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Comparison of Investment Avenues
WHAT IS INVESTMENT AVENUE Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions. Types of investor In continuation of the lessons I’ve learned from Rich Dad Poor Dad author, Robert Kiyosaki, I will discuss today what he called “Types of Investors” According to him, there are two main types of investors: Average Investors and Professional Investors.
Average investors Buy packaged securities such as mutual funds, treasury bills, or real-estate-investment trusts.
Professional investors are more aggressive—they create investment opportunities or get in on the ground floor of new offerings, build businesses and marketing networks, assemble groups of financiers to fund deals too large for them to undertake alone, and pick the companies with the most promise for initial public offerings of stock
There are five different types of professional investors : The Accredited Investor As defined by Robert Kiyosaki, accredited investors are individual investor that earns at least $200,000 in annual income ($300,000 for a couple) and/or has a net worth of $1million. An accredited investor has access to many lucrative investments that, because o f t h e i r r i s k m a y b e l e g a l l y o f f - l i m i t s t o p e o p l e o f l e s s e r i n c o m e . A l t h o u g h u s u a l l y financially educated, accredited investors are not necessarily fully literate. They may be c o n t e n t w i t h s e c u r i t y a n d c o m f o r t r a t h e r t h a n w e a l t h , a n d m a y r e l y o n a d v i s o r s t o develop and implement their financial plans The Qualified Investor This investor is well versed in either fundamental or technical investing and so there a r e t w o t y p e s o f q u a l i f i e d i n v e s t o r s . The fundamental investor a nd technical investor.
Fundamental investing requires the ability to assess a company’s potential by reviewing f financial statements, tracking the industry the company represents, and calculating how changes in interest rates and the economy as a whole could affect profitability. The fundamental investor uses financial ratios, which you’ll learn all about later, to assess the strength of a company he or she is considering as an investment. Technical investing is different—it is based on knowledge of the sales history of a company’s stock, the mood of the market in general, and techniques such as short selling and options. The fundamental investor is typically an S in the CASH FLOW Quadrant because he or she will usually operate alone in evaluating stocks, either through examining fundamentals or using technical analysis in e v a l u a t i n g p o t e n t i a l investments. Unlike a fundamental investor, a technical investor (often a stock t r a d e r ) d o e s n o t necessarily look for well-run, profitable corporations. If people are rushing to invest in ascertain type of industry, say dot-com companies, the technical investor may jump on the bandwagon, regardless of whether these companies are showing earnings, let alone profits. Technical investing is thus more speculative than fundamental, but it can yield greater rewards. Regardless of investment style, qualified investors know how to make, or at least preserve, money in an up or down market
The Sophisticated Investor The goal of this investor is to build wealth by developing a foundation of assets that can generate high cash returns with minimum payment of taxes. Armed with the three E’s— education, experience, and excess cash—the sophisticated investor takes advantage of t a x , c o r p o r a t e , a n d s e c u r i t i e s l a w s t o p r o t e c t c a p i t a l a n d m a x i m i z e earnings. When operating from the B quadrant, the investor can c h o o s e t h e b e s t s t r u c t u r e o r e n t i t y through which to create assets. This entity provides some degree of control over the investment and also serves as a firewall between personal and business finances in the event of a lawsuit. Sophisticated investors exercise control over the timing of taxes and the character of their income. They know, for example, to defer paying taxes on capital gains from
reale s t a t e b y r o l l i n g o v e r p r o f i t s t o m o r e e x p e n s i v e p r o p e r t y . T h e y l o o k a t e c o n o m i c downturn as an opportunity to pay bargain basement prices for quality securities, and they create deals instead of simply waiting for the right one to come along. Sophisticated investors take risks but abhor gambling, hate losing but are not afraid to, are financially intelligent yet rely on experts to teach them more, own little in their names yet command great wealth. Although they become partners in real-estate ventures andl a r g e s h a r e h o l d e r s i n c o r p o r a t i o n s , t h e y l a c k o n e e s s e n t i a l s t r e n g t h : m a n a g e m e n t control over their assets. The Inside Investor. Building or owning a profitable business is the primary goal of this investor. Whether as an officer of a corporation or owner of a majority of its shares of s t o c k , t h e i n s i d e investor exercises some degree of management control. By running business systems from the inside, he or she learns how to analyze them from the outside and thereby becomes a sophisticated investor as well. Although inside investors have financial intelligence, they do not necessarily have financial resources and thus may not meet the definition of an accredited investor. If inside investors mind their own business and succeed, however, they can become no t o n l y a c c r e d i t e d investors but ultimate investors as well. The Ultimate Investor . The goal of the ultimate investor is to own a business that is so successful that shares a r e sold to the public. Making an initial public offering (IPO) is e x p e n s i v e a n d f u l l o f risks, yet it allows business owners to cash in on the equity they have built up in the company, while also raising money to pay down debt and fund expansions. The ultimate investor is one who has mastered every rule and enjoys playing the game for its own sake. Which type of investor do you belong? As for me, I am not even a professional investor. I am just an average investor. But with the continuous learning’s that I feed my mind, I hope to become a professional investor someday and be able to reach the ‘ultimate investor’ status.
Characteristics of investment
Certain features characterize all investments. The following are the main characteristics feature if investments: 1. 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 f o r m o f y i e l d p l u s c a p i t a l a p p r e c i a t i o n . T h e
The return from an investment depends upon the nature of investment. The lower the credit worthiness of the borrower. the higher is the risk. Some investments like company deposits. N S C . The risk may relate to loss of capital. Investments in ownership securities like equity share carry higher risk compared to investments in d e b t i n s t r u m e n t l i k e debentures & bonds. nonpayment of interest. 3. The risk of an investment depends on the following factors. An investor generally prefers liquidity for his investment. W h i l e s o m e investments like government securities & bank deposits are almost risk less. others are more risky. the maturity period & a host of other factors. S o m e i n v e s t m e n t instrument like preference shares & debentures are marketable. or marketable without loss of money & without loss of time is said to possess liquidity. P . The risk varies with the nature of investment. Liquidity: An investment. a good return with minimum risk or minimization of risk & maximization of return. . O . the longer is the risk. delay in repayment of capital. 4. bank d e p o s i t s . Risk: Risk is inherent in any investment. a r e n o t m a r k e t a b l e . d e p o s i t s . 2. N S S e t c . Safety: The safety of an investment implies the certainty of return of capital w i t h o u t l o s s o f money or time. which is easily saleable. safety of his funds. Equity shares of companies listed on stock exchanges are easily marketable through the stock exchanges. Every investor expects to get back his capital on maturity without loss & without delay. but there are no buyers in many cases & hence their liquidity is negligible. Different types of investments promise different rates of return. The dividend or interest re c e i v e d f r o m t h e investment is the yield. or v a r i a b i l i t y o f r e t u r n s . The longer the maturity period.difference between the sale price & thepurchase price is capital appreciation. Safety is another features which an investors desire for his investments.
Real assets: Real assets are physical investments. p o s t o f f i c e deposits. Mutual fund schemes: If an investor does not directly want to invest in the markets. Financial securities: These investment instruments are freely tradable andnegotiab le. This would a l s o h e l p h i m i n c r e a t i n g a w e l l d i v e r s i f i e d portfolio. rare coins & stamps and art objects.B e f o r e c h o o s i n g t h e a v e n u e f o r i n v e s t m e n t t h e i n v e s t o r w o u l d p r o b a b l y w a n t t o evaluate and compare them. 1. 2. non-convertible debentures. he/she could buy units/shares in a mutual fund scheme. We shall name and briefly describe them. public sector bonds. A n d w o u l d i n c l u d e b a n k d e p o s i t s . provident fund schemes. savings certificates. Non-securitized financial securities: T h e s e i n v e s t m e n t i n s t r u m e n t s a r e n o t tradable. precious stones. con v e r t i b l e debentures. These would include equity shares. gilt-edged securities and money market securities. company fixed deposits. national savings schemes and life insurance.INVESTMENT AVENUES IN INDIA There are a large number of investment instruments available today. To make our lives easier we would classify or group them u n d e r 4 m a i n t y p e s o f investment avenues. preference shares. income (or debt) oriented or balanced (i. which would include real estate gold & silver. transferable nor n e g o t i a b l e . These schemes are mainly growth (or equity) oriented.e. 3. which is both maintainable and manageable . both growth and debt) schemes. 4.
