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SEEMA SETHI do hereby declare that the training report entitled "CHANGES IN INVESTMENT PATTERN AT HDFC BANK AMBALA CANTT” submitted by me for the partial fulfillment of degree of Master of Business Administration from MAHARISHI DAYANAND UNIVERSITY, ROHTAK is having original work conducted by me. The data and facts provided in the report are authentic to the best of my knowledge. I solemnly declare that the work done by me is original and no copy of it has been submitted to any other university for award of any other degree, diploma, and fellowship on similar topic.
Heartfelt thanks to those who supported me… It often happens that one is at loss of words when one is really thankful and sincerely wants to express one's feeling of gratitude towards those for rendering helpful and selfless service. A undertaken of study like this is never the outcome of effort of a single person so I would be failing in duty if I don’t say a word of thank to all those who have been the source of guidance, advice, co-operation and having taken pain in acquainting me required information and data for the fulfillment of my project report successfully. I am earnestly grateful to Mr. Vijay Sethi (Manager of HDFC Bank) for providing me an opportunity to undertake project work in their esteemed organization and practical training, which will go long term in shaping my career.
I am deeply indebted to our Director Dr. M.K. Sehgal and all my faculty members of the institute for their valuable contribution during the academic session and guidance in preparation of this project report. I especially want to thank my guide Mr. Adarsh Kumar Aggarwal (Faculty of Finance) for guiding, supporting, also for giving a very patient hearing whenever I needed. SEEMA SETHI
TABLE OF CONTENTS
(ii) DECLARATION (iii) ACKNOWLEDGEMENT (v) EXECUTIVE SUMMARY
INDEX Chapter-1 INTRODUCTION Chapter-2 RESEAECH METHODOLOGY Chapter-3 INDUSTRY PROFILE Chapter-4 COMPANY PROFILE Chapter-5 CHANGES IN INVESTMENT PATTERN Chapter-6 ANALYSIS AND INTERPRETATION CONCLUSION SUGGESTIONS BIBLOGRAPHY ANNEXURES
INDEX OF TABLES
TABLE1- HOLDERS OF DIFFERENT INVESTMENT SCHEMES TABLE2- SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS TABLE3- COMPARISON BETWEEN MUTUAL FUNDS AND FD’S TABLE4- CONSIDERATION WHILE INVESTING IN DIFFERENT SCHEMES TABLE5- HOLDERS OF MUTUAL FUNDS TABLE6- SATISFACTION WITH RESULTS OF MUTUAL FUNDS TABLE7- AWARENESS REGARDING REGULATION OF MUTUAL FUNDS TABLE8- VIEWS REGARDING FUTURE OF MUTUAL FUNDS TABLE9- REASONS FOR NOT INVESTING IN MUTUAL FUNDS TABLE - SOURCES OF INFORMATION
INDEX OF GRAPHS
GRAPH1- HOLDERS OF DIFFERENT INVESTMENT SCHEMES GRAPH2- SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS GRAPH3- COMPARISON BETWEEN MUTUAL FUNDS AND FD’S GRAPH4- CONSIDERATION WHILE INVESTING IN DIFFERENT SCHEMES GRAPH5- HOLDERS OF MUTUAL FUNDS GRAPH6- SATISFACTION WITH RESULTS OF MUTUAL FUNDS GRAPH7- AWARENESS REGARDING REGULATION OF MUTUAL FUNDS GRAPH8- VIEWS REGARDING FUTURE OF MUTUAL FUNDS GRAPH9- REASONS FOR NOT INVESTING IN MUTUAL FUNDS GRAPH10- PREFERENCE TOWARDS MUTUAL FUNDS GRAPH 11- SOURCES OF INFORMATION
Standing on the threshold of the economic revival of the Indian economy where the recovery and growth are already knocking at our door to usher the new order with a note of optimism. The potential of India as a market and as a manufacturing base continues to attract more and more interest of the world at large. Undoubtedly, lot of development is taking place in the investment pattern of the economy and its multiplier impact would be there to be witnessed over a period of years. Investment scenario is changing very rapidly. Emergence of modern instruments of investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and Infrastructure Bonds proves to be a better option for the investors in comparison to the old instruments of investment such as fixed deposits, savings, recurring deposits etc. This project deals with the thorough study of these modern instruments in respect of their returns, liquidity, and tenure & safety aspect etc.
History Of Banking In India
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan shareholders. and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
Nationalisation Of Banks In India
The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them. Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank
Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India Before the steps of nationalization of Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services. The second phase of nationalization of Indian banks took place in the year 1980. Seven more banks were nationalized with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India was under Government ownership. After the nationalization of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1969 : Nationalisation of 14 major banks. 1980 : Nationalisation of seven banks with deposits over 200 crores.
Banking Sector : Growth & Evolution
The Indian Banking sector has undergone a sea of change in the past decade with the Implementation of the ongoing banking sector reforms. The sector, over the years has become more efficient with the implementation of prudential norms for asset classification and improved thrust on technology advancement. The PSBs (Public Sector Banks) still dominate the sector with 75% of the market share of business and profits. The new private sector banks with their technology driven business model are fast catching up with the PSBs. The last two years has seen banks book windfall gains in treasury profits. With the interest rates hardening up, banks need to focus on core profit growth. The retailisation of the banks’ balance sheet has seen banks improve their asset mix with home loans, auto loans and personal loans
GROWTH & EVOLUTION OF THE FINANCIAL SECTOR
The financial sector is in a process of rapid transformation. Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The role of an integrated financial infrastructure is to stimulate and sustain economic growth. The US$ 28 billion Indian financial sector has grown at around 15 per cent and has displayed stability for the last several years, even when other markets in the Asian region were facing a crisis. The financial sector has kept pace with the growing needs of corporate and other borrowers. Banks, capital market participants and insurers have developed a wide range of products and services to suit varied customer requirements. The Reserve Bank of India (RBI) has successfully introduced a regime where interest rates are more in line with market forces. Financial institutions have combated the reduction in interest rates and pressure on their margins by constantly innovating and targeting attractive consumer segments. Banks and trade financiers have played a vital role to promote the foreign trade of the country.
The Indian banking system has a large geographic and functional coverage. Presently the total asset size of the Indian banking sector is 3US$ 270 billion while the total deposits amount to US$ 220 billion with a branch network exceeding 66,000 branches across the country. Revenues of the banking sector have grown at 6 per cent CAGR over the past few years to reach a size of US$ 15 billion. While commercial banks cater to short and medium term financing requirements; national level and state level financial institutions meet longer-term requirements. Banking has grown into a technology concentrated and customer friendly model with a focus on convenience. The sector is moving towards the emergence of financial supermarkets in the form of universal banks providing a set of services ranging from retail to corporate banking, industrial lending and investment banking. While corporate banking is clearly the largest segment, personal financial services is the highest growth segment. The recent favorable government policies for enhancing limits of foreign investments to 49 per cent among other key initiatives have encouraged such activity. Larger banks will be able to muster sufficient capital to finance asset expansion and fund investments in technology.
BUSINESS ENVIRONMENT AND LIKELY FUTURE DIRECTION
In the banking industry, business, in simple terms is defined as the sum of the deposits and advances as on a particular date. The business of scheduled commercial banks is estimated to grow from Rs 21,644 billion in 2002-03 to Rs 32,229 billion by 2005-06 at a CAGR of 14.2 per cent, led by continued growth in retail finance, gradual recovery in commercial credit, pick-up in agriculture credit and growth in deposits.
