31128326 an-analysis-of-investors-behaviour-on-various-investment-avenues-in-india


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31128326 an-analysis-of-investors-behaviour-on-various-investment-avenues-in-india

  2. 2. 1.1 INTRODUCTION TO THE REPORT Savings form an important part of the economy of any nation. With the savings investedin various options available to the people, the money acts as the driver for growth of thecountry. Indian financial scene too presents a plethora of avenues to the investors. Thoughcertainly not the best or deepest of markets in the world, it has reasonable options for anordinary man to invest his savings. One needs to invest and earn return on their idle resources and generate a specifiedsum of money for a specific goal in life and make a provision for an uncertain future. One of theimportant reasons why one needs to invest wisely is to meet the cost of inflation. Inflation isthe rate at which the cost of living increases. The cost of living is simply what it cost 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 orservice in the future as it does now or did in the past. The sooner one starts investing thebetter. By investing early you allow your investments more time to grow, whereby the conceptof compounding increases your income, by accumulating the principal and the interest ordividend earned on it, year after year.The three golden rules for all investors are: · Invest early · Invest regularly · Invest for long term and not for short term 2
  3. 3. 1.2 OBJECTIVE OF THE STUDY The purpose of the analysis is to determine the investment behaviour of investors andinvestment preferences for the same. Investors perception will provide a way to accuratelymeasure how the investors think about the products and services provided by the company.Today͛s trying economic conditions have forced difficult decisions for companies. Most aremaking conservative decisions that reflect a survival mode in the business operations. Duringthese difficult times, understanding what investors on an ongoing basis is critical for survival.Executives need a third party understanding on where investor͛s loyalties stand. More thanever management needs ongoing feedback from the investors, partners and employees inorder to continue to innovate and grow.͞The main objective of the project is to find out the needs of the current and futureinvestors.͟ For this analysis, customer perception and awareness level will be measured in important areas such as: 1. To understand in depth about different investment avenues available in India. 2. To find out how investors get information about the various financial instruments. 3. The type of financial instruments, they would prefer to invest. 4. The duration for which they would prefer to keep their money invested. 5. What are the factors that they consider before investing? 6. To give a recommendations to the investors that where they should invest. 3
  4. 4. 7. To know the risk tolerance level of the individual investor and suggest a suitable portfolio. 8. To develop a profile of sample Indian individual investor in terms of their demographics. And demographics based on occupation of the sample investor. 9. To identify the objective of savings of an investor. 10. To study the dependence/independences of the demographic factors (Age) of the investor and his/her risk tolerance level.Plan of the study Chapter 1 covers the core areas of the report: The introduction, objectives, need, limitations and research methodology of the study. It also covers value addition and sources of information. Chapter 2 covers the literature review given by various behavioural scientists and investment experts. Chapter 3 covers the industry profile, which is a brief explanation of the financial industry, governing bodies and various investment avenues. Chapter 4 covers data analysis and interpretation part. Analysis is made from the data obtained through questionnaires. Chapter 5 covers the findings and suggestions drawn from the data analysis and interpretations. Chapter 6 covers the summary and conclusion of the report. 4
  5. 5. 1.3 NEED FOR THE STUDY Stock market has been subjected to speculations and inefficiencies, which are beachedto the rationality of the investor. Traditional finance theory is based on the two assumptions.Firstly, investors͛ make rational decisions; and secondly investors are unbiased in theirpredictions about future returns of the stock. However financial economist have now realizedthat the long held assumptions of traditional finance theory are wrong and found that investorscan be irrational and make predictable errors about the return on investment on theirinvestments. This analysis on Individual Investors͛ Behaviour is an attempt to know the profile of theinvestor and also know the characteristics of the investors so as to know their preference withrespect to their investments. The study also tries to unravel the influence of demographicfactors like age on risk tolerance level of the investor. 5
  6. 6. 1.4 VALUE ADDITION This analysis will help to strengthen investor intimacy. This analysis will also throw lighton various investment avenues available in India that will help in many ways like. Theexpectations of different types of investors regarding particular service requirements can beidentified. y The common problem areas faced by the investors can be understood. y It also enhances new services initiatives. y This study will help in gaining a better understanding of what an investor looks for in an investment option. y It can be used by the financial sector in designing better financial instrument customized to suit the needs of the investor. y It will also help the agents and brokers in marketing the existing financial instruments. y It will provide knowledge to the investors about the various financial services provided by the company to their investors. y It will also help the company to understand what is the requirement and expectations of different categories of investors. This analysis will be originated in order to empower the investors with detailed researchon various investments avenues available in India. The awareness lever of the investors aboutthe various investment options and what is the perception of the investors with regard to theinvestments they want to make. 6
  7. 7. 1.5 LIMITATIONS OF THE STUDY This analysis is based upon investors͛ behaviour for investment preferences duringnormal time vis-à-vis recessionary period. This analysis would be focusing on the informationfrom the investors about their knowledge, perception and behaviour on different financialproducts.The various limitations of the study are: y The total number of financial instruments in the market is so large that it needs a lot of resources to analyze them all. There are various companies providing these financial instruments to the public. Handling and analyzing such a varied and diversified data needs a lot of time and resources. y As the analysis is based on primary as well as secondary data, possibility of unauthorized information cannot be avoided. y Reluctance of the people to provide complete information about them can affect the validity of the responses. y The lack of knowledge of customers about the financial instruments can be a major limitation. y The information can be biased due to use of questionnaire. 7
  8. 8. 1.6 RESEARCH METHODOLOGYSampling technique Initially, a rough draft will be prepared keeping in mind the objective of the research. Apilot study will be undertaken in order to know the accuracy of the questionnaire. The finalquestionnaire will be arrived at only after certain important changes are incorporated.Convenience sampling technique will be used for collecting the data from different investors.The investors are selected by the convenience sampling method. The selection of units fromthe population based on their easy availability and accessibility to the researcher is known asconvenience sampling. Convenience sampling is at its best in surveys dealing with anexploratory purpose for generating ideas and hypothesis.Sampling unit: The respondents who will be asked to fill out the questionnaires are the sampling units.These comprise of employees of MNC͛s, government employees, housewives, self employed,professionals and other investors.Sampling size: The sample size will be restricted to only 100, which comprised of mainly people fromdifferent regions of Hyderabad due to time constraints.Sampling area: The area of the research is Hyderabad. 8
  9. 9. 1.7 SOURCES OF INFORMATIONPrimary Data: Information is collected by conducting a survey by distributing a questionnaire to 100 investors in Hyderabad. These 100 investors are of different age group, differentoccupation, different income levels, and different qualifications. (A copy of the questionnaire isgiven in the last as ANNEXURE 1).Secondary Data: This data is collected by using the following means. 1. Articles in Financial Newspapers (͚Economic times͛ and ͚Business Standard͛). 2. Investment Magazines, Business Magazines, Financial chronicles. 3. Expert͛s opinion published in various print media. 4. Books written by various Foreign and Indian authors on Investments. 5. Data available on internet through various websites www.tax4India.com www.economictimes.Indiatimes.com www.business-standard.com www.Indiamoney.com www.moneymanagementideas.com www.savingwala.com 9