The annual composite rate of growth is expected 13.RBI Mutual Fund AUM’s Growth Month/Year MF AUM's Change in % Mar98 Mar00 Mar01 Mar02 Mar03 Mar-04 Sep-04 4-Dec 13762 6 45 15114 1 9 149300 1 Mar-03 Mar Sep-04 -04 4-Dec 60541 85159 98914 113118 128085 0 3 1 8 3 15 14 13 12 - 156725 162257 1 9 18 3 68984 93717 83131 94017 75306 26 13 12 25 . According to the latest report by ADB. mutual fund assets will be double. The market was slow since early 2007 and continued till the first quarter of 2009.90. the total assets of all scheduled commercial banks should be Rs 40. Indian mutual fund industry reached Rs 1.50. According to the current growth rate.000 crore.537 crore. Let us discuss with the following table: Aggregate deposits of Scheduled Com Banks in India (Rs.Crore) Month/Yea Mar-98 Mar-00 Mar-01 Mar-02 r Deposits Change in % over last yr Source .3 billion (Rs 30.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. by year 2010.13 lakh crore) which is one-tenth of the combined valuation of the Asia region. As of March 2009. The Indian equity market has become the third biggest after China and Hong Kong in the Asian region.GROWTH OF SOURCES GROWTH OF INDIAN EQUITY MARKET The Indian Equity Market is more popularly known as the Indian Stock Market. It is estimated that by 2010 March-end. the market capitalization was around $598. it has a market capitalization of nearly $600 billion. GROWTH OF MUTUAL FUND IN INDIA By December 2004.
Our saving rate is over 23%. Emphasis on better corporate governance. SEBI allowing the MF's to launch commodity mutual funds. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments. at prices related to net asset value per unit. changing the value of the investor’s holdings. who earns a fee. Only channelizing these savings in mutual funds sector is required. Mutual fund investors are not lenders or deposit holders in a mutual fund. New investors come in and old investors can exit. 'B' and 'C' class cities are growing rapidly. US based.over last yr Source AMFI Some facts for the growth of mutual funds in India 100% growth in the last 6 years. Investors hold a proportionate share of the fund in the mutual fund. Mutual funds invest in marketable securities according to the investment objective. . The money in the mutual fund belongs to the investors and nobody else. The market value of the investors’ funds is also called as net assets. Everybody else associated with a mutual fund is a service provider. Today most of the mutual funds are concentrating on the 'A' class cities. Trying to curb the late trading practices. The value of the investments can go up or down. There is a big scope for expansion. Soon they will find scope in the growing cities. with over US$1trillion assets under management worldwide. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. Introduction of Financial Planners who can provide need based advice. highest in the world. We have approximately 29 mutual funds which is much less than US having more than 800. Description on Various Investment Avenues Mutual Fund:- Mutual fund is a pool of money collected from investors and is invested according to stated investment objectives Mutual fund investors are like shareholders and they own the fund.NAV of a mutual fund fluctuates with market price movements.
The Indian Mutual Fund industry has already opened up many exciting investment opportunities to Indian investors. with more money under Mutual Fund management than deposited with banks.-the fund industry has already overtaken the banking industry. Diversification of investment holdings reduces the risk tremendously.Emergence of Mutual Funds:- Mutual Funds now represent perhaps the most appropriate investment opportunity for most small investors.S. History of Mutual Funds:- In the second half of 19th century. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. UTI’s first scheme. bank rates have fallen down and are generally below the inflation rate. In 1992. investor need a financial intermediary who provides the required knowledge and professional expertise on successful investing.A. This is where mutual funds come to the rescue. Diversification means spreading out money across many different types of investments. investor in UK considered the stock market is good for the investment. In 1987 the other public sector institutions set up their Mutual Funds. Despite the expected continuing growth in the industry. Nowadays. government allowed the private sector players to set-up their funds. In 1963. Mutual funds are highly cost efficient and very easy to invest in. In 2001 there is a crisis in UTI and in 2003 UTI splits up into UTI 1and UTI 2. As financial markets become more sophisticated and complex. By pooling money together in a mutual fund. Therefore. keeping large amounts of money in bank is not a wise option. But for small investor it is not possible to operate in the market effectively. One of the options is to invest the money in stock market. Also. under which the Unit Trust of India (UTI) was set-up as a statutory body. But the biggest advantage of mutual funds is diversification. the government of India took the initiative by passing the UTI act. Mutual Fund is a still new financial intermediary in India. as in real terms the value of money decreases over a period of time. Mutual Fund Industry in India:- Mutual Fund is an instrument of investing money. The designated role of UTI was to set up a Mutual Fund. investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. one doesn't have to figure out which stocks or bonds to buy. But a common investor is not informed and competent enough to understand the intricacies of stock market. The first investment company was the Scottish-American Investment Company. The history of Indian Mutual Fund industry can be explained easily by various phases :- . In 1994 the foreign Mutual Funds arrives in Indian market. set up in London in 1860. This led to establishment of an investment company which led to the small investor to invest in equity market. It is no wonder then that in the birthplace of mutual funds-the U. called. When one investment is down another might be up.
Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. custodial and other fees translate into lower costs for investors. Return Potential: Over a medium to long-term. Mutual Funds save your time and make investing easy and convenient. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion.Benefits of Investing in Mutual Funds Professional Management: - Mutual Funds provide the services of experienced and skilled professionals. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries. In closed-end schemes. Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage. backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Transparency: You get regular information on the value of your investment in addition to . the investor gets the money back promptly at net asset value related prices from the Mutual Fund. Liquidity: In open-end schemes. delayed payments and follow up with brokers and companies.
regular withdrawal plans and dividend reinvestment plans. for picking up stocks. thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.disclosure on the specific investments made by your scheme. as their management is not dynamic enough to explore the available opportunity in the market. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Affordability: Investors individually may lack sufficient funds to invest in high-grade stocks. Flexibility: Through features such as regular investment plans. . Disadvantages of Investing Mutual Funds:- Professional Management: Some funds doesn’t perform in neither the market. you can systematically invest or withdraw funds according to your needs and convenience. The operations of Mutual Funds are regularly monitored by SEBI. the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors.
It might have been more advantageous for the individual to defer the capital gains liability.Costs: – The biggest source of AMC income is generally from the entry & exit load which they charge from investors. For example. at the time of purchase. . the manager often has trouble finding a good investment for all the new money. Dilution is also the result of a successful fund getting too big. Taxes: When making decisions about your money. Types of Mutual Funds Mutual fund schemes may be classified on the basis of its structure and its objective:By Structure:- Open-ended Funds:An open-end fund is one that is available for subscription all through the year. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Dilution: – Because funds have small holdings across different companies. fund managers don't consider your personal tax situation. These do not have a fixed maturity. when a fund manager sells a security. which affects how profitable the individual is from the sale. When money pours into funds that have had strong success. a capital-gain tax is triggered. The mutual fund industries are thus charging extra cost under layers of jargon. high returns from a few investments often don't make much difference on the overall return.
