REPORT ON INVESTMENT AVENUES PRESENTED BY: Arnav Kharhyal
INVESTMENT HAS DIFFERENT MEANINGS IN FINANCE AND ECONOMICS. FINANCE INVESTMENT IS PUTTING MONEY INTO SOMETHING WITH THE EXPECTATION OF GAIN, THAT UPON THOROUGH ANALYSIS, HAS A HIGH DEGREE OF SECURITY FOR THE PRINCIPAL AMOUNT, AS WELL AS SECURITY OF RETURN, WITHIN AN EXPECTED PERIOD OF TIME.
IN CONTRAST PUTTING MONEY INTO SOMETHING WITH AN EXPECTATION OF GAIN WITHOUT THOROUGH ANALYSIS, WITHOUT SECURITY OF PRINCIPAL, AND WITHOUT SECURITY OF RETURN IS SPECULATION OR GAMBLING .
INVESTMENT IS RELATED TO SAVING OR DEFERRING CONSUMPTION . INVESTMENT IS INVOLVED IN MANY AREAS OF THE ECONOMY , SUCH AS BUSINESS MANAGEMENT AND FINANCE WHETHER FOR HOUSEHOLDS, FIRMS, OR GOVERNMENTS.
(BANK DEPOSITS, FIXED DEPOSITS, POST OFFICE SCHEMES, DEBEBTURES,BOND, DEBT, MF’S)
EQUITY( SHARES, EQUITY MF’S)
NON FINANCIAL ASSETS
1. FINANCIAL SECURITIES
2. NON-SECURITIZED FINANCIAL SECURITIES
3. MUTUAL FUND SCHEMES
4. REAL ASSETS
THESE INVESTMENT INSTRUMENTS ARE FREELY TRADABLE AND NEGOTIABLE. THESE WOULD INCLUDE:
PUBLIC SECTOR BONDS,
MONEY MARKET SECURITIES.
MARKET DEBT EQUITY FINANCIAL SECURITIES
Tenure of investment is always fixed.
Quantum of returns is always fixed.
Coupon rate & YTM are always variables.
Frequency of return is possible.
Nomenclature for the return is called Interest.
The return in equity is called Dividend.
A BOND IS A LONG-TERM LOAN ISSUED IN THE FORM OF A NEGOTIABLE SECURITY BY A CORPORATION,
GOVERNMENT, OR GOVERNMENT AGENCY.
BONDS ARE LOANS FROM THE BONDHOLDER (BUYER) TO THE ISSUER (SELLER).
A BOND IS A PROMISE BY THE ISSUER TO PAY BACK THE AMOUNT LOANED TO IT (CALLED PRINCIPAL) PLUS AN AGREED TO AMOUNT OF INTEREST ON OR BEFORE A STATED DATE.
THE INTEREST MAY BE PAID PERIODICALLY DURING THE LIFE OF THE LOAN OR ALL AT ONCE WHEN THE LOAN IS PAID BACK.
BONDS ARE ALSO CALLED FIXED INCOME
BEARER AND REGISTERED BONDS .
GENERAL OBLIGATION AND REVENUE BONDS.
TREASURY/GOVERNMENT BILLS .
ZERO COUPON BONDS.
HIGH YIELD (JUNK) BONDS.
BONDS ARE ALSO IDENTIFIED BY THE WAY THEY ARE OWNED. BEARER BONDS, FOR EXAMPLE, BELONG TO THE PERSON WHO HOLDS THEM AND OWNERSHIP IS NOT OTHERWISE RECORDED.
EUROBONDS ARE ISSUED IN THIS FORMAT. WHILE THIS FORM OF OWNERSHIP CARRIES THE RISK OF LOOSING THE CERTIFICATE, IT OFFERS THE HIGHEST DEGREE OF ANONYMITY AND THAT IS WHY IN SOME COUNTRIES, THE UNITED STATES FOR EXAMPLE, THEY ARE NO LONGER ALLOWED.
Bearer and Registered Bonds
GENERAL OBLIGATION BONDS USUALLY REFER TO GOVERNMENT BONDS AND ARE BACKED BY THE FULL FAITH AND CREDIT OF THE TAXING POWER (COUNTRY, MUNICIPALITY, ETC.) THAT ISSUES THEM.
REVENUE BONDS ARE PAYABLE ONLY FROM SOME SPECIFIC SOURCE OF TAXES (HIGHWAYS TOLLS, WATER BILLS, ETC.) AND ARE NOT SUBJECT TO THE GENERAL TAXING POWER OF THE ISSUER.
