Investment alternative

Investment Alternatives
PROJECT ON
INVESTMENT ALTERNATIVES
IN PARTIAL FULFILLMENT
OF BANKING & INSURANCE COURSE
FOR ACADEMIC YEAR
2006 – 2007
SUBMITTED BY
DIVYESH. B. RATHOD
T.Y.B.B.I
SHRI. CHINAI COLLEGE OF COMMERCE &
ECONOMICS
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What is Investment?
Investment is the employment of funds with the aim of achieving
additional income or growth in value. The essential quality of an
investment is that it involves “waiting” for a reward . It involves the
commitment of resources, which have been saved or put away from
current consumption in the hope that some benefits will accrue in future.
The term ‘Investment’ does not appear to be simple, as it has been
defined. Financial experts and economists have further categorized
investment. It has also often confused with the term speculation.
The following discussion will give an explanation of the various ways in
which investment is related or differentiated from the financial and
economic sense and how speculation differs from investment. However,
it must be clearly established that investment involves long-term
commitment.
Financial and Economic Meaning of Investment
Investment is the allocation of monetary resources to assets that are
expected to yield some gain or positive return over a given period of time.
These assets range from safe investments to risky investments.
Investments in this form are also called ‘Financial investments’
From the point of view of people who invest their funds, they are the
suppliers of ‘capital’ and in their view, investment is a commitment of a
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person’s funds to derive future income in the form of interest, dividends,
rent premiums, pension benefits or the appreciation of the value of their
principal capital. To the financial investor, it is not important whether
money is invested for a productive use or for the purchase of second-hand
instruments such as existing shares and stocks listed on the stock
exchanges. Most instruments are considered to be transfers of financial
assets from one person to another.
The nature of Investment in the financial sense differs from its use in the
economic sense. To the economists, ‘Investment’ means the net
additions to the economy’s capital stock, which consists of goods, and
services that are used in the production of other goods and services.
In this context, the term investment therefore implies the formation of
new and productive capital in the form of new construction, new
producer’s durable equipment such as plant and equipment.
Inventories and human capital are included in the economists
definition of investment.
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WHY INVESTMENTS ARE IMPORTANT?
Investments are important and useful in the context of present- day
conditions. Some factors that have been made investment decisions
increasingly important are:
a) Longer Life Expectancy or Planning for Retirement,
b) Increasing Rates of Taxation,
c) Higher Interest Rates,
d) Higher Rate of Inflation,
e) Larger Incomes, and
f) Availability of a complex number of investment outlets.
a) Longer Life Expectancy or Planning for Retirement:-
Investment decisions have become significant as most people in India
retire between the ages 55 and 60. Also, the trend shows longer life
expectancy. The earnings from employment should, therefore be
calculated in such a manner that a portion should be put away as
savings. Savings by themselves so not increase wealth; these must be
invested in such a way that the principle and income will be adequate
for a greater number of retirement years.
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Increase in working population, proper planning for life span and
longevity have ensured the need for balanced investments.
b) Increasingly Rates of Taxation:
Taxation is one of crucial factors in any country which introduces an
element of compulation in a person’s savings. There are various forms
of saving outlets in our country in the form of Investments which
helps in bringing down the tax level by offering deductions in personal
income. Benefits in tax accrue out of investment in Unit Trust
Certificates, Unit Linked Insurance Plan, Life Insurance, National
Savings Certificate, etc.
c) Interest Rates:-
Another aspect which is necessary for a sound investment plan is the
level of interest rates. Interest rates vary between on investment and
another. These may vary between risky and safe investments: they
may also differ due to different benefits schemes offered by the
investments. These aspects must be considered before actually
allocating any amount. A high rate of interest may not be the only
factor favouring the outlet for investments. Stability of interest is as
important as receiving a high rate of interest.
d) Inflation:-
Inflation has become a continous problem since the last decade. In
these years of rising prices, several problem are associated coupled
with a failing standard of living. Before funds are invested, erosion pf
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the resources will have to be carefully considered in order to make the
right choice of investments. The investor will try and search an outlet
which will give him a high rate of return in the form of interest to
cover any decrease due to inflation. He will also have to judge
whether the interest or return will be continuous or there is likelihood
or irregularity.
e) Income:-
Another reason why investment decisions are assumed importance is
the general increase in employment opportunities in India. After
independence, with the stages at development in the country, a
number of new organisations and services were formed. These
employment opportunities gave rise in both male and female working
force. More incomes and more avenues of investment have led to the
ability and willingness of working people to save and invest their
funds.
f) Investment Channels:-
The growth and development of the country leading to greater
economic activity has lead to the introduction of a vast arrays of
investment outlets. Apart from putting aside savings banks where
interest is low, investors have the choice of a variety of instruments.
The investors in his choice of investment will have to try and achieve
a proper mix between high rate of return to reap the benefits of both.
Some of the instruments available are corporate stock, provident fund,
life insurance, fixed deposits in the corporate sector, and so on.
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FACTORS FAVOURABLE FOR INVESTMENT
The investment market should have a favourable environment to be
able to function effectively. In India where all business activities are
marked by social, economic and political considerations, it is
important that the political and economic institutions are favourable.
Generally, there are basic considerations which foster growth and
bring opportunities for investment. These are
a) Legal Safeguards,
b) Stable Currency,
c) Existence of Financial Institutions to aid savings, and
d) Form of Business Organisation.
a) Legal Safeguards:-
A stable government which frames adequate legal safeguards
encourages accumulation of savings and investments. Investors will be
willing to invest their funds if they have the assurance of protection of
their contractual and property rights.
In India, the Investors have the dual advantage of free enterprises and
government control. Freedom, efficiency and growth are ensured form
the competitive forces of private enterprise. On the other hand, being a
mixed economy, government control exerts discipline and curtails
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some element of freedom. A combination of the public sector
controlled by the government and private sector left free to operate,
hopes to achieve benefits of both socialistic and capitalist forms of
government without their disadvantages.
In India, the political climate is conducive to investment as
government control lends stability to the capital market.
b) A Stable Currency:-
A well organised monetary system with definite planning and proper
policies is a necessary pre – requisites to an investment market. Most
of the investments such as bank deposits, life insurance and shares are
payable in a fixed amount of the currency of the country. A proper
monetary policy will give direction to the investment outlets.
Price inflation destroys the purchasing power of investments. Inflation
occurs generally in unstable conditions like war or floods but in the
last decade, it is also discernible in peace conditions especially in
developing countries because of huge government defecit financed by
bank credit.
A reasonable stable price level which is produced by wise monetary
and fiscal management contributes towards proper control, good
government, economic well-being and a well disciplined growth –
oriented investment market and protection to investors.
c) Existence of Financial Institutions to Encourage Savings:-
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The presence of financial institutions which encourage savings and
direct them to productive uses helps the investment market to grow.
The financial institutions generally in existence in most countries are
commercial banks, life insurance companies and investment
companies.
In India, the presence of large number of financial institutions under
Central Government and State Government and rural bodies have
encouraged the growth of savings and investment. To maintain a few,
there are the life Insurance Corporation and Unit Trust of India. They
offer a wide variety of schemes for savings and give tax benefits also.
Apart from these, there is well organised network of development
banks such as the Industrial Development Bank of India (IDBI),
Industrial Credit Investment Corporation of India (ICICI). At the state
level, there are State Financial Corporations, for rural areas and
agriculture, the National bank of agriculture and Rural Development
(NABARD). These Financial institutions and development banks offer
a wide variety of policies for encouraging savings and investment.
d) Form of Business Organisation:-
The form of business organisation which is permanent in existence
aides savings and investment. The public limited companies has been
said to be the best form of organisation. The three characteristics of
the corporations which have been very useful for investors are limited
liability of shareholders, perpetual life and transferability and
divisibility of stocks and shares. The public limited company with the
ability to continue its business irrespective of member’s comprising it,
gives longevity and soundness to its business activity.
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In contrast to a public limited company whose shareholders have
limited liability, the sole proprietor or a partner in a partnership firm is
liable for all the debts of the firm to the full extent of his personal
wealth. In these conditions, investors are hesitant to risk their savings
in these forms of organisation. Besides unlimited liability, the
partnership and proprietor also suffer from short life of organisation.
With the death or retirement of any partners, a partnership firm is
dissolved. Similarly, a sole proprietor carries on business only during
his lifetime. In these unstable and unsure conditions, investors would
not like to make their investments. The public limited company,
therefore, is a popular form of investment as the investors benefit from
liquidity, convenience and longevity.
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FEATURES OF INVESTMENT PROGRAMME
The features of an investment programme consist of safety of principal,
liquidity, income stability, adequate income, purchasing power stability,
and appreciation, freedom from management of investments, legality and
transferability.
1. Safety of Principal:-
The investor, to be certain of the safety of principal, should carefully
review the economic and industry trends before choosing the types of
investment. Errors are unavoidable and, therefore, to ensure safety of
principal, the investor should consider diversification involves mixing
investment commitments by industry, geographically by management, by
financial type and by maturities. A proper combination of these factors
would reduce losses. Diversification to a great extent helps in proper
investment programmes but it must be reasonably accomplished and
should not be carried out to extremes.
2. Liquidity:-
Every Investor requires a minimum liquidity in his investments to meet
emergencies. Liquidity will be ensured if the investor buys a proportion
of readily saleable securities out of his total portfolio. He may, therefore,
keep a small proportion of cash, fixed deposits and units which can be
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immediately made liquid. Investment like stocks and property or real
estate cannot ensure immediate liquidity.
3. Income Stability:
Regularly of income at a consistent rate is necessary in any investment
pattern. Not only stability, it is also important to see that income is
adequate after taxes. It is possible to find out some good securities which
pay practically all their earnings in dividends.
4. Appreciation and Purchasing Power Stability:-
Investors should balance their portfolios to fight against any purchasing
power instability. Investors should judge level inflation, explore the
possibility of gain and loss in the investments available to them,
limitations of personal and family considerations. The investors should
also try and forecast which securities will possible appreciate. A purchase
of property at the right time will lead to appreciation in time. Growth
stock will also appreciate over time. These, however, should be done
thoughtfully and not in a manner of speculation or gamble.
5. Legality and Freedom from Care:-
All Investments should be approved by law. Law relating to minors,
estates, trusts, shares and insurance should be studied. Illegal securities
will bring out many problems for the investor. One way of being free
from care is to invest in securities like Unit Trust of India, Life Insurance
Corporation or Savings Certificates. The management of securities is then
left to the care of the Trust who diversifies the investments according to
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safety, stability and liquidity with the consideration of their investment
policy. The identity of legal securities and investments in such securities
will also help the investor in avoiding many problems.
6. Tangibility:-
Intangibility securities have many times lost their value due to price level
inflation, confiscatory laws or social collapse. Some investors prefer to
keep a part of their wealth invested in tangible properties like building,
machinery, and land. It may, however, be considered that tangible
property does not yield an income apart from the direct satisfaction of
possession or property.
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THE INVESTMENT PROCESS – STAGES IN
INVESTMENT
The Investment process is generally described in four stages. These
stages are:-
1. Investment policy
2. Investment Analysis,
3. Valuation of securities, and
4. Portfolio Construction
1. Investment Policy:-
The first stage determines and involves personal financial affairs and
objectives before making investment. It may also be called preparation of
the investment policy stage. The investor has to see that he should be able
to create an emergency fund, an element of liquidity and quick
convertibility of securities into cash. This stage, may therefore, be
considered appropriate for identifying investment assets and considering
the various features of investments.
2. Investment Analysis:-
When an individual has arranged a logical order of the types of
investments that he requires on his portfolio, the next step is to analyse
the securities available for investment. He must make a comparative
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analysis of the type of industry, kind of security and fixed v/s Variable
securities. The primary concern at this stage would be from beliefs
regarding future behaviour or prices and stocks, he expected returns and
associated risk.
3. Valuation of Securities:-
The third step is perhaps the most important consideration of the
valuation of investment. Investment value, in general, is taken to be the
present worth to the owners of future benefits from investments. The
investor has to bear in mind the value of these investments. An
appropriate set of weights have to be applied with the use of forecasted
benefits to estimate the value of the investment assets. Comparision of
the value with the current market price of the asset allows a determination
of the relative attractiveness of the asset. Each asset must be valued on its
individual merit. Finally, the portfolio should be constructed.
4. Portfolio Construction:-
As discussed earlier under features of an investment programme,
portfolio construction requires knowledge of the different aspects of
securities. These are briefly recapitulated here, consisting of safety and
growth of principal, liquidity of assets after taking account the stage
involving investment timing, selection of investment, allocation of
savings to different investments and feedback of portfolio.
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INVESTMENT ALTERNATIVES
Investment avenues are the outlets of funds. There are varieties of
investment avenues or alternatives. The investors are free to select any
one or more alternative avenues depending upon their needs. All
categories of investors are equally interested in safety, liquidity, and
reasonable return on the funds invested by them. In India, investment
alternatives are continuously increasing along with the new corporate
securities, public provident fund, mutual fund etc. thus, wide variety of
investment avenues are now available to the investors. However,
investors should be very careful about their hard money. An investor can
select the best avenues after studying the merits and demerits of different
avenues. Even financial advertising, newspaper supplements on financial
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matters and investment journals offers guidance to investors in the
selection of suitable investment avenues.
