PROJECT

ON
INVESTMENT OPTIONS
IN INDIA

BY:

SAKSHI SINGHAL

B.COM (HONS) IIIRD YEAR

SECTION – A

ROLL.NO. – 3001

UNDER SUPERVISION OF:

MS. EMA MITTAL

DEPARTMENT OF COMMERCE

KESHAV MAHAVIDYALAYA

(UNIVERSITY OF DELHI)

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 DECLARATION

I, Sakshi Singhal, student of B.Com (Hons), final year have made this project on
“Investment Options In India”. I certify that the information contained in this report
is an original work & fully based on my understanding. The information taken
from different sources has been acknowledged. I agree to abide by the decisions made
by the ‘Teacher-in-charge’, in case, this report is found as a work of copy.

TEACHER-IN-CHARGE STUDENT

( Ms.Ema Mittal) (Sakshi Singhal)

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 ACKNOWLEDGEMENT

I want to express my sincere thanks and deep sense of gratitude to my mentor

and respected teacher Ms. EMA MITTAL and to all teachers of Keshav
Mahavidyalaya for their valuable guidance, interest and constant encouragement for
fulfillment of our project. It is a great opportunity for me to work on such an
interesting topic which would prove to be of great help in understanding the
investing procedures and options in India .

Sakshi Singhal

B.Com (hons)

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 INDEX
 Chapter-1
 Introduction
 Objective of the study
 Scope of the study
 Chapter-2
 Meaning of Investment
 Characteristics of Investment
 Setting the investment objectives
 SWOT analysis
 Investment decision making approaches
 Chapter-3
 Investment options in India
 Fixed deposits
 Bonds
 Stock market
 Real Estate
 Mutual Funds
 Insurance
 Gold
 Chapter-4
 Few analysis
 Suggestions and recommendations
 Conclusion
 Bibliography

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 CHAPTER 1

Introduction
Savings from an important part of the economy of any nation, with the savings invested in
various options available to the people, the money acts as the driver for growth of the country.
Indian financial scene too presents a plethora of avenues to the investors. Though certainly not
the best or deepest of markets in the world, it has reasonable options for an ordinary man to
invest his savings.

The money you earn is partly spent and the rest saved for meeting future expenses. Instead of
keeping the savings idle you may like to use savings in order to get return on it in the future, this
is called investment.
Our needs to invest and earn return on your idle resources and generate sum of money for a
specific goal in life and make a provision for an uncertain future. One of the important reason
why people need to invest wisely is to meet the cost of inflation. Inflation is the rate at which the
cost of living increases. The sooner one starts investing the better it is. By investing early you
allow your investments more time to grow, whereby the concept of compounding increases you
income by accumulating the principal and interest or dividend 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

Objectives of the study
 To understand all about different investment avenues available in India.
 What are the various factors that are considered before investing.
 To understand pros and cons of investment avenues.

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Scope of the study
This project enables to have a better knowledge of investing options available in the market. The
project highlights some of the most important investing options available with the Indian
investors. It gives an overview of pros and cons of investing in different avenues and also help in
choosing best from them.

CHAPTER-2
Meaning of Investment

Investment is an activity that is engaged in by people who have savings, i.e. investments are
made from savings, or in other words, people invest their savings. But all savers are not
investors. Investment is an activity which is different from saving. It may mean many things to
many persons. If one person has advanced some money to another, he may consider his loan as
an investment. He expects to get back the money along with interest at a future date. Another
person may have purchased one kg of gold for the purpose of price appreciation and may
consider it as an investment. Yet another person may purchase an insurance plan for the various
benefits it promises in the future. That is his investment. In all these cases it can be seen that
investment involves employment of funds with the aim of achieving additional income or growth
in values. The essential quality of an investment is that it involves waiting for a reward.
Investment involves the commitment of resources which have been saved in the hope that some
benefits will accrue in future. Thus investment may be defined as ³a commitment of funds made
in the expectation of some positive rate of return´. Expectation of return is an essential element
of investment. Since the return is expected to be realized in future, there is a possibility that the
return actually realized is lower than the return expected to be realized. This possibility of
variation in the actual return is known as investment risk.

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Characteristics of Investment

All investments are characterized by certain .features. Let us analyze these characteristic features
of investments.
 Return
All investments are characterized by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return. The return may be received in the
form of yield plus capital appreciation. The difference between the sale price and the
purchase price is capital appreciation. The dividend or interest received from the
investment is the yield. Different types of investments promise different rates of return.
The return from an investment depends upon the nature of the investment, the maturity
period and a host of other factors.

 Risk
Risk is inherent in any investment. This risk may relate to loss of capital, delay in
repayment of capital, nonpayment of interest, or variability of returns. While some
investments like government securities and bank deposits are almost riskiness, others are
more risky. The risk of an investment depends on the following factors.
o The longer the maturity period, the larger is the risk.
o The lower the credit worthiness of the borrower, the higher is the risk.
o The risk varies with the nature of investment.