These schemes generally invest in safer short-term instruments such as treasury bills. That is. That is. It could be worth paying the load. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. a commission will be payable. In order to provide an exit route to the investors. Tax Saving Schemes:- . no commission is payable on purchase or sale of units in the fund. The fund is open for subscription only during a specified period. Typically entry and exit loads range from 1% to 2%. some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. Money Market Funds:The aim of money market funds is to provide easy liquidity. if the fund has a good performance history. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. each time you buy or sell units in the fund. No-Load Funds:A No-Load Fund is one that does not charge a commission for entry or exit. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. Interval Funds:- Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. certificates of deposit. preservation of capital and moderate income. The advantage of a no load fund is that the entire corpus is put to work. commercial paper and inter-bank call money.Closed-ended Funds:- A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. Load Funds:A Load Fund is one that charges a commission for entry or exit.
provided the capital asset has been sold prior to April 1. 2000 and the amount is invested before September 30. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds. 2000. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act. Various types of Mutual Funds . 1961.These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues.
fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. are prone to higher risk than other equity funds. are comparatively riskier than diversified funds. there are following types of equity funds:- AGGRESSIVE GROWTH FUNDS:In Aggressive Growth Funds. SPECIALTY FUNDS: Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Specialty funds are concentrated and thus.Equity Funds: Equity funds are considered to be the more risky funds as compared to other fund types. Banking. Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors. In the order of decreasing risk level. Without entirely adopting speculative strategies. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Growth Funds invest in those companies that are expected to post above average earnings in the future. Because of these speculative investments Aggressive Growth Funds become more volatile and thus. There are following types of specialty funds: Sector Funds:Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology.e. GROWTH FUNDS: Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. . for 3 years or more. but they also provide higher returns than other funds. Auto. It is advisable that an investor looking to invest in an equity fund should invest for long term i. There are different types of equity funds each falling into different risk bracket.
. However. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently. blue chip companies (less than Rs. These funds invest in big. 2500 crore but more than Rs. These funds are well diversified and reduce sector-specific or company-specific risk. DIVERSIFIED EQUITY FUNDS: Except for a small portion of investment in liquid money market. high dividend yielding companies. which is otherwise considered as a risky instrument.Foreign Securities Funds:Foreign Securities Equity Funds have the option to invest in one or more foreign companies. which generate stable income for investors. However. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. Market capitalization of MidCap companies is less than that of big. 500 crore. Option Income Funds:While not yet available in India. 500 crore) and Small-Cap companies have market capitalization of less than Rs. and then sell options against their stock positions. Proper use of options can help to reduce volatility. like all other funds diversified equity funds too are exposed to equity market risk. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. investment gets risky. diversified equity funds invest mainly in equities without any concentration on a particular sector(s). foreign securities funds are exposed to foreign exchange rate risk and country risk. a minimum of 90% of investments by ELSS should be in equities at all times. Mid-Cap or Small-Cap Funds:Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Option Income Funds write options on a large fraction of their portfolio. Foreign securities funds achieve international diversification and hence they are less risky than sector funds.
Although debt securities are generally less risky than equities. they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. EQUITY INCOME OR DIVIDEND YIELD FUNDS: The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices).) are known as Debt / Income Funds. financial institutions. Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or specialty funds. is reduced. it is advisable to invest in Value funds with a long-term time horizon as risk in the long term. there can be following types of debt funds:- . In order to ensure regular income to investors. VALUE FUNDS:Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. Therefore. debt (or income) funds distribute large fraction of their surplus to investors. to a large extent. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. To minimize the risk of default. Value stocks are generally from cyclical industries (such as cement. steel. The portfolio of these funds comprises of shares that are trading at a low Price to Earnings Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio.) which make them volatile in the short-term.Equity Index Funds: Equity Index Funds have the objective to match the performance of a specific stock market index. are more risky. governments and other entities belonging to various sectors (like infrastructure companies etc. DEBT / INCOME FUNDS:Funds that invest in medium to long-term debt instruments issued by private companies. Narrow indices are less diversified and therefore. Based on different investment objectives. debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds. sugar etc. banks. Debt funds that target high returns are more risky. Equity index funds that follow broad indices (like S&P CNX Nifty.
the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). These funds are generally debt funds and provide investors with a low-risk investment opportunity. government had to intervene and took over UTI's payment obligations on itself. Focused Debt Funds: Unlike diversified debt funds. is shared by all investors which further reduces risk for an individual investor. focused debt funds are narrow focus funds that are confined to investments in selective debt securities. no AMC in India offers assured return schemes to investors. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs).Diversified Debt Funds: Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. But. issued by companies of a specific sector or industry or origin. though possible. these funds are conceivable and may be offered to investors very soon. Assured Return Funds: Although it is not necessary that a fund will meet its objectives or provide assured returns to investors. debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. Eventually.e. although they may earn at times higher returns for investors. on account of default by a debt issuer. but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Although not yet available in India. and therefore. High Yield Debt funds: As we now understand that risk of default is present in all debt funds. UTI had offered assured return schemes (i. Some examples of focused debt funds are sector. . Currently. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". In the past. These funds are more volatile and bear higher default risk. Any loss incurred. funds that invest only in Tax Free Infrastructure or Municipal Bonds. focused debt funds are more risky as compared to diversified debt funds. UTI was not able to fulfill its promises and faced large shortfalls in returns. specialized and offshore debt funds. To safeguard the interests of investors. Because of their narrow orientation. Monthly Income Plans of UTI) that assured specified returns to investors in the future. The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. However.
However. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. like all debt funds. However. gilt funds too are exposed to interest rate risk. Hybrid funds have an equal proportion of debt and equity in their portfolio. convertible securities. Balanced funds are appropriate for conservative investors having a long term investment horizon. Unlike closed-end funds. GILT FUNDS:Also known as Government Securities in India. MONEY MARKET / LIQUID FUNDS:Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. hybrid funds are those funds whose portfolio includes a blend of equities. debts and money market securities. These securities are highly liquid and provide safety of investment. Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). fixed term plans are not listed on the exchanges. . The typical investment options for liquid funds include Treasury Bills (issued by governments). Issued by the Government of India. Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Fixed term plan series usually invest in debt / income schemes and target short-term investors. moderate capital appreciation and at the same time minimizing the risk of capital erosion. The objectives of balanced funds are to reward investors with a regular income.Fixed Term Plan Series: Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. and equity and preference shares held in a relatively equal proportion. There are following types of hybrid funds in India: Balanced Funds: The portfolio of balanced funds includes assets like debt securities. even money market / liquid funds are exposed to the interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. thus making money market / liquid funds the safest investment option when compared with other mutual fund types. HYBRID FUNDS:As the name suggests. these investments have little credit risk (risk of default) and provide safety of principal to the investors.
A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. ASSET ALLOCATION FUNDS: Mutual funds may invest in financial assets like equity. and therefore. REAL ESTATE FUNDS:Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets. the success of these funds depends upon the skill of a fund manager in anticipating market trends. The level of risks involved in these funds is lower than growth funds and higher than income funds. gold futures or shares of gold mines) are common examples of commodity funds. The objective of these funds may be to generate regular income for investors or capital appreciation. fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. crude oil etc. In other words. . debt. "Precious Metals Fund" and Gold Funds (that invest in gold. money market or nonfinancial (physical) assets like real estate.. are known as Specialized Real Estate Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. food grains. commodities etc.Growth-and-Income Funds: Funds that combine features of growth funds and income funds are known as Growthand-Income Funds.) or commodity companies or commodity futures contracts are termed as Commodity Funds. COMMODITY FUNDS:Those funds that focus on investing in different commodities (like metals.