  11. 11. Literature suggests that major research in the area of investors͛ behaviour has beendone by behavioural scientists such as Weber, Shiller and Shefrin. Shiller who stronglyadvocated that stock market is governed by the market information which directly affects thebehaviour of the investors. Several studies have brought out the relationship between thedemographics such as Gender, Age and risk tolerance level of individuals. Of this therelationship between Age and risk tolerance level has attracted much attention. Horvath and Zuckerman suggested that one͛s biological, demographic andsocioeconomic characteristics; together with his/her psychological makeup affects one͛s risktolerance level. Malkiel suggested that an individual͛s risk tolerance is related to his/herhousehold situation, lifecycle stage and subjective factors. Mittra discussed factors that wererelated to individuals risk tolerance, which included years until retirement, knowledgesophistication, income and net worth. Guiso, Jappelli and Terlizzese, Bajtelsmit and VenDerhei,Powell and Ansic, Jianakoplos and Bernasek, Hariharan, Chapman and Domain, Hartog, Ferrer-I-Carbonell and Jonker concluded that males are more risk tolerant than females. Wallach and Kogan were perhaps the first to study the relationship between risktolerance and age. Cohn, Lewellen et.al found risky asset fraction of the portfolio to bepositively correlated with income and age and negatively correlated with marital status. Morinand Suarez found evidence of increasing risk aversion with age although the households appearto become less risk averse as their wealth increases. YOO found that the change in the riskyasset holdings were not uniform. He found individuals to increase their investments in riskyassets throughout their working life time, and decrease their risk exposure once they retire. 11
  12. 12. Lewellen et.al while identifying the systematic patterns of investment behaviour exhibited byindividuals found age and expressed risk taking propensities to be inversely related with majorshifts taking place at age 55 and beyond. Indian studies on individual investors were mostlyconfined to studies on share ownership, except a few. The RBIs survey of ownership of sharesand L.C. Guptas enquiry into the ownership pattern of Industrial shares in India were a few inthis direction. The NCAERs studies brought out the frequent form of savings of individuals andthe components of financial investments of rural households. The Indian Shareowners Surveybrought out a volley of information on shareowners. Rajarajan V classified investors on thebasis of their demographics. He has also brought out the investors characteristics on the basisof their investment size. He found that the percentage of risky assets to total financialinvestments had declined as the investor moves up through various stages in life cycle. Alsoinvestors lifestyles based characteristics has been identified. The above discussion presents adetailed picture about the various facets of risk studies that have taken place in the past. In thepresent study, the findings of many of these studies are verified and updated. 12
  14. 14. Indian financial industry is considered as one of the strongest financial sectors amongthe world markets. Many industry experts may give various reasons for such Indian financialindustry reputation, but there is only one answer which no one can deny, is the effectivecontrol and governance of the country͛s supreme monetary authority the ͞RESERVE BANK OFINDIA͟ (RBI). Financial sector in India has experienced a better environment to grow with thepresence of higher competition. The financial system in India is regulated by independentregulators in the field of banking, insurance, mortgage and capital market. Government of Indiaplays a significant role in controlling the financial market in India. Ministry of Finance, Government of India controls the financial sector in India. Everyyear the finance ministry presents the annual budget on 28th February. The Reserve Bank ofIndia is an apex institution in controlling banking system in the country. Its monetary policy actsas a major weapon in Indias financial market.Various governing bodies in financial sector: 1. RBI - Reserve Bank of India is the supreme authority and regulatory body for all the monetary transactions in India. RBI is the regulatory body for various Banking and Non Banking financial institutions in India. 2. SEBI - Securities and Exchange Board of India is one of the regulatory authorities for Indias capital market. 3. IRDA ʹ Insurance regulatory and development authority in India regulates all the insurance companies in India. 14
  15. 15. 4. AMFI ʹ Association of mutual funds in India regulates all the mutual fund companies in India. 5. FIPB ʹ Foreign investments promotion board regulates all the foreign direct investments made in India. y Ministry of housing is planning to establish a real estate regulatory and governing body by the end of financial year 2010 - 11. y Investments in gold is governed by the world gold council, in India we do not have any regulatory authority for investments in gold. y Ministry of Finance, Government of India has a control over all the financial bodies in India. y Government securities, Public Provident Fund (PPF), National Savings Certificate (NSC), Post Office Savings are all under the control of the central government.Investment are normally categorized using the risk involved in it, risk is dependent on variousfactors like the past performance, its governing body, involvement of the government etc., inthis scenario Indian investments are classified in to 3 categories based on risk. They are 1. Low Risk/ No Risk Investments. 2. Medium Risk Investments. 3. High Risk Investments.Apart from these, there are traditional investment avenues and emerging investment avenues. 15
  16. 16. Various Investment avenues available in IndiaSafe/Low Risk Avenues: y Savings Account y Bank Fixed Deposits. y Public Provident fund. y National savings certificates. y Post office savings. y Government Securities.Moderate Risk Avenues: y Mutual Funds. y Life Insurance. y Debentures. y Bonds.High Risk Avenues: y Equity Share Market. y Commodity Market. y FOREX Market.Traditional Avenues: y Real Estate (property). y Gold/Silver. y Chit Funds.Emerging Avenues: y Virtual Real Estate. y Hedge Funds/Private Equity Investments. y Art and Passion. 16
  17. 17. DESCRIPTION ON VARIOUS INVESTMENT AVENUESSAVINGS ACCOUNT As the name denotes, this account is perfect for parking your temporary savings. Theseaccounts are one of the most popular deposits for individual accounts. These accounts providecheque facility and a lot of flexibility for deposits and withdrawal of funds from the account.Most of the banks have rules for the maximum number of withdrawals in a period and themaximum amount of withdrawal, but no bank enforces these. However, banks have every rightto enforce such boundaries if it is felt that the account is being misused as a current account. Atpresent the interest on these accounts is regulated by Reserve Bank of India. Presently Indianbanks are offering 3.50% p.a. interest rate on such deposits. This account gives the customer a nominal rate of interest and he can withdraw moneyas and when the need arises. The position of account is depicted in a small book known as PassBook. Such accounts should be treated as a temporary parking area because the rate ofinterest is much less than Fixed Deposits. As soon as one͛s savings accumulate to an amountwhich he can spare for a certain period of time, shift this money to Fixed Deposit. The returnson the money kept in Savings Bank account will be less but the freedom to withdraw is thehighest. 17
  18. 18. FIXED DEPOSITS/ TERM DEPOSITS The term fixed in Fixed Deposits denotes the period of maturity or tenor. FixedDeposit, therefore, pre plans a length of time for which the depositor decides to keep themoney with the Bank and the rate of interest payable to the depositor is decided by this tenure.Rate of interest differs from Bank to Bank. Normally, the rate is highest for deposits for 3-5years. This, however, does not mean that the depositor loses all his rights over the money forthe duration of the tenor decided. Deposits can be withdrawn before the period is over.However, the amount of interest payable to the depositor, in such cases goes down. Every Banks offer fixed deposits schemes with a wide range of tenures for periods from7 days to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits forthe duration of time for which the depositor decides to keep the money with the bank.However, in case of need, the depositor can ask for closing the fixed deposit in advance bypaying a penalty. Soon some banks have even introduced variable interest fixed deposits. Therate of interest in such deposits will keep on varying with the prevalent market rates i.e. it willgo up if market interest rate goes and it will come down if the market rates fall.Tax deduction: Banks should deduct tax at source on interest paid in excess of Rs. 5000 perannum to any depositor. This is not per deposit but per individual. Therefore if an individual has5 deposits and the aggregate interest earned on these is Rs. 7000 though in each individualdeposit, interest should not exceed Rs. 2000, tax must be deducted at source. 18
