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Shares constitute the ownership securities and are popular among the investing class. Investment in shares is risky as well as profitable. Transactions in shares takes place in the primary and secondary markets. Purchasing of shares is now easy and quick due to the extensive use of computers and screen based trading (SBTs). The shares available for investment are classified into different categories such as blue chip shares, growth shares, speculative shares, income shares and so on. Shares certificates in physical form are no more popular in India due to demat facility. It gives convenience in handling and transfer of shares. For this, demat account can be opened in the bank which provides depository services. (e.g. ICICI Demat) Blue Chip Shares: Shares of known and financially sound companies are called blue chip shares. Such companies are called blue chip companies as they are well established over a long period and are stable and profitable. They carry goodwill and market reputation. Investor prefer to invest in blue chip companies due to safety, security and attractive return. Advanatages of Investment in shares: 1) 2) 3) 4) 5) Equity shareholders get income in the form of dividend. The liability of equity shareholders is limited. Shares are easily tranferable i.e. transfer of ownership. High liquidity. Equity shareholders gets an opportunity to participate in the profitability of company. 6) Tax benefit (Dividend on shares of Indian companies has been made tax free).
Disadvantages of Investment in shares: 1) 2) 3) 4) Uncertainty of Income/return. Risky Investment. Speculative activities are harmful. Future of the shareholder is linked with the future of the company.
Investment in Bonds and Debentures:
In addition to company deposits, it is possible to purchase bonds and debentures of joint stock companies for investment purpose. Both represent creditorship securities. Debentures indicates loan given to the company at a specific rate of interest and on certain terms and conditions. Debentures are more popular than shares due to the safety and security available. Companies issue Investors. At present, convertible bonds and debentures are among Indian Investors. In India, Bonds and debentures are also issued by public sector companies and financial institutions. Advantages of Investment in Bonds and debentures: 1) 2) 3) 4) 5) 6) 7) Easy transferability by endorsement and delivery. Safety and security due to government backing. Attractive interest. Investment exempted for wealth tax. Maturity period from 5 years to 25 years. Listing on nearby stock exchange. Simple procedure for investment.
Mutual fund schemes:
UTI had virtual monopoly in the field of mutual fund from 1964 to 1987. After 1987, State Bank of India, Bank of India and other banks started their mutual funds. After 1991 (due to economic liberalization) many financial institutions started their mutual funds (e.g. Kothari Pioneer Fund, CRB Capital Markets and so on.
A mutual fund is formed by the coming together of a number of investors who hand over their surplus funds to a professional organization to manage their funds. The main function of mutual fund is to mobilize the savings of the general public and invest them in stock market securities. Advantages of Investment in Mutual Funds: 1) 2) 3) 4) 5) 6) Benefits of Diversified and profitable investment. Benefits of professional management. Liquidity to the investment. Tax benefits. Effective regulation. Spread of risk.
Disadvantages of Investment in Mutual Funds: 1) Risky investment if not managed efficiently. 2) No direct control on their investment as the investment policies are decided by trustees. 3) Investment of mutual fund are not given adequate information about the functioning of their mutual funds. 4) The future of mutual fund investor is linked with the future of mutual fund. 5) The expectations of investors are fast growing in the case of mutual funds but the managers of mutual funds find it hard to meet such high expectations of investors.
Investment of surplus money in bank deposits is quite popular among the investors. (particularly among salaried people). Banks collect working capital for their business through deposits called Bank Deposits. The deposits are given by the customers for specific period and the bank pays interest on them. In India, all types of Banks accept deposits by offering interest.
The deposits can be accepted from individuals, institutions and even business enterprises. The business and profitability of banks depend on deposit collection. For depositing money in the bank, an investor/depositor has to open an account in a bank. Different types of deposit accounts are: 1) Current Account. 2) Savings Bank Account. 3) Fixed Deposit Account. 4) Recurring Deposit Account.
Advantages of Bank Deposits: 1) 2) 3) 4) Reasonably Safe and secured. Reasonable return on the investment. Banks offer loan facility. Banks offer various services and facilities to their customers. Disadvantages of Bank Deposits: 1) Rate of return is low. 2) Capital appreciation is not possible in bank investment.
Post Office Schemes:
Post office operates as a financial institution. It collects small savings of the people through savings bank account facility. In addition, time deposits and government loans are also collected through post offices. Certain government securities such as National savings certificates etc. are sold through post offices. New schemes are regularly introduced by the Postal Department in order to collect savings of the people. This includes recurring deposits, monthly income scheme, PPF and so on. Postal savings bank schemes were popular in India for a long period as banking facilities were limited and were available mainly in urban areas upto 1950’s.