The following investment avenues are popular and used extensively in
India:-
1. Investment in shares, debentures and bonds of different types
issued by companies and Public Sector Organisations.
2. Postal Savings Schemes
3. Public Fund (PF), Public Provident Fund (PPF), and Other Tax
sheltered savings schemes such as National Savings Schemes,
National Saving Certificates and Tax Saving Schemes of LIC,
ICICI, Infrastructure Bonds and so on.
4. Investment in investment intermediaries such as UTI and Mutual
funds run by LIC, Banks and HDFC, etc.
5. Deposits in Companies, (public Deposit) or deposits in Public
Sector Organisations and Banks.
6. Life Insurance Investment i.e. Investment in different life policies
such as Whole Life Policy, Endowment Policy, and so on.
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7. Investment in Real Estate.
8. Investment in Gold, Silver, Precious Metals and Antiques.
9. Investment on GILT – edged Securities and securities of
government and semi – government organisations (e.g. Relief
Bonds, Bonds of Port Trusts, Treasury bills, etc.
It may be noted that there are some avenues / investment schemes where
tax benefits are available. Such schemes are called Tax Savings Schemes
of Investment. The tax liability reduces when investment is made in such
schemes. The schemes are decided by the government and announced
along with the annual budget. A tax payer can take the benefit of such
schemes and bring down his total tax liability. The basic purpose of such
schemes is to encourage investment in certain investment avenues, in
some schemes, the entire investment is made tax free i.e. it is deducted
from yearly taxable income.
Popular Tax Saving Investment are noted as below:
1. Public Provident Fund (PPF)
2. Tax Sheltered saving schemes of post office such as NSC, NSS,
etc.
3. Investment in Infrastructure Bonds of IDBI, ICICI.
4. Life Insurance Schemes where insurance premium is given tax
benefits.
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5. Investment in mutual funds. Here, the tax benefits relates to
income earned through such investment.
6. Investment in Residential House. Principal as well as Interest
Provide tax benefits.
7. Investment in Pension Plan of insurance Companies.
8. Medi-claim i.e. Health Insurance.
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NON – MARKETABLE FINANCIAL INSTRUMENTS
The Financial Instruments which are not transferable are known as non –
marketable Financial assets. The investors can invest in these financial
assets but they cannot sale these financial instruments in the capital
market like shares and debentures. These investments include the
following:
1. Post Office Savings Schemes.
2. Public Provident Fund.
3. Deposits with Banks.
1. Post office Savings Schemes
Post office operates as a financial institution. It collects small savings
of the people through savings bank account facility. In addition time
deposits and government loans are also collected through post offices.
Certain government securities such as Kisan Vikas Patras, National
Saving certificates, etc. are sold through post offices. New schemes
are regularly introduced by the postal Department in order to collect
savings of the people. This includes recurring deposits, monthly
income schemes, PPF, and so on
Postal savings bank schemes were popular in India for a long period
as banking facilities were limited and were available mainly in the
urban areas upto 1950’s. The popu8larity of postal savings schemes is
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reducing due to the growth of banking and other investment facilities
throughout the country. However, even at present, small investors use
postal savings facilities for investing their savings / surplus money for
short term / long term due to certain benefits like stable return,
security and safety of investment and loss facility against postal
deposits. Even tax benefits is one attraction for investment in post
office. Investment in postal office is as good as giving money to the
government for economic development along with reasonable
return and tax benefits.
Post Office Savings Bank (POSB) has a customer base of 11 crores
account holders with annual deposits exceeding Rs.70,000 crores and
a network of 1,55,000 branches. The outstanding balance under all
national savings schemes in post offices stood at Rs. 2,18,695.15
crores by march 2001.
Post Office Saving Schemes includes the following:
i. Kisan Vikas Patras
ii. National Savings Certificate
iii. Post Office Saving Account.
iv. Post Office Monthly Income Account.
v. Post Office Monthly Recurring Account.
vi. Post Office Time Deposit Account.
a) Kisan Vikas Patras
Kisan Vikas Patras (KVP) doubles your money in 7 years and 3
months with the advantage of premature withdrawal. KVP is sold
through all Head Post Offices and Other authorised post offices
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throughout India. The rate of returns is 9.75%, compounded
annually. KVP scheme doubles in seven years and three months.
KVP accumulates money at a fixed rate, and your money doubles
in 7 years and 3 months. But KVP is not meant for regular income.
It is for those looking for a safe avenue of investment without the
pressing need for a regular source of income.
The minimum investment in KVP is Rs. 100. certificates are
available in denominations of Rs. 100, Rs.500, Rs.1000, Rs.5000,
Rs.10000 and Rs.50000. the denomination of Rs. 50,000 is sold
through head post offices only. There is no limit on holding of
these certificates. Any number of certificates can be purchased. A
KVP is sold at a face value, the maturity value is printed on the
certificate .
It is a good option if you are looking for hassle free investment as
it assures a certain sum of money at the expiry of the duration of
your investment.
Income is assured at the prescribed rate of interest. As mentioned,
this is a risk-free investment channel as the KVP comes with the
backing of the government of India. Since the KVP has the backing
of the Government of India and is, therefore, extremely safe, it
does not require any commercial rating.
KVP is not a bearer certificate, and is not easily transferable.
Permission of the post-master is required for any transfer for any
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transfer. KVP cannot be traded in the secondary market and hence,
the question of its market value does not arise.
Although no TDS is applicable on the interest income from KVP,
there are no tax incentives as per the provisions of the Income Tax
Act, 1961.
b) National Savings Certificate
National Savings Certificates (NSC) is certificates issued by
Department of post, Government of India and is available at all
post office counters in the country. It is a long-term safe savings
option for the investor. The scheme combines growth in money
with reductions in tax liability as per the provisions of the Income
Tax act, 1961. The duration of a NSC Scheme is 6 years.
National Savings Certificate can be Purchased by the following:
• An Adult in his own name or on behalf of a minor,
• A minor,
• A trust
• Two adults jointly,
• Hindu Undivided family
National Savings certificates are available in the denominations of
Rs. 100, Rs.500, Rs.1000, Rs.5000, Rs.10000. there is no
maximum limit on the purchase of the certificates. It is having a
high interest rate at 8 % compounded half yearly. Post maturity
interest will be paid for a maximum period of 24 months at the rate
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applicable to individual savings account. A 1000 Rs. Denomination
certificate will increase to Rs. 1601 on completion of 6 years.
Maturity value of a certificate of any other denomination is at
proportionate rate. Premature encashment of the certificate is not
permissible except at a discount in the case of death of the
holder(s) forfeiture by a pledgee and when ordered by a court of
law.
Interest accrued on the certificates every year is liable to income
tax but deemed to have reinvested. Income Tax rebate is available
on the amount invested and interest accruing under Section 88 of
Income Tax Act, as amended from time to time. Income tax relief
is also available on the interest earned as per limits fixed vide
section 80L of Income Tax, as amended from time to time.
c) Post Office Saving Account
Post office saving account is similar to a savings account in a bank.
It is a safe instrument to park those funds, which you might need to
liquidate fully or partially at very short notice. Post office savings
accounts are especially suited for those living in rural and semi-
rural areas where the reach of banks is very limited.
The account can be opened at any post office with a minimum
balance of Rs. 20. Maximum of Rs. One lakh for a single account
holder and Rs. Two lakhs for joint account holders can be
deposited. There is no lock-in or maturity period. The amount can
be withdrawn anytime subject to keeping a minimum balance of
Rs. 50 in simple account and Rs. 500 for cheque facility accounts.
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Rate of interest is decided by the central Government from time to
time. Interest is calculated on l monthly balances and credited
annually. Income tax relief is available on the amount of interest
under the provisions of section 80L of Income Tax Act.
d) Post Office Monthly Income Account
Post Office Monthly Income Account is meant for those investors
who want to invest a lump sum and earn interest on monthly basis
for their livelihood. The scheme is therefore, a boon for retired
persons.
The account can be opened by a single adult or 2-3 adults jointly.
Period of maturity of an account is six years. Only one deposit can
be made in an account. Minimum deposit limit is Rs. 1000.
Maximum deposit limit is Rs. 3 lakhs in case of single account and
Rs. 6 lakhs in case of joint account.
Interest @ 8%per annum is payable monthly. In addition, bonus
equal to 10%of the deposited amount is payable at the time of
repayment on maturity. Premature closure facility is available on
the interest earned as per limits fixed vide section 80L of income
Tax, as amended from time to time.
Advantages
• Premature closure of the account is permitted any time after the
expiry of a period of one year of opening the account. Deduction of
an amount equal to 5 per cent of the deposit is to be made when the
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account is prematurely closed. Investors can withdraw money
before three years, but a discount of 5%.
• Closing of account after three years will not have any deductions.
Monthly interest can be automatically credited to savings account
provided both the accounts standing at the same post office.
• The interest income accruing from a post office MIS is exempt
from tax under Section 80L of the Income Tax Act, 1961.
Moreover, no TDS is deductible on the interest income. The
balance is exempt from Wealth Tax.
e) Post office Recurring Deposit Account
A Post – Office Recurring Deposit Account (RDA) is a banking
service offered by Department of post. Government of India at all
post office counters in the country. The scheme is meant for
investors who want to deposit a fixed amount every month, in
order to get a lump sum after five years. The scheme, a systematic
way for long term savings, is one of the best investment option for
the low income groups. The Post- Office recurring deposits offer a
fixed rate of interest, currently at 7.5 per cent per annum
compounded quarterly.
The recurring deposit account can be opened at any post office.
Period of maturity of account is 5 years. Sixty equal monthly
deposits shall be made in an account in multiplies of Rs. Five
subject to a minimum of ten rupees.
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Premature closure of accounts is permissible after expiry of three
years. In case of premature closure of account, the interest at the
rate applicable to post office savings account shall be payable.
Advantages
• The post office offers a fixed rate of interest unlike banks which
constantly change their recurring deposit interest rates depending
on their demand supply position.
• As the post office is a department of the government of India, it is a
safe investment. The principal amount in the Recurring Deposit
Account is assured. Moreover Interest earned on this account is
exempted from tax as per Section 80L of Income Tax Act.
f) Post Office Time Deposit Account
A Post - Office Time Deposit Account (RDA) is a banking service
similar to a bank Fixed Deposit offered by Department of post,
Government of India at all post office counters in the country. The
scheme is meant for those investors who want to deposit a lump
sum of money for a fixed period; say for a minimum period of one
year to two years, three years and a maximum period of five years.
Investor gets a lump sum (principal + interest) at the maturity of
the deposit. Time Deposits scheme return a lower, but safer,
growth in Investment.
The amount can be deposited for 1 year, 2 year, 3year,and 5years.
The deposited amount is repayable after expiry of the period for
which it is made viz; 1 year, 2 years, 3 years or 5 years.
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This investment option pays annual interest rates between 6.25
and 7.5 per cent, compounded quarterly. Time deposit for 1
year offers a coupon rate of 6.25%, 2-year deposit offers an
interest of 6.5%, and 3 years is 7.25% while a 5- year Time
Deposit offers 7.5% return.
Interest is calculated on quarterly compounding basis, and is
payable annually. Rate of interest varies according to the period of
the deposit and is decided by the Central Government from time to
time. Income tax relief is available on the amount of interest under
the provisions of section 80L of Income Tax Act.
Premature withdrawals from all types of post office time deposit
accounts are permissible after expiry of 6 months with certain
conditions.
2. Public Provident Fund
Public Provident Fund, popularly known as PPF, is a savings cum
tax saving investment for middle class and salaried persons. It is
even useful to businessmen and higher income earning people. It
was introduced in 1969. the PPF scheme is very popular among the
marginal income tax payers. It also serves as a retirement planning
tool for many of those who do not have any structured pension plan
covering them.
The features of PPF scheme
• Public Provident Fund account can be opened at designated post
offices throughout the country and at designated branches of Public
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Sector Banks throughout the country. The account can be opened
by an individual in his own name, on behalf of a minor of whom he
is a guardian, or by a Hindu Undivided Family.
• Minimum deposit required in a PPF account is Rs.500 in a
financial year. Maximum deposit limit is Rs. 70,000 in a financial
year.
• The account matures for closures after 15 years. Account can be
continued with or without subscriptions after maturity for block
periods of five years. Premature withdrawal is permissible every
year after completion of 5 years from the end of the year of
opening the account.
• The PPF account is not transferable, but nominee facility is
available.
• Loans from the amount at credit in PPF amount can be taken after
completion of one year from the end of the financial year of
opening the account and before completion of the 5TH
year
• Interest at the rate notified by the central Government from time to
time, is calculated and credited to the accounts at the end of each
financial year. Presently, the rate of interest is 8% per annum.
• Income Tax rebate is available “on the deposits made” under
section 80C of Income Tax Act, as amended from, time to time.
Interest credited every year is Tax – Free.
Limitations of PPF Account
• Low Liquidity as one withdrawal is allowed in a year.
• The PPF account is for a period of 15 years which is very long
period.
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In spite of limitations, PPF is an attractive avenue for investment
in the case of tax payers/salaried class / businessmen / professionals.
3. Deposits with Banks
Investment of surplus money in bank deposits is quite
popular among the investors (particularly among salaried persons).
Banks (co – operative and commercial) collect working capital for
their business through deposits called bank deposits. The deposits are
given by thje customers for specific period and the bank pays interest
on them. The deposits can be accepted from the individuals,
institutions and even business enterprises. The business and
profitability of banks depend on deposit collection. For depositing
money in the bank, an investor / depositor has to open an account in
the bank.
Different types of deposits accounts are:
a) Savings Bank Account
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A Saving Bank account (SB Account) is meant to
promote the habit of saving among the people. It also facilitates
safekeeping of money. In this scheme fund is allowed to be withdrawn
whenever required, without any condition. Hence a savings account is
a safe, convenient and affordable way to save your money. Bank
deposits are fairly safe because banks are subject to control of the
reserve bank of India with regard to several to several policy and
operational parameters. Bank also pays you a minimal interest for
keeping your money with them. The Interest Rate of Savings bank
account in India varies between 2.5%and 4%. In Savings Bank
account, bank follows the simple interest method. The rate of interest
may change from time to time according to the rules of Reserve Bank
of India.
b) Fixed Deposits Account:
A fixed deposits is meant for those investors who want to
deposit a lump sum of money for a fixed period, say for a minimum
period of 15 days to five years and above, thereby earning a higher
rate of interest in return. Investor gets a lump sum (principal +
Interest) at the maturity of the deposit.
Bank fixed deposits are one of the most common savings scheme open
to an average investor. Fixed deposits also give a higher rate of
interest than a saving bank account . the facilities vary from bank to
bank. Some of the facilities offered by banks are overdraft (loan)
facility on the amount deposited, premature withdrawal before
maturity period (which involves a loss of interest) etc. bank deposits
32