 Safety
The safety of an investment implies the certainty of return of capital without loss
of money or time. Safety is another feature which an investor desires for his investments.
Every investor expects to get back his capital on maturity without loss and without delay.

 Liquidity
An investment which is easily saleable or marketable without loss of money and without
loss of time is said to possess liquidity. Some investments like company deposits,
bank deposits, P0. Deposits, NSC, NSS etc. are not marketable. Some investment
instruments like preference shares and debentures are marketable, but there are no buyers

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 in many cases and hence their liquidity is negligible. Equity shares of companies listed on
stock exchanges are easily marketable through the stock exchanges. An investor
generally prefers liquidity for his investments, safety of his funds, a good return with
minimum risk or minimization of risk and maximization of return.

Setting the Investment Objectives

The first step for the investor is to set the investment objective. Which would vary for
individuals, pension and mutual funds, banks, financial institutions, insurance companies, etc?

For instance the objective for a pension or mutual fund or insurance company maybe to have a
cash flow specification to satisfy liabilities at different dates in the future. These liabilities would
include redemption, dividends or claim settlement payouts.

For the individual investor the objective maybe to maximize return on investment. A more
appropriate word would be ‘optimize’. As the individual would achieve optimum return at
optimum risk. To maximize return would imply the maximization of risk, which would not be
practical or sustainable.

SWOT Analysis:

Strengths:

 Whether he is living in own home/house.

 Whether he owns office space (may even be generating rental income).
 Whether the investment knowledge base is available.
 Whether the investment system, management process, and platform are available.
 Whether the investment capital is available.

Weaknesses:

 Level of risk tolerance; would be a weakness if it is high.

 Level of money management skills.

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  Whether there is enough income generation through present investments.
 Whether there is a current expenses overrun.

Opportunities:

 Whether there is potential for growth.

Threats:

 Inflation risk.
 Interest rate risk.
 Conduct and actions of the peer group and extended family which may cause financial
damage or harm.

Investment Decision Making Approaches

As investors we would have diverse investment strategies with the primary aim to achieve
superior performance, which would also mean a higher rate of return on our investments.
All investment strategies can be broadly classified under 4 approaches, which are explained
below.

Fundamental approach: In this approach the investor is concerned with the intrinsic value of
the investment instrument. Given below are the basic rules followed by the fundamental investor.

There is an intrinsic value of a security, which in turn is dependent on the underlying economic
factors. This intrinsic value can be ascertained by an in-depth analysis of the fundamental or
economic factors related to an economy, industry and company.

At any point in time, many securities have current market prices, which are different from their
intrinsic values. However, sometime in the future the current market price would become the
same as its intrinsic value. We as fundamental investors can achieve superior results by buying
undervalued securities and selling overvalued securities.

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Psychological approach: The psychological investor would base his investment decision on the
premise that stock prices are guided by emotions and not reason. This would imply that the stock
prices are influenced by the prevalent mood of the investors. This mood would swing and
oscillate between the two extremes of “greed” and “fear”. When “greed” has the lead stock
prices tend to achieve dizzy heights. And when “fear” takes over stock prices get depressed to
lower than lower levels.

As psychic values seem to be more important than intrinsic values, it is suggested that it would
be more profitable to analyze investor behaviour as the market is swept by optimism and
pessimism. Which seem to alternate one after the other? This approach is also called “Castle-in-
the-air” theory. In this approach the investor uses some tools of technical analysis, with a view to
study the internal market data, towards developing trading rules to make profits..

Academic approach: Over the years, the academics have studied many aspects of the securities
market and have developed advanced methods of analysis. The basic rules are:

The stock markets are efficient and react rationally and fast to the information flow over time.
So, the current market price would reflect its intrinsic value at all times. This would
mean "Current market price = Intrinsic value".

Stock prices behave in a random fashion and successive price changes are independent of each
other. Thus, present price behavior can not predict future price behavior.

In the securities market there is a positive and linear relationship between risk and return. That is
the expected return from a security has a linear relationship with the systemic or non-
diversifiable risk of the market.

Eclectic approach: This approach draws upon all the 3 approaches discussed above. The basic
rules of this approach are:

1. Fundamental analysis would help us in establishing standards and benchmarks.

2. Technical analysis would help us gauge the current investor mood and the relative strength of
demand and supply.

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3. The market is neither well ordered nor speculative. The market has imperfections, but reacts
reasonably well to the flow of information. Although some securities would be mispriced, there
is a positive correlation between risk and return.