Investors’ money is held in the Trust (the mutual fund). Sponsor and the custodian cannot be the same entity.Sponsor is the promoter of the fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. If two AMCs merge. flexibility of holding a single share (tradable at index linked prices) at the same time.AMC should have a net worth of at least Rs. The AMC is the business face of the mutual fund. An AMC of one fund cannot be Trustee of another fund. are known as Fund of Funds. Trustees oversee the AMC and seek regular reports and information from them. according to the mandate of the investors. the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes. Recently introduced in India. Trustees are appointed by the sponsor with SEBI approval. with SEBI approval. An AMC cannot engage in any business other than portfolio advisory and management. the stakes of sponsor’s changes and the schemes of both funds come together. just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. High court. This requires SEBI and trustee approval. which further helps in diversification of risks. SEBI and . and supervised by the Board of Trustees. Trustees are required to meet atleast 4 times a year to review the AMC the investors’ funds and the investments are held by the custodian. Trustee Company and AMC are usually private limited companies. The mutual fund is formed as trust in India. The AMC’s capital is contributed by the sponsor. but do invest in other Mutual Fund schemes offered by different AMCs. FUND OF FUNDS:Mutual funds that do not invest in financial or physical assets. The trustees make sure that the funds are managed according to the investors’ mandate. these funds are quite popular abroad. Sponsor should contribute atleast 40% of the capital of the AMC. Sponsor should have atleast 5-year track record in the financial services business and should have made profit in atleast 3 out of the 5 years. A trust deed is signed by trustees and registered under the Indian Trust Act. Atleast 50% of trustees should be independent. 10 crore at all times. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes. R&T agents manage the sale and repurchase of units and keep the unit holder accounts. A mutual fund is constituted as a Trust. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment. FUND STRUCTURE AND CONSTITUENTS:Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC . Atleast 50% of the AMC’s Board should be of independent members. Sponsor creates the AMC and the trustee company and appoints the Boards of both these companies. The biggest advantage offered by these funds is that they offer diversification. However.EXCHANGE TRADED FUNDS (ETF):Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. The trustees appoint the asset management company (AMC) to actually manage the investor’s money. The AMC gets a fee for managing the funds. it is called as scheme take over. If the schemes of one fund are taken over by another fund. AMC should be registered with SEBI AMC signs an investment management agreement with the trustees.
No approval is required. which represent a portion of a company's assets (capital) and earnings (dividends). This needs high court approval as well as SEBI and Trustee approval. or equity. it's worth remembering that these may vary at the different exchanges where the company is quoted. Company names also have abbreviations called ticker symbols. You can find stock symbols wherever stock performance information is published . if you buy 1000 shares of stock in a company that has issued a total of 100. However. however. Investors can choose to exit at NAV if they do not approve of the transfer. Investors buy stock in the form of shares.Trustee approval needed. you own one per cent of the company. As a shareholder.000 shares. or 'Epic' symbol. While one per cent seems like a small holding. If one AMC or sponsor buys out the entire stake of another sponsor in an AMC. In theory. Your stake may authorize you to vote at the company's annual general meeting. For close-ended funds the investor approval is required for all cases of merger and takes over. in a company. They have a right to be informed. . many of which have a market value running into billions of pounds. a) STOCKS SYMBOLS:A stock symbol. In reality. The sponsor. stock (often referred to as shares) is ownership. no matter how small their stake. EQUITY SHARES ABOUT SHARES:At the most basic level. can exercise some influence over company management at the annual general meeting. where shareholders usually receive one vote per share. in the case of open-ended funds. very few private investors are able to accumulate a shareholding of that size in publicly quoted companies. who has sold out. every stockholder. most private investors' stakes are insignificant. the extent of your ownership (your stake) in a company depends on the number of shares you own in relation to the total number of shares available For example. newspaper stock listings and investment websites. Management policy is far more likely to be influenced by the votes of large institutional investors such as pension funds.for example. is the standard abbreviation of a stock's name. exits the AMC. there is a takeover of AMC.
a) Trading shares on the stock exchange: As an investor in the INDIA. you need to contact a stockbroker who will buy or sell the shares on your behalf. Details of the trade are transmitted electronically to the stockbroker who is responsible for settling the trade. b) The trading process:If you decide to buy or sell your shares. you can't buy or sell shares on a stock exchange yourself. . You need to place your order with a stock exchange member firm (a stockbroker) who will then execute the order on your behalf. The stock exchange is also a market for investors who can buy and sell shares at any time. Firstly. Trading is done through computerized systems. the stock exchange is a market for issuers who want to raise equity capital by selling shares to investors in an Initial Public Offering (IPO). You will then receive confirmation of the deal. the stockbroker will input the order on the SETS or SEAQ system to match your order with that of another buyer or seller. The same applies to stocks.b) PERFORMANCE INDICATORS:Here is a list of the standard performance indicators Performance Indicator Definition Closing price High and low day 52 week range Volume and low Net change the The last price at which the stock was bought or sold The highest and lowest price of the stock from the previous trading The highest and lowest price over the previous 52 weeks The amount of shares traded during the previous trading day High The difference between the closing price on the last trading day and closing price on the trading day prior to the last THE STOCK EXCHANGES:A marketplace in which to buy or sell something makes life a lot easier. The NSE AND BSE are the leading stock exchange in the INDIA. A stock exchange is an organization that provides a marketplace in which investors and borrowers trade stocks. After receiving your order.
Each exchange has its own listing requirements. marriage and eventually after a lifetime of work we look forward to life of retirement. Insurance is a provision for the distribution of risks that is to say it is a financial provision against loss from unavoidable disasters. Insurance People need insurance in the first place. The insurer in accepting the risks so distributes them that the total of all the amounts is paid for this insurance protection will be sufficient to meet the losses that occur. we are financially and emotionally dependents on our parents and there are no financial commitments to be met. The idea is if any one or both die their dependents continue to live comfortably. This is also the stage when our income may be unable to meet the growing expenses of a young household. This is known as a dual listing. This principle is introduced in most stores where a division is made between the sales clerk and the cashiers department the arrangement dividing the risks of loss. In the first twenty of our life. a stock must meet the listing requirements laid down by that exchange in its approval process. Insurance then provide divided responsibility. In the next twenty years we gain financial independence and provide financial independence to our families. In the next twenty as we see our investments grow after our children grow and become financially independent. To be listed on a stock exchange. It is possible for a stock to be listed on more than one exchange. and some exchanges are more particular than others.c) Types of shares available on the stock exchange:- You cannot trade all stocks on the stock exchange. Our finances too tend to change as we go through the various phases of life. An insurance policy is primarily meant to protect the income of the family’s bread earners. The circle of life begins at birth follower by education. The protection which it affords takes form of a guarantee to indemnify the insured if certain specified losses occur. The insurance principle is similarly applied in any other cases of divided responsibility. The principle of insurance so far as the undertaking of the obligation is concerned is that for the payment of a certain sum the guarantee will be given to reimburse the insured. As a business however insurance is usually recognized as some form of securing a promise of indemnity by the payment of premium and the fulfillment of certain other stipulations .