  19. 19. PUBLIC PROVIDENT FUND (PPF) PPF is a 30 year old constitutional plan of the Central Government happening with theobjective of providing old age profits security to the unorganized division workers and selfemployed persons. Currently, there are almost 30 lakhs PPF account holders in India acrossbanks and post offices.Eligibility: Any individual salaried or non-salaried can open a PPF account. He may also pledgeon behalf of a minor, HUF, AOP and BOI. Even NRIs can open PPF account. A person can containonly one PPF account. Also two adults cannot open a combined PPF account. The collectiveannual payment by an individual on account of himself his minor child and HUF/AOP/BOI (ofwhich individual is member) cannot exceed Rs.70, 000 or else the excess amount will bereturned without any interest.Subscription: The yearly contribution to PPF account ranges from a least of Rs.500 to amaximum of Rs.70, 000 payable in multiple of Rs.5 either in lump sum or in convenientinstallments, not exceeding 12 in a year.Penalty in case of non-subscription: The account will happen to obsolete if the requiredminimum of Rs.500 is not deposited in any year. The amount before now deposited willcontinue to earn interest but with no facility of taking loan or making withdrawals. The accountcan be regularized by depositing for each year of default, arrears of Rs.500 along with penaltyof Rs.100. 19
  20. 20. Where to open: A PPF account can be opened at any branch of State Bank of India or itssubsidiaries or in few national banks or in post offices. On opening of account a pass book willbe issued wherein all amounts of deposits, withdrawals, loans and repayment together withinterest due shall be entered. The account can also be transferred to any bank or post office inIndia.Interest rate: Deposits in the account earn interest at the rate notify by the Central Govt fromtime to time. Interest is designed on the lowest balance among the fifth day and last day of thecalendar month and is attributed to the account on 31st March every year. So to derive themaximum, the deposits should be made between 1st and 5th day of the month, as it alsoenables you to earn interest on your Savings Bank A/c for the previous month.Tenure: Even though PPF is 15 year scheme but the effectual period works out to 16 years i.e.the year of opening the account and adding 15 years to it. The sum made in the 16th financialyear will not earn any interest but one can take advantage of the tax rebate.Withdrawal: The investor is allowable to make one removal every year beginning from theseventh financial year of an amount not more than 50% of the balance at the end of the fourthyear or the financial year immediately preceding the withdrawal, whichever is less. This facilityof making partial withdrawals provide liquidity and the withdrawn amount can be used for anypurpose. 20
  21. 21. NATIONAL SAVINGS CERTIFICATE (NSC) National Savings Certificate (NSC) is a fixed interest, long term instrument forinvestment. NSCs are issued by the Department of Post, Government of India. Since they arebacked by the Government of India, NSCs are a practically risk free avenue of investment. Theycan be bought from authorized post offices. NSCs have a maturity of 6 years. They offer a rateof return of 8% per annum. This interest is calculated every six months, and is merged with theprincipal. That is, the interest is reinvested, and is paid along with the principal at the time ofmaturity. For every Rs. 100 invested, you receive Rs. 160.10 at maturity. NSCs qualify for investment under Section 80C of the Income Tax Act (IT Act). Even theinterest earned every year qualifies under Sec 80C. This means that investments in NSCs andthe interest earned on it every year, up to Rs. 1 Lakh, are deductible from the income of theinvestor. There is no tax deducted at source (TDS).Features of NSC ͻ Minimum investment Rs. 500/- No maximum limit. ͻ Rate of interest 8% compounded half yearly. ͻ Rs. 1000/- grow to Rs. 1601/- in six years. ͻ Two adults, Individuals, and minor through guardian can purchase. ͻ Companies, Trusts, Societies and any other Institutions not eligible to purchase. ͻ Non-resident Indian/HUF cannot purchase. ͻ No pre-mature encashment. 21
  22. 22. POST OFFICE SAVINGS There are various investment schemes available in post offices, like KVP (Kisan VikasPatra), MIS (Monthly Income Scheme) and various others. All these schemes are completelyrisk-free, and you do not need to have large sum of money to start investing in these post officeschemes. Some schemes offer Tax-saving benefits and some gives tax-free returns. So you needto find out some scheme as per your requirements.These are some of the safe and secure investments that you can opt for. Though the interestrates are not so high, but still you must invest some part of your money into any of theseinvestment instruments. It is your hard-earned money, so better play safe and invests somepart in secure funds also.GOVERNMENT SECURITIES (G-secs) Government securities (G-secs) are supreme securities which are issued by the ReserveBank of India on behalf of Government of India in lieu of the Central Governments marketborrowing program.The term Government Securities includes: ͻ Central Government Securities. ͻ State Government Securities ͻ Treasury bills 22
  23. 23. The Central Government borrows funds to finance its fiscal deficit. The marketborrowing of the Central Government is increased through the issue of dated securities and 364days treasury bills either by auction or by floatation of loans. In addition to the above, treasurybills of 91 days are issued for managing the temporary cash mismatches of the Government.These do not form part of the borrowing program of the Central Government.Features ͻ Issued at face value ͻ No default risk as the securities carry sovereign guarantee. ͻ Ample liquidity as the investor can sell the security in the secondary market ͻ Interest payment on a half yearly basis on face value ͻ No tax deducted at source ͻ Can be held in Demat form. ͻ Redeemed at face value on maturity ͻ Maturity ranges from of 2-30 years. ͻ Securities qualify as SLR investments (unless otherwise stated).Benefits of Investing in Government Securities ͻ No tax deducted at source ͻ Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals ͻ Qualifies for SLR purpose ͻ Zero default risk being sovereign paper ͻ Highly liquid. ͻ Transparency in transactions and simplified settlement procedures through CSGL/NSDL. 23
  24. 24. MUTUAL FUNDS A mutual fund is a professionally-managed firm of collective investments that poolsmoney from many investors and invests it in stocks, bonds, short-term money marketinstruments, and/or other securities. In a mutual fund, the fund manager, who is also known asthe portfolio manager, trades the funds underlying securities, realizing capital gains or losses,and collects the dividend or interest income. The investment proceeds are then passed along tothe individual investors. The value of a share of the mutual fund, known as the net asset valueper share (NAV), is calculated daily based on the total value of the fund divided by the numberof shares currently issued and outstanding.Advantages of Mutual Funds 1. Diversification 2. Professional Management 3. Regulatory oversight 4. Liquidity 5. Convenience 6. Transparency 7. Flexibility 8. Choice of schemes 9. Tax benefits 10. Well regulated 11. Drawbacks of Mutual FundsFollowing are the few drawbacks of Mutual Funds: 1. No Guarantees 2. Fees and commissions 3. Taxes 4. Management risk 24
  25. 25. LIFE INSURANCE Life insurance is a contract between the policy owner and the insurer, where the insureragrees to pay an amount of money upon the happening of the insured individuals orindividuals death or other event, like terminal illness, critical illness. In return, the policy owneragrees to pay a fixed amount called a premium at regular intervals or in bulge sum. Like other insurance policies, life insurance is also a contract between the insurer andthe policy owner whereby a benefit is paid to the nominated beneficiaries if an insured eventoccurs which is covered by the policy. The assessment for the policyholder is derived not froman actual claim event. But to a certain extent it is the value derived from the peace of mindexperienced by the policyholder, because of the negating of adverse financial consequencescaused by the death of the Life Assured. To be a life policy the insured event must be basedupon the lives of the people named in the policy.Advantages of a Life Insurance Policy 1. Financial Security 2. Helps to diverts States Resources for Other Purpose 3. Facilitates Economic Movements 4. Helps to Avail Tax Exemptions 25
  26. 26. BONDS DEBENTURES Bonds Debentures, these two words can be used interchangeably. In Indian markets,we use the word bonds to indicate debt securities issued by government, semi-governmentbodies and public sector financial institutions and companies. We use the word debenture torefer to the debt securities issued by private sector companies.Bonds - Debt securities issued by Govt. or Public sector companiesDebentures - Debt securities issued by private sector companiesIn other words we can tell that a bond is a debt security, similar to an I.O.U. When you purchasea bond, you are lending money to a government, municipality, corporation, or Public entityknown as the issuer. The issuer promises to pay you a specified rate of interest during the life ofthe bond, in return for the loan. They also promises to repay the face value of the bond (theprincipal) when it ͞matures.͟Following are allowed to issue bonds ͻ Governments ͻ Municipalities ͻ Variety of institutions ͻ CorporationsBuying and Holding of Bonds: Investors can subscribe to primary issues of Corporates andFinancial Institutions (FIs). It is common practice for FIs and Corporates to raise funds for assetfinancing or capital expenditure through primary bond issues. Some bonds are also available inthe secondary market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. 26