Due to the slowdown in industrial growth, many corporate restructured themselves to survive; hence, credit off take was low. With reduced avenues for investment of surplus funds, banks turned to retail financing. The retail finance portfolio grew by around 27 per cent during the same period. I. Sources of of funds different of Scheduled sources of Commercial funds Banks(SCBs) of SCBs
Deposits consist of demand deposits (current account deposits), savings deposits and term deposits. Firms maintain demand deposits to meet their day-to-day cash requirements. The deposits of all scheduled banks are expected to grow from a level of Rs 14,045 billion as of March 2003 to Rs 19,929 billion as of March 2006 at a CAGR of 12.4 per cent. This will be driven by a growth of 8.5 per cent, 16.2 per cent and 11.7 per cent in demand deposits, savings deposits and term deposits, respectively. Technology-driven products also taper growth in demand deposits. It’s estimated that demand deposits will grow at a CAGR of 4.1 percent from Rs 1,668 billion as of March 2003 to Rs 1,881 billion by end-March 2006, due to the introduction of newer, technology-driven products/facilities. With the advent of new technology-driven products such as electronic fund transfers, Real Time Gross Settlements (RTGS) and Cash Management Systems (CMS), the clearing cycle has shortened. RTGS and CMS allow quick transfer of funds to and from any part of the country. This will encourage corporates/firms to reduce their balances in demand deposits, and probably slow down their growth. Further, customer-friendly products that are introduced by banks with the aid of technology (swipe-in and swipe-out) will divert some portion of demand deposits towards fixed deposits.
Alternative investment products Besides term deposits, investors have the option of investing in insurance, small savings schemes, mutual funds etc. While the share of small savings schemes in total investments has remained more or less stable, the share of insurance and mutual funds in the total pie is increasing. This has led to a drop in the share of the bank liability product from 68 per cent in 1998-99 to 57 per cent in 2002-03.
Borrowings are expected to grow at 7.1 per cent CAGR from Rs 912 billion as of March 2003 to Rs 1,122 billion by end-March 2006, led by a strong growth in advances. During 2000-01 to 2002-03, borrowings of scheduled commercial banks grew by 22.9 per cent (5.4 per cent) CAGR.
Another source of funds for the banking sector is the equity capital. In the last 10 years, the total equity capital raised by banks has gone up, although it is not the main source of funds for banks. With stricter capital adequacy norms and the growing loan book size, banks will need to infuse more capital to maintain a healthy capital adequacy ratio. Many of the public sector banks have reduced the government stake by raising equity from the market. In 2002-03, the total amount raised by public sector banks through equity was approximately Rs 7.7 billion. Hence, in order to maintain a healthy capital adequacy ratio, going forward, and banks will embark on infusing more equity capital. Equity capital is estimated to grow at CAGR of 2.5 per cent in the next year.
II. Increasing credit deposit ratio to slow down the growth rate of investments
The investments portfolio of banks is likely to grow at CAGR of 8.8 per cent during 2003-04 to 2005-06. With low credit off take, banks had no avenues to deploy funds. Hence they parked them in investments. The investment to deposit ratio grew from 42
per cent in 1998 to 51 per cent in 2003 and is estimated to have been 50.5 per cent in 2004. With the expected increase in demand for commercial credit, banks would prefer lending to the industrial sector than invest in government securities, as the former yields higher returns. Also, to meet the demand for commercial credit, banks would prune their investment portfolio. With the estimated slow down in investments, the investment-deposit ratio is expected to taper to 46 per cent by March 2006.
III. Interest rates to harden in 2004-05
The benchmark 10-year yield on government securities is estimated to rise by 183 basis points (bps) during 2004-05 to 7.00 per cent by March 2005 from 5.17 per cent as of end-March 2004. The benchmark yield is expected to go up further by 50 bps during 2005-06 to touch 7.50 per cent by March 2006. Rising inflation and the gradual increase in credit demand has led to a hardening of interest rates. Banks have started moving to the short end of the curve with the rise in interest rates. In general, the movement of interest rates depends on:
1.Growthinmoneysupply 2.Growth in credit off take 3.International interest rate. 4.Expected rate of inflation 5. Fiscal deficit, and the resultant borrowing programme of the government IV. Agri Credit
During 1999-2000 to 2002-03, agriculture credit recorded a CAGR of 19.2 per cent from Rs 504.3 billion as of end-March 2000 to Rs 853.8 billion as of end-March 2003. The growth in agriculture credit has been steady due to low penetration of agricultural credit in the rural areas and uneven agriculture output over the years. The government has laid emphasis on improving the credit delivery to the agriculture
sector and thus improving agriculture production in the country. The Ministry of Finance has advised all banks to increase their agriculture credit by 30 per cent over the next 3 years, from 2004-05 to 2007-08. Further, several measures have been initiated, like increasing the credit limit of the Kisan credit card scheme, special agricultural credit plans, etc. The Reserve Bank of India has directed banks to restructure / reschedule the overdue agriculture loans, waive margin money requirement for agricultural loans up to Rs 50,000, etc. Agriculture credit had been growing between 17-18 per cent during the last few years. Several banks have started restructuring their operations to meet the targeted agricultural growth.
The net outstanding retail finance portfolio of the banks is expected to grow at a CAGR of 36 per cent during the period 2003-04 to 2005-06, from Rs 1,051 billion as of end-March 2003 to Rs 2,670 billion as of end-March 2006, driven by continued growth in housing, commercial vehicles and car finance. The projected growth in the outstanding retail finance in the next 3 years would be mainly driven by the following factors. 1. Continued growth expected in housing finance, and cars and commercial vehicles finance. 2. Increasing market share of banks vis-à-vis NBFCs in the retail finance pie. 3. Increasing tenures of the loans. During 2000-01 to 2002-03, the retail finance portfolio of banks has grown at a CAGR of 27 per cent from Rs 516.4 billion to Rs 1,051.4 billion. This steady growth in retail finance portfolio was mainly on account of the following factors: 1. Focus of large public and private sector banks on disbursements to the household sector 2. for housing loans, commercial of vehicles, banks cars and two wheelers NBFCs. Increasing penetration vis-à-vis
3. Lower interest rates, contributing to increase in demand, and rising tenure of car, housing and commercial vehicle portfolio.
VI. Non Performing Assets
By March 2006, the gross NPA may come down to 5.82 per cent as against as 8.84 per cent as of March 2003, while net NPA may drop to 2.54 per cent from 4.42 per cent during the same period. At the gross level, the gross NPAs, which stood at Rs 687.80 billion as on March 31, 2003, have fallen to Rs 669.15 billion as on March 31, 2004, but would rise thereafter to Rs 710.56 billion as in March 2006, with the growth in advances. But it’s estimated that gross NPAs will fall further to 5.84 per cent by end-March 2006.The prime drivers are: 1. Credit administration: Improved credit management, by improving the process of credit appraisals, providing extensive training staff members undertaking appraisals, putting in place an effective system of post disbursement monitoring of accounts.
2. Risk management: Increased focus on the improving risk management, with the aid of information technology. 3. Improving corporate performance: Since March 2003, the corporate sector performance has improved significantly, and we expect it to continue improving its profitability in the current industrial upturn, which will help improve the risk profile of loans given to the industrial sector. The gross NPA of the scheduled commercial banks have fallen from 12.8 per cent as of end-March 2000 to 8.8 per cent as of end-March 2003, while net NPAs had fallen from 6.8 percent to 4.4 per cent during the same period. The primary drivers for the improvement are: 1. Higher provisions: The falling interest rate and corresponding increase in profit on sale of investments provided banks enough room to increase their provisioning / write off of bad loans while maintaining profit growth.
2. Regulatory measures: Regulators introduced various measures, such as One Time Settlement Scheme (OTS), Corporate Debt Restructuring (CDR) etc, which allowed banks to restructure the bad loans or settle the bad loans at a discount. It also prevented potential NPAs from becoming NPAs. 3. Legal reforms: Reforms in the legal systems, in the form of strengthening the Debt Recovery Tribunal (DRT) and enactment of the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, enabling banks to pressurize the defaulters to clear the over dues, and thus clean their balance sheet.