CHAPTER-3
Investment Options In India

1. Fixed Deposits
There are many investment options available for the people in the market, but there are
mainly five investment options, which are considered to be as most popular and most
effective investment options available in the current market scenario. In general, almost
95-98% people do invest in these, since the Expected Rate of Return is much higher
than any other investment options, irrespective of the amount of risk is very high in
some of the cases.
This investment option is most popular and safest option available in the market. With
almost every working people invest in fixed deposits; this investment option leads the
chart of four investment options because of its safety and popularity. Though the
amount of return is much lesser than the other three options, this option heads the table
as it has almost no risk of losing the invested amount. Also, it is the oldest among the
other three, so the trust factor of people is very high. There are mainly three types of
fixed deposits available in the market, namely, viz.

a) Fixed deposits offered by Banks:

Considered as the safest of all options, For an ordinary person though, banks have acted
as the safest avenue wherein a person deposits money and earns interest on it. The two
main modes of investment in banks, savings accounts and fixed deposits have been
effectively used by one and all. However, today the interest rate structure in the country
is headed southwards, keeping in line with global trends. With the banks offering just

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above in their fixed deposits for one year, the yields have come down substantially in
recent times. Add to this, inflammatory pressure in the economy and we have a position
where the savings are not earning. The inflation is creeping up almost 8% at times, this
means the value of money saved goes down instead of going up. This effectively marks
any chance of gaining investments from the banks.

b) Fixed deposits offered by Post Offices:

Just like banks, post offices in India have a wide network. Spread across the nation,
they offer financial assistance as well as serving the basic requirements of
communication. Among all saving options, Post office schemes have been offering the
highest rates. Added to it is the fact that the investments are safe with the department
being a Government of India entity. Soothe two basic and most sought features, those of
return safety and quantum of returns were being handsomely taken care of. Though
certainly current market position is not the most efficient systems in terms of service
standards and liquidity; these have still managed to attract the attention of small, retail
investors. However with the government investing its intention of reducing the interest
rates in small savings options, this avenue is expected to lose some of the investors.
Public Provident Funds act as options to save for the postretirement period for most
people and have been considered good option largely due to the fact that returns were
higher than most other options and also helped people gain from tax benefits under
various sections. This option too is likely to lose some of its sheen on account of
reduction in the rates offered.

c) Company fixed deposits:

Another oft-used route to invest has been the fixed deposit schemes floated by
companies. Companies have used fixed deposit schemes as a means of mobilizing funds
for their options and have paid interest on them. The safer a company is rated, the lesser
the return offered has been the thumb rule.
However, there are several potential roadblocks are there.

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Firstly, of all the danger of financial positions of the company not being understood by
the investor lurks. The investors rely on intermediaries who more often than not, don’t
reveal the entire truth.
Secondly, liquidity is a major problem with the amount being received months after the
due dates. Premature redemption is generally not entertained without cuts in the returns
offered and though they present a reasonable option to counter interest rate risk
(especially when the economy is headed for a low interest regime), the safety of amount
has been found lacking. Many cases like the Kuber Group and DCM Group fiascos have
resulted in low confidence in this option.
They cover the fixed deposits of varied tenures offered by the commercial banks and
other on-banking financial institutions. These are generally a low risk prepositions as
the commercial banks are believed to return the amount due without default. By and
large these FDs are the preferred choice of risk-averse Indian investors who rate safety
of capital & ease of investment above all parameters. Largely, these investments earn a
marginal rate of return of 6-8% per annum.

2. Bonds
Bonds are a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt
security is generally issued by a company, municipality or government. A bond investor
lends money to the issuer and in exchange, the issuer promises to repay the loan amount on
a specified maturity date. The issuer usually pays the bond holder periodic interest payments
over the life of the bond.

DIFFERENT TYPES OF BONDS:

a. Zero coupon bonds-This bond is issued at a discount and repaid at a face value. No
periodic interest is paid at the time of maturity. The difference between the issue
price and the redemption price represents the return of the holder.
b. Deep discount bond-This bond is issued at a very high discount on its face value
and face value is paid at the time of maturity. IDBI and SIDBI had issued this
instrument .IDBI had issued deep discount bond of face value of Rs.1 lakh at a price

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 of Rs.2, 700/- with a maturity period of 25years. The bond appreciates to its face
value over the maturity period of 25 years. Alternatively, the investor can withdraw
from the investment periodically after 5 years.
c. Convertible Bond-A bond gives the investor the option to convert the bond into
equity at a fixed conversion price.
d. Dual convertible bond-A dual convertible bond is convertible into either equity
shares or debentures/preference shares at the option of the investor.
e. Disaster Bonds-These are issued by companies and institutions to share the risk and
expand the capital to link investors return with the size of investors losses, the
smaller the return and vice-versa.
f. Commodity Bonds-Commodity bonds are bonds issued to share the risk and
profitability of future commodity prices with the investors. For example, Petro
bonds, gold bonds, silver bonds etc.

Bonds are IOUs issues by companies or governments when they need to raise cash. In
the case of corporate bonds they are an alternative source of finances to shares/stocks,
but instead of then owning part of the company and sharing the profits (which is fairly
risky) with a bond you are promised your money back on a certain date with a regular
fixed interest payment or "coupon"(originally called that because the bond certificate
had coupons attached that could be torn off and redeemed on certain dates) Good
solvent companies (or governments) will pay the coupons and the
original sum

3. Stock Market
Indian stock markets particularly the BSE and the NSE, had been a preferred
destination not only for the Indian investors but also for the Foreign investors. Although
Indian Markets had been through tough times due to various scams, but history shows
that they recovered very fast. Many types of scrip had been value creators for the
investors. People have earned fortunes from the stock markets, but there are people who
have lost everything due to incorrect timings or selection of fundamentally weak
companies.
The Indian Stock Market is also the other name for Indian Equity Market or Indian

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Share Market. The forces of the market depend on the monsoons, global funding
flowing into equities in the market and the performance of various companies. The
market of equities is transacted on the basis of two major stock indices, National Stock
Exchange of India Ltd.(NSE) and The Bombay Stock Exchange (BSE), the trading
being carried on in dematerialized form. The physical stocks are in liquid form and
cannot be sold by the investors in any market.