A whole of life plan is suitable for an individual who is looking for an extended life insurance cover and /or wants to pay premium over as long as tenure as possible to reduce the amount of upfront premium payment. the investment risk is generally borne by the investor. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). In a ULIP. An individual can either contribute through regular premiums or make single premium investments. A Unit is the component of the Fund in a Unit Linked Insurance Policy. Pension plans Pension plans allow an individual to save in a tax differed manner. Since a term insurance contract only pays in the event of eventuality the life cover comes at low premium rates. It is important to remember that in a ULIP. Whole of life plans A whole of life plan provides life insurance cover to an individual up to a specified age. diversified equity funds. The returns in a ULIP depend upon the performance of the fund in the capital market. i. An annuity is paid till the life the lifetime of the insured or a pre-determined period depending upon the annuity option chosen by the life insured. Investors also have the . ULIP investors have the option of investing across various schemes.Types of insurance Term insurance plans Term insurance is the cheapest form of life insurance available. the invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. half-yearly. Savings accumulate over the deferment period. debt funds etc. quarterly or monthly basis. Endowment plans pay a death benefit in the event of an eventuality should the customer survive the benefit period a maturity benefit is paid to the life insured. investors have the choice of investing in a lump sum (single premium) or making premium payments on an annual. Unit Linked Insurance Plans Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk protection and flexibility in investment. balanced funds. Endowment plans Endowment plans are savings and protection plans that provide a dual benefit of protection as well as savings. the individual has the option of choosing an annuity plan from a life insurance company. Term insurance is a useful tool to purchase against risk of early death and protection of an asset. In a ULIP. Once the contract reaches the vesting age . The policy value at any time varies according to the value of the underlying assets at the time.e.
Conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). For example. Service Tax Deductions: Service tax is deducted from the risk portion of the premium. . he can enhance the contribution in ULIP. state of health etc. if an individual has surplus funds. Administration Charges: This is the charge for administration of the plan and is levied by cancellation of units. Fund Management Fees: Fees levied for management of the fund and is deducted before arriving at the NAV. debt funds) either at a nominal or no cost. with subsequent switches.flexibility to alter the premium amounts during the policy's tenure. Expenses Charged in a ULIP Premium Allocation Charge: A percentage of the premium is appropriated towards charges initial and renewal expenses apart from commission expenses before allocating the units under the policy. amount of coverage. balanced funds. subject to a charge. Surrender Charges: Deducted for premature partial or full encashment of units. ULIP investors can shift their investments across various plans/asset classes (diversified equity funds. Fund Switching Charge: Usually a limited number of fund switches are allowed each year without charge. Mortality Charges: These are charges for the cost of insurance coverage and depend on number of factors such as age.
e. 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively.03% GOI 2012 is a Central Government security maturing in 2012.. treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government.The market borrowing of the Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans. The term Government Securities includes: • • • Central Government Securities. .GOVERNMENT SECURITIES Government securities(G-secs) are sovereign securities which are issued by the Reserve Bank of India on behalf of Government of India. These do not form part of the borrowing programme of the Central Government Types of Government Securities Government Securities are of the following types:Dated Securities : are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. Coupon or interest rate is fixed at the time of issuance. and remains constant till redemption of the security. These were issued first on January 19. 11. The key features of these securities are: • They are issued at a discount to the face value.g.in lieu of the Central Government's market borrowing programme. In addition to the above. which carries a coupon of 11. The tenor of the security is also fixed. The key features of these securities are: • • They are issued at face value. State Government Securities Treasury bills The Central Government borrows funds to finance its 'fiscal deficit'. • The tenor of the security is fixed.03% payable half yearly. • • • Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These are called dated securities because these are identified by their date of maturity and the coupon. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.
1995. 2000 crore. but this amount is paid in installments over a specified period. and remains constant till redemption of the security. The security is redeemed at par (face value) on its maturity date. The key features of these securities are: • • They are issued at face value. Interest /Coupon payment is made on a half yearly basis on its face value. The key features of these securities are: • They are issued at face value. In other words it means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy back (call option) bond from holder in 2007. Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. The coupon is reset every six months . Recently RBI issued a floating rate bond. The tenor of the security is also fixed. Though the benchmark does not change. 1994 for Rs. The benchmark rate may be Treasury bill rate. The difference between the issue price (discounted price) and face value is the return on this security. Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The tenor of the security is also fixed. • The security is redeemed at par (face value) on its maturity date.72%. The first issue of such stock of eight year maturity was made on November 15. Floating rate bonds of four year maturity were first issued on September 29. The security is redeemed at par (face value) on its maturity date. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. the coupon of which is benchmarked against average yield on 364 Days Treasury Bills for last six months. • • • • Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark rate. Such stocks have been issued a few more times thereafter. Coupon or interest rate is fixed at the time of issuance. in year 2007. followed by another issue on December 5.e. However the bond has call and put option after five years i. the rate of interest may vary according to the change in the benchmark rate till redemption of the security. .• The securities do not carry any coupon or interest rate. • • • Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond has been priced in line with 5 year bonds. 1995. Interest /Coupon payment is made on a half yearly basis on its face value. bank rate etc. This bond is due for redemption in 2012 and carries a coupon of 6. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately.
Primary Dealers and Financial Institutions have been allowed to hold these securities with the Public Debt Office of Reserve Bank of India in dematerialized form in accounts known as Subsidiary General Ledger (SGL) Accounts. These provide investors with an effective hedge against inflation. They can be purchased from Primary Dealers. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. which is the borrower. Interest /Coupon payment is made on a half yearly basis on its face value. companies. State Governments. 1997 on tap basis. is a leading Primary Dealer in the government securities market. financial institutions. The key features of these securities are: • • They are issued at face value. Primary Dealers. Foreign Institutional Investors. These bonds were floated on December 29. Therefore the actual amount of interest paid varies according to the change in the Wholesale Price Index. PNB Gilts Ltd. institutions.Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale price index. The tenor of the security is fixed. In addition government securities can also be held in dematerialized form in demat accounts maintained with the Depository Participants of NSDL.25% GOI 2008 indicates the following: 12. trusts. The principal redemption is linked to the Wholesale Price Index. Forms of Issuance of Government Securities • Banks. Availability Government securities are highly liquid instruments available both in the primary and secondary market. partnership firms. and is actively involved in the trading of government securities. Entities having a Gilt Account with Banks or Primary Dealers can hold these securities with them in dematerialized form. Example: 12. firms. Nepal Rashtra bank and even individuals are eligible to purchase Government Securities. research organisations. Eligibility All entities registered in India like banks.25% is the coupon rate. mutual funds. • • Minimum Amount . Coupon or interest rate is fixed as a percentage over the wholesale price index at the time of issuance. 2008 is the year of maturity. The principal redemption is linked to the Wholesale Price Index. GOI denotes Government of India. Provident Funds.. • • • Features of Government Securities Nomenclature The coupon rate and year of maturity identifies the government security. corporate bodies.
and 3 rd November every year. the client pays Rs. Therefore the interest has to be paid for 150 days (including 3rd May. government dated securities can be purchased for a minimum amount of Rs. Therefore the principal amount payable is Rs. including 3rd May. Since the settlement is on October 3.The settlement is due on October 3. State Government Securities can be purchased for a minimum amount of Rs 1. up to 30th May + 30 days of June.48.80 for every unit of government security having a face value of Rs.000/. However for Treasury bills it is 365 days for a year. For entities having a demat acount with NSDL.18.18.80%.10 lacs X 101. 100/. July.101. • • Day Count For government dated securities and state government securities the day count is taken as 360 days for a year and 30 days for every completed month. 10 lacs. August and September + 2 days of October).833. Interest payable = 10 lacs X 7. and excluding October 3.000/-only. 10 lacs. 2002) (28 days of May.80.33 Benefits of Investing in Government Securities No tax deducted at source . that date is excluded.101.101. 2002. The last interest payment date for the current year is 3 rd May 2002. would receive the maturity proceeds and they would pay the Gilt Account Holders.Treasury bills can be purchased for a minimum amount of Rs 25000/only and in multiples thereof.33. For Gilt Account Holders. 10.only. 10. The calculation would be made as follows: Face value of Rs.40% GOI 2012 for which the interest payment dates are 3rd May.000 Last interest payment date was May 3.@ Rs.80% =10. 360 X 100 Total amount payable by client =10.40% X 150 = Rs. 2002.40% GOI 2012 for face value of Rs. 30833.the maturity proceeds would be collected by their DP's and they in turn would pay the demat Account Holders. i. Example : A client purchases 7. the Bank/Primary Dealers.e. the maturity proceeds would be credited to their current accounts with the Reserve Bank of India.In terms of RBI regulations.000+30833. What is the amount to be paid by the client? The security is 7. Repayment Government securities are repaid at par on the expiry of their tenor. 2002 and settlement date is October 3.33=Rs. The different repayment methods are as follows : • For SGL account holders. 2002.@ Rs.