Popularity of postal savings schemes is now reducing due to the growth in the banking sector and other investment facilities throughout the country. However, even at present, small investors use postal savings facilities for investing their savings or surplus money for short term or long term due to certain benefits like stable return, security, and safety of investment and loan facility against postal deposits. Even tax benefit is one attraction for investment in post office. Investment in postal schemes is as good as giving money to the government for economic development along with reasonable return and tax benefits. Post office savings bank has a customer base of more than 11 crore account holders with annual deposits exceeding Rs. 70,000 crore and a network of 1,55,000 branches. The outstanding balance under all national savings schemes in post office stood at Rs. 2,18,695.15 crore by March 2001. Postal savings schemes include the following: 1) 2) 3) 4) 5) Savings Bank Account. Monthly Income Scheme. Recurring Deposits. Time Deposits. Investment in Government Securities.
Thus, post office provides various schemes for safe investment of surplus funds. However, the return on investment is rather low.
Money Market Instruments:
A money market security is a debt instrument of short period maturity. Money market securities in India are as explained below.
A) Treasury Bills: It is a short term money market instrument used by the Central Government for short term borrowing from the market for meeting urgent financial needs. Its features are: 1) The maturity of Treasury Bill is for the period of six months. 2) It is issued at a discount and is repayable at par. 3) It carries low rate of return due to short period. 4) It is a gilt-edged security. 5) Highest safety as government is responsible for the payment of interest and refund. 6) RBI looks after the issue and sale of treasury bills on behalf of Central Government. B) Commercial Paper It is a money market security. It is a short term unsecured promissory note issued by a firm for the loan taken. Such commercial papers are issued by reputed companies for meeting their urgent short term needs. Features of Commercial Paper: 1) The usual period for the issue of commercial paper is 180 days. 2) It is sold at discount and is redeemable at its face value. 3) The denomination of commercial paper is normally high and is bought by institutional investors and companies for short term investment of surplus available with them. 4) Freely tranferable and negotiable. 5) Maturity period of commercial paper was initially from 3 months to 6 months. 6) Minimum size of commercial paper was Rs.25 lakhs. 7) Commercial paper were to be issued in the multiples of Rs. 25 lakhs subject to the minimum size of an issue being Rs. 1 crore.
C) Certificate of Deposit: A certificate of Deposit is a time deposit with a commercial bank but can be negotiated. Such deposit carries attractive interest rate. It is a document of title similar to a time deposit receipt issued by a bank. It is benefitial to banker as well as investors. Investor is assured of ready liquidity. There is no prescribed interest rate on CD’s and the banks have the freedom to issue CD’s at discount and face value. It is a part of Bank’s time deposit. They are usually issued at face value on which fixed rate of interest is paid.
Life Insurance business was nationalized in India since long 1956 and is run by the Life Insurance corporation of India. Lic is one avenue for investment of money out of regular income. Life Insurance business is no more the monopoly of LIC. Private sector is now allowed to participate in the insurance business. Advantages of Investment in Life Insurance schemes: 1) Protection to family members. 2) Provision for old age. 3) A method of compulsory saving over a long period out of regular income. 4) Bonus to policyholders on yearly basis. 5) Tax benefit. 6) It gives mental peace to investors. 7) Comfortable and financially independent life after retirement.
Investment in Real estate is popular due to high saleable value after some years. Such properties include buildings, commercial premises, industrial land, plantations, farmhouses, agricultural land near cities and so on. They purchase such properties at low prices and do not sale the same unless there is substantial increase in the market prices. The property owners are willing to wait even for 20 to 30 years for attractive return. During this period, it is a type of dead investment for the owners. Liquidity in the case of such properties is limited as quick sale is neither possible nor profitable. Similarly, documentation formalities are also lengthy and costly in the case of purchase and the sale of real estate properties.
Gold and silver:
In India, there is attraction for gold and silver since the early historical period. Our faith in god and gold dates back to the vedic times. In India, gold is an obsession, deep rooted in mythology, religious rites and its very psyche. Gold and silver are useful as a store of wealth. Both the metals are highly liquid. This facilitates easy convertibility into cash at any time and that too without incurring any loss. The market price of both the metals is continuously rising. This makes investment profitable. It actually acts as a hedge against inflation. It has immediate liquidity. It is quite safe and secured investment. The benefit of capital appreciation is also available. Such investments are risky due to thefts. Regular income from the investment is not available. It is not useful for capital formation and economic growth.
Tax Saving Schemes:
There are certain schemes introduced for the purpose of tax saving. These schemes provide income tax benefits to the investors who invest in these schemes. Under section 80c of the Income Tax Act, 1961, the following schemes are eligible for tax saving. The Finance Act,2010 provides tax exemption upto Rs.1,20,000 for the investments in the following schemes: 1) 2) 3) 4) 5) 6) 7) 8) Life Insurance Premium. Public Provident Fund. Post Office Savings Deposits. National Savings Certificate. Unit Linked Insurance Plan. Fixed Deposits. Mutual Funds. LIC’s Pension Plan.