  27. 27. However, this amount varies from issue to issue. There is no prescribed upper limit to yourinvestment. The duration of a bond issue usually varies between 5 and 7 years.Selling of Bonds: Selling bonds in the secondary market has its own drawbacks. First, there is aliquidity problem which means that it is a tough job to find a buyer. Second, even if you find abuyer, the prices may be at a sharp discount to its intrinsic value. Third, you are subject tomarket forces and, hence, market risk. If interest rates are running high, bond prices will bedown and you may well end up incurring losses. On the other hand, Debentures are alwayssecured.Debentures A debenture is similar to a bond except the securitization conditions are different. Adebenture is generally unsecured in the sense that there are no liens or pledges on specificassets. It is defined as a certificate of agreement of loans which is given under the companysstamp and carries an undertaking that the debenture holder will get a fixed return (fixed on thebasis of interest rates) and the principal amount whenever the debenture matures.Debentures vs. Bonds: Debentures and bonds are similar except for one difference bonds are more secure thandebentures. In case of both, you are paid a guaranteed interest that does not change in valueirrespective of the fortunes of the company. However, bonds are more secure than debentures,but carry a lower interest rate. The company provides collateral for the loan. Moreover, in caseof liquidation, bondholders will be paid off before debenture holders. 27
  28. 28. STOCK MARKET The first step is to understand the stock market. A share of stock is the smallest unit ofownership in a company. If you own a share of a company͛s stock, you considered as the partowner of the company.Stock Market Trading Stock market trading consists of buying and selling of company stocks and as well asstock derivatives. This type of trading usually takes place in a stock exchange, in whichcompanies need to be listed in order for their shares to be bought and sold. This trading marketprovides with substantial earnings potential and is one among the most popular investmentoptions.Working of Stock Market Stock market trading is normally done by brokers. As a result, the first step is to seek areliable investment broker. Stock market trading occurs at a physical stock exchange, wherebuyers and sellers of company shares meet and agree on the price at which the transactionswould materialize. Conventional stock trading entails an investor placing an order for a specific number ofshares of a company with his/her broker present in the physical stock market. The brokerforwards the order to the floor clerk, who then attempts to locate a trader desire to sell thoseshares. Bids are then exchanged. The transaction closes only after the buyer agrees on the price 28
  29. 29. quoted by the seller. This technique is also called ͞open outcry,͟ because it involves traderscrying out their bids. Stock market trading will also takes place online. This procedure is much quicker andless complicated than trading in the physical stock market. Online stock market tradingengrosses the real time placement of buying and selling orders for stocks. The transaction isaccomplished when the trading system is capable to match bids and a confirmation is received.Benefits of Stock Market Trading 1. It promotes economic growth. 2. It helps companies raise capital and handle financial issues. 3. It ensures that money is invested in businesses to enhance profit potential. 4. It helps investors realize substantial profits.Drawbacks of Stock Market Trading: 1. It proposes lower leverage than other forms of trading, such as Forex trading. 2. The short selling of stocks is hard, because stock prices do not appreciate significantly in a short span of time. Accordingly, there is a wait period before you can book healthy profits. 3. It is traded for limited hours in a day. 29
  30. 30. COMMODITY TRADING The terms ͞commodities͟ and ͞futures͟ are often used to depict commodity trading orfutures trading. It is similar to the way ͞stocks͟ and ͞equities͟ are used when investors talkabout the stock market. Commodities are the actual physical goods like gold, crude oil, corn,soybeans, etc. Futures are contracts of commodities that are traded at a commodity exchangelike MCX. Apart from numerous regional exchanges, India has three national commodityexchanges namely, Multi Commodity Exchange (MCX), National Commodity and DerivativesExchange (NCDEX) and National Multi-Commodity Exchange (NMCE). Forward MarketsCommission (FMC) is the regulatory body of commodity market. It is one of a few investment areas where an individual with limited capital can makeextraordinary profits in a relatively short period of time. Many people have become very rich byinvesting in commodity markets. Commodity trading has a bad name as being too risky for theaverage individual. The fact is that commodity trading is only as risky as you want to make it.Those who treat trading as a get-rich-quick scheme are likely to lose because they have to takebig risks. If you act carefully, treat your trading like a business and are willing to settle for areasonable return, the possibility of success is very high. The course of trading commodities is also known as futures trading. Unlike other kindsof investments, such as stocks and bonds, when you trade futures, you do not really buyanything or own anything. You are speculating on the future direction of the price in thecommodity you are trading. This is like a bet on future price direction. The terms buy andsell merely indicate the direction you expect future prices will move. If, for example, you were 30
  31. 31. speculating in wheat, you would buy a futures contract if you thought the price would be goingup in the future. You would sell a futures contract if you thought the price of wheat would godown. For every trade, there is always a buyer and a seller. Neither person has to own anywheat to participate. But he has to deposit sufficient capital with a brokerage firm to insurethat he will be able to pay the losses if his trades lose money.Working of Commodity Market: Commodity Market works Just like stock futures. When youbuy Futures, you dont have to pay the entire amount, just a fixed percentage of the cost. This isknown as the margin. Lets say you are buying a Gold Futures contract. The minimum contractsize for a gold future is 100 Gms. 100 gms of gold may be worth Rs. 1,50,000. The margin forgold set by MCX is 3.5%. So you only end up paying Rs 5,250. The low margin means that you can buy futures representing a large amount of gold bypaying only a fraction of the price. So you bought the Gold Futures contract when it was Rs.1,50,000 per 100 gms. The next day, the price of gold rose to Rs 1,60,000 per 100 gms. Rs10,000 (Rs 1,60,000 - Rs 1,50,000) will be credited to your account. The following day, the pricedips to Rs 1,55,000. Rs 5000 will get debited from your account (Rs 1,60,000 - Rs 1,55,000). 31
  32. 32. FOREX MARKET Forex trading is the immediate trade of one currency and the selling of another.Currencies are traded through an agent or dealer and are traded in pairs. For example Euro(EUR), US dollar (USD), British pound (GBP) or Japanese Yen (JPY). Here you are not buying anything physical; this type of trading is confused. Think ofbuying a currency as buying a share of a particular country. When you purchase say JapaneseYen, you are in effect buying a share in the Japanese financial system, as the price of thecurrency is a direct reflection of what the market thinks about the current and future health ofthe Japanese economy. In common, the exchange rate of a currency versus other currencies is areflection of the condition of that countrys financial system compared to the other countriesfinancial system. Unlike other financial markets like the New York Stock Exchange, the Forex spot markethas neither a physical location nor a central exchange. The Forex market is measured an Over-the-Counter (OTC) or Interbank market, due to the fact that the entire market is runelectronically within a network of banks continuously over a 24-hour period. Until the late 1990s only the big guys could play this game. The first requirement wasthat you could trade only if you had about ten to fifty million bucks to start with Forex. Forexwas initially intended to be used by bankers and large institutions and not by small guys.However because of the rise of the Internet, online Forex trading firms are now able to offer 32
  33. 33. trading accounts to retail traders. All you need to get started is a computer, a high-speedInternet connection, and the information.The foreign exchange market is exclusive because of the following reasons; ͻ Its trading volumes ͻ The tremendous liquidity of the market ͻ Its geographical dispersion ͻ Its long trading hours ͻ The variety of factors that affect exchange rates. ͻ The low limits of profit compared with other markets of fixed income but profits can be high due to very great trading volumes ͻ The use of leverageBenefits of Forex Trading 1. Forex is the largest market. 2. No Bulls or Bears! 3. Forex trading online offers great leverage 4. Forex prices are predictable. 5. Forex trading online is commission free 6. Forex trading online is instant. 33