are fairly safer because banks are subject to control of the Reserve
Bank of India.
The rate of interest for Bank Fixed Deposits varies between 4 and 11
percent, depending on the maturity period (duration) of the FD and the
amount invested. Interest rate also varies between each bank. A bank
FD does not provide regular interest income, but a lump-sum amount
on its maturity.
c) Recurring Deposit Account
The Recurring deposit in bank is meant for someone who
wants to invest a specific sum of money on a monthly basis for a fixed
rate of return. At the end, you will get the principal sum as well as the
interest earned during that period. The scheme, a systematic way for
long term savings, is one of the best investment option for the low
income groups. The rate of interest varies between 7 and 11 percent
depending on the maturity period and amount invested.
The interest is calculated quarterly or as specified by the bank
Advantages of Bank Deposits
• Investment is reasonably safe and secured with adequate
liquidity.
• Banks offer reasonable rate of return on the investment made
and that too in a regular manner.
• Banks offer loan facility against the investment made.
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• Procedures and formalities involved in a bank investment are
limited, simple and quick.
• Banks offer various services and facilities to their customers.
Limitations/Demerits of Bank Deposits
• The rate of return in the case of bank investment is low as
compared to other avenues of investment.
• The return on the investment is not adequate even to
protection against the present inflation rate in the country.
• Capital appreciation is not possible in bank investment.
34