General Obligation and Revenue Bonds
A COUNTRY’S LONG TERM FINANCING NEEDS ARE MET BY ISSUING BONDS THAT MATURE FROM ANYWHERE AFTER ONE YEAR UP TO ESSENTIALLY AS LONG AS A COUNTRY WANTS AND TO WHICH THE PUBLIC IS WILLING TO COMMIT ITS MONEY. AVERAGE LENGTHS RUN TO 20 OR 30 YEARS AND ARE CALLED LONG-TERM BONDS. THESE LONG-TERM BONDS ARE WATCHED CLOSELY BY THE MARKET AS AN INDICATION OF WHERE LONG-TERM INTEREST RATES WILL BE HEADING.
NOTES USUALLY HAVE A MATURITY OF FROM 2 TO 10 YEARS AND ARE KNOWN AS INTERMEDIATE TERM INVESTMENT INSTRUMENTS. NOTES ARE NOT CALLABLE BEFORE THEIR MATURITY DATE. NOTES USUALLY PAY INTEREST SEMI ANNUALLY.
T-BILLS, OR BILLS, ARE THE SHORTEST TERM TREASURY SECURITY AND USUALLY MATURE IN 3, 6, 9 OR 12 MONTHS. T-BILLS CARRY NO COUPON RATE OF INTEREST BUT ARE SOLD AT A DISCOUNT FROM PAR.
PAR IS THE FACE AMOUNT OF THE BOND. THIS MEANS THAT THE PRICE PAID FOR A T-BILL IS LESS THAN ITS VALUE AT MATURITY. THUS A 12 MONTH T-BILL YIELDING 5% WOULD BE SOLD AT A 5% DISCOUNT FROM THE FACE VALUE OF THE BOND .
THESE BONDS NOT ONLY BEAR A FIXED RATE OF INTEREST, BUT ALSO HAVE A PROFIT-SHARING FEATURE.
THE BONDHOLDER IS ENTITLED TO PARTICIPATE ALONG WITH SHAREHOLDERS IN EARNINGS OF THE CORPORATION TO THE EXTENT DESCRIBED IN THE BOND CONTRACT. THESE ARE USED WIDELY IN EUROPE AND ARE USUALLY ISSUED BY WEAK COMPANIES AS AN ADDED INDUCEMENT TO ATTRACT BUYERS.
ZEROS, AS THEY ARE FREQUENTLY REFERRED TO, ARE ISSUED AT A DISCOUNT FROM THEIR PAR VALUE.
UNLIKE A CONVENTIONAL BOND, ZEROS PAY NO INTEREST BETWEEN ISSUANCE AND REDEMPTION BUT
ONLY AT MATURITY. ALTHOUGH THE BONDHOLDER FORFEITS IMMEDIATE INCOME FROM THE ZERO, THE
YIELD TO MATURITY IS COMPUTED ON THE
ASSUMPTION THAT THE COUPON INTEREST IS REINVESTED AT THE PREVAILING RATE WHEN RECEIVED. CONSEQUENTLY, AS INTEREST RATES FALL THE REINVESTMENT IS PRESUMED TO BE AT THE LOWER RATE, REDUCING THE YIELD BUT INCREASING THE PRICE OF THE BOND.
Zero Coupon Bonds
USUALLY ALL THAT THE BONDHOLDER IS PROMISED IS THE PRINCIPAL AND INTEREST. THERE IS AN
EXCEPTION TO THIS RULE AND IT IS CALLED A CONVERTIBLE BOND. THIS IS A BOND THAT AT ITS
MATURITY, OR SOME OTHER STATED DATE, MAY BE CONVERTED TO A STATED NUMBER OF COMMON
SHARES IN A CORPORATION. A NEW CORPORATION WITHOUT MUCH MONEY OR TRACK RECORD FOR
PAYING OFF BONDS OR A CORPORATION WITH A LOW CREDIT RATING MIGHT OFFER CONVERTIBLE BONDS BECAUSE THE BORROWING COSTS OF STRAIGHT BONDS WOULD BE PROHIBITIVE. CONVERTIBLE BONDS RANK BELOW CONVENTIONAL BONDS BUT AHEAD OF ANY EQUITY IN THEIR CLAIM ON THE ASSETS OF A COMPANY.
THE TOP FOUR RANKINGS OF ANY RATING SERVICE ARE USUALLY KNOWN AS INVESTMENT GRADES.
BONDS IN THESE CATEGORIES MAY GENERALLY BE BOUGHT FOR FIDUCIARY ACCOUNTS UNLESS
SPECIFICALLY RESTRICTED. FIDUCIARY ACCOUNTS INCLUDE PENSION PLANS AND SOME BANK TRUST
ACCOUNTS. ANY BOND BELOW INVESTMENT GRADE IS REFERRED TO AS A “ JUNK” BOND. BUT, IN THE
TERMS OF THE MARKET, IT IS CALLED A HIGH-YIELD BOND. IT IS CALLED JUNK, BECAUSE IT DESCRIBES
THE QUALITY OF THE BOND.