4. Best practices: Banks started adopting best practices, and building strong credit risk management to improve their loan portfolio.
GLOBAL BANKING SCENARIO
The first major trend is that of universal banking as a model with emphasis on retail banking. Banks have begun to offer whole portfolio of services because they aim at maximizing bank’s share of the customer’s wallet. Retail banking is less subject to economic cycles than wholesale or investment banking which explains the emphasis on retail banking within the model of universal banking. The second trend is that of use of technology in reducing cost of operations. The process has gone so far ahead that technology is no longer a differentiator between banks. The third trend is towards emergence of regulatory model in the form of Basel II which reconciles the market based assessment of risk with the regulatory capital, something which Basel I did not do. The expectation is that Banks with better risk management would be permitted lower regulatory capital, allowing them more room for growth, as compared to banks with weaker risk management.
Lastly, there is a renewed emphasis on effective corporate governance arising as a response to the fiduciary nature of banking business, the need to raise capital from the markets and stiffer legislation. Effective corporate governance would correct information asymmetry, increase efficiency and enhance brand image. The combined effect of all the above trends would be increased competition among banks with tighter regulation, enabling the financial sector to yield higher value addition per unit of capital employed and resulting in the financial sector accounting for a higher share of gross domestic product, ranging between 8 to 10% in US, UK and Australia as compared to 6.5% for India. I. Indian Aspirations
In the context of these global trends, one can trace the sources of competitive strengths of the Indian banking sector. As far as the strengths are concerned • There has been sufficient deregulation in the financial sector over the last decade to induce elements of competition in the banking sector. • Secondly, the Indian Banking sector has a longer experience of market economies than say the counterparts in Eastern Europe. • Thirdly, Indian players also have international presence.
• Fourthly, the growth of retail lending, over the last five years or so, if not the quality of the portfolio, mirrors the international trend. • Fifth, India has a large and untapped market. Over 60% of the household still do not have access to banking services. This implies a considerable scope for experimentation, innovation, and expansion which can develop into long term competitive advantages for the sector.
• Lastly, the public ownership of roughly three fourth of the Indian Banking sector is, for the moment, an effective shield which the banks can use to nurture their competitive advantages. However one can hardly be complacent, if one looks at Indian banking in terms of cost structure, human resources, technology platforms, management systems and corporate governance. There is certainly an efficient fringe in banking sector, but that fringe is overshadowed by public sector banks which constitute the bulk. In case of public sector banks, operating profit as a percentage of total assets is about 1 percentage point lower than that of foreign banks operating in India. In spite of a series of VRS, the wage bill as percentage of total assets in case of public sector banks is higher by about 1 percentage point as compared to the new private sector banks which shows the scope for economies. In the area of technology, the haste to implement core banking is not matched by a similar urgency to introduce modest but more effective solutions relating to systems, procedures and customer interface. As regards risk assessment and mitigation, freeing up of interest rates, more often that not, has provided the managements a rationale to bypass risk based pricing of credit altogether. As regards corporate governance, it is still looked at as a matter of conscience rather than business necessity.
Parameter - Capital adequacy ratio, Capital to risk-weighted assets ratio (CRAR) As of March 2003, all scheduled commercial banks, except two banks, had their CRAR above the stipulated norm of 9 %. Between March 2002 and March 2003, we see a marked improvement in the nationalized banks. This was due to the increase in profitability and the fresh capital raised by many banks. With the likely implementation of new Capital Accord (Basel II), many banks, especially those having a global presence, have been holding capital in excess of the stipulated norm.
From the sample of six banks listed below, we see that the capital adequacy ratio of all banks, except ICICI Bank, has improved. The capital adequacy ratio of PSBs has shown a significant improvement in comparison to that of the new private sector banks on account of the aggressive lending strategy of new private sector banks in comparison to the aggressive capital raising strategy of the public sector banks. CRAR of top six banks With the expected increase in demand for credit, banks will prefer to increase their loan portfolio instead of investments. This will result in banks shifting their focus from investments towards advances.
CRITICAL SUCCESS FACTORS FOR BANKING INDUSTRY
Critical success factors for banks today revolve around being more competitive in their chosen markets, delivering products and service to their customers "anytime/any where", effective enterprise information management and optimized use of their technology and people resources. The open systems based, network computing model best positions a bank to effectively address these "critical success factors", as opposed to constantly expanding and re-engineering expensive and cumbersome mainframecentric legacy environments. I. New Technologies supporting these CSF’s 1. Data warehousing: effective enterprise information management
The Banking Industry is data rich but information poor. Enterprise information management can be best addressed by using data warehousing technologies and disciplines. Data warehousing based solutions can be implemented the quickest and the 2. most Thin cost-effectively client: the on UNIX-based ideal open systems computing platforms. model network
Sun is encouraging the industry to adopt the network computing model, and incorporate Java as a core development component. A key component of this strategy includes the network appliance, or Sun Ray. Because of their high utilization of workstations that perform basically single or dual repetitive operational functions,
banks are ideally positioned to exploit the network computing model, utilizing the network appliance.
Delivering products quickly and "any time/any where" requires a bank to focus on its channel delivery strategy and position itself to integrate its delivery channels in the future. The Banking Industry has traditionally developed systems with a product or line of business focus. This is changing to a customer relationship focus with integrated delivery of products and services. 4.Embracethe‘Net’economy The Internet has been identified as the next business frontier. While many banks have approached it initially as a sales and marketing vehicle, its real potential exists as a financial transaction medium and a customer support channel. The Internet can allow a bank to reduce its cost of delivering retail services, like home banking, or corporate services, like Cash Management, and thus expand its customer and fee revenue base. “How can bank leverage their strengths to have a better future?” Since the availability of funds is more and deployment is less, banks should evolve new and attractive products and services to the customers. There should be rational thinking in sanctioning loans, which will bring down the NPA’s. The banking sector is made more attractive with differential interest rates. Banks should also ensure that its funds are effectively utilized in the priority sector. Banks should be given more autonomy and independence and the unions should play a major role in building the banking industry. Banks with their large customer base and good reputation can effectively counter the threats from NBFC’s and mutual funds. Internet banking is growing in India where banking is made more user friendly. Banks with Their Intellectual Capital Should move towards Fee based activities.
With The emergence of IT, using its intellectual resources banks should be able to attract funds and market their products nd services more effectively and efficiently. The efficiency with which bank is able to manage the competitive forces will be reflected in their financial statements.
I.Foreign Banks During 1999-00 to 2002-03, foreign banks held on to their share of the business and also maintained the highest spreads. Greater spreads and a high core fee income ratio helped them in sustaining high operating expenses. They will continue to have a high core fee income ratio, but are likely to face competition from other bank groups, who are increasing their worldwide presence. Foreign banks have the lowest NPA ratios and, with their stringent credit assessment norms, will continue to maintain them.
II.Other Scheduled Commercial Banks
Since these banks, especially the new private sector banks, are expanding their operations, operating expenses will be high. But the benefits of these large investments will accrue to them in the near future. The yield on carry business is likely to improve with the gradual increase in credit demand from the commercial sector. However, the improvement could be restricted due to the expected drop in the yield on investments. Because of the aggressive lending strategy adopted by the new private sector banks, the asset quality may deteriorate, although the banks will try to maintain the net NPA ratio. Private sector banks have to concentrate on their credit management systems to improve the asset quality.