Coupon rate for the security remains unchanged. • The basic features of the auctions are given below: • • Method of auction: There are two methods of auction which are followedUniform price Based or Dutch Auction procedure is used in auctions of dated government securities. This method of auction is normally used in case of reissue of existing government securities. the Reserve Bank of India announces the issue size(or notified amount) and the tenor of the paper to be auctioned. since the auction is a multiple price auction. The bidders submit bids in terms of the price. Bidders who have bid at lower than the cut-off yield pay a premium on the security. Bids at prices lower than the cut-off are rejected and at higher than the cut-off are accepted. Bidders who have bid at higher than the cut-off price pay a premium on the security. Multiple/variable Price Based or French Auction procedure is used in auctions of Government dated securities and treasury bills.• • • • • Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals Qualifies for SLR purpose Zero default risk being sovereign paper Highly liquid. • • . Transparency in transactions and simplified settlement procedures through CSGL/NSDL Methods of Issuance of Government Securities Government securities are issued by various methods. Bids are accepted at different prices / yields quoted in the individual bids. In a price based auction. Cut off yield: is the rate at which bids are accepted. Cut off price: It is the minimum price accepted for the security. The bids are accepted at the same prices as decided in the cut off. the Reserve Bank of India announces the issue size(or notified amount). The cut-off yield is set as the coupon rate for the security. Bids at yields higher than the cut-off yield is rejected and those lower than the cut-off are accepted. thereby getting a lower yield. which are as follows: Auctions: Auctions for government securities are either yield based or price based. The bidders submit bids in terms of the yield at which they are ready to buy the security. • Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at the time of auction. • In an yield based auction. the tenor of the paper to be auctioned. as well as the coupon rate.
Tap stock provides an opportunity to unsuccessful bidders in auctions to acquire the security at the market determined rate. On-tap issue This is a reissue of existing Government securities having pre-determined yields/prices by Reserve Bank of India. Fixed coupon issue Government Securities may also be issued for a notified amount at a fixed coupon. Such an action on the part of the Reserve Bank of India leads to a realignment of the market prices of government securities. the interest dates and the date of maturity remain the same as determined in the initial primary auction. The Reserve Bank of India (RBI) may participate as a non-competitor in the auctions. This is usually done when the Ways and Means Advance (WMA) is near the sanctioned limit and the market conditions are not conducive to an issue. Underwriting in Auctions • For the purpose of auctions.Price based auctions lead to finer price discovery than yield based auctions. The period for which the issue is kept open may be time specific or volume specific. bids are invited from the Primary Dealers one day before the auction wherein they indicate the amount to be underwritten by them and the underwriting fee expected by them. The coupon rate. The devolvement is at the cut-off price/yield. the issue remains open to further subscription by the investors as and when considered appropriate by RBI. • • • If there is a devolvement. • Notified amount: The amount of security to be issued is ‘notified’ prior to the auction date. After the initial primary auction of a security. the underwriters do not have to subscribe to the issue necessarily unless they have bid for it. Underwriting fee is paid at the rates bid by PDs . for the underwriting which has been accepted. Reserve Bank of India may sell government securities through on tap issue at lower or higher prices than the prevailing market prices. Most State Development Loans or State Government Securities are issued on this basis. In case of the auction being fully subscribed. Private Placement The Central Government may also privately place government securities with Reserve Bank of India. The unsubscribed portion devolves on RBI or on the Primary Dealers if the auction has been underwritten by PDs. The auction committee of Reserve Bank of India examines the bids and based on the market conditions. the successful bids put in by the Primary Dealers are set-off against the amount underwritten by them while deciding the amount of devolvement. for information of the public. takes a decision in respect of the amount to be underwritten and the fee to be paid to the underwriters. The issue is priced at market .
Joint 'A' Type Certificate: Issued jointly to two adults payable to both holders jointly or to the survivor. This is of course a huge benefit for you can decide as much as your budget allows. & Rs. it purchases government securities from the market. popularly known as NSC.000. RBI in turn may decide upon further selling of the security so purchased under the Open Market Operations window albeit at a different yield. getting double benefits. Whenever the Reserve Bank of India wishes to infuse the liquidity in the system. Joint 'B' Type Certificate: Issued jointly to two adults payable to either of the holders or to the survivor. Rs. NSCs are an instrument for facilitating long-term savings. 100 Rs 500. So it is for you to decide how much you want to put in the NSCs. They not only save tax on their hard-earned income but also make an investment which are sure to give good and safe returns. A large chunk of middle class families use NSCs for saving on their tax. Rs. 5000. 1000. and whenever it wishes to suck out the liquidity from the system. National Savings Certificate National Savings Certificate. How to Invest National Savings Certificates are available at all post-offices. The yield at which these securities are sold may differ from the yield at which they were privately placed with Reserve Bank of India. Who can Invest An adult in his own name or on behalf of a minor A trust Two adults jointly Denomiations and Limit National Savings Certificates are available in the denominations of Rs.related yields. After having auctioned a loan whereby the coupon rate has been arrived at and if still the government feels the need for funds for similar tenure. it sells government securities in the market. Open market operations are used by the Reserve Bank of India to infuse or suck liquidity from the system. The application can be made either in person or through an agent. it may privately place an amount with the Reserve Bank of India. Reserve Bank of India may later offload these securities to the market through Open Market Operations (OMO). . Post office agents are active in nooks and corners of the country. There is no maximum limit on the purchase of the certificates. is a time-tested tax saving instrument that combines adequate returns with high safety. Following types of NSC are issued: Single Holder Type Certificate: This can be issued to: (a) An adult for himself or on behalf of a minor (b) A Trust. 10. Open Market Operations (OMO) Government securities that are privately placed with the Reserve Bank of India are sold in the market through open market operations of the Reserve Bank of India.
Presently interest paid is 8 % per annum half yearly compounded. popularly known as PPF. The account holder can retain the account after maturity for any period without making any further deposits. on behalf of a minor of whom he is a guardian.000 in a financial year. as amended from time to time. forfeiture by a pledgee and when ordered by a court of law. Maturity value of a certificate of any other denomination is at proportionate rate. The balances in PPF account cannot be attached by any authority normally. Who can Open Account The account can be opened by an individual in his own name. Maximum number of deposits is twelve in a financial year. The amount of deposit can be varied to suit the convenience of the account holders. Maximum deposit limit is Rs. 70. Maturity The maturity period of the account is 15 years. In this case the account will continue to earn interest at normal rate as admissible till the account is closed. Income tax relief is also available on the interest earned as per limits fixed vide section 80L of Income Tax. Public Provident Fund Public Provident Fund. Tax Benefits Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested. as amended from time to time. One deposit with a minimum amount of Rs. Income Tax rebate is available on the amount invested and interest accruing under Section 88 of Income Tax Act. 500 in a financial year. Tabs on Investment Minimum deposit required in a PPF account is Rs. How to Open Account Public Provident Fund account can be opened at designated post offices throughout the country and at designated branches of Public Sector Banks throughout the country. is a savings cum tax saving instrument.500/.Maturity Period of maturity of a certificate is six years. Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s).is mandatory in each financial year. It also serves as a retirement planning tool for many of those who do not have any structured pension plan covering them. . Rate of interest is 8% compounded annually.