MONEY MARKET INSTRUMENTS
Money market is a market for borrowing and lending for short periods. It
is one constituent of capital market. However, it is basically concerned
with short-term investment. Money market securities are fixed income
securities similar to gilt-edged securities, preference shares and
debentures. Normally individual investors are not interested in money
market securities as the return on the investment is not attractive.
However, institutional investors with huge surplus funds purchase money
market securities for short term investments. A money market security is
a debt instrument of short period maturity. Money market securities in
India are as explained below:
1. Treasury bills
2. GILT – Edged securities
3. Commercial paper
4. Certificate of Deposits.
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1. Treasury Bills
Treasury bill is a short-term money market instrumental used by
the Central Government for short term borrowing from the market
for meeting urgent needs. Treasury Investors in T-bills generally
include banks and other institutional investors.
Features of Treasury Bills
• It is GILT – Edged securities. Being issued by the government they
are considered to be risk free as they are issued by the Government.
As such, they are highly marketable.
• Investors prefer treasury bills because of high liquidity, assured
returns, eligibility for statutory requirements, no default risk, on
capital depreciation etc.
• Investors prefer treasury bills because of high liquidity, assured
returns, eligibility for statutory requirements, no default risk, no
capital depreciation etc.
• The T – bills are issued for a minimum amount of Rs. 25,000/- and
in multiples of Rs. 25,000. T-bills are issued at a discount and
redeemed at par. Though the yield on treasury bills is less when
compared to other money market instruments, the risk adverse
investors and banks prefer to invest in these securities. At present,
The Government of India (GOI) issues 4 types of T-Bills i.e. 14
day, 91 day, 182 day and 364 day.
• Thus, RBI raises on behalf of the Government of India by acting as
an issuing agent to meet the latter’s short term funds requirement.
2. GILT – Edged Securities
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Government (Central and States) securities and securities issued by
financial institutions such as IDBI,ICICI, etc are called GILT –
Edged securities. These are debt securities issued by the central
government, state government, and Semi – government’s agencies.
The market for such securities is called gilt – edged market.
Securities are also gilt – securities. Such securities are in the form
of bonds and credit notes. Institutional agencies such as banks,
insurance companies, employee’s provident funds are the buyers of
such securities. Such securities are fully secured as they have
government backing. The maturity period is varying generally upto
10 to 20 years. Gilt – edged securities market constitutes the largest
segment of the Indian Capital Market. This market is expanding
rapidly in recent years. Gilt – edged security is highly liquid asset
as it can be sold easily. Tax benefits are available to gilt – edged
securities.
3. Commercial Paper
CPs as a source of short – term finance is used by corporates as an
alternative to bank Finance for working capital. Generally,
corporates prefer to raise funds through this route when the interest
rate on working capital charged by banks is higher than the rate at
which funds can be raised through CP.
CP is a short-term, unsecured usuance promissory note issued at a
discount to face value by well known or reputed companies who
carry a high credit rating and have a strong financial background.
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Any private sector company, public sector unit, non – banking
company can raise funds through commercial paper. CPs are
generally open to all the investors – individuals, banks, corporates
and also non-resident Indians (NRIs).
CPs are backed by the liquidity and earning power of the issuer,
but are not backed by any assets. Hence they are unsecured.
Investors prefer to invest in CPs due to high liquidity, varied
maturity and high yield when compared to bank deposits.
Moreover, the liquidity is high because it can be transferred by
endorsement and delivery.
CPs are issued in multipies of Rs. 5 lakhs and the minimum size of
each issue is Rs. 5 lakhs. Also CPs have a minimum maturity
period of 15 days and a maximum of 1 year. Unlike Certificate of
Deposits, the issuer can Buy-Back its Own CP.
The company needs to get the commercial paper credit rated
by one of the approved credit rating agencies like
CRISIL/ICRA/DCR, as prescribed by RBI.
4. Certificate of Deposits
Certificate of deposits (CDs are issued by banks in the form of
usuance promissory notes. Due to their negotiable nature, these are
also known as negotiable certificate of deposits (NCDs).
CDs are issued by commercial banks and six financial institutions
– IFCI, IDBI, ICICI, EXIM Bank, IIB, and SIDBI etc.
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CDs are considered as virtually risk less instruments as the defaults
risk is almost nil and investors are sure of receiving the invested
amount with interest. CDs are freely transferable by endorsement
and delivery, immediately after the date of issue and can be traded
in secondary market from the date of issue, unlike conventional
deposits.
CDs are issued at a discount to face value. The discount rate is
freely determined by the issuing bank considering the prevailing
call money rates, treasury bills rate, maturity of the CD and its
relation with the customer, etc.
Banks can issue CDs for a minimum period of 15 days to a
maximum of one year whereas a financial institution can issue CDs
for a minimum of 1 year and a maximum of 3 years.
The minimum size for the issue of CDs is Rs. 5 lakhs (face value)
and thereafter in multiplies of Rs. 1 lakh. It should be taken into
consideration that there is no ceiling on the maximum amount that
can be raised by them.
39