III.Public Sector Banks
These banks need to rein in their operating costs by controlling manpower costs and rationalizing operations. Investments in technology may result in surplus staff, which can affect productivity (if the excess manpower is not utilized properly). The gradual increase in commercial sector credit will enable a healthy growth in advances. Public
sector banks need to reduce their exposure to investments by focusing on the core activity of lending. Moreover, these banks have started focusing on retail finance, which will contribute to the growth in advances. The asset quality of the public sector banks may improve on account of the expected improvement in credit management. But PSBs need to improve and be aggressive in their communication and business strategies to garner more customers, if they want to attain mass in the retail finance segment
Budget 2004-05: Banking
The much-needed reforms in the banking sector have transformed the sector drastically in the last few years. Falling interest rates as well as strengthening of the hands of banks (Securitisation Act) have changed the dynamics of the Indian banking sector itself. The new Securitisation Act has given more power to the banking sector against defaulting borrowers. Further, changes to be implemented on the issue of voting rights among private sector banks is likely to speed up the consolidation process.
The government has proposed to double credit to the agriculture sector in the next three years. There has been a significant emphasis on making credit available towards infrastructure development. Inter-institutional group comprising select banks and financial institutions incorporated to ensure speedy conclusion of loan agreements for infrastructure projects. Nearly Rs 400 bn will be kept aside by this consortium for infrastructure support. Task force to be set up to explore reforms in the cooperative banking sector. Securitisation Act to be amended. FDI in the insurance sector to be hiked from 26% to 49%.
As per the common minimum program (CMP), the budget has focused a lot on the need to improve credit to the agriculture sector and banks will be at the forefront of disbursing credit. Vagaries of monsoons impact the agriculture sector heavily and banks are vulnerable if monsoon fails. Also, the RBI has
released new guidelines for banks with regards to agricultural lending. However, it is too early to ascertain the impact. The impact of these initiatives by the government will only be apparent over the long-term. Banks are likely to benefit from increased lending to the infrastructure sector. This will come about in two ways i.e. direct equity participation and indirectly (corporate borrowing for expanding capacity). While this would provide an impetus to core advances of banks, the quality of such advances is likely to be better. In this light, there is relatively less NPA risk. Reforms in the banking sector in the form of amendments to the Securitisation Act may strengthen the backbone of the financial sector. A hike in the FDI in the insurance sector is likely to significantly raise investments in the nascent insurance sector. Domestic banks like ICICI Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with international insurance majors will be able to infuse more capital into their insurance business. In the future, there may be an opportunity for these domestic banks to unlock value from such investments as well.
Housing Finance Sector
Against the milieu of rapid urbanization and a changing socio-economic scenario, the demand for housing has grown explosively. The importance of the housing sector in the economy can be illustrated by a few key statistics. According to the National Building Organization (NBO), the total demand for housing is estimated at 2 million units per year and the total housing shortfall is estimated to be 19.4 million units, of which 12.76 million units is from rural areas and 6.64 million units from urban areas. The housing industry is the second largest employment generator in the country. It is estimated that the budgeted 2 million units would lead to the creation of an additional 10 million man-years of direct employment and another 15 million man-years of indirect employment. Having identified housing as a priority area in the Ninth Five Year Plan (1997-2002), the National Housing Policy has envisaged an investment target of Rs. 1,500 billion for this sector. In order to achieve this investment target, the Government needs to make low cost funds easily available and enforce legal and regulatory reforms.
HDFC was incorporated in 1977 with the primary objective of meeting a social need – that of promoting home ownership by providing long-term finance to households for their housing needs. HDFC was promoted with an initial share capital of Rs. 100 million.
The primary objective of HDFC is to enhance residential housing stock in the country through the provision of housing finance in a systematic and professional manner, and to promote home ownership. Another objective is to increase the flow of resources to the housing sector by integrating the housing finance sector with the overall domestic financial markets..
HDFC’s main goals are to a) develop close relationships with individual households, b) maintain its position as the premier housing finance institution in the country, c) transform ideas into viable and creative solutions, d) provide consistently high returns to shareholders, and e) to HDFC is a professionally managed organization with a board of directors consisting of eminent persons who represent various fields including finance, taxation, construction and urban policy & development. The board primarily focuses on strategy formulation, policy and control, designed to deliver increasing value to shareholders.
BOARD OF DIRECTORS
Mr. Deepak S Parekh (Chairman) Mr. Keshub Mahindra (Vice Chairman) Mr. Shirish B Patel Mr. B S Mehta Mr. D M Sukthankar Mr. D N Ghosh4 Dr. S A Dave Mr. S Venkitaramanan Dr. Ram S Tarneja Mr. N M Munjee Mr. D M Satwalekar Ms. Renu S. Karnad (Executive Director) Mr. K M Mistry (Managing Director)
DR.D.S Parikh (chairman)
MR.Keshub mahindra (Vice Chairman)
Mr.Renu S.Karnad (Executive Director)
Mr. Mistry (Managing Director)
Mr.Shirish B Patel (BOD)
Mr. Mehta (BOD)
Mr. Sukthankar (BOD)
Mr. D.N Ghosh (BOD)
Mr.S.A Dave (BOD)
Mr. S Venkitaramanan(BOD)
Mr. Rama Tarnej a (BOD )
AWARDS AND ACCOLADES
o HDFC Ranked as ‘India’s Third Best Managed Company’ by Finance Asia – 2005 o Mr. Deepak Parikh awarded the 'Hall of Fame' award by Outlook Money magazine. o HDFC receives the 'Dream Home' award for the best Housing Finance company for 2004 from Outlook Money magazine o Awards galore by HDFC at the 44th ABCI Awards!!! o 5th Best Company to work for in India, ranked by Business Today in November 2004 o Economic Times Corporate Citizen of the Year Award, November 2004 o Rated by Deutsche Bank as one of the top 5 banks/Financial Institutions in Asia in October 2004 o Ranked among the Top 20 companies to deliver healthiest returns to shareholders, Outlook Money Magazine - September 2004 o 1st Prize at the New York Festival's Gold Midas Awards for Environmental Communication Ad in August 2004 o Features in the Forbes list of Top 20 Leading Indian Companies in May 2004. o One of the Top 10 Investor Friendly Companies, ranked by Business Today in March 2004. o HDFC Ranked No. 3 - 'India's Best Managed Companies' by Finance Asia o Clean Sweep by HDFC at the 43rd ABCI Awards!!! o National Award for Excellence In Corporate Governance by The Institute of Company Secretaries of India o 2nd Best Company for Corporate Governance in India by the Asset magazine. o The Economic Times Lifetime Achievement Award - 2003. (For Mr. Deepak Parikh - Chairman, HDFC Ltd. )
o One of the Top Ten - Most Admired Companies in India ' - 2003 by Business Barons o One of the Top Ten - Most Admired CEOs in India ' - 2003 by Business Barons ( for Mr. Deepak Parikh ) o India's Second Best Managed Company - 2003 by Finance Asia. o India's Biggest Wealth Creator in the banking and financial serives by the fourth Business Today - Stern Steward Survey. o One of the Top Ten - Most Respected Companies in India' by Business world. o Highest rating for ' Governance and Value Creation ' by CRISIL. o One among the top ten ' Company Leaders in India' by the Far Eastern Economic Review Survey. o Best Managed Financial Institution in India' by fox Pitt Survey.
HDFC BANK LIMITED - A PROFILE
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI’s liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of ‘HDFC Bank Limited’, with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995.
HDFC is India’s premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its
housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.
HDFC Bank’s mission is to be a World-Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank’s risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank’s business philosophy is based on four core values - Operational Excellence, Customer Focus, Product Leadership and People.