High Yield (Junk) Bonds
Equity Investment Instruments
Common Stock is where the investor holds some shares of the company and earns money as dividends, which is not a guarantee.
Buying Preferred Stock is a more stable equity investment with no power in decision-making. Dividends are regular and independent of the market.
Warrants are unique such that common stock is available at a specific price during a stipulated time-period.
Convertible Debt is a bond without collateral that is exchanged for common stock. These debentures are priced at rates lower than stock-prices.
Equity line of credit is similar to bank line of credit. It is a commitment by the investor to purchase common stock over a period of time.
Sales of restricted shares refer to stock of the company that may be transferred to another person only after meeting certain criteria.
Private Equity Investments Types
Private equity is any investment made in companies that will not trade it on a stock exchange. Companies utilize private equity investment funds for any of the following strategy.
WHAT IS RIGHT ISSUE?
Right issue is when a listed company which proposes to issue fresh securities to its existing share holders as on a record date.
The rights are normally offered in a particular ratio to the no. of securities held prior to the issues.
This is best suited foe companies who would like to rise the capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.
TOTAL 23 STOCK EXCHANGES IN INDIA NORTH ZONE EAST ZONE WEST ZONE SOUTH ZONE Kanpur Bhubaneswar Ahmedabad Bangalore Ludhiana Calcutta Baroda Chennai New Delhi Gauhati Indore Cochin Jaipur Patna Mumbai Coimbatore Pune Mangalore Inter connected National Stock Exch OTC Exchange of India
Primary market is a market for new issues of securities such as IPO’s
Part of the financial market where enterprises issue their new shares and bonds.
Securities are bought by the way of public issue directly from the company.
The market where securities are traded after they are initially offered in the primary market .
Previously issued securities are bought and sold.
Shares are traded between two investors.
Most trading is done in the secondary market .
Examples- Bombay stock exchange , NYSE,NSE etc.
THESE INVESTMENT INSTRUMENTS ARE NOT TRADABLE, TRANSFERABLE NOR NEGOTIABLE AND WOULD INCLUDE:
POST OFFICE DEPOSITS,
COMPANY FIXED DEPOSITS,
PROVIDENT FUND SCHEMES,
NATIONAL SAVINGS SCHEMES AND
Non-securitized financial securities
MUTUAL FUND IS MECHANISM OF POOLING RESOURCES(MONEY) FROM INVESTORS & INVEST IN SECURITIES( STOCKS & BONDS) WHICH WILL BE MANAGED BY PROFESSIONAL PEOPLE CALLED THE FUND MANAGERS ALSO KNOWN AS PORTFOLIO MANAGERS. THE INVESTMENT PROCEEDS( LOSS OR PROFIT) ARE THEN PASSED ON TO THE RESPECTIVE INDIVIDUAL. WHAT IS MUTUAL FUND?
How is a mutual fund set up?
Mutual fund is set up in the form of a trust.
Which has sponsor, trustees, management company and a custodian.
The trust is established by a sponsor or more than 1 sponsor who is like promoter of a company.
The trustees of the mutual fund hold its property for the benefit of the unit holders.
Asset management co. approved by SEBI manages the funds by making investments in various types of securities.
Custodian, who is registered with SEBI holds the securities of various schemes of the fund in its custody.
The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI regulation by the mutual fund.
MUTUAL FUND OPERATION FLOW CHART
INVESTORS POOL THEIR MONEY WITH FUND MANAGER.
FUND MANAGER INVEST HAS MONEY IN SECURITIES.
SECURITIES GENEARTES RETURNS.
RETURNS ARE THEN PASSED BACK TO INVESTORS.
MUTUAL FUND Open ended funds Close ended funds
Open for all the time
Repurchased all the time.
As Repurchased so not listed stock exchange
Switch over allowed
Open for fixed period.
Duration 3, 5 and 7 years.
Repurchased fixed time.
Listed at stock exchange.
IF AN INVESTOR DOES NOT DIRECTLY WANT TO INVEST IN THE MARKETS, HE/SHE COULD BUY UNITS/SHARES IN A MUTUAL FUND SCHEME. THESE SCHEMES ARE MAINLY GROWTH (OR EQUITY) ORIENTED, INCOME (OR DEBT) ORIENTED OR BALANCED (I.E. BOTH GROWTH AND DEBT) SCHEMES.
Mutual fund schemes
Types of Mutual Funds BY INVESTMENT OBJECTIVE
Growth Schemes 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 short-term decline in value for possible future appreciation.