Why do so many people invest in shares?

Simply put, you want to invest in order to create wealth. While investing is relatively
painless, its rewards are plentiful. To understand why you need to invest, you need to
realize that you lose when you just save and do not invest. That is because the value of
the rupee decreases every year due to inflation. Historically shares have outperformed
all the other investment instruments and given the maximum returns in the long run. In
the twenty-five-year period of 1980-2005 while the other instruments have barely
managed to generate returns at a rate higher than the inflation rate (7.10%), on an
average shares have given returns of about 17% in a year and that does not even take
into account the dividend income from them. Were we to factor in the dividend income
as well, the shares would have given even higher returns during the same period.
[Inflation: general rise in prices and wages caused by an increase in the money supply
and demand for goods, and resulting in a fall in the value of money. Inflation occurs
when most prices rise by some degree across the economy.]
Advantages of investing in shares:
There are lots of advantages of investment in share market. Some of these are:

a. Dividend income: investments in shares are attractive as much for the

appreciation in the share prices as for the dividends their companies pay out.

b. Tax advantages: shares appear as the best investment option if you also consider
the unbeatable tax benefits that they offer. First, the dividend income is tax-free
in the hands of investors. Second, you are required to pay only a 10% short term
capital gains tax on the profits made from investments in shares, if you book

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 your profits within a year of making the purchase. Third, you don't need to pay
any long term capital gains tax on the profits if you sell the shares after holding
them for a period of one year. The capital gains tax rate is much higher for other
investment instruments: a 30% short-term capital gains tax (assuming that you
fall in the 30% tax bracket) and a 10% long-term capital gains tax.

c. Easy liquidity: shares can also be made liquid anytime from anywhere (on
sharekhan.com you can sell a share at the click of a mouse from anywhere in the
world) and the gains can be realized in just two working days. Considering the
high returns, the tax advantages and the highly liquid nature, shares are the best
investment option to create wealth.

How people earn from the investment in shares?

Shares can give us returns in two forms.
A. Appreciation in share prices: You buy shares with the belief that their price will
increase and that when this happens you will be able to sell off your shares and earn
profit. For example, if you bought a share for Rs100 three years ago and it is
Rs500 today, then you have earned Rs400 in three years.

B. Dividend: when a company makes profits, it can choose to share part of its profits
with its Shareholders by paying out dividend. This dividend is paid as a percentage of
the face value of the share. For example, a company may declare a dividend of 25%.
Then if the face value of its share is Rs10 you will get Rs2.50 for every share you own
of that company, irrespective of the market price. In itself this might not be much, but
over a longer period of time or if you have a lot of shares, you could earn quite a bit
from the dividend itself. The best thing about dividends is that they are tax-free in the
hands of investors. Dividend yield stocks are known to give returns higher than fixed
deposits [dividend yield = (dividend per share / market price of the share) x 100].

What are the expenses during transaction?

Every share transaction attracts some tax or the other. Some of the main expenses are as

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follows.
A. Capital gains tax: If you purchase a share and sell it at a price higher than the
purchase price and if this sale is within a year of the purchase, then a 10% capital gains
tax is levied on the profit that you make. For example, if you bought a share for Rs100
on January 1, 2005and sold it for Rs150 on July 1, 2005, then you have to pay a tax of
10% on the Rs50 profit that you make. If you sell after a year of purchase, there is no
tax on the long-term gains.

B. Securities transaction tax: Securities transaction tax (STT) is levied by the

government on every transaction you do on a stock exchange. You don’t have to pay
this separately; it’s collected by your broker. As per the Union Budget 2005 the STT
will be 0.10% on delivery-based transactions and 0.02% on intra-day transactions.

C. Brokerage: Brokers get a commission on every trade that they do for you. This
Commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for
delivery-based transactions and 0.10% for intraday transactions. On the brokerage
amount you are required to pay a service tax to the government (to be collected by the
broker). The brokerage varies depending on the service that the broker provides you.
Some brokers, such as Share khan, offer its clients regular updates on companies,
multiple means to transact and customer service support.

D. Depository fees: Since most of the shares exist in a dematerialized form, every time
you buy or sell shares the transactions are being noted by your DP. The DPs normally
levy a charge which is an annual charge or a charge on each transaction.