The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up capital is Rs.309.9 crore (Rs.3.09 billion). The HDFC Group holds 22.2% of the bank’s equity and about 19.5% of the equity is held by the ADS Depository (in respect of the bank’s American Depository Shares (ADS) Issue). Roughly 31.7% of the equity is held by Foreign Institutional Investors (FIIs) and the bank has about 190,000 shareholders. The shares are listed on the The Stock Exchange, Mumbai and the National Stock Exchange. The bank’s American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol “HDB”.
Times Bank Amalgamation
In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co./Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. The acquisition added significant value to HDFC Bank in terms of increased branch network, expanded geographic reach, enhanced customer base, skilled manpower and the opportunity to cross-sell and leverage alternative delivery channels.
HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over 495 branches spread over 218 cities across India. All branches are linked on an online real-time basis. Customers in over 120 locations are also serviced through Telephone Banking. The Bank’s expansion plans take into account the need to have a presence in all major industrial and commercial centres where its corporate customers are located as well as the need to build a strong retail customer base for both deposits and loan products. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centers where the NSE/BSE have a strong and active member base. The Bank also has a network of about over 1054 networked ATMs across these cities. Moreover, HDFC Bank’s ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit / Charge card holders.
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Kapoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing HDFC are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength.
HDFC Bank operates in a highly automated environment in terms of information technology and communication systems. All the bank’s branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). The Bank has made substantial efforts and investments in acquiring the best technology available internationally, to build the infrastructure for a world class bank. In terms of software, the Corporate Banking business is supported by Flexible, while the Retail Banking business by Fin ware, both from i-flex Solutions Ltd. The systems are open, scaleable and web-enabled.
The Bank has prioritized its engagement in technology and the internet as one of its key goals and has already made significant progress in web-enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share.
HDFC Bank caters to a wide range of banking services covering both commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. The bank has three key business segments:
a) Wholesale Banking Services
The Bank’s target market is primarily large, blue-chip manufacturing companies in the Indian corporate sector and to a lesser extent, small & mid-sized corporate and agri-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporate including multinationals, companies from the domestic business houses and prime public sector companies. It is recognized as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks.
Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the financial markets in India, corporate need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the bank’s Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.
b) Retail Banking Services
The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to the customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form.
HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Master card Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2005, the bank had a total card base (debit and credit cards) of 4.2 million cards. The Bank is also one of the leading players in the “merchant acquiring” business with over 42,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.
RATINGS/AWARDS a) Credit Rating
HDFC Bank has its deposit programmes rated by two rating agencies - Credit Analysis & Research Limited. (CARE) and Fitch Ratings India Private Limited. The Bank’s Fixed Deposit programme has been rated ‘CARE AAA (FD)’ [Triple A] by CARE, which represents instruments considered to be “of the best quality, carrying negligible investment risk”. CARE has also rated the Bank’s Certificate of Deposit (CD) programme “PR 1+” which represents “superior capacity for repayment of short term promissory obligations”. Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the “TAAA (ind)” rating to the Bank’s deposit programme, with the outlook on the rating as “stable”. This rating indicates “highest credit quality” where “protection factors are very high”. HDFC Bank also has its long term unsecured, subordinated (Tier II) Bonds of Rs.4 billion rated by CARE and Fitch Ratings India Private Limited. CARE has assigned the rating of “CARE AAA” for the Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating “AAA(ind)” with the outlook on the rating as “stable”. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments.
b) Corporate Governance Rating
The bank was one of the first four companies, which subjected itself to a Corporate Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India Limited (CRISIL). The rating provides an independent assessment of an entity’s current performance and an expectation on its “balanced value creation and corporate governance practices” in future. The bank has been assigned a ‘CRISIL GVC Level 1’ rating which indicates that the bank’s capability with respect to wealth creation for all its stakeholders while adopting sound corporate governance practices is the highest.
c) Awards and Accolades
Over the years, HDFC Bank has received recognition and awards from various leading organisations and publications, both domestic and international. In June 2005, HDFC Bank won Asia money magazine’s “Best Domestic Commercial Bank Award 2005” for India. The Bank was awarded The Asian Banker’s, “Excellence in Retail Banking Risk Management Award for 2004”, a pan-Asia recognition of the bank’s risk management abilities. The Asset (Triple A Country Awards) rated HDFC Bank as the “Best Domestic Bank in India – 2004” and “Best Domestic Bank in India – 2003”. Forbes Global again named the Bank in its listing of ‘Best Under a Billion, 100 Best Smaller Size Enterprises in Asia/Pacific and Europe”, in its November 2004 issue. The Bank was rated as the “Best Overall Local/Domestic Bank – India” in the Corporate Cash Management Poll conducted by the Hong Kong based Asia money magazine. The said magazine also awarded the Bank with the titles of “Overall Most Improved Company for Best Management Practices in India” in the Best Managed Companies poll 2004, “Best Local Cash Management Bank”, Best Overall Domestic Trade Finance Services Award”, and also awarded the Managing Director, Mr. Aditya Puri as the “Best Chief Executive Officer in India”. In May 2004, the Bank also won the “Operational Excellence in Retail Financial Services – India” award as part of the Asian Banker Excellence in Retail Financial Services Program 2003. HDFC Bank was selected by Finance Asia as the “Best Local Bank – India 2003”,
“Best Local Bank in India 2002”, “Best Domestic Commercial Bank – India 2001”, “Best Domestic Commercial Bank – India 2000” and “Best Domestic Commercial Bank – India 1999”. Euro money rated HDFC Bank as “Best Bank in India 2002”, “Best Bank – India 2001”, “Best Domestic Bank – India 2000” and “Best Bank – India 1999”. For its use of information technology the bank has been recognized as a “Computerworld Honors Laureate” and awarded the 21st Century Achievement Award in 2002 for Finance, Insurance & Real Estate category by Computer world, Inc., USA. Closer home, HDFC Bank was selected as the “Best Bank in India” for the second consecutive year in 2004 by Business Today. The Bank was selected by Business World as "one of India's Most Respected Companies" as part of The Business World Most Respected Company Awards 2004. In the FE-E&Y Best Banks Survey for 2002-03, HDFC Bank was selected as the number one new generation private-sector bank. Outlook Money Awards selected HDFC Bank as the “Best Bank – Private Sector 2003-04” in February 2004. HDFC Bank was ranked India’s Best Bank – 2003 by Business Today and as Best Bank for the year 2000 by Business India. It was also the winner of The Economic Times Award – Corporate Excellence for Emerging Company of the Year 2000-01. HDFC Bank was awarded the Best IT User award 2003 (category: Banking) as part of the IT User Awards 2003 conferred by Economictimes.com & Nasscom.
Savings, Fixed Deposits, Current and Demat Accounts
Savings Account: Apart from the usual facilities, you get a free ATM Card, Interbranch banking, Net-Banking, Bill-Pay, Phone-Banking, Debit Card and MobileBanking, among others.
HDFC Bank Preferred: A preferential Savings Account where you are assigned
a dedicated Relationship Manager, who is your one-point contact. You also get privileges like fee waivers, enhanced ATM withdrawal limit, priority locker allotment, free Demat Account and lower interest rates on loans, to name a few.
Sweep-In Account: A fixed deposit linked to your Savings Account. So, even if
your Savings Account runs a bit short, you can issue a cheque (or use your ATM Card). The money is automatically swept in from your fixed deposit into your Savings Account.
Super Saver Account: Gives you an overdraft facility up to 75% of your Fixed
Deposit. In an emergency, you can access your funds while your Fixed Deposit continues to earn high interest.
HDFC Bank Plus: Apart from Regular and Premium Current accounts we also
have HDFC Bank Plus, a Current Account and then some more. You can transfer up to Rs. 50 lakh per month at no extra charge, between the four metros. You can also avail of cheque clearing between the four metros, get cash delivery/pickup upto Rs. 25,000/-, home delivery of Demand Drafts, at-par cheques, outstation cheque clearance facility, etc.