one or more securities firms or banks. Thereafter one withdrawal in every year is permissible. to finance current expenditure. The most important features of a bond are: . in which the authorized issuer owes the holders a debt and. the account will be treated as discontinued. Account Transfer The Account is transferable from one post Office / bank to another and from post Office to bank or from a bank to a post office. depending on the terms of the bond. The interest on deposits is totally tax free. The discontinued account can be activated by payment of the minimum deposit of Rs.The account holder also has an option to extend the PPF account for any period in a block of 5 years at each time. Bonds provide the borrower with external funds to finance long-term investments. Nominee/legal heir of PPF Account holder cannot continue the account after the death. BONDS A bond is a debt security. Tax Benefits Deposits in PPF are eligible for rebate under section 80-C of Income Tax Act. is obliged to pay interest (the coupon) and/or to repay the principal at a later date. Deposits are exempt from wealth tax. The most common process of issuing bonds is through underwriting.50/. the bond holder is the lender. in the case of government bonds. and the coupon is the interest. credit institutions.500/. termed maturity. Premature Closure or Withdrawl Premature closure of a PPF Account is not permissible except in case of death. Lapse in Deposits If deposits are not made in a PPF account in any financial year. or. after the maturity period of 15 years. In underwriting. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. However government bonds are instead typically auction. companies and supranational institutions in the primary markets.with default fee of Rs. Premature withdrawal is permissible in the 7th year of the account subject. Bonds must be repaid at fixed intervals over a period of time Bonds are issued by public authorities. The security firm takes the risk of being unable to sell on the issue to end investors. forming a syndicate. buy an entire issue of bonds from an issuer and re-sell them to investors. Thus a bond is like a loan: the issuer is the borrower. to a limit of 50% of the amount at credit preceding three year balance.for each defaulted year. It is a formal contract to repay borrowed money with interest at fixed intervals.
at the due dates. As long as all payments have been made. physical bonds were issued which had coupons attached to them. Treasury securities. a market developed in euros for bonds with a maturity of fifty years. federal and state securities and commercial laws apply to the enforcement of these agreements. Issue price — The price at which investors buy the bonds when they are first issued. The terms may be changed only with great difficulty while the bonds are outstanding. such as LIBOR. that is. most bonds are semi-annual. These bonds are also called junk bonds. and some even do not mature at all. Maturity date — The date on which the issuer has to repay the nominal amount. and Europe. In the market for U. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment. which influences the probability that the bondholders will receive the amounts promised. and which has to be repaid at the end. In the U. Usually this rate is fixed throughout the life of the bond. medium term (notes): maturities between one and ten years. it grants option-like features to the holder or the issuer: . principal or face amount — the amount on which the issuer pays interest. investors expect to earn a higher yield. The quality of the issue. or it can be even more exotic. there are three groups of bond maturities: short term (bills): maturities up to one year. the issuer has no more obligations to the bond holders after the maturity date. and also in the U.S.K. In the U.Nominal. It can also vary with a money market index. The maturity can be any length of time. although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. less issuance fees. long term (bonds): maturities greater than ten years. such as actions that the issuer is obligated to perform or is prohibited from performing. which will typically be approximately equal to the nominal amount. with amendments to the governing document generally requiring approval by a majority (or super-majority) vote of the bondholders.S. Indentures and Covenants — An indenture is a formal debt agreement that establishes the terms of a bond issue. which means that they pay a coupon every six months. In early 2005. Covenants specify the rights of bondholders and the duties of issuers. Some bonds have been issued with maturities of up to one hundred years. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. Coupon — The interest rate that the issuer pays to the bond holders. This will depend on a whole range of factors. while covenants are the clauses of such an agreement. As these bonds are more risky than investment grade bonds. High yield bonds are bonds that are rated below investment grade by the credit rating agencies. coupon dates — the dates on which the issuer pays the coupon to the bond holders. Most bonds have a term of up to thirty years.. The name coupon originates from the fact that in the past. which are construed by courts as contracts between issuers and bondholders. The net proceeds that the issuer receives are thus the issue price. Optionality: Occasionally a bond may contain an embedded option.S.
Issuers may either pay to trustees. the separated coupons and the final principal payment of the bond are allowed to trade independently. typically every one or three months. Also known as a "survivor's option". see put option.50%.Callability — Some bonds give the issuer the right to repay the bond before the maturity date on the call dates. FRN coupons reset periodically. but only at a high cost.S. A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. see call option. Fixed rate bonds have a coupon that remains constant throughout the life of the bond. In theory. Inflation linked bonds. Most callable bonds allow the issuer to repay the bond at par. "Puttable" denotes that it may be putted. such as LIBOR or Euribor. See IO (Interest Only) and PO (Principal Only). An American callable can be called at any time until the maturity date. restricting the issuer in its operations. Putability — Some bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates. the so called call premium. A European callable has only one call date. Zero-coupon bonds may be created from fixed rate bonds by a financial institutions separating "stripping off" the coupons from the principal. usually coinciding with coupon dates. convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock. Zero-coupon bonds don't pay any interest. These have very strict covenants. or. any Index could be used as the basis for the coupon of an FRN. These bonds are referred to as callable bonds. Coupon examples: three month USD LIBOR + 0. There are four main categories. and CPI (the Consumer Price Index). However. then the remainder is called balloon maturity. then return them to trustees. Floating rate notes (FRNs) have a coupon that is linked to an index. the issuer has to pay a premium. This is a special case of a Bermudan callable. An example of zero coupon bonds are Series E savings bonds issued by the U. government.) call dates and put dates—the dates on which callable and putable bonds can be redeemed early. purchase bonds in open market. as the . exchangeable bond allows for exchange to shares of a corporation other than the issuer. This is mainly the case for high-yield bonds. (Note: "Putable" denotes an embedded put option. so long as the issuer and the buyer can agree to terms. If that is not the case. They are issued at a substantial discount to par value. or twelve month CPI + 1. The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008). With some bonds. in which the principal amount and the interest payments are indexed to inflation. A Bermudan callable has several call dates. the issuer can repay the bonds early. The bond holder receives the full principal amount on the redemption date. which in turn call randomly selected bonds in the issue. sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. alternatively. To be free from these covenants. The entire bond issue can be liquidated by the maturity date. Common indices include: money market indices. In other words.20%.
It is the alternative to a Bearer bond. As physically processing paper bonds and interest coupons became more expensive. They have no maturity date. collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs). local government. etc. Often they are registered by a number to prevent counterfeiting. the risk is higher.  Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer. Therefore. with the current value of principal near zero. Some book-entry bond issues do not offer the option of a paper certificate. The most famous of these are the UK Consols.principal amount grows. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued.S. even to investors who prefer them. Especially after federal income tax began in the United States. are sent to the registered owner. and the principal upon maturity. and state and local tax-exempt bearer bonds were prohibited in 1983. The senior tranches get paid back first. the person who has the paper certificate can claim the value of the bond.e. First the liquidator is paid. although municipal bonds issued for certain purposes may not be tax exempt. city.  U.S. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Some ultra long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i. Municipal bond is a bond issued by a state. the subordinated bond holders are paid. the payments increase with inflation. although the amounts are now insignificant. The government of the United Kingdom was the first to issue inflation linked Gilts in the 1980s. government. there is a hierarchy of creditors. issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. U.S. subordinated bonds usually have a lower credit rating than senior bonds. Bearer bonds are very risky because they can be lost or stolen. Interest payments. As a result. or by a transfer agent. for example equity-linked notes and bonds indexed on a business indicator (income. In case of bankruptcy. After they have been paid. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U. then government taxes. The first bond holders in line to be paid are those holding what is called senior bonds. corporations stopped issuing bearer bonds in the 1960s. Some of these were issued back in 1888 and still trade today. added value) or on a country's GDP. and asset-backed securities. the subordinated tranches later. Other indexed bonds. The main examples of subordinated bonds can be found in bonds issued by banks. Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. The latter are often issued in tranches. Treasury stopped in 1982. Bearer bond is an official certificate issued without a named holder. bearer bonds were seen as an opportunity to conceal income or assets. but may be traded like cash. 24th century)) are virtually perpetuities from a financial point of view. Perpetual bonds are also often called perpetuities. which are also known as Treasury Annuities or Undated Treasuries. In other words. or their agencies. Examples of asset-backed securities are mortgagebacked securities (MBS's). Territory. Book-entry bond is a bond that does not have a paper certificate.  .S. the U.