INVESTMENT IN EQUITY AND PREFERENCE
SHARES
These are ownership securities. Shares bestow certain advantages
to both the listing companies and the investors. Investment in this
financial instrument is of long-term nature. This, however, does not mean
loss of liquidity for the investor. Depending upon availability of investors
interest in the company, shares can be easily converted into cash in the
secondary market. Joint stock companies collect their long term/fixed
capital by issuing shares (equity and preference). This is called “Stock
Financing”. Shares constitute the ownership securities and are popular
among the investing class. Investment in shares is risky as well as
profitable. Transactions in shares take place in the primary and secondary
markets.
A shareholders bears the highest risk in the company’s operations.
Conversely, he is also entitled to participate in the earning and wealth of
the company without limit. Issue of shares is of advantage to the
company, as payment of dividend is discretionary. Equity is not required
to be refunded. This instruments is quite popular with individual investors
in India.
Face value of ordinary shares in India can be any amount from Re.
1 to Rs. 1,000 but the most common denomination of shares is Rs.10.
Large majority of investors (particularly small investors) prefer to
purchase shares through brokers and other dealers operating on
commission basis. The shares available for investment are classified into
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different categories such as blue chip shares, growth shares, speculative
shares, income shares, and so on. Shares certificates in physical form are
no more popular in India due to Demat facility.
Blue Chip Shares: Shares of known and financially sound companies are
called Blue Chip Shares. Such companies are also known as blue chip
companies as they are well established over a long period and are stable
and profitable. Blue Chip Companies are popular in the stock market and
they carry goodwill and market reputation. Investors prefer to invest in
Blue Chip Shares due to safety, security and attractive return. In India,
Reliance, Tata companies, L & T Companies relating to information
technology are regarded as bleu chip companies.
Preference Shares
A preference share (PS) is said to be a hybrid financial instrument.
Companies have issued preference shares with a large number of
innovations. PS, as its name suggests, is an ownership security, but unlike
an ordinary share where dividend is discretionary, PS carries a fixed rate
of return (dividend) like a debenture. In order of preference, PS holders
rank below the claims of creditors of the company, but above those of
ordinary shareholders.
Types of Preference Shares available in the market:
i. Cumulative and Non-cumulative.
ii. Convertible and Non – convertible
iii. Redeemable and Non – redeemable.
iv. Participating and Non – participating.
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In case of Cumulative Preference Shares, the dividend(s), if not paid in
any period(s) are accumulated as a liability of the company and has to be
paid subsequently.
Convertible Preference Shares can be converted into ordinary share on
terms and condition fixed at the time of issue of such shares.
Redeemable preference shares have fixed period of maturity and are
repayable at the end of that period. It is because of this property. Such
Preference Shares are regarded more as a debt instrument than an
ownership security.
Participating preference shareholders have the best of both the worlds in
as much as they are not only entitled to a fixed rate of dividend, but can
also expect to earn a higher dividend in case the company makes good
profits.
Advantages of Investment in Shares
• Equity shareholders get income in the form of dividend. Profitable
and stable companies offer good reward to their investors in the
form of high rate of dividend.
• Shares are easily transferable and this facilitates easy transfer of
ownership at the option of the shareholders (investor). It also
brings liquidity to the investment in shares.
• The equity shareholders get an opportunity to participate in the
profitability of their company in the course of time.
• Equity shares carry tax benefits. At present, dividend on shares of
Indian companies has been tax – free as per the government policy.
• Capital gain to the equity investor is possible in the case of shares
as the prices of shares fluctuate along with the future prospects of
42