Demat Account: Conduct hassle-free transactions on your shares. You can also
access your Demat Account on the Internet.
Innovative services for your convenience... Phone-Banking: 24-hour automated banking services with 39 PhoneBanking
ATM 24-hour banking: Apart from routine transactions, you can also pay your
utility bills and transfer funds, at any of our ATMs across the country all year round.
Inter-city/Inter-branch Banking: Access your account from any of our
495 branches in 218 cities.
Net-Banking: Access your bank account from anywhere in the world, at anytime,
at your own convenience. You can also view your Demat Account through Net Banking.
International Debit Card: An ATM card you can shop with all over the country
and in over 140 countries with. You can spend in any currency, and pay in Rupees.
Mobile-Banking: Access your account on your mobile phone screen at no airtime
cost. Use SMS technology to conduct your banking transactions from your cellphone.
BillPay: Pay your telephone, electricity and mobile-phone bills through our ATMs,
Internet, phone or mobile phone. No more standing in long queues or writing cheques.
Loans for every need
Now, our loans come to you in easy-to-pay monthly installments, and are available with easy documentation and quick delivery.
Personal Loans: Take a loan of up to Rs. 3 lakh for a wedding, education,
purchase of a computer or an exciting holiday.
New Car Loans and Used Car Loans: Finance up to 90% of the cost of a car,
new or used! And the loans come to you with easy documentation and speedy processing at attractive interest rates.
Loans Against Shares: Get an overdraft up to Rs. 10 lakh at an attractive interest
rate against physical shares, up to 50% of the market value of your shares. In case of Demat Shares, you can get a Loans Against Shares of up to 65% of the market value of your shares, till Rs. 20 lakh.
Two Wheeler & Consumer Loans: To help you buy the best durables for
Demat Account: Protect your shares from damage, loss and theft, by maintaining
your shares in electronic form. You can also access your demat account on the internet.
Current Account: Get a personalised cheque book, monthly account statements,
inter-branch banking and much more.
Mutual Funds: Apart from a wide choice of mutual funds to suit your individual
needs, you benefit from expert advice on choosing the right funds based on in-depth market analysis.
International Credit Card: Get an option of Silver, Gold, or Health Plus Credit
card, accepted worldwide from a world-class bank. If you have outstanding balance on your other credit card, you can transfer that balance to this card at a lower interest rate.
NRI Services: A comprehensive range, backed by unmatched features and worldclass service, ensures NRIs all the banking support they need.
Forex Facilities: Avail of foreign currency, travellers cheques, foreign exchange
demand drafts, to meet your travel needs.
Insurance*: HDFC Bank now brings you Life Insurance and Pension Solutions
like Risk Cover Scheme, Savings Scheme, Children’s Plan and Personal Plan from HDFC Standard Life Insurance Co. Ltd.
Management Hierarchy Board of directors:
Mr. Jagdish Kapoor, chairman Mr. Aditya Puri, Managing Director Mr. Keki Mistry Dr. (Mrs.) Amla Samanta Mr. Anil Ahuja Dr. Venket Rao Gadwal Mr. Vineet Jain Mrs. Renu Karnad Mr. Arvind Pande Mr. Rajan Kapur Mr. Bobby Parekh
Mr. Ashim Sama SENIOR MANAGEMENT TEAM
A.Parthasarathy A Rajan Abhay Aima Bharat Shah C.N.Ram G.Subramanian Harish Engineer Neeraj Swaaroop Paresh Sukthankar Samir Bhatia Sudhir M Joshi Vinod G Yennamadi
VICE PRESIDENT (LEGAL)&COMPANY SECRETARY
SWOT ANALYSIS Strengths:
1. HDFC is an old and well renowned bank with well qualified employees 2. HDFC is a leading bank in regard to home loans as compared to any private or public sector bank. 3. According to the recent news in the economic times HDFC bank beats SBI as the most valuable financial firm.
1. The direct selling agents are posing a threat to the reputation of the firm by not disclosing the complete information about their services. 2. The staff does not provide complete information to employees regarding the penalties involved.
1. HDFC bank is going global to the Arabian countries. 2. Awareness of the e-age services and greater demand of credit cards are posing greater opportunities.
1. The opening up of another private sector bank, ICICI in the city. 2. The merger of the public sector banks thus making them stronger and efficient as compared to the private sector banks. 3. The private sector banks are facing stiff and tough competition from the foreign banks. The faith of the people towards the public sector banks makes them all the more reluctant to switch over to a private bank.
Type of Research:
The type of research is analytical. Analytical research includes journals magazinies, internet and fact finding enquiries of different kinds. The major purpose of analytical research is description of the state of affairs as it exists at present. In social science and business research we quite often use the term Ex post facto research for analytical research studies. The main characteristic of this method is that the researcher has no control over the variables; he can only report what has happened or what is happening.
As the research type is descriptive, so we will be using Analytical Research Design to do our Research work. The methodology of study will be through journals,internet,magazines.
Source of Data Sampling Plan: Secondary data.
Secondary data was collected from the bank’s annual report, brochures and its website.
Methods of data collection: Secondary Data: For secondary data the methods used for data collection are as
follows: Internet, newspapers, bank’s manual, brochures etc.
Objectives of the study:
1. To assess the trends towards the investment pattern. 2. To study the traditional instruments of investments at HDFC BANK such as Fixed Deposits, Recurring Deposits , saving account,current account etc. 3. Modern instruments of investments such as Mutual funds, SIP, ULIPetc. At HDFC
4. Fixed deposits. Vs RD
L i m i t at i o n s of t h e s t u d y :
o The constraint of time available for carrying out this study is limited. o The findings of the research are limited to a particular area & cannot be applied to all places. o As the human behavior is not constant so the results collected through Questionnaire may or may not apply to future period of time. o Human Bias can also be considered as an important limitation of the research.
“CHANGES IN INVESTMENT PATTERN”
CHANGES IN INVESTMENT PATTERN
Investment scenario is changing very rapidly. Emergence of modern instruments of investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and Infrastructure Bonds proves to be a better option for the investors in comparison to the old instruments of investment such as fixed deposits, savings, recurring deposits etc. This project deals with the thorough study of these modern instruments in respect of their returns, liquidity, and tenure & safety aspect etc. Investments have become a key complexity because of the following reasons: -Interest rates falling. -Equity markets violate. -All usual choices look the same. One of the most important question in today’s scenario is that where would a person like his / her money to be i.e. what are the factors which a person look for before investing: a) Investments opportunities to optimize returns. b) Focus on tax-free returns. c) Protect income flows. d) Preserve capital.
CRITICAL ANALYSIS OF
TRADITIONAL AND MODERN INVESTMENTS INSTRUMENTS
TRADITIONAL INSTRUMENTS OF INVESTMENT
The traditional instruments of investment were: 6.1FIXED DEPOSITS 6.2RECURRING DEPOSITS 6.3NSC’s(National Saving Certificates) 6.4TIME DEPOSIT 6.5POST OFFICE MONTHLY INCOME SCHEMES
6.1 FIXED DEPOSITS
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India. In this category we include deposits, which are made with the bank for a fixed period. The deposit of specifies the period at the time of making the deposit. These deposits are repayable after the maturity/expiry of the specified period. The depositor, depending upon his requirements instructs the bank to keep the deposit for a certain period. For example, if the depositor knows that he is not going to need the money for the next three years, he may ask the bank to prepare a fixed deposit receipt for a
period of three years. On the other hand, if he requires the money after say nine months or so, he may request the bank to prepare the fixed deposit receipt for a shorter period. As the date of repayment of the fixed deposits is determined in advance, the bank need not keep more cash reserves against it and can utilize such amount profitably elsewhere. Since the depositor parts with liquidity for a definite period, the bank offers higher rate of interest on fixed deposits. Some years ago fixed deposits are very popular among the depositors and constitute more than half of the total bank deposits.