  34. 34. REAL ESTATE AS AN INVESTMENT OPTION The growth curve of Indian economy is at an all time high and contributing to theupswing is the real estate sector in particular. Investments in Indian real estate have beenstrongly taking up over other options for domestic as well as foreign investors. The boom in the sector has been so appealing that real estate has turned out to be aconvincing investment as compared to other investment vehicles such as capital and debtmarkets and bullion market. It is attracting investors by offering a possibility of stable incomeyields, moderate capital appreciations, tax structuring benefits and higher security incomparison to other investment options. A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) andErnst Young has predicted that Indian real estate industry is poised to emerge as one of themost preferred investment destinations for global realty and investment firms in the next fewyears. The potential of Indias property market has a revolutionizing effect on the overalleconomy of India as it transforms the skyline of the Indian cities mobilizing investmentssegments ranging from commercial, residential, retail, industrial, hospitality, healthcare etc. Butmaximum growth is attributed to its growth from the booming IT sector, since an estimated 70per cent of the new construction is for the IT sector. Real estate industry research has also thrown light on investment opportunities in thecommercial office segment in India. The demand for office space is expected to increasesignificantly in the next few years, primarily driven by the IT and ITES industry that requires anprojected office space of more than 367 million sq ft till 2012-13. 34
  35. 35. INVESTMENT IN GOLD Gold has got lot of emotional value than monetary value in India. India is the largestconsumer of gold in the world. In western countries, you can find most of their gold in theircentral banks. But in India, we use gold mainly as jewels. If you look at gold in a business sense,you will understand that gold is one of the all time best investment tool. My dear readers,today I would like to discuss on investments in gold and its potential.Indian Gold Market Current Scenario: y Size of the Gold Economy: more than Rs. 30,000 crores y Number of gold jewelry manufacturing units: 1,00,000 y Number of people employed: 5,00,000 y Gems Jewellery constitute 25% of India¡¦s exports about 10% of our import bill constitute gold import. y Number of banks allowed importing gold: 15 (While recently this has been liberalized, detailed notification is awaited) y Official estimates of the stock of gold in India: 9,000 tons y Unofficial estimates of the stock of gold in India: 12,000 ¡V 14,000 tons y Gold held by the Reserve Bank of India: 358 tons y Gold production in India: 2 tons per annum. 35
  36. 36. Demand for gold in the Indian Market: India has the highest demand for gold in the world and more than 90% of this gold isacquired in the form of jewellery. Following are the factors influencing the demand for gold.The movement of gold prices is one of the important variables determining demand for gold.The increase in the irrigation, technological change in agriculture (through mechanization andhigh yielding varieties), have generated large marketable surplus and a highly skewed ruralincome distribution is another factors contributing to additional demand for gold.Supply of Gold: The main economic effects that arise from the changes in the supply of goldcan be seen against the quantum of gold that is already in existence in the economy. The supplyof gold is not up to the requirements as the production of gold is also coming down anddemand for gold is going up very sharply.Gold as an Investment Option: Gold as an investment tool always gives good returns, flexibility, safety and liquidity tothe investors. Therefore as a financial consultant my advice to you all is, kindly allocate aportion of your portfolio for gold investments. Practice the habit of buying at least one gram ofgold every month. 36
  37. 37. EMERGING INVESTMENT AVENUES According to a study undertaken jointly by Merrill Lynch, Cap Gemini, and Ernst Young, High Net worth Individuals [HNIs] or wealthy investors are proactive in portfoliomanagement, risk management, consolidation financial assets and use of diversificationstrategies as actively as large institutions. HNIs are proactive in identifying new investmentoptions and take inputs from professional advisors in volatile market conditions. HNIs are dynamic in modifying their asset allocation and were among the first investorsto move from equities to fixed income during 2001-2002 period of downturn in equity markets.They shifted back to equities when they identified favorable market trends.Investment products and avenuesͻ Managed products: Managed product service is the most popular investment strategyadopted by wealthy investors globallyͻ Real Estate: Wealthy investors have found this asset class very attractive and haveinvested directly in real estate and indirectly through real estate investment trusts.ͻ Art and passion: Wealthy investors also have their investment in art, wine, antiques,and collectiblesͻ Precious Metals: Gold and other precious metals are attractive investment options tobalance the asset allocation 37
  38. 38. ͻ Commodities: Wealthy investors have turned to commodities to offset the lowerreturns from fixed income securities.ͻ Alternative investments: Hedge funds and Private equity investments such as venturefunds are becoming increasingly popular with wealthy investors to reduce the investment risksrelated to stock market fluctuations. This is because these instruments have low correlationwith equity asset class performance. Investment in non correlated assets, such as commoditieshelps to improve diversification of the portfolio amidst volatile market conditions.INVESTMENT IN ART Today, we find that an increasing number of individuals are looking at alternativeinvestments, which provide them with a diversification away from a particular asset class.People are willing to invest and looking for areas other than the stock market for investing.Investing in the vintage wine, coins, stamps and Art, is now an indulgence which gives them anopportunity to cash in on their hobbies, without having the level of expertise that is requiredfor other direct investments. Art is being incorporated into the investors overall asset allocation decision. The artscene around the world is growing significantly. With more and more investors looking at art asan alternative asset class and a store of a long term value, average annual art valuations haveoutpaced average annual stock market valuations by more than three times since 2000. 38
  39. 39. HEDGE FUNDS Over the last 15 years, hedge funds have become increasingly popular with high networth individuals, as well as institutional investors. The number of hedge funds has risen byabout 20% per year and the rate of growth in hedge fund assets has been even more rapid. A hedge fund is a private investment fund, charging a performance fee and is open toonly a limited number of investors. These funds are like mutual funds, which collect moneyfrom investors and use the proceeds to buy stocks and bonds. They can invest on almost anytype of opportunity; in any market where in good returns are expected with low risk levels.Hedge Fund Risks: y Lack of transparency y Limited liquidity y Difficulty accessing quality hedge funds y Unreliable or incomplete return data y Valuation risk y Asymmetrical nature of Hedge fund returns distributions [SKEW] y Counterparty risk [Leverage] 39
  40. 40. PRIVATE EQUITY INVESTMENTS Is the most important funding source in the entrepreneurial marketplace? Privateequity investments contribute to the funding of around 25 times the number of businesses theventure capitalists fund each year. Private equity investments are usually derived from a high net-worth individual whorepresents an essential source of funding for early stage, high-risk ventures. It is estimated thatone-seventh of the 300,000 + start/early growth firms in the US receive funding from angelinvestors. This translates into over $20 billion of investment in approximately 50,000 deals eachyear. This investment group exceeds venture capital sources which are estimated at $5 - $7billion spread over 1,000 venture capital investments each year.A typical profile of a private equity investor:ͻ Is someone that prefers to invest within one day of travel?ͻ Is very well educatedͻ Tends to invest collectively within a group of other private equity investorsͻ Usually invests within the dollar range of $10,000 - $500,000, averaging $230,000ͻ Makes one investment every two years Private equity investors have proven to be the single most important players in theentrepreneurial marketplace. Private capital investors fund thirty to forty times as manyentrepreneurial companies as the entire venture capital industry and estimates put the totalamount between $20 - $60 billion annually. 40
  42. 42. Analysis in this report: An analysis is made on the responses received from 100 sample investors. The objectiveof the report is to find out the investor͛s behaviour on various investment avenues, to find outthe needs of the current and future investors. The questionnaire contains various questions on the investor͛s financial experience,based on these experiences an analysis is made to find out a pattern in their investments. Based on these investment experiences of the 100 sample investors an analysis is madeand interpretations are drawn. Interpretations are made on a rational basis, theseinterpretations may be correct or may not be correct but care is taken to draw a valid andapprovable interpretation. Analysis is made only from the information collected through questionnaires no otherdata or information is taken in to consideration for purpose of the analysis. 42
  43. 43. Analysis of the Survey:TABLE 1: DEMOGRAPHICS OF THE SAMPLE INVESTORPARAMETER NO: OF INVESTORS PERCENTAGEGENDERMALE 58 58%FEMALE 42 42%TOTAL 100 100%AGE GROUPBELOW 20 0 0%BETWEEN 20 ʹ 30 35 35%BETWEEN 30 ʹ 40 35 35%ABOVE 40 30 30%TOTAL 100 100%QUALIFICATIONUNDER GRADUATES 7 7%GRADUATES 46 46%POST GRADUATES 39 39%OTHERS 8 8%TOTAL 100 100%OCCUPATIONSALARIED 52 52%BUSINESS 22 22%PROFESSIONAL 14 14%HOUSE WIFE 11 11%RETIRED 1 1%TOTAL 100 100%ANNUAL INCOMEBELOW Rs. 2,00,000 37 37%Rs. 2,00,000 - 4,00,000 31 31%Rs. 4,00,000 - 6,00,000 18 18%ABOVE Rs, 6,00,000 14 14%TOTAL 100 100% 43