the company. Due to rise in the prices of the shares, there is capital
appreciation and this offers extra benefit to the shareholders.
Limitations of Investment in shares
1. Uncertainity of Income / Return:-
The return as regards investment in shares is uncertain as it is
linked with the profitability of the company.
2. Risky Investment:-
In the case of shares, there is an element of risk as regards
changing market values. The shares price may go down due to
various reasons. Secondly, selling at low price is bound to bring
financial loss. This suggests that investment in shares is always
risky.
3. Speculative activities are harmful:-
Speculative activates are quite common as regards shares.
However, such speculative deals affect genuine investors and they
may suffer loss even when they are not directly involved in such
speculative activities.
4. Future linked with the company:-
In the case of shares, the future of the shareholder is linked with
the future of the company. The return on investment will be
attractive, if the company makes good profit. However, a
shareholder may not get any return on his investment if his
company fails to get reasonably high profit.
43

MUTUAL FUND SCHEMES
UTI had virtual monopoly in the field of mutual fund from 1964 to 1987.
After 1987, state bank of India, bank of India, and other banks started
their mutual funds. After 1991 (due to economic liberalisation) many
financial institutions started their mutual funds (e.g. Kothari Pioneer
Fund, CRB Capital Markets and so on). In brief, along with UTI, many
more mutual funds are now started for the benefits of small investors. A
mutual fund is formed by coming together of a number of investors
who hand over their surplus to a professional organisation to manage
their funds.
The main function of mutual fund is to mobilize the savings of the
general public and invest them in the stock market securities. At Present,
there is diversion of savings of the middle class investors from banks
to mutual funds.
More than 63 mutual funds are operating in India. The popular mutrual
funds in India are as noted below:
1. HDFC Mutual Fund.
2. Birla Sun Life Mutual Fund.
3. Alliance Capital Mutual Fund.
4. Tata Mutual Fund.
5. Templetion India Income Fund.
6. Standard Chartered Mutual Fund.
7. Kotak Mutual Fund.
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Mutual fund is a financial intermediary which collects savings of the
people for secured and profitable investment. The mutual funds in India
are registered as trusts under the Indian Trust Act. These funds are
managed by financial and professional experts.
In brief, small investors get many benefits (and that too without any
botheration) due to formation of mutual funds in India. Mutual funds
such as SBI Mutual Fund, LIC Mutual Fund, Shriram Mutual Fund,
Tata Mutual Fund, and ICICI Mutual Fund are popular as they offer
various services and benefits to the investing class.
Advantages of Mutual Funds
Mutual funds are the best tools to counter volatility. It is more effective
for an investor as professional and experienced fund managers handle the
investor’s money.
Professional wealth management comes at a heavy price that is not
affordable for solo investor today. The choices before investor today are
enormous. There are so many funds with varying risks available and
returns available. Mutual funds plays a crucial role in channelling savings
of millions parts of the country into investment in both equity and debt
instruments. The other obvious advantages of investing in a Mutual Fund
are:
• Diversification:-
The best mutual funds design their portfolios so individual
investments will react differently to the same economic conditions.
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For example, economic conditions like a rise in interest rates may
cause certain securities in a diversified portfolio to decrease in
value. Other securities in the portfolio will respond to the same
economic conditions by increasing in value. When a portfolio is
balanced in this way, the value of the overall portfolio should
gradually increase over time, even if some securities lose value.
• Professional Management:-
Professional fund manager’s who regular monitor market trends for
taking investment decisions manage mutual funds. The also
dedicated research professionals working with them who make an
in depth study of the investment option to ntake an informed
decision. Most mutual funds pay topflight professionals to manage
their investments. These managers decide what securities the fund
will buy and sell.
• Regulatory Oversight:- mutual funds are subject to many
government regulations that protect investors from fraud.
• Liquidity:-
One of the greatest advantages of mutual funds is liquidity. It’s
easy to get your money out of a mutual fund. Write a check, make
a call, and you’ve got the cash.
• Convenience:-
With features like dematerialised account statements, easy
subscription and redemption processes, availablity of NAVs and
performance details through journals, newspaper and updates and
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lot more; Mutual funds are sure a convenient way of investing. We
can usually buy Mutual fund shares by Mail, Phone, or over the
Internet.
• Low Cost :-
Mutual Fund expenses are often no more than 1.5 percent of your
investment. Expenses for index funds are less than that , because
index funds are not actively managed. Instead, they automatically
buy stock in companies that are listed on a specific index.
• Transparency:-
As funds have to make full disclosure of investments on a periodic
basis.
• Flexibility:-
In term of needs based choices
1. Choices of schemes
2. Well regulated
• Tax Benefits:- investment in Mutual Funds also enjoys several tax
benefits and advantages.
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Disadvantages of Mutual Funds
Unless an investor would like to venture into sector specific funds,
which are high risk in nature, he would generally be able to
optimise his risk-return quotient in fact mutual funds are gaining
acceptance all over India. We have also witnessed a shift from the
traditional to professional fund management houses even from
satellite towns. The factors affecting mutual fund growth are:
• No Guarantees
No investment is risk free. If the entire stock market decline in
value, the value of mutual fund shares will go down as well, no
matter how balanced the portfolio. Investors encounter fewer risks
when they invest in mutual funds than when they buy and sell
stocks on their own. However, anyone who invests through a
mutual fund runs the risks of losing money.
• Fees and Commissions:-
All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or “loads” to
compensate brokers, financial consultants, or financial planners.
Even if we don’t use a broker or other financial adviser, we will
pay a sales commission if we buy shares in a Loan fund.
• Taxes:-
During a typical year, most actively managed mutual funds sell
anywhere from 20 to 70 percent of the securities in their portfolios.
If your fund makes a profit on its sales, you will pay taxes on the
income you receive, even if you reinvest the money you made.
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• Management risks:-
When we invest in a mutual fund, we depend on the fund’s
manager to make the right decisions regarding the fund’s portfolio.
If the manager does not perform as well as you had hoped, we
might not make as such money on our investment as we expected.
Of course, if we invest in Index Funds, we forget management risk,
because these funds do not employ managers.
49