6.1.1 The joy of fixed returns
Fixed deposits remain the most popular instrument for financial savings in India. They are the middle path investments with adequate returns and sufficient liquidity. There are basically three avenues for parking savings in the form of fixed deposits. The most common are bank deposits. For nationalized banks, the yield is generally low with a maximum interest of 10 to 10.5% per annum for a period of three years or more. As opposed to that, NBFCs and company deposits are more attractive. The idea is to select the right company to minimize the risk. Company deposits as a saving instrument have declined in popularity over the last three years. The major reasons being the slowdown in economy resulting in default by some companies. Also, some NBFCs simply vanished with the depositors' money. All that is likely to change for the better. Corporate performance is likely to improve and stricter control by RBI should improve NBFCs record. But one still needs to be selective.
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate.
The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-. Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making one big deposit. In case of any premature withdrawal of partial amount, then only one or two deposit need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to consider before investing in an FD is the rate of interest and the inflation rate. A high inflation rate can simply chip away your real returns. o Interest for re-investment is calculated every quarter, and the Principal is increased to include interest earned during the previous quarter.
o Tax at source is deducted as per the Income Tax regulations prevalent
from time to time.
Note: Interest rates are subject to change from time to time. Request you to clear your cache to see the updated interest rates. The bank will give applicable interest rates as on the date of receipt of the funds.
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested. Interest rate also varies between each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period
can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 10 years.
5-30 days 30-45 days 46-90 days 91-180 days 181-365 days 1-1.5 years 1.5-2 years 2-3 years 3-5 years 5 years
Interest rate (%) per annum
4 -7 % 5-8 % 6-8 % 6.5-9.5 % 7-9.5 % 8.5-10.25 % 8.5-10.5 % 9-10.5 % 9.5-10.5 % 9.5-11 %
6.1.4 How to apply
One can get a bank FD at any bank, be it nationalised, private, or foreign. You have to open a FD account with the bank, and make the deposit. However, some banks insist that you maintain a savings account with them to operate a FD. When a depositor opens an FD account with a bank, a deposit receipt or an account statement is issued to him, which can be updated from time to time, depending on the duration of the FD and the frequency of the interest calculation. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in.
We present a few pointers, which FD investors must consider at the time of investment, 1.Safety
FDs have conventionally been the premier choice for investors with a low risk appetite; assured returns is the key factor, which attracts investors towards deposits. Stick to FDs of the highest credit rating i.e. those with a “AAA” rating even if their rates seem modest vis-à-vis those offered by company deposits. Company deposits are unsecured in nature and investing in them would imply taking on disproportionately higher risk. If as an investor you are open to investing in instruments involving higher risk levels, market linked instruments like mutual funds may not be a bad deal.
Short tenured fixed deposits continue to be your best bet. With interest rates on the ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking your investments in longer tenured instruments may lead to an opportunity loss. Even if a 3-Yr FD looks like a lucrative proposition as compared to one, which runs over a year or so, pick the short tenured one. In a rising rate scenario, you could be more than compensated for the lower returns at present.
Find out how your FD fares on the premature encashment front i.e. how easily can your investments be liquidated. Also enquire about the penalty clause.
4. Some Additional Benefits
FD’S from reputed entities offer additional benefits e.g. they can be used as collateral security against which loans can be raised.
Benefits of Company Fixed Deposits as an investment avenue Advantages
Bank deposits are the safest investment after Post office savings because all bank deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India. It is possible to get a loans up to75- 90% of the deposit amount from banks against fixed deposit receipts. The interest charged will be 2% more than the rate of interest earned by the deposit. With effect from A.Y. 1998-99, investment on bank deposits, along with other specified incomes, is exempt from income tax up to a limit of Rs.12, 000/- under Section 80L. Also, from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The 1995 Finance Bill Proposals introduced tax deduction at source (TDS) on fixed deposits on interest incomes of Rs.5000/- and above per annum.
Company Fixed Deposit’s are non-transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands, it cannot be misused. The FD holder in such a case should write to the company, which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one.
No income tax is deducted at source if the interest income is up to Rs 5000/-in one financial year.One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000.-
Further, advantage of investing in company fixed deposits is that one can analyses the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
It is also important that company fixed deposit should be made for short term, i.e., tenure should be for 1-3 years depending upon the rate of interest. This will help the investor to switch to other company if need be
Recently, nomination facility has been introduced in company fixed deposits.
6.1.7 History of Company Fixed Deposits in India
Company Fixed Deposit market in India has an interesting phase of evolution. It basically grew out of the need of Corporate Sector for raising short-term finance and requirements of small investors to earn superior returns as compared to returns offered by the Banks. The concept of company fixed deposits was started in India in 1964 by Bajaj Capital Ltd.by launching first ever Company Fixed Deposit of Oberoi Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels prompted others private and public sector companies which started accepting deposits from public. Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The numbers of depositors have increased to around 5 million. The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns, premature encashment, simplicity of transactions, TDS benefits, wide choice, All these features have made company deposits a preferred instrument of investment.
WHERE NOT TO INVEST
Companies which pay a rate of interest higher than 14% Companies, which are not paying regular dividends to their shareholders. New companies belonging to first generation of promoters, which have yet to prove their credit worthiness. It is best to avoid private limited companies, and partnership firms and other unincorporated bodies. Such companies are under no obligation to publish their balance sheets working results and it is, therefore, very difficult to judge their performance.
Companies whose balance sheets show accumulated losses. Companies with a poor liquidity position and below investment grade rating.
How to choose a company for making deposit
There are many companies operating in Company Deposit market. Investors, however, have to be careful while selecting a company for investing their hard earned money. Following is a checklist for selecting good companies:
Credit Rating/ Reputation and Size of Industrial Group
The first thing to check out is the rating of the deposit scheme. Investors should avoid those companies, which have below ‘A’ rating. In case of manufacturing companies, it’s however not mandatory to get rating. In this case investor should look at the background of promoters and financial track record. In manufacturing companies, reputation and size of industrial group to which the company belongs is the key criteria for safety and reliability. The whole procedure of making investment in company deposits can be described in two words; it is simple and liquid. It is simple for depositor to put in and get back his money anytime after 6 months. It is also simple for company to raise money in form of fixed deposits.
Don't put all your eggs in one Basket
The deposits should be spread over a large number of companies engaged in different industries. In this way an investor will be able to diversify his risk among various Industries/ Companies. Investors should not put more than 10% of their total portfolio in one particular company.
Period of Deposit Ideally the investment should be for 1 to 3 years depending upon the rate of interest. 1. Periodic Review of the Companies
The performance of the companies should be reviewed at maturity i.e., whether to renew or reshuffle, the deposit. A watch should also be kept over the companies by checking their share prices, annual reports and other news reported in the commercial columns of daily papers.
Persons who can open an account
I) An account may be opened by a) A single adult; or b) Two adults jointly, the amount due on the account being payablei) To both jointly or survivor, or ii) to either of them or survivor, or c). A guardian on behalf of a minor or a person of unsound mind; or d).A minor who has attained the age of ten years, in his own name.
The Recurring deposit in Bank is meant for someone who want to invest a specific sum of money on a monthly basis for a fixed rate of return. At the end, you will get the principal sum as well as the interest earned during that period. The scheme, a systematic way for long term savings, is one of the best investment option for the low income groups.