  44. 44. Interpretation: Table 1 above shows, that 58 (58%) of the investors are men and the rest 42(42%) arefemales. Generally males bear the financial responsibility in Indian society, and therefore theyhave to make investment (and other) decisions to fulfill the financial obligations. When it comes to age, it was found that 35% are young and significant number underthe age group of 20 ʹ 30. 35% of them are in the age group of 30 to 40. 30% of them are above40 years of age. There are no investors below 20 years of age. Nearly 52% of the investors belong to the salaried class, 22% were business class, 14%were professionals, 11% were housewives and the rest were retired. It was found that irrespective of annual income they earn all the investors interested ininvestments since today͛s inflated cost of living is forcing everyone to save for their futureneeds, and invest those saved resources efficiently. 39(39%) of the individual investors covered in the study are postgraduates; 46(46%)investors are graduates and 7(7%) of the investors are under-graduates, and 8(8%) investorsare categorized as others who are either illiterates, had less education than under graduationor who are more qualified than post graduates. It is interesting to note that most investors(covered in the study) can be said to possess higher education (Bachelor Degree and above),and this factor will increase the reliability of conclusions drawn about the matters underinvestigation. 37(37%) of the investors are earning less than 2 lakhs per annum, 31(31%) investors areearning between 2 lakhs and 4 lakhs, 18(18%) investors are earning between 4 lakhs and 6 44
  45. 45. Lakhs, 14(14%) investors are earning more than 6 lakhs per annum. Since most of the investorsare below 4 lakhs annual earnings, many of them are non risk takers.TABLE 2 OTHER CHARACTERISTICS OF SAMPLE INVESTOR Table 2.1 INVESTORS WILLING TO LOSE PRINCIPAL AMOUNT PARAMETER NO OF INVESTORS PERCENTAGE YES 5 5 NO 95 95 TOTAL 100 100Interpretation: since many of the investors annual earnings are below 2 lakhs and 4 lakhs,many of them do not take the risk of losing their principal investment amount. 95% of thesample investors are not ready to lose their principal investment amount. 5% are ready to takerisk of losing their principal up to certain extent. Table 2.2 TIME PERIOD PREFERED TO INVEST PARAMETER NO OF INVESTORS PERCENTAGE SHORT TERM 10 10 MEDIM 60 60 LONG TERM 30 30 TOTAL 100 100 45
  46. 46. Interpretation: It͛s interesting to know that many of the investors prefer to invest their moneyfor medium term i.e. from 1 ʹ 5 yrs, instead of short term or long term. 10% preferred shortterm, 60% preferred medium term, and 30% preferred long term.Table 2.3 FREQUENCY OF MONITORING THE INVESTMENTPARAMETER NO OF INVESTORS PERCENTAGEDAILY 17 17MONTHLY 35 35OCCATIONALLY 41 41OTHER 7 7TOTAL 100 100 NO OF INVESTORS OTHER, 7 DAILY, 17 DAILY MONTHLY OCCATIONA OCCATIONALLY LLY, 41 OTHER MONTHLY, 3 5 46
  47. 47. Interpretation: Due to the busy life schedule, many of the investors are not able to spend timein monitoring their investments, only 17% of the investors are monitoring their investmentsdaily, 35% are monitoring on a monthly basis, 41% , the majority investors are monitoring theirinvestments occasionally. Many of them who have invested in safe investment avenues do notbother about their investments, some of them forget about the investments for many years.Table 2.4 INVESTMENT IN EQUITY MARKETPARAMETER NO OF INVESTORS PERCENTAGEYES 30 30NO 70 70TOTAL 100 100 Out of the total sample investors only 70% of the investors invest in equity share marketthrough their DEMAT A/C, 30% of the investors never invested in equity shares. The investorswho invest in equity share market are asked another question, what would they do if the stockmarket falls immediately after their investment, many of them replied that they would wait tillthe market increases instead of selling them at a loss, very few answered that they wouldaverage the investment by buying some more shares.Table 2.5 FAMILY BUDGETPARAMETER NO OF INVESTORS PERCENTAGEYES 73 73NO 27 27TOTAL 100 100 47
  48. 48. 73% of the sample investors had a monthly family budget for their daily expenditure.27% of the investors replied they never thought of having a budget calculation, and few think ofhaving a budget but never implemented so far. Many people with excess money never cared tomake any family budgets.Table 2.6 INVESTMENT TARGETPARAMETER NO OF INVESTORS PERCENTAGEYES 48 48NO 52 52TOTAL 100 100 It͛s interesting to know that almost same proportion of investors have differentthoughts, 48% of the investors have an investment target every year, and 52% of the investorsdo not go for any targets for investment. On personal questioning many of the investors whohad an investment target every year are not able to reach their targets due to contingentexpenses. Few investors invest regularly but never thought of having a target every year. 48
  49. 49. Table 2.7 FINANCIAL ADVISORPARAMETER NO OF INVESTORS PERCENTAGEYES 23 23NO 77 77TOTAL 100 10077% of the investors never had a financial advisor, they never approached an advisor for theirfinancial needs, the reason may be inadequate income and excess expenditure, and therewouldn͛t be surplus money to worry about. 23 % of the investors have financial advisors, whomanage their investments.Table 3 Objectives of InvestmentTable 3.1 SAVINGS OBJECTIVEPARAMETER VOTES WEIGHTS RANKINGCHILDRENS EDUCATION 71 29 1RETIREMENT 47 19 3HOME PURCHASE 38 15 4CHILDRENS MARRIAGE 30 12 5HEALTHCARE 57 23 2OTHERS 5 2 6TOTAL 248 100 49
  50. 50. VOTES OTHERS HEALTHCARE CHILDRENS MARRIAGE HOME PURCHASE VOTES RETIREMENT CHILDRENS EDUCATION 0 20 40 60 80 Table 3.1 shows the savings objectives of the sample investors, investors are givenoption to select one or more savings objectives, since there may be one or more answers,weights are given for each parameter bases on the votes given by the investors, the maximumweigthage represents many investors have that as main objective. Based on the weightscalculated ranks are given in the order of maximum weightage given by investors. First rank isgiven to children͛s education, many investors feel that, investing money for the future of theChilds education is very important than any other need. Many of the investors are in the agegroup of 20 ʹ 30 and 30 ʹ 40 as of now they are thinking of saving for their children͛s marriage.So children͛s marriage is given last rank. After children͛s education investors are saving for theirown health care. There is a greater need for Indians to save for their health care who are livinga mechanical life. Retirement and home purchase are given subsequent ranks after health care. 50
  51. 51. Table 3.2 PURPOSE BEHIND INVESTMENTPARAMETER VOTES WEIGHTS RANKWEALTH CREATION 37 22 4TAX SAVING 43 25 3EARN RETURNS 45 27 1FUTURE EXPENDITURE 44 26 2TOTAL 169 100 All the investors have very common purposes for investing, they have more than onepurpose for investing their money. Salaried people invest for tax savings, and for futureexpenditure, business people invest for the purpose of earning returns. Almost all the investorshave all the 4 purposes behind investing their money. 51
  52. 52. Table 3.3 FACTORS CONSIDERING BEFORE INVESTINGPARAMETER VOTES WEIGHTS RANKINGSAFETY OF PRINCIPAL 60 43 1LOW RISK 35 25 2HIGH RETURNS 27 19 3MATURITY PERIOD 16 11 4TOTAL 138 100 When the investors are asked about the factors considering before investment many ofthem have voted for safety of principal and low risk. First rank is given to safety of principal and2 nd to low risk. Here there are some contradicting results, some investors expect high returnsat a very low risk, and this is not possible in practical Indian investment avenues. Investmentbelieves in a proved principle, ͞higher the risk higher the returns, lower the risk lower thereturns͟. Investors need to know about this principle before investing. 52
  53. 53. Independent Variables and Dependent VariablesThere are total four independent variables1. Age group. 2. Occupation. 3. Qualification. 4. Annual incomeThere can be many dependent variables like 1. Level of risk tolerance 2. Percentage of income that can be invested 3. Time period that can be taken for investments 4. Savings objectives 5. Investment preference.These independent variables can be compared with any dependent variables for finding therelations between the parameters.In my analysis I have taken occupation category for comparison with dependent variableinvestment preference and age group comparing with the dependent variable level of risktolerance.Below are the demographics of the sample investors based on the category occupation. 53
  55. 55. GRADUATES 11 50%POST GRADUATES 6 27%OTHERS 0 0%TOTAL 22 100%ANNUAL INCOMEBELOW Rs. 2,00,000 11 50%Rs. 2,00,000 -4,00,000 5 23%Rs. 4,00,000 -6,00,000 1 5%ABOVE Rs, 6,00,000 5 23%TOTAL 22 100%III. PROFESSIONALPARAMETER NO: OF - PROFESSIONAL PERCENTAGEAGE GROUPBELOW 20 0 0%BETWEEN 20 - 30 8 57%BETWEEN 30 - 40 2 14%ABOVE 40 4 29%TOTAL 14 100%QUALIFICATIONUNDER GRADUATES 0 0%GRADUATES 6 43%POST GRADUATES 6 43%OTHERS 2 14%TOTAL 14 100%ANNUAL INCOMEBELOW Rs. 2,00,000 2 14%Rs. 2,00,000 -4,00,000 8 57%Rs. 4,00,000 -6,00,000 1 7%ABOVE Rs, 6,00,000 3 21%TOTAL 14 100% 55
  56. 56. IV. HOUSEWIFEPARAMETER NO: OF - HOUSEWIFE PERCENTAGEAGE GROUPBELOW 20 0 0%BETWEEN 20 - 30 4 36%BETWEEN 30 - 40 3 27%ABOVE 40 4 36%TOTAL 11 100%QUALIFICATIONUNDER GRADUATES 1 9%GRADUATES 6 55%POST GRADUATES 2 18%OTHERS 2 18%TOTAL 11 100%ANNUAL INCOMEBELOW Rs. 2,00,000 9 82%Rs. 2,00,000 -4,00,000 1 9%Rs. 4,00,000 -6,00,000 0 0%ABOVE Rs, 6,00,000 1 9%TOTAL 11 100%ASSUMPTIONAs a part of the analysis I assumed that preference for investment avenues is dependent on theoccupation of the investor. Hence preferred investment avenue are derived from thedemographics of the sample investor based on occupation. 56