Most individuals who want to own bonds do so through bond funds. a decrease in the market price of the bond means an increase in its yield.000 annuity over a 5-year interval. usually a European state. its bondholders will often receive some money back (the recovery amount). Serial bond is a bond that matures in installments over a period of time. in the U. insurance companies and banks. Bondholders also enjoy a measure of legal protection: under the law of most countries. Interest is paid like a traditional fixed rate bond.) One way to quantify the interest rate risk on a bond is in terms of its duration. .000. Thus bonds are generally viewed as safer investments than stocks. Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. Note that this drop in the bond's market price does not affect the interest payments to the bondholder at all. meaning that their market prices will decrease in value when the generally prevailing interest rates rise. the volatility of bonds (especially short and medium dated bonds) is lower than that of shares. a $100. If there is any chance a holder of individual bonds may need to sell his bonds and "cash out"..Lottery bond is a bond issued by a state. More relevantly. This can be damaging for professional investors such as banks. Sometimes. 5year serial bond would mature in a $20. Price changes in a bond will also immediately affect mutual funds that hold these bonds. nearly 10% of all bonds outstanding are held directly by households.  Investing in bonds Bonds are bought and traded mostly by institutions like pension funds. bonds' market prices would increase if the prevailing interest rate were to drop." meaning that in the event of default. reflecting investors' ability to get a higher interest rate on their money elsewhere — perhaps by purchasing a newly issued bond that already features the newly higher interest rate. Since the payments are fixed. Revenue bonds are typically "non-recourse. bonds can also be risky: Fixed rate bonds are subject to interest rate risk. if a company goes bankrupt. insurance companies. the market price of bonds will fall. (Conversely. pension funds and asset managers (irrespective of whether the value is immediately "marked to market" or not).S. but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. though not nearly as easy as it is to sell stocks – and the comparative certainty of a fixed interest payment twice per year is attractive. the bond holder has no recourse to other governmental assets or revenues. Efforts to control this risk are called immunization or hedging. as it did from 2001 through 2003. Some of these redemptions will be for a higher value than the face value of the bond. but this perception is only partially correct. Bonds do suffer from less day-to-day volatility than stocks. bond markets rise (while yields fall) when stock markets fall. Bonds are liquid – it is fairly easy to sell one's bond investments. Still. whereas the company's stock often ends up valueless. so long-term investors who want a specific amount at the maturity date need not worry about price swings in their bonds and do not suffer from interest rate risk. War bond is a bond issued by a country to fund a war. In effect. When the market interest rate rises. the value of the portfolio will also have fallen. interest rate risk could become a real problem. If the value of the bonds held in a trading portfolio has fallen over the day. However. and bonds' interest payments are often higher than the general level of dividend payments.
and the investor might not be able to find as good a deal. but futures contracts have an expiry date and are deliverable. As with interest rate risk. corn and rice or metals such as copper. bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors. after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company World com. COMMODITIES A commodity is a normal physical product used by everyday people during the course of their lives. as it is not practical to trade the physical commodities. meaning that even though the company has agreed to make payments plus interest towards the debt for a certain period of time. exchangeable. which affects mutual funds holding these bonds. Under the laws of many countries (including the United States and Canada).for instance if the credit rating agencies like Standard & Poor's and Moody's upgrade or downgrade the credit rating of the issuer. Traditionally.7 cents on the dollar. Futures contracts give the investor ease of use and the ability to buy or sell without delay. . especially because this usually happens when interest rates are falling. As an example.Bond prices can become volatile depending on the credit rating of the issuer . The execution method of trading futures contracts is similar to trading physical shares. and standardized futures contracts. Futures contracts can be broken by simply offsetting the transaction. For example. A company's bond holders may lose much or all their money if the company goes bankrupt. meaning the investor is forced to find a new place for his money. A downgrade will cause the market price of the bond to fall. these commodities include grains such as wheat. For example. gold and silver. The best way to trade the commodity markets is by buying and selling futures contracts on local and international exchanges. The process of trading commodities. There is no guarantee of how much money will remain to repay bondholders. in 2004 its bondholders ended up being paid 35. Trading futures is easy. In a bankruptcy involving reorganization or recapitalization.Futures contracts have an expiry date and need to be occasionally rolled over from the current contract month to the following contract month. at a fixed date and price in the future. deposit holders (in the case of a deposit taking institution such as a bank) and trade creditors may take precedence. the company can choose to pay off the bond early. This creates reinvestment risk. bondholders may end up having the value of their bonds reduced. this risk does not affect the bond's interest payments (provided the issuer does not actually default). A futures contract is used to buy or sell a fixed quantity and quality of an underlying commodity. there is an expectation when trading commodity futures of achieving higher returns compared to shares or real estate. and can be accessed by using the services of any full or on-line futures brokerage service. The full list of commodity markets is numerous and too detailed. as mentioned above. but puts at risk the market price. must be facilitated by the use of trading liquid. Some bonds are callable. if you buy one futures contract to open then you sell one futures contract to close that market position. as opposed to liquidation. often through an exchange for a smaller number of newly issued bonds. Bank lenders. so successful investors can expect much higher returns compared to more conventional investment products. or metals that are used in production or as a traditional store of wealth and a hedge against inflation. and holders of individual bonds who may have to sell them.
Short-selling is the ability to sell commodity futures creating an open position in the expectation to buy-back at a later time to profit from a fall in the market. Previous research that direct stock and bond investment offers little evidence of providing returns consistent with direct commodity investment. then it will simply be a buyto-open and sell-to-close set of transactions similar to share trading. and with the abundance of information and trading opportunities available there is no reason for any investor to exclusively trade the share market when there is potential profits from trading commodity futures.The reason is because the biggest advantage to trading commodity futures. Besides being a source of information on cash commodity and futures commodity market trends. they are used as performance benchmarks for evaluation of commodity trading advisors and provide a historical track record useful in developing asset allocation strategies. for the private investor is the opportunity to legally short-sell these markets. As is true for stock and bond performance. as well as investment in managed futures and hedge fund products. If you wish to trade the up-side of commodity futures. commodity-based products have a variety of uses. direct commodity investment may be the principal means by which one can obtain exposure to commodity price movements. However. the investor benefits of commodity or commodity-based products lie primarily in their ability to offer risk and return trade-offs that cannot be easily replicated through other investment alternatives. Thus for investors. The commodity markets will always produce rising of falling trends. commodity-based firms may not be exposed to the risk of commodity price movement. The increased use of commodity trading vehicles in investment management has led practitioners to create investable commodity indices and products that offer unique performance opportunities for investors in physical commodities. The commodities that are traded in the market • • • • • • • Gold Copper Silver Sugar Wheat Zeera Guar .
Data Analysis General instruments of investment avenues 120 100 80 60 40 20 0 EQUITY SHARES MUTUAL FUNDS BONDS INSURANCE FIXED DEPOSIT YES NO .
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