LIFE INSURANCE
Life insurance business was nationalised in India since long 1956 and is
run by Life Insurance Corporation of India. In addition, we have also
postal life insurance Scheme run by postal department. LIC is responsible
for the expansion of life insurance business in India. In addition, it plays
an important role in collecting the savings. LIC is one avenue for
investment of money out of regular income. It also gives protection to the
family members of the policyholders. Private is now allowed to
participate in the insurance business.
Advantages of Investment in Life Insurance Schemes
• Protection to family members through financial support in the case
of death of policyholder.
• Investment in life insurance schemes serves as a provision for old
age (maintenance, medical expenses, etc.)
• It acts as a method of compulsory saving over a long period of
regular income.
• Investment in life insurance schemes provides loan facility from
banks
• LIC now gives bonus to the policyholders on yearly basis. This add
to the maturity value of policy.
• Investment in life insurance schemes gives tax benefits.
• Investment in life insurance provides comfortable and financially
independent life after retirement.
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LIC issues different life policies such as whole life policy, endowment
policy, money back policy, etc. as investor can select any policy
considering his age, monthly / annual income and capacity to save.
Investment in LIC has a wider significance. It is not merely for
monetary benefit but for security of investor and his family members.
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Investment In Real Estate Properties
Investment in real estate is popular due to high saleable value after
some years. Such properties include buildings, commercial premises,
industrial land, plantations, farmhouses, agricultural land near cities, and
so on. Such properties attract the attention of affluent investors and
builders. The property owners are willing to wait even for 20 to 30 years
for attractive return. During this period, it is a type of deal investment for
the owners. However, the resale price will be attractive in due course
when they can recover four times (or even more) the price paid. This is
how real estate is one attractive as well as profitable avenue for
investment provided the property to be purchased is selected with proper
care and foresight.
A residential home/building represents the most attractive real
estate property for large majority of investors. Such investment is
attractive due to the following reasons:
• Ownership of a residential house provides owned accommodation
and gives satisfaction to the head as well as family members.
• There is a capital appreciation of residential buildings particularly
in the urban areas.
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• Loans are available from different agencies like banks, HDFC, and
so on for buying, construction or renovation of owned residential
building.
• Interest on such loans is taxed deductible within certain limits.
• Wealth tax benefits are available in the case of residential building
as the value is reckoned at its historical cost and not at its present
market price.
Advantages Of Investment In Real Estate
• Real estate acts as an asset (financial security) which can be used
in case of need. Moreover, the asset value increases year after year.
• Profit in the real estate investment is substantial provided the
owner is willing to wait till appropriate time.
• The chances of capital appreciation are usually bright in the case of
real estate properties.
• Real estate properties can be used as security for raising loans. In
addition tax benefit and protection against inflation are available.
Disadvantages Of Investment In Real Estate
• Investment in real estate properties is normally substantial. Due to
huge investment in one item, the benefits of diversification of
investment are not available.
• In real estate property, profitability is available at the cost of
liquidity. Thus, liquidity is low.
• The risk in the investment is more as compared to investment in
banks, UTI, etc.
• Tax burden in the form of stamp duty, capital gain tax, etc is heavy
as and when the property is sold out.
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• Repairs, maintenance, etc constitute additional expenditure and
botheration to the owner.
• Government rules and regulations regarding buying and selling are
troublesome in the case of real estate properties.
54

GET A GRIP ON GOLD
The yellow metal has more to it than just pretty jewellery. It can be
a good form of investment.
GOLD, that precious metal, has caught the fancy of many over the
centuries. Especially India, which is the leading consumer of gold
covering over 25% of the global market, according to the World Gold
Council. The country is besotted with this yellow metal that’s not only
used, as a saving’s option. In fact for centuries, the value of gold has
transcended all national, political and cultural borders, making it the ideal
currency.
Besides being the basic means of savings, gold is intertwined with
the lives of the people and is a part of social and religious customs. It is
still popular for its beauty, scarcity, resistance to rust and corrosion,
besides being a hedge against inflation. The precious metal’s used as an
investment is rooted in history and derives from its roles as a safe haven,
a store of value and a monetary asset.
The Gleam Of Jewellery
About 50% of household investments in India are said to be in
gold, most of it in the form of jewelry, unlike in developed countries,
where such investments are made in coins and bars. It is yet to take the
shape of pure investment vehicle seeking comparable returns. However, it
has given over 9% returns during the last three years.
About 80% of gold imported or produced goes into making of
jewellery. The remaining is retained or held in the form of coins, bars and
55

bullion. Trading in gold remained in the trader’s domain till the banks
were allowed to sell imported gold to their customers about a few years
ago. The banks made the certified metal available in the form of gold
coins and bars, addressing the issue of quality.
Bright Exchange
The advent of gold trading on stock exchanges and technological
development over the last decade is throwing up new hopes in the area of
gold trading. In spot markets, gold is available for sale but in quantities of
10 grams or more, making it difficult for the retail investor to participate.
Once the exchange traded funds (ETFs) being proposed by the
market regulator Securities and Exchange Board of India (SEBI), it
would be possible for the investors to accumulate in quantities starting
from one gram.
Tax Implications
Since there is no income as such from holding gold, there is no liability
for income tax. But bullion and jewelry are subject to capital gains and
wealth tax after necessary deductions. However, buying gold in large
quantities may invite the taxman to your place.
Benefits
Gold as a means of investment is used for hedging against inflationary
risks. The returns from gold, as was brought out by different studies over
the last two decades, were not comparable with equities or some fixed
investment categories. Globally, it is used as a hedge against uncertainties
in the form of wars and calamities, which make its prices spiral.
The major benefit of gold as an investment is its low – to – negative
correlation with most other asset classes. The price of gold is not linked
to the performance of economy, industry or companies. It means that,
when all the other asset classes fail to perform, gold would produce good
returns. Thus, it would balance the performance of the portfolio during
stable and unstable conditions.
56