Risks ---the only disadvantage in investing in shares:

There are two types of risk associated with this kind of investment:   company specific
risk and  market risk.
Set of risks that deals with a company and its sector are referred to as  company
specific risk.
Examples of company specific risk: bad management, bad marketing strategies, sector

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disturbances that have an impact on industry etc.External factors (economic, global
factors) that affect the market as a whole are referred to as market risk.
Examples of market risk: political instability, high inflation, rupee depreciation, rising
Interest rates, global incidents like wars and disasters that throttle the nation's economy
etc.

How company specific risk can be identified?

With careful scrutiny and proper homework, it might be easy to identify and be
forewarned of the risks a company may be carrying. Specifically check out for the
mergers and acquisitions that do not have a real synergy or are a nightmare after
reconciliation (A O L - Time Warner, Hewlett Packard-Compaq).
Also is suspicious of diversifications that do not really add value to a company's core
offering. A third kind of risk would be with the companies that have bet their stakes on
single product offering and are high on debt. Likewise companies that depend on
research could be prone to higher risk, if the research doesn't come to fruition.
How people can minimize their risk and maximize their return?
Buy when stocks are falling, sell when these are rising. This works well when you are a
long-term investor and there is an extended bear or Bull Run. Don't try to second guess
or predict that the market will fall today and rise tomorrow. Even seasoned investors
cannot do that!

A. Don't try to guess the market's favorites

Your instincts might tell you that pharmacy or technology stocks are hot due to
certain policies or events, but remember millions of investors have already
guessed that and bought these stocks. The prices of these stocks would therefore
be at a higher level when you buy them. Instead focus on the long term and don't
get swayed by short-term events.

B. Avoid hot tips

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 You may have overheard some news about a stock or your friend may advise that
a particular stock is all geared to move up. Avoid such tips like the plague and
your investments will remain safe.

C. Blue-chips are safe bets

Blue-chip companies are there because they have done well in the past and have
a high market capitalization. It is a likely guess that they will maintain their
track record and give you higher returns even in future. Therefore invest in
companies that have a good track record.

D. Slow and steady stream of investments

Set aside a certain portion of your earnings every month and invest that sum in
shares irrespective of the market conditions. This way, over a period of time you
can amass substantial number of shares of the stocks in your portfolio.

E. Think portfolio
Don't put all your earnings in a single stock. Try to have a diverse portfolio of
stocks. This way even if one stock doesn't do well, you are still well protected.
Also invest across sectors, since any problem in one sector would affect all
stocks in the sector. As a thumb rule, if you have investments of up to Rs50, 000
invest in two to three stocks. For about Rs150, 000invest in three to five stocks,
for around Rs500, 000 have five to seven stocks and around ten stocks for higher
amounts.

F. Don’t invest all your savings

Always maintain a core set of reserves. You should never touch these reserves
for investing, so that even in the worst case you still have some money. Typically
these reserves should be your salary of about six months.

4. Real Estate

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 Returns are almost guaranteed because property values are always on the rise due to
growing world population. Residential real estate is more than just an investment. There
are more ways than ever before to profit from real estate investment.

Real Estate Investment Groups

Real estate investment groups are similar to small mutualfunds. They are set up for rental
properties. While an investor may own one or more units, a professionally managed company
acquires, builds, maintains and lets out all the units on the properties in exchange for a
percentage of the monthly rent.

Real Estate Trading

Real estate traders hold properties for only a short span of time (less than four months), aiming to
sell them at a profit. This process is called flipping properties. Investors aim at purchasing
significantly undervalued or very hot properties. Such owners may or may not invest money into
improving the property before putting it back on sale. A bear market could result in substantial
losses for a real estate trader, since the investment is large.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a corporation that invests in real estate. REITs trade on

major exchanges. A REIT uses investors' money to acquire and operate properties.

The benefits of REITs are:

 REITs provide fairly regular income.

 Investors gain exposure to non-residential investments (like malls and office buildings).
 REITs are highly liquid.
 REITs are required by law to distribute 90% of their taxable income in the form
of dividends to shareholders.

Before making a choice regarding the kind of real estate participation, an investor must evaluate
his/her investment capacity and risk appetite
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 5. Mutual Funds
There is a collection of investors in Mutual funds that have professional fund managers
that invest in the stock market collectively on behalf of investors. Mutual funds offer a
better route to investing in equities for lay investors. A mutual fund acts like a
professional fund manager, investing the money and passing the returns to its investors.
All it deducts is management fee and its expenses, which are declared in its offer
document.

Mutual Funds are essentially investment vehicles where people with similar

investment objective come together to pool their money and then invest accordingly.
Each unit of any scheme represents the proportion of pool owned by the unit holder
(investor).

Mutual Funds in India are financial instruments. These funds are collective investments
which gather money from different investors to invest in stocks, short-term money
market financial instruments, bonds and other securities and distribute the proceeds as
dividends. The Mutual Funds in India are handled by Fund Managers, also referred as
the portfolio managers. The Securities Exchange Board of India regulates the Mutual
Funds in India. The share value of the Mutual Funds in India is known as net asset
value per share (NAV). The NAV is calculated on the total amount of the Mutual Funds
in India, by dividing it with the number of shares issued and outstanding shares on daily
basis.