Income Schemes 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. Capital appreciation in such schemes may be limited.
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
REAL ASSETS ARE PHYSICAL INVESTMENTS, WHICH WOULD INCLUDE :
REAL ESTATE ,
GOLD & SILVER,
RARE COINS & STAMPS AND
ART AND PASSION: WEALTHY INVESTORS ALSO HAVE THEIR INVESTMENT IN ART, WINE, ANTIQUES, AND COLLECTIBLES
TOP INVESTMENT OPTIONS WHILE SOME PLANS ACCRUE SHORT TERM PROFITS SOME ARE LONG TERM DEPOSITS. THE FIRST STEP TOWARDS INVESTING IN INDIAN MARKET IS TO EVALUATE INDIVIDUAL REQUIREMENTS FOR CASH, COMPETENCE TO UNDERTAKE INVOLVED RISKS AND THE AMOUNT OF RETURNS THAT THE INVESTOR IS EXPECTING. BELOW ARE TOP 10 INVESTMENT OPTIONS IN INDIA WHICH ASSURE SAFE AND SATISFACTORY RETURNS.(LAST UPDATED ON 12 TH MAY 2011)
Current Investments Avenues in India
1.Investments in Bank Fixed Deposits (FD) Fixed Deposit or FD is accrues 8.5% of yearly profits, depending on the bank's tenure and guidelines, which makes it's widely sought after and safe investment alternative. The minimum tenure of FD is 15 days and maximum tenure is 5 years and above. Senior citizens are entitled for exclusive rate of interest on Fixed Deposits.
2.Investments in Insurance policies
Some top Insurance firm in India under whom you can buy insurance scheme are LIC, SBI Life, ICICI Prudential, Bajaj Allianz, Birla Sunlife, HDFC Standard Life, Reliance Life, Max NewYork Life, Metlife, Tata AIG, Kotak Mahindra Life, ING Life Insurance, etc.
3.Investments in National Saving Certificate (NSC) National Saving Certificate (NSC) is subsidized and supported by government of India as is a secure investment technique with a lock in tenure of 6 years. There is no utmost limit in this investment option while the highest amount is estimated as ` 100. The investor is entitled for the calculated interest of 8% which is forfeited two times in a year
4.Investments in Public Provident Fund (PPF) Like NSC, Public Provident Fund (PPF) is also supported by the Indian government. An investment of minimum ` 500 and maximum ` 70, 000 is required to be deposited in a fiscal year. The prospective investor can create it PPF account in a GPO or head post office or in any sub-divisions of the centralized bank
5.Investments in Stock Market Investing in share market yields higher profits. Influenced by unanticipated turn of market events, stock market to some extent cannot be considered as the safest investment options. However, to accrue higher gains, an investor must update himself on the recent stock market news and event
6.Investments in Mutual Funds Mutual Fund firms accumulate cash from willing investors and invest it in share market. Like stock market, mutual fund investment are also entitled for various market risks but with a fair share of profits.
7.Investments in Gold Deposit Scheme Controlled by SBI, Gold Deposit Scheme was instigated in the year 1999. Investments in this scheme are open for trusts, firms and HUFs with no specific upper limit. The investor can deposit invest minimum of 200 gm in exchange for gold bonds holding a tariff free rate of interest of 3% - 4% on the basis of the period of the bond varying with a lock in period of 3 to 7 year.
8.Investments in Real Estate Indian real estate industry has huge prospects in sectors like commercial, housing, hospitality, retail, manufacturing, healthcare etc. Calculated realty demand for IT/ITES industry in 2010 is estimated at 150mn sq.ft. around the chief Indian cities. Termed as the "money making industry", realty sector of India promises annual profits of 30% to 100% through real estate investmen
9.Investments in Equity Private Equity is expanding at a fast pace. India acquired US $13.5 billion in 2008 under equity shares and featured among the top 7 nations in the world. In 2010, the total equity investment is predicted to increase upto USD 20 billion. Indian equities promise satisfactory returns and have more than 365 equity investments firms functioning under it.
10.Investments in Non Resident Ordinary (NRO) funds Investing in domestic (NRO) is one of the best investment alternatives for NRIs who wish to deposit their income accrued abroad and maintain it in Indian rupees.The interest returns accrued on in this account is entitled under IT Act and is subject to 30% tax reduction at source including the appropriate surcharge and education cess.
Investment has become one of the favorite investment destination for the foreign investors across the globe .
India is considered the 4 th biggest economy in the world.
Indian economy will grow to become 60% in the size of the economy of US so investment can be said to be the key player .
India is performing good in the 3 crore sectors of investment including education ,infrastructure and securities.