BONDS OR FIXED INCOME SECURITIES
There are various investments which provide fixed income from
the investments to the investors. Bonds, debentures, public deposits are
some of the example of fixed income securities. The investors get interest
regularly from the companies. The investors may be paid quarterly, half –
yearly, or yearly. The details of these securities are as follows:
1. Company Deposits / Public Deposits
In order to meet temporary financial needs, companies accept
deposits from the investors. Such deposits are called public deposits or
company fixed deposits and are popular particularly among the middle
class investors. Almost all companies collect crores of rupees through
such deposits. Companies were offering attractive interest rates
previously. However, the interest rates are now reduced considerably. At
present, the interest rate offered is 9 to 12 percent
At present along with private sector companies, even public sector
companies and public utilities also accept such deposits in order to meet
their working requirements. This source is popular and used extensively
by the companies.
Advantages of Company Deposits / Public Deposits
• Public deposits are available easily and quickly, provided that
company enjoys public confidence.
• This method of financing is simple and cheaper than obtaining
loans from commercial banks. This makes public deposits
attractive and agreeable to companies and also to depositors.
• Public deposits enable the companies to trade on equity and pay
higher dividends on equity shares.
• The depositors receive interest in their deposits. This rate is higher
than the interest rate offered by the banks. The interest rate is also
paid regularly by reputed companies.
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• The formalities to be completed for depositing money are easy and
simple. There is no deduction of tax at source where interest does
not exceed a particular limit.
• The risk involved is also limited particularly when money is
deposited with a reputed company.
2. Bonds And Debentures
In addition to company deposits, it is possible to purchase bonds
and debentures of joint stock companies for investment purpose. Both
represent creditorship securities. Debentures indicates loan given to the
company at a specific rate of interest and on certain terms and conditions.
Debentures are more popular than shares due to the safety and security
available. Companies issue different types of debentures for the
convenience of investors. At present, convertible bonds and debentures
are popular among Indian investors.
In India, bonds and debentures are also issued by public sector companies
and financial institutions. IDBI issues flexi-bonds, deep discount bonds,
retirement bonds, growing interest bonds and regular income bonds. Such
infrastructure bonds are popular among the investors and their response is
encouraging. Public sector bonds normally get good response from the
investing class.
Advantages Of Bonds
• Easy transferability by endorsement and delivery
• Safety and security due to government backing
• Attractive interest and other favourable terms and conditions
including wide choice as regards selection of bonds.
• Investment exempted for wealth tax
• Maturity period from 5 years to 25 years.
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• Listing on nearby stock exchange
• Simple procedure for investment
3. Government Of India Savings Bonds
(a) Government of India 8.0% Savings (Taxable) Bonds
The GOI has recently introduced these 8% savings (taxable) bonds. These
bonds are convenient for charitable trusts. It is the best option for
investment of surplus funds. There is no maximum limit for investment in
the bonds. 8% interest payable is taxable.
Important Features of 8% India Savings (Taxable) Bonds
• Resident individuals (not NRI), minor, HUF, Charitable
Institutions and universities can buy these bonds.
• 8% p.a. interest is payable half yearly or Rs. 1000 becomes Rs.
1601 after 6 years. Half yearly or cumulative interest payment
options are available. Interest is eligible for deduction u/s 80C
(upto Rs. 1,00,000).
• It is for the period of six years.
• Bonds are not transferable and pledgable.
• No TDS will be deducted on interest.
• Nomination facility is available.
b) 9.00% GOI Senior Citizens Savings Schemes
It is a special investment scheme introduced for the benefits of
senior citizens. And its important features are as follows:
• Resident Indians aged 60 years and above can invest in this
scheme.
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• Interest rate is 9% and is payable quarterly.
• Period of scheme is 5 years
• Ceiling for maximum permissible deposit per person is Rs.
15,00,000.
• Account can be opened jointly with spouse only.
• No TDS will be deducted but interest is taxable.
• Premature withdrawal facility is available after one year.
c) Government of India 6.50% Savings (Tax free) Bonds
Recently, the government has started issuing 6.50% (tax free) bonds
which are reasonably attractive and secured investment for individuals
and institutions.
Important Features of Government of India 6.50% Savings (Tax
free) Bonds
• Resident individuals (not NRI), HUF, and minor through guardian
can invest in this bonds.
• No maximum limit on the amount of investment in this bonds.
• Interest 6.50%, interest is payable half yearly or cumulative.
Interest payment in exempted from income tax – no wealth tax.
• Maturity period is of 5 years.
• Pledge and transfer are not allowed. However, the bonds can be
transferred only by way of gifts.
60

• Cumulative as well as non cumulative facility is available
• Redemption (pre mature encashment) is allowed after 3 years only.
It may be noted that 6.50% savings bonds offers more benefits /
concessions as compared to 8.0% savings (taxable) bonds. Both the
bonds are popular and used extensively as a safe and secure
investment avenue by large number of rich investors. Both the
investments are not available to NRIs. The new savings bonds of GOI
are similar to relief bonds which RBI was issuing previously on behalf
of the Government of India. RBI relief bonds are discontinued till
further notice. The appreciation for both categories of bonds may be
submitted to SBI or HDFC banks. They issue bond of certificates of
GOI.
61

ANALYSIS ON SURVEY REPORT
1. Are you aware of different types of investment schemes?
Yes:- 96%
No:- 4%
yes
no
2. Are you aware of Mutual Funds Schemes available in the
market?
Yes:- 76%
No:- 34%
62

yes
no
3. Are you ready to Invest in Mutual Funds?
Yes:- 68%
No:- 32%
yes
no
4. According to you, which is the best Investment alternative
you would like to invest from the following?
Real Estate Properties:- 34%
Post Office Savings:- 42%
Gold & Silver:- 27%
63

Real Estate
Properties
Post Office
savings
Gold & Silver
5. Have you ever invested in any Investment Schemes?
Yes- 83%
No- 17%
yes
no
64

INTERVIEW
I Interviewed to Mr. Furqan Qureshi a Investment Consultant, who is
a member of BSEL & NSEIL. The Interview was regarding the
investment alternatives in which he would like to invest. I took the
interview in a questionnaire type.
1. If I give you Rs. 50,000, where would you like to invest and why?
If I had Rs. 50,000, I would like to invest that money in Mutual Funds,
as various companies are coming up with various Mutual Fund Schemes.
And due to regular returns, high liquidity, and also they are subject to
many government regulations that protect Investors from fraud. Even I
would like to go for Equity shares.
I am interested in investing for short period and for high profit.
65

2. Would you like to go for Insurance Policies and which would you
prefer Private or Government?
As far as Returns are concerned, I would not like to go any Insurance
policies as they are Expensive. But after the age of 40, I would like to go
for Insurance for the safety and security for my family and then returns
will be secondary motive.
I am not interested in Private Sector as there is an increasing competition
in the market it may result into shut down or winding up of the company.
3. What about investing in Post Office Savings Schemes?
Post Office Savings Schemes are good for the retired persons who
can’t risks. I would like to go for Post office Savings Schemes since it is
backed up by the government of India.
In post Office Savings Schemes, I would like to go Recurring Account
as I would be saving some part of my income on monthly or on recurring
basis.
4. How about investing in Gold or Silver|?
I would like to Invest in Gold as Gold is good Investment for
emergency.
5. What do you think about Real Estate Property Investment?
According to me, one should look at Real Estate Properties being
Potential Investment Avenue.
66

And I would go for Commercial place rather than residential. And
there is capital gain in the future. And also I would rent the property and
earn additional income from it.
67

Investment alternative

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