Benefits of Mutual Funds:-

Investing in mutual has various benefits, which makes it an ideal investment avenue.

a. Professional investment management:

One of the primary benefits of mutual funds is that an investor has access to
professional management. A good investment manager is certainly worth the fees you
will pay. Good mutual fund managers with an excellent research team can do a better
job of monitoring the companies they have chosen to invest in than you can, unless you

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 have time to spend on researching the companies you select for your portfolio. That is
because Mutual funds hire full-time, high-level investment professionals. Funds can
afford to do so as they manage large pools of money. The managers have real-time
access to crucial market information and arable to execute trades on the largest and
most cost-effective scale. When you buy a mutual fund, the primary asset you are
buying is the manager, who will be controlling which assets are chosen to meet the
funds' stated investment objectives.

b. Diversification:
A crucial element in investing is asset allocation. It plays a very big part in the success
of any portfolio. However, small investors do not have enough money to properly
allocate their assets. By pooling your funds with others, you can quickly benefit from
greater diversification. Mutual funds invest in a broad range of securities. This limits
investment risk by reducing the effect of a possible decline in the value of any one
security. Mutual fund unit-holders can benefit from diversification techniques usually
available only to investors wealthy enough to buy significant positions in a wide variety
of securities.

c. Low Cost:
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000,
and sometimes less.

d. Convenience and Flexibility:

Investing in mutual funds has its own convenience. While you own just one security
rather than many, you still enjoy the benefits of a diversified portfolio and a wide range
of services. Fund managers decide what securities to trade collect the interest payments
and see that your dividends on portfolio securities are received and your rights
exercised. Another big advantage is that you can move your funds easily from one fund
to another within a mutual fund family.

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e. Liquidity:
In open-ended schemes, you can get your money back promptly at net asset value
related prices.

f. Transparency:
Regulations for mutual funds have made the industry very transparent. You can track
the investments that have been made on your behalf and the specific investments made
by the mutual fund scheme to see where your money is going. In addition to this, you
get regular information on the value of your investment.

g. Variety:
There is no shortage of variety when investing in mutual funds. You can find a mutual
fund that matches just about any investing strategy you select. There are funds that
focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The
greatest challenge can be sorting through the variety and picking the best for you.

Mutual fund risks:

Having understood the basics of mutual funds the next step is to build a successful
investment portfolio. Before you can begin to build a portfolio, one should understand
some other elements of mutual fund investing and how they can affect the potential
value of your investments over the years. The first thing that has to be kept in mind is
that when you investing mutual funds, there is no guarantee that you will end up with
more money when you withdraw your investment than what you started out with.
That is the potential of loss is always there. Even so, the opportunity for investment
growth that is possible through investments in mutual funds far exceeds that concern for
most investors.

Here's why:-

At the cornerstone of investing is the basic principal that the greater the risk you take,
the greater the potential reward. Risk then, refers to the volatility -- the up and down

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activity in the markets and individual issues that occurs constantly over time. This
volatility can because by a number of factors -- interest rate changes, inflation or
general economic conditions. It is this variability, uncertainty and potential for loss,
that causes investors to worry. We all fear the possibility that a stock we invest in will
fall substantially. Different types of mutual funds have different levels of volatility or
potential price change, and those with the greater chance of losing value are also the
funds that can produce the greater returns for you over time. You might find it helpful
to remember that all financial investments will fluctuate. There are very few perfectly
safe havens and those simply don't pay enough to beat inflation over the long run.

Structure of the Indian mutual fund industry:

The Indian mutual fund industry is dominated by the Unit Trust of India, which has a
total corpus of Rs. 700bn collected from more than 20 million investors. The UTI has
many schemes in all categories i.e. equity, balanced, income etc with something open
ended and some being closed ended. The unit scheme 1964 commonly referred to as US
64, which is balanced fund, is the biggest scheme with a corpus of about Rs. 200bn.
UTI was floated by financial institution and is govern by a special act of parliament.
Most of its investors believe that the UTI is government owned and controlled, which,
while legally uncorrected, is true for all practical purposes.

Restrictions on Investments:
• A mutual fund scheme shall not invest more than 15% of its NAV in debt instrument
issued by a single issuer, which are rated not below investment grade by a credit rating
agency authorized to carry out such activity under the Act. Such investment limit may
be extended to20% of the NAV of the scheme with the prior approval of the Board of
Trustees and the Board of Asset Management Company.
• A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such instruments shall
not exceed 25% of the NAV of the scheme. All such investments shall be made with the
prior approval of the Board of Trustees and the Board of Asset Management Company.
• No mutual fund under all its schemes should own more than ten percent of any
company’s paid up capital carrying voting rights.

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• Such transfers are done at the prevailing market price for quoted instruments on spot
basis. The securities so transferred shall be in conformity with the investment objective
of the scheme to which such transfer has been made.