  57. 57. Table 5: INVESTMENT PREFERENCE BASED ON OCCUPATIONTable 5.1 Preferred investment avenues for salariedINVESTMENTAVENUES VOTES WEIGHTS RANKLIFE INSURANCE 35 16 1GOLD 25 12 2BANK FIXED DEPOSITS 24 11 3MUTUAL FUNDS 23 11 4REAL ESTATE 23 11 5POST OFFICE SAVINGS 20 9 6PPF 18 8 7NSC 17 8 8EQUITY SHARES 16 7 9SAVINGS ACCOUNT 14 7 10TOTAL 215 100Since the investor has an option to invest in more than one Investment Avenue, weights aregiven on the basis of preference to investment avenues. The avenue which is given maximumweightage by the investors is ranked first. First Ten ranks are given to the first ten preferredinvestment avenues. First preference is given to life insurance, second to investing in gold, thirdto bank fixed deposits. Tenth preference is given to bank savings account.Table 5.2 Preferred investment avenues for business peopleINVESTMENTAVENUES VOTES WEIGHTS RANKBANK FIXED DEPOSITS 13 16 1INSURANCE 13 16 2REAL ESTATE 11 14 3MUTUAL FUNDS 10 12 4GOLD 8 10 5 57
  58. 58. EQUITY SHARES 7 9 6 CHIT FUNDS 6 7 7 POST OFFICE SAVINGS 5 6 8 SAVINGS ACCOUNT 4 5 9 NSC 4 5 10 TOTAL 81 100 Thinking of the business people is almost same to that of salaried people, both aresimilar in preferring insurance and bank fixed deposits, but given third preference to realestate. Gold is given 5th place here. Last place is given to national savings certificates.Table 5.3 Preferred investment avenues for professionals III. PROFESSIONAL INVESTMENT AVENUES VOTES WEIGHTS RANK BANK FIXED DEPOSITS 10 19 1 INSURANCE 10 18 2 GOLD 6 11 3 REAL ESTATE 6 11 4 POST OFFICE SAVINGS 5 9 5 SAVINGS ACCOUNT 4 7 6 MUTUAL FUNDS 4 7 7 PPF 3 6 8 BONDS 3 6 9 GOVT SECURITIES 3 6 10 TOTAL 54 100There is no much difference in the preferences of professionals when compared to salaried andbusiness people. Professionals does not prefer mutual funds(7th rank), where salaried andbusiness people prefer at 4th place. Professionals are more interested in post office savingsrather than mutual funds. As business people professionals also prefer bank fixed deposits inthe first place, then life insurance. Professionals does not prefer national saving certificates atall, eliminated it from the top 10. 58
  59. 59. Table 5.4 Preferred investment avenues for housewivesINVESTMENTAVENUES VOTES WEIGHTS RANKGOLD 9 18 1INSURANCE 9 18 2BANK FIXED DEPOSITS 8 16 3REAL ESTATE 5 10 4POST OFFICE SAVINGS 5 10 5CHIT FUNDS 4 8 6EQUITY 4 8 7SAVINGS ACCOUNT 3 6 8NSC 2 4 9MUTUAL FUNDS 1 2 10TOTAL 50 100Indian housewives love gold as much as themselves. Housewives have given first rank to goldpushing insurance and bank fixed deposits to second and third place. House wives gave leastpreference to mutual funds. They are more attracted to traditional investment avenues likegold, real estate, post office savings and chit funds.Table 5.5 Preferred investment avenues ʹ overallINVESTMENTAVENUES VOTES WEIGHTS RANKLIFE INSURANCE 67 17 1BANK FIXED DEPOSITS 55 14 2GOLD 50 13 3REAL ESTATE 45 12 4MUTUAL FUNDS 38 10 5POST OFFICE SAVINGS 35 9 6EQUITY SHARES 29 8 7SAVINGS ACCOUNT 25 6 8NSC 25 6 9PPF 22 5 10TOTAL 391 100 59
  60. 60. HYPOTHESIS - Increase in Age decreases the Risk tolerance level. y Relation between Age and risk tolerance y Level of risk tolerance dependent on the age of the investor. y Risk tolerance of an investor shows a negative relation to the age of that investor y Lower the age higher the risk capabilities, higher the age lower the risk capabilities.LEVEL OF RISK TOLERANCE WITH RESPECT TO AGE GROUPFor the purpose of analysis investors are placed under three categories. 1. Low risk category 2. Medium risk 3. High riskClassification is done based on three factors 1. Past investments of the investor. 2. Investor experience in investing( level of experience). 3. Investor preference for investments.First the total sample of 100 is divided in to 3 age groups.Investors in each age group are classified in to 3 risk categories based on the above factors. 60
  61. 61. Table 6: Finding relationship between age group and level of risk toleranceTable 6.1 risk tolerance of age group 20 ʹ 30PARAMETER 20 - 30 AGE GROUP NO OFLEVEL OF RISK INVESTORS PERCENTAGELOW RISK 13 37%MEDIUM RISK 17 49%HIGH RISK 5 14%TOTAL 35 100%Table 6.2 risk tolerance of age group 30 - 40PARAMETER 30 - 40 AGE GROUP NO OFLEVEL OF RISK INVESTORS PERCENTAGELOW RISK 20 57%MEDIUM RISK 11 32%HIGH RISK 4 11%TOTAL 35 100%Table 6.3 risk tolerance of age group above 40PARAMETER ABOVE 40 AGE GROUPLEVEL OF RISK NO OF INVESTORS PERCENTAGELOW RISK 21 70%MEDIUM RISK 6 20%HIGH RISK 3 10%TOTAL 30 100% 61
  62. 62. OBSERVATIONS:Observations from table 6.1, 6.2, 6.3 From the table 6.1 we find that 49% of Investors between the age group of 20 ʹ 30 cameunder medium risk category, where as the percentage of investors who came under mediumrisk in the age group of 30 ʹ 40 has decreased to 32%. It still came down in the case of investorsin the age group of 40 above, which is only 20%. We can see a decreasing trend in thebehaviour of investors towards medium risk when their age increased. 37% of the investors in the age group of 20 ʹ 30 are in the low risk category, where asInvestors under the age group 30 ʹ 40, 57% came under the low risk category, there is a largeincrease in the investors who came under low risk category in this age group. It has furtherincreased, 70% of the investors in the age group above 40 came under the low risk category.We can see an increasing trend with respect to low risk category as the age increases. Same observations are arrived at, when comparing the high risk category with respectto the age groups. As the age increases the level of risk tolerance is coming down. 14% cameunder the high risk category under the age group 20 ʹ 30, when it came to age group above 40above only 10% came under the high risk category. From the above observations we can conclude that there is a strong inverse or negativerelationship between risk tolerance and age group. 62
  63. 63. Attributes Risk Tolerance LevelAge -0.74 When Karl Pearson͛s correlation coefficient is calculated, it is found to be -0.74 by whichwe can conclude that there is a strong negative correlation between Age and Risk tolerance.Age accounts for the major differences in risk taking decisions by the investors. The older aninvestor, the better seemed his/her performance in comparison to the younger ones. Over-confidence in their own investment ability among the youngsters largely accounts for theexcessive trading among younger investors leading to lower returns and this direct to decline inthe risk tolerance level. 63
  65. 65. Findings: 1. The study reveals that male investors dominate the investment market in India. 2. Most of the investors possess higher education like graduation and above. 3. Majority of the active and regular Investors belong to accountancy and related employment, non-financial management and some other occupations are very few. 4. Most investors opt for two or more sources of information to make investment decisions. 5. Most of the investors discuss with their family and friends before making an investment decision. 6. Percentage of income that they invest depend on their annual income, more the income more percentage of income they invest. 7. The investors͛ decisions are based on their own initiative. 8. The investment habit was noted in a majority of the people who participated in the study. 9. Most Investors prefer to park their funds in avenues like Life insurance, FD, Gold and Real Estate. 10. Most of the investors get their information related to investment through electronic media (TV) next to print media (News paper/ Business news paper/ Magazines) 11. Most of the investors are financial illiterates. 12. Increase in age decrease the risk tolerance level. 13. Women are attracted towards investing gold than any other investment avenue. 65
  66. 66. Risk tolerance level and Suggestion of Suitable Portfolio to theInvestors The role of uncertainty and the knowledge about the return on Investment Avenue areimportant components of any investment. The extent of an investor͛s ability to tolerate theseuncertainties of return is referred as risk tolerance level of an investor (Schaefer, 1978). Risktolerance tends to be subjective rather than objective. Schaefer described the relation this way: ͞two persons may very well agree on theriskiness of a set of gambles, but may nevertheless prefer different gambles, rank orderingthem differently according to their personal tolerance. There are two common methods ofestimating investors͛ tolerance of risk. The first method is a clear understanding of the investorand his/her history with investment securities. The second method is to use a questionnairedesigned to elicit feelings about risky assets and the comfort level of the investor given certainchanges in the portfolio or certain investment scenarios. The second method is used to know the risk tolerance level of the investors. Based onthe responses to the questionnaire, the cumulative scale is constructed and scores are assignedto each investor accordingly to categorize the respondents in to i.e. Low, Moderate and Highrisk tolerance level. The investors are divided into 3 categories i.e., A, B and C depending ontheir risk tolerance starting with Low risk tolerance, Moderate risk tolerance and High risktolerance. Generally investors with a low risk tolerance act differently with regard to risk thanindividuals with a high risk tolerance. Investor with a high level of risk tolerance would becomfortable with market volatility, while low risk-tolerance individuals require stability and are 66
