnered from its resale. @otable, in this context
is the gains reaped by real estate speculators who trade in real estate
futures >by buying and selling purchase options?.
)ommon examples of real estate investment are individuals owning
multiple pieces of real estate7s one of which is his primary residence andothers are occupied by tenants from where the rental income accrues. 2eal
estate investment is also associated with appreciation in the value of
property thereby having the potential for capital gains. Tax implications
differ for real estate investment and residential real estates. 2eal estate
investment is long term in nature and investment professionals routinely
maintain that one7s investment portfolio should have at least Dpercnt!5
01percnt! invested in real estate.
0.6 &etuns !ssociated With &eal (state
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2eal 'state Investment %roperty follows a business cycle like any
investment business5it has its peaks and troughs. (ut as real estate
investment property is defined as investment in properties, which even canbe commercial in nature, real estate can make a fortune for many
individuals giving them the license to permanently walk away from their
jobs. )ommercial property may include apartments and multifamily units,
offices, hotels, malls, retail stores, businesses and industrial property.
)ommercial properties are acquired for reali9ing both capital gains and
rental income %roperty investment can lead to diversification of one7s
investment portfolio, as real estate investments can be profitable for many
giving them financial freedom in the long run. The real property can be
put to its best use if it produces the highest value for land, as if vacant. (ut
as many real estate investment property analysts point out, it can go
horribly wrong if not undertaken in a careful manner. Thus it is always
advisable to conduct a thorough research before arriving at a decision. t
present, terms such as Kforeclosure investingL and Kno money down real
estate investingL have become associated with real estate property
investment. While foreclosure investing means buying properties from
owners who are in a financial distress, thus giving the opportunity to buy
cheap, no money down real estate investing is an attractive service offered
by many real estate agencies which helps people to invest in real estate
without any credit check and employment verifications.
&eal estate investment can e o"itale i" one ta8es note o" the
"olloing:
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+aximi9ing return
+inimi9ing risk
)omparing investments
#aving time, and,
ptimi9ing the deal structure
In short, people investing in real estate should be able to study the market
trend of rising and falling real estate prices and then arrive at a decision.
This service is also offered by many real estate investing agencies that willprovide investment analyses software and real estate software cash flow
tool that will help the investors make the right decisions about real estate
investment decisions. The return on investment on real estate should be
considered when deciding to invest in real estate.
2eturn on investment can be calculated on past or current investment or
on the estimated return on future investment. It does not indicate the
period for which the investment is being made. 2ate of 2eturn, or 2eturn
on Investment is essentially the future stream of income or a cash flow
from an invested capital. This capital might be investing in real estate
property or company shares and debentures.
The future stream of income or cash flow might arise from interest,
dividends or capital gains. capital gain occurs when the market value of
an investment rises or falls. It does not however, include the returns
accrued on the investment.
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2eal estate investment can be attractive if viewed as a business
opportunity! it can generate rental income, using it as collateral to secure
a loan for a business venture, to offset otherwise taxable income throughcash savings on tax5deductible interest rate losses, or simply from the
profits garnered from its resale. @otable, in this context is the gains
reaped by real estate speculators who trade in real estate futures>by
buying and selling purchase options?
s per the commercial real investment property boom in many areas of the
world, it has been ascribed to improvement of the economy and growth of
business ventures in the country. (ut it should be noted that investment in
commercial properties yield more returns and cash flow than investments
in residential properties
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ther Investment -venues
6.1 )old
-or centuries gold has been the ultimate cushion against the dangers of
stocks price falls, fluctuating rate changes, inflation, risingBfalling real
estate prices, natural calamities, wars and more. *old has been the best
way to safeguard your investments against unstable financial markets.
Why Is )old Such ! )ood Investment?
Whether or not gold is a good investment, is a question that does not have
a simple answer. *old has appreciated substantially over the past couple
of years. The growth rate of late has been much higher than the
conventional rate of appreciation. $owever, if we look at the past 3D501
years record, it is seen that *old is a hedge against inflation.
ver the last 01 years, the average return from *old has been around 8/.
#o, if the past trend continues, one could expect around say 5F/ returns
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from gold in the long5term.
lso, another aspect that we should look at is a weakening currency. @o
matter which country you originate from, there is a chance that your
country7s currency will suffer a downfall at a particular point of time.