6. INSURANCE

Introduction to insurance:
The business of insurance is related to the protection of the economic values of the
assets. Every asset has a value. The asset would have been created through the efforts of
the owner. The asset is valuable to the owner, because he expects some benefits from it.
It is a benefit because it meets some of his needs. But every asset is expected to last for
a certain period of time during which it will provide the benefits. After that the benefit
may not be available. The owner is aware of this and he can so manage his affairs that
by the end of that period or life-time, a substitute made available. Thus he makes sure
that the benefit isn’t lost. Here comes the thought of insurance.

Purpose and needs of insurance:

Assets are insured, because they are likely to be destroyed or made non-functional
before the expected life time, through accidental occurrences are called perils.
Fire, floods, breakdowns, lightning, and earthquakes such things are called perils. If
such perils can cause damage to the assets, we say that the asset is   exposed to that
risk. Perils are the events. Risks are the consequential losses or damages.
The risk only means that there is a possibility of loss or damage. The damage may or
may not happen, but the word ‘possibility’ implies uncertainty. Insurance is relevant
only if there are uncertainties. If there is no uncertainty about the occurrence of an
event, it can’t be insured against.
Insurance doesn’t protect the asset. It does not prevent its loss due to the peril. The peril
can’t be avoided through the insurance. The risk can sometimes be avoided, through
better safety and damage control measures. Insurance only tries to reduce the impact of
the risk on the owner of the asset and those who depend on that asset. They are the ones

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who benefit from the asset and therefore, would lose, when the asset is damaged.
Insurance only compensates for the losses-and that too, not fully.

An example of how insurance works:

In a village, there are 4000 houses, each valued at Rs.2 0000. Every year, on an average,
4houses get burnt, resulting into a total loss of Rs.80000.if all the 400 owners come
together and contribute Rs.200 each, the common fund would be Rs. 8 0000. This would
be enough to pay Rs.20000 to each of the 4 owners whose houses got burnt. Thus the
loss of Rs.20000each of 4 owners is shared by 400 house-owners of the village, bearing
Rs.200 each. This works out to 1% of the value of the house, which is the same as the
probability of risk (4 out of 400 houses).

In India, insurance business is classified primarily as life and non-life or general. Life
insurance includes all risks related to the lives of human beings and general insurance
covers the rest. General insurance has 3 classifications viz. fire (dealing with all fire
related risks),marine (dealing with all transport related risks and ships) and
miscellaneous (dealing with all others like liability, fidelity, motor, crop, etc).

Personal accident and sickness insurance, which are related to human beings, is
classified as ‘non-life’ in India but is classified as ’life’, in many other countries.
What is ‘non-life’ in India is termed ‘property and casualty’ in some other countries.
In India, the IRDA has, in 2005, issued regulations enabled micro insurance (broadly
meaning insurance for small sums assured, like 5-50 thousands) to be done by both life
and general insurers on the basis of mutual tie-ups. A policy may be issued by a life
insurer covering both life and non-life risks, but premium on account of the nonlife
business will be passed on to a general insurer and the claim amount collected from the
latter.

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A comparison with other forms of savings will show that life insurance has the
following advantages:
a. In the event of death, the settlement is easy. The heirs can collect the money
quicker, because of the facility of nomination and assignment. The facility of
nomination is now available for some bank accounts, provident fund etc.
b. There is certain amount of compulsion to go through the plan of savings. In
other forms, if one changes the original plan of savings, there is no loss. In
insurance, there is a loss.
c. Creditors can’t claim the life insurance money. they can be protected against
the attachment by courts.
d. There are tax benefits, both in income tax and capital gains.
e. It is possible to protect a life insurance policy from being attached by debtors.
The beneficiaries’ interest will remain secure.

7. Gold

Gold has been valued since prehistoric times and is the investment option that has been seen as
the ultimate form of safe haven investment and the only true form of wealth. Gold has been
popular in India because it acted as a good hedge against inflation. There is so much uncertainty
in the world in terms of economic growth and geopolitics, it is no surprise that many investors,
big and small have chosen to hedge their investments through gold.

Gold is an important and popular investment for many reasons:

 Gold remains as an integral part of social and religious customs, besides being the basic
form of saving.

 Gold has aesthetic appeal .Its beauty recommends it for ornament making above all other
metals.

 Gold is indestructible which does not tarnish and is also not corroded by acid-except by a
mixture of nitric and hydrochloric acids.

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  Gold is a currency that has no borders and does not need to be honoured by any
governmental obligations.

 Gold has long proven ability to retain value and appreciate in value.

 Gold is readily available in a standardized form.

The last few years show a steep rise in oil prices resulting in a rise in inflation not only in India
but globally. The impact has been varied across countries depending on factors such as economic
cycle and oil consumption. This general price rise has added to the attractiveness of gold.

In other words when the stock market crashes or when the dollar weakens, gold continues to be a
safe haven investment because gold prices rise in such circumstances.

Gold investment options

Not many people know that there are various investment options in gold like gold bars,
numismatic coins, and gold accumulation plans by banks and financial institutions, and gold
mutual funds.

Across the world, several investment options are available for investors to put their money in the
yellow metal. 