  67. 67. averse to uncertainties. (MacCrimmon Wehrung, 1986). Individuals with low levels of risktolerance require lower chances of a loss, choose not to operate in unfamiliar situations andrequire more information about the performance of an investment (MacCrimmon Wehrung). Table 7 SUGGESTED PORFOLIO CONSTRUCTION BASED ON AGE GROUP AND LEVEL OF RISK LEVEL OF RISK - PERCENTAGE OF INCOME TO BE PARAMETER APPORTIONED TOTAL AGE GROUP LOW RISK MEDIUM RISK HIGH RISK BETWEEN 20 - 30 30% 50% 20% 100% BETWEEN 30 - 40 50% 35% 15% 100% ABOVE 40 70% 20% 10% 100% TOTAL 100% 100% 100%Portfolio construction:Step 1: Identify the age group of the investor, check in which age group he comes under.Suggest suitable portfolio from the above table.Example: An investor of age 36 working in public sector Company has approached you to investhis 8 lakhs of money in a suitable investment.Advice : the investor comes under the age group 30 ʹ 40.His suitable portfolio will be 1. 50% invest in low risk investment avenues. 2. 35% invest in medium risk avenues. 3. 15% invest in high risk avenues. Step 2: investment preference made from the table 5.5 or based on his occupation. Since he come under the occupation salaried he can choose the preferred investment avenues from table 5.1 67
  69. 69. Summary This report is a reflection of the behaviour of various categories of investors.Selection of a perfect investment avenue is a difficult task to any investor. An effort is made toidentify the tastes and preferences of a sample of investors selected randomly out of a largepopulation. Despite of many limitations to the study I was successful in identifying someinvestment patterns, there is some commonness in these investors and many of themresponded positively to the study. This report concentrated in identifying the needs of current and future investors,investor͛s preference towards various investment avenues are identified based on theiroccupation. Investors risk in selecting a particular avenue is dependent on the age of thatinvestor.Conclusion This study confirms the earlier findings with regard to the relationship between Age andrisk tolerance level of individual investors. The Present study has important implications forinvestment managers as it has come out with certain interesting facets of an individualinvestor. The individual investor still prefers to invest in financial products which give risk freereturns. This confirms that Indian investors even if they are of high income, well educated,salaried, independent are conservative investors prefer to play safe. The investment productdesigners can design products which can cater to the investors who are low risk tolerant anduse TV as a marketing media as they seem to spend long time watching TVs. 69
  70. 70. BIBILIOGRAPHY BOOKS1. The Mindful Investor, by Maria Gonzalez and Graham Bayron.2. Understanding Indian Investors, by Jawahar Lal.3. Security Analysis and Portfolio Management by Punithavathi Pandian.4. Investment Analysis and Portfolio Management, by Prasanna Chandra. RESEARCH PAPERS An Empirical study on Indian individual investor͛s behaviour, by Syed Tabassum Sultana. WEB SITES www.tax4India.com www.economictimes.Indiatimes.com www.business-standard.com www.Indiamoney.com www.moneymanagementideas.com www.savingwala.com 70
  71. 71. ANNEXURE 1 NIZAM COLLEGE Hyderabad Department of Business ManagementDear Respondent,SUB: DzRequest to fill the Questionnairedz regarding a research study.I am a final year student currently pursuing my Master of Business Administration (MBA) atNIZAM COLLEGE, OSMANIA UNIVERSITY. I am conducting a research study on DzINVESTMENTAVENUESdz Ȃ an analysis on investor behaviour on various investment avenues available in India.This research (project) is taken as a partial requirement for the completion of my MBA degreeunder OSMANIA UNIVERSITY.I seek your kind assistance in completing the attached questionnaire which would takeapproximately 10 minutes of your valuable time. Your responses will be treated asDzStrictly Confidentialdz.If you have any queries or concerns about completing the questionnaire, please do not hesitate tocontact me @ email: rakesh.enugala@gmail.com Mobile Number: 9989-1234-20Note: There is no right or wrong answer. To make this study possible and successful, your kindco-operation and honest responses are greatly valued. Yours Sincerely Rakesh Reddy EMBA Coordinator: Project Guide:Dr. M. Usha Ms. Vinita SharmaM.Com, M.Phil, PhD Faculty of INVESTMENT MANAGEMENTProfessor, NIZAM COLLEGE 71
  72. 72. Questionnaire1. Are you aware of the following investment avenues? (Tick which ever applicable in the boxes).Safe/Low Risk Investment Avenues: High Risk Investment Avenues: Savings Account. Equity Share Market. Bank Fixed Deposits. Commodity Market. Public Provident Fund. FOREX Market. National Savings Certificates. Post Office Savings. Traditional Investment Avenues: Government Securities. Real Estate (property). Gold/Silver.Moderate Risk Investment Avenues: Chit Funds. Mutual Funds. Life Insurance. Emerging Investment Avenues: Debentures. Virtual Real Estate. Bonds. Hedge Funds. Private Equity Investments. Art and Passion.2. What do you think are the best options for investing your money? (choose from above list) (Rank in the order of preference) 1.___________________________________ 2.___________________________________ 3.______________________________________ 4.___________________________________ 5.___________________________________ 6.______________________________________3. Reasons for selecting these options : 1_________________________________________________________________________________ 2_________________________________________________________________________________4. In the past, you have invested mostly in (write as many as applicable) _____________________________________________________________________________________________________________ _____________________________________________________________________________________________________________5. In which sector do you prefer to invest your money? Private Sector Government Sector Public Sector Foreign Sector6. What are the important factors guiding your investment decisions? (Return, safety of principal, diversification, progressive values, etc.)? _________________________________________________________________________________________________________________ 72
  73. 73. 7. What are your savings objectives? Childrenǯs Education Retirement Home Purchase Childrenǯs Marriage Healthcare others_______________________________________________________________8. What is your investment objective? Income and Capital Preservation Long-term Growth Growth and Income short-term Growth Others_________________________________________________________________________________________________9. What is the purpose behind investment? Wealth Creation Tax Saving Earn Returns Future Expenses Others________________________________________________________________________________________________10. Have you set aside funds specifically for the education and marriage of your children? If yes, please give amounts and how the funds are held Education: Amount Rs.__________________________________ invested in ________________________________ Marriage: Amount Rs.__________________________________ invested in ________________________________11. Do you have a formal budget for family expenditure? Yes No12. Do you have a savings and investment target amount you aim for each year? Yes if yes: Amount_______________________________________________________________________ No13. At which rate do you want your investment to grow? Steadily At an Average Rate Fast14. Which factor do you consider before investing? Safety of Principal Low Risk High Returns Maturity Period15. Do you invest your money in share market? (through a DEMAT A/C) Yes No If yes: Imagine that stock market drops after you invest in it then what will you do? Withdraw your money Wait to increase Invest more in it16. How often do you monitor your investment? Daily Monthly Occasionally17. What percentage of your income do you invest? 0-15% 15-30% 30-50%18. What is the time period you prefer to invest? Short-term (0-1yrs) Medium-term (1-5yrs) Long-term (5yrs)19. Can you take the risk of losing your principal investment amount? Yes No If yes: What percentage ________________________20. What is your source of investment advice? Newspapers News Channels Family or Friends Books Internet Magazines Advisors Certified Market Professional/Financial Planners 73
  74. 74. Personal Details(Personal details are kept highly confidential; these details will not be revealed to any third party)Name: ____________________________________________________ Designation: _________________________________________Organization: ________________________________________Age Group: Below 20 Between 20-30 Between 30-40 Above 40Qualification: Under Graduate Graduate Post Graduate Other: ______________________________________________Occupation (what category do you come under): Salaried Business Housewife Student Professional Retired Other: ______________________________________________Annual income: Below Rs. 2,00,000 Rs. 2,00,000- Rs 4,00,000 Rs. 4,00,000-Rs 6,00,000 Above Rs. 6,00,000Do you have a financial advisor? Yes NoWhat best describes your investment experience? Beginning (no investment experience) Moderate (comfortable with fixed deposits, chit funds, post office) Knowledgeable (has bought or sold individual shares of stock or bonds) Experienced (frequently trade in stocks, commodities, options and futures)Date:Signature: You have successfully completed this Questionnaire Thank you again for your time and support! 74