*old, on the other hand, retains its true value and can help you protect
your riches because it does not rely on the state of the country7s economic,
whether it is on the up or downtrend. Therefore, investing a small portion
of one7s investment portfolio in gold would be a good idea.
4o 'an One Invest In )old?
*old can be bought in various forms and the decision should be based on
the reason you need gold. If you see this purely as an investment, you can
either buy it in the form of physical gold Q bars, biscuits and or coins or
even in a demateriali9ed form.
-or most Indians, gold purchases usually mean buying jewellery.
$owever, the disadvantage of buying gold in the form of jewellery is that
its resale is not always a profitable proposition.
He$e a$e some othe$ *a#s o investing in go'd:
6"' Etfs
Aou can invest in gold by buying *old 'xchange Traded -unds >'T-s?.
(eing 'T-s, these funds are listed and traded on the stock exchange i.e.
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investors can buy and sell them like any other stock on the stock exchange,
on a real5 time basis.
ll you need is a demat account and a share trading account with a broker
or sub5broker who deals in stocks. These are traded in units of one. That
means you can buy one or more units at a time. 'ach unit represents
approximately the market value of one gram of gold.
*old 'T-s are traded close to real5time gold prices in the market, that is,
'T- prices move up and down with the market price of gold in the
conventional marketplace. Aour expenses in an 'T- would be very low&
you would pay securities transaction tax >#TT?, brokerage Bservice tax,
and the like, which are unlikely to exceed around 3/ of market price.
Aou7d hold gold in demat form in your demat account, just as you hold
shares. If you decide to sell your 'T- units, you can do so through your
stock broker or sub5broker and the charges would be the same as what you
paid while buying the 'T-. Thus an 'T- is very convenient, and you need
not worry about the purity of the gold, secure storage, insurance against
theft, and so on
Physical 6old
This is the traditional way to invest in gold. Investors can buy gold and
then store it in a bank7s locker. If you are one of those people who keep
buying gold jewellery for a marriage of a daughter or son, a better optionwould be to buy gold 'T- units now at the current price of gold, hold them
in your demat account, and sell them in the future, whenever you want,
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and use the money to buy jewellery then.
In this way, you will be protecting yourself from rising gold prices, while
also sparing yourself anxiety about the purity and safety of your gold. Aou
can keep accumulating gold at a slow rate, perhaps even one gram at a
time.
It is evident that gold is an asset class that you can rarely go wrong with.
Therefore, think seriously about investing in gold.
6.2 -onds:
=nlike equities that represent a participation in a company, a bond is a
debt security. When you purchase a bond, you lend money to the issuer of
the bond. The issuer can be a government, a municipality, a federal
agency, a corporation or another entity. bond has generally a maturity
>a date at which the issuer reimburse the amount borrowed? and an
interest payment.
The stream of payments linked to a bond is known in advance >provided
that the issuer can pay? but this stream depends of the bond. Aou have
bonds that pay a fixed interest during the life of the paper >fixed rate
bonds?! you have others that pay a revised interest rate >floating rate
bonds? or even no interest at all >9ero coupon bonds?.
The first thing that comes to most people6s minds when they think of
investing is the stock market. fter all, stocks are exciting. The swings in
the market are scrutini9ed in the newspapers and even covered by local
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evening newscasts. #tories of investors gaining great wealth in the stock
market are common. (onds, on the other hand, don6t have the same sex
appeal. %lus, bonds are much more boring 5 especially during raging bullmarkets, when they seem to offer an insignificant return compared to
stocks.
$owever, all it takes is a bear market to remind investors of the virtues of
a bond6s safety and stability. In fact, for many investors it makes sense to
have at least part of their portfolio invested in bonds.
6.3 'ommodities ,a8et:
- commodity may be defined as an article, a product or material that is
bought and sold.It can be classified as every ind of movable property,
except -ctionable laims, )oney ; 0ecurities. )ommodities actually
offer immense potential to become a separate asset class for market5savvy
investors, arbitrageurs and speculators. 2etail investors, who claim to
understand the equity markets, may find commodities an unfathomable
market. (ut commodities are easy to understand as far as fundamentals of
demand and supply are concerned. 2etail investors should understand the
risks and advantage