* Gold savings accounts: They operate like regular bank accounts where the customer’s account
is credited with balances of gold and withdrawals can be either in the form of gold coins or
currency equivalents.
* Gold accumulation plan: A monthly debit from customer's savings account is backed by 100
percent Physical gold.
* Gold chits: Also there are gold chits run by jewelers where at the end of the year, housewives
can buy gold jewellery or coins from the same jeweler worth the total money they have paid in
installments.
* Gold deposit scheme: It is one of the options to invest in gold where one can keep gold in
banks for specified period like a fixed deposit and can claim as and when required .But it is not

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like pledging as the ornaments will not be returned in its original form because the banks melt
them and rent to the industry.
* I-gold: An investor can purchase gold from a stock broker as just as he used to buy equity
shares.

Suggestions for investing in gold

* When investments in gold are made in the form of ornaments a large part of the appreciation in
value is lost while selling it apart from the making charges, waste removal and sales tax. Buying
in the form of gold bars or coins from approved value is considered to be best.

* Buying Gold in seasons other than wedding season and festive seasons like Diwali will offer 
best returns.

*The investor has to lose the making charges when invested in the gold deposit scheme

Studies conducted by Security Exchange Board of India reveal that gold has been the second
most preferred option among the Indian public after deposits in banks. An increased pace of
liberalization measures in India will account for many new options to emerge to invest in gold
bars, gold coins, gold funds and gold options.

The benefits of investing in gold are that besides earning a decent rate of return there are no
headaches about keeping it safe. When investments are valued in a depreciating currency
allocating a portion to gold is similar to a financial insurance policy.

COMPARISON OF INVESTMENT AVENUES

Financial Capital Risk Marketabilit Tax Benefit Convenience

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securities Appreciation y
Equity Low High High High Yes
Non- High Low Low Average Nil
convertible
Debentures
Financial
Securities
(Non-
securitized)
Bank deposits Low Nil low High Yes
Provident Nil High Nil Average Yes
fund
Life insurance Nil High Nil Average Yes
Mutual funds
Growth/equity Low High High High Yes
Income/debt High Low Low High Yes
Real assets
Real estate Low High Low Low Limited
Gold/silver Nil Average Average Average Nil

CHAPTER-4

Few analyses

1) Knowledge in people about available investment avenues

Investment option Yes No

Mutual fund 55 45
Equity market 75 25
Fixed deposits 100 0
Insurance 98 2
Bonds 35 65

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 100 100
98
80
55
60 45 65
40
25
20 35

0 0 2
d
un ke
t
la f ar its
ut
u m p os ce s
M ity de r an nd
u su o
Eq ed In B
Fix

Yes No

Interpretation- it shows that people are more aware about investment as fixed
deposits(100) in bank because it is a common type of investment since earlier time,
followed by insurance(98). Near about 75 people knows about investment in equity
shares & 55 in mutual funds. And 35 knows about investment in bonds

2) Source of information regarding investment avenues

Sources of information Responses in %

Media 45
Newspaper 30
Co.’s sales force 15
advertisement 10

Responses in %

10%
15%
Media
45%
Newspaper
Co.’s sales force
advertisement

30%

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 Interpretation- it shows that media is the most powerful source of information regarding
investment avenues, for e.g.- ZEE BUSINESS, CNBC AWAZ. after media newspaper is
a good source of information. Co’s sales force and advertisement are also helpful in
providing such information.

3) Basis for making investment

Basis of investment Responses in %

Market sentiments 43
Fundamental and technical analysis 18
Past performance 39
50
40
30
20
10
0
t ts is ce
en en lys an
stm a
ve tim la
n rm
in sen ci a r fo
o f
ke
t n pe
sis ar ch st
a M te Pa
B nd
ala
t
en
am
nd
Fu

Interpretation- It shows that 43% people takes market sentiments as the basis for
making investment , while there are 39% people, who considers the past performance &
only 18% people make fundamental & technical analysis for making investment.

SUGGESTIONS AND RECOMMENDATIONS

 To earn good return with less capital risk, an investor has to be active while designing his
portfolio.

 Every attributes of investor like his age level, income level, and his expectation level
have effect on their portfolio design.

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 An investor should go with well diversified portfolio

 Investors should update his knowledge continuously to grab good opportunities in the
market.

 Investors should take decision carefully because updating of portfolio is a costly affair.

CONCLUSION

The investment market in India has witnessed an impressive growth and structural
changes during last many years. The awareness among Indian investors has shown a sea
change over the years.

Investing wisely is an important part of financial security and our country India is
offering number of investment avenues to its citizens in growing their money and wealth.
Try to start invest money as early as possible so that the money will grow accordingly in
our lifetime. Today Indian youths are well paid compared to last decades thanks to
Information Technology, ITES like BPO, Call Center and overall strong economy. So
people are able to save more money. Choosing a wise investment is very crucial because
you have to balance the risks and returns.

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BIBLIOGRAPHY

1. BusinessKnowledgeSource.com

2. www.investmentarticle.com

3. www.sebi.gov.in

4. Book- “investment management” by R.P. Rustagi

5. Wikipedia

6. www.mutualfundsindia.com

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