The minimum investment of Recurring Deposit varies from bank to bank but usually it begins from Rs 100/-. There is no upper limit in investing. The rate of interest varies between 7 and 11 percent depending on the maturity period and amount invested. The interest is calculated quarterly or as specified by the bank. The period of maturity ranging from 6 months to 10 years. The deposit shall be paid as monthly installments and each subsequent monthly installment shall be made before the end of the calendar month and shall be equal to the first deposit. In case of default in payment, a default fee is chargeable for delayed deposit at the rate of Rs. 1.50/- for every Rs. 100/- per month for deposits up to 5 years and Rs. 2/- per Rs. 100/- in case of longer maturities. Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation if it is more than the rate of return offered by the bank. Worse, lower the gap between the interest rate on a recurring deposit and inflation, lower your real rate of return. Premature withdrawal is also possible but it demands a loss of interest.
The rate of interest varies between 7 and 11 percent depending on the maturity period and amount invested. The interest is calculated quarterly or as specified by the bank.
Amount invested per month
Rs 100 Rs 500 Rs 750 Rs 3000
Maturity amount in 2 years (5%interest)
Rs 2626 Rs 13,132 Rs 19,698 Rs 78,792
Some Nationalised banks are giving more facilities to their customer, State Bank of India give Free Roaming Recurring Deposit facility to their customers. They can transfer their account to any branch of SBI free. Tax benefit on the interest earned on Recurring Deposit up to Rs 12000 Tax Deductible at source if the interest paid on deposit exceeds Rs 5000/-per customer, per year, per branch.
6.2.4 How to open an Account
A Recurring Bank Deposit account can be opened at any branch of a bank that offers this facility. However, some banks insist that you maintain a savings bank account with them to operate a Recurring Bank Deposit account. The terms and conditions vary from bank to bank. When a depositor opens a Recurring Bank Deposit account with a bank, a pass-book or an account statement is issued to him. These are fixed deposits with a difference.
How it works
In a normal fixed deposit, you put in an amount and, after a specific period of time, you are free to withdraw it. Meanwhile, you do not touch the money or add to it. A recurring deposit works on a similar principle. The difference is: instead of putting in a bulk amount, you put in a specified amount (which you decide when you open your recurring account) every month. This could be a small amount that will not pinch your pocket or make a dent in your lifestyle At the end of the tenure, you get a nice amount. And the interest that you earn -- to a maximum of Rs 12,000 per year -- is exempt from tax (under Section 80L of the Income Tax Act, 1961). There are two ways you can open a recurring deposit:
1. With your bank. How it works
Your bank automatically deducts a fixed amount from your savings account. So, every month, when your salary cheque is put in your account, your bank will debit the amount you initially agreed upon and credit it to your recurring deposit account. If you tell them to put in Rs 1,000 every month, this amount will automatically move from your savings account to your recurring deposit account. So with no effort on your part, at the end of 12 months, you will have Rs 12,000 to which you can add the interest the bank will give you. With banks, you determine beforehand how much you would like to put in every month and that is how it stays -- you cannot change that figure till the end of your recurring term. So if you fix it at Rs 1,000 every month, that is the amount that will move to your recurring account -- nothing more, nothing less.
What you should know o Though banks score high on convenience, they offer lower returns. The rates vary from three percent to seven percent per annum. o Banks offer you flexibility, in that you can start with a term that is as low as one year onwards.
2. With the local post office How it works
You can put in amounts as low as Rs 10 per month. There is no upper limit. The post office deposit will give you 7.5 per cent per annum.
What you should know
o The post office scheme is for five years. o You have to make a trip every month to your post office to deposit your amount. So, as far as recurring deposit options are concerned, you will either make a trip to your local post office or tell your local bank that you would like a recurring deposit option. The tenure of the deposit, the interest rate and the minimum amount to be regularly deposited will vary from bank to bank.
6.3.1 What is Time Deposit A Post-Office Time Deposit Account (RDA) is a
banking service similar to a Bank Fixed Deposit offered by Department of post, Government of India at all post office counters in the country. The scheme is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of one year to two years, three years and a maximum period of five years. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Time Deposits scheme return a lower, but safer, growth in investment.
6.3.2 Features Time Deposits can be made for the periods of 1 year, 2 years, 3
years and 5 years. The minimum investment in a post-office Time deposit is Rs 200 and then its multiples and there is no prescribed upper limit on your investment. Account may be opened by an individual, Trust, Regimental Fund and Welfare Fund. The account can be closed after 6 months but before one year of opening the account. On such closure the amount invested is returned without interest. 2 year, three year and five year accounts can be closed after one year at a discount. They involve a loss in the interest accrued for the time the account has been in operation. Interest is payable annually but is calculated on a quarterly basis at the prescribed rates. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. One can take a loan against a time deposit with the balance in your account pledged as security for the loan.
6.3.3 Returns This investment option pays annual interest rates between 6.25 and
7.5 per cent, compounded quarterly. Time deposit for 1 year offers a coupon rate of 6.25%, 2-year deposit offers an interest of 6.5%, 3 years is 7.25% while a 5-year Time Deposit offers 7.5% return.
Duration of Account Quarterly Compound Interest
1year 2 years 3 years 5 years
6.25% 6.5% 7.25% 7.5%
6.3.4 Advantages In this scheme your investment grows at a pre- determined rate
with no risk involved. With a Government of India-backing, your principal as well as the interest accrued is assured under the scheme. The rate of interest is relatively high compared to the 4.5% annual interest rates provided by banks. Although the amount invested in this scheme is not exempted as per section 88 of Income Tax, the amount of interest earned is tax free under Section 80-L of Income Tax Act.
6.3.5 How to start a Time Deposit A Time Deposit account can be opened at
any post-office in the country. Account may be opened by an individual, i.e., Single, Joint A/B (not more than two adults) Trust, Regimental Fund and Welfare Fund. On opening a Time Deposit, you will receive an account statement stating the amount deposited and the duration of the account. The account can be closed after 6 months of opening the account. On such closure the amount invested is returned with/without interest depending on the time the deposit was maintained.
6.4. National Savings Certificates
6.4.1 What is National Savings Certificate National Savings Certificates
(NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years.
6.4.2 Features NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs
5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper limit on investment. o Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. o One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. o The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. o One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co-operative society, a corporation or a government company, a housing finance company approved by the National Housing Bank etc with the permission of the concerned post master. o Though premature encashment is not possible under normal course, under subrule (1) of rule 16 it is possible after the expiry of three years from the date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88.
6.4.3 Return It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A 1000 rs denomination certificate will increase to 1601Rs. on completion of 6 years. Interest rates for the NSC Certificate of Rs 1000
YEAR 1 year 2 year 3 year 4 years 5 years 6 years
RATE OF INTEREST Rs 81.60 Rs 88.30 Rs95.50 Rs103.30 Rs 111.70 Rs 120.80
6.4.4 Advantages Tax benefits are available on amounts invested in NSC under
section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks associated with your investment.
6.4.5 How to start Any individual or on behalf of minors and trust can purchase
a NSC by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office. The issue of certificate will be subject to the realization of the cheque, pay order, DD. The date of the certificate will be the date of realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by the post-office on payment of the prescribed
6.5 Post Office Monthly Income Scheme 6.5.1 What is post office monthly income scheme?
The post-office monthly income scheme (MIS) provides for monthly payment of interest income to investors. It is meant for investors who want to invest a sum amount initially and earn interest on a monthly basis for their livelihood. The MIS is not suitable for an increase in your investment. It is meant to provide a source of regular income on a long term basis. The scheme is, therefore, more beneficial for retired persons.
6.5.2 Features Only one deposit is available in an account. Only individuals can open the account;
either single or joint.( two or three). Interest rounded off to nearest rupee i.e, 50 paise and above will be rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint
account. The duration of MIS is six years. 6.5.3 Returns The post-office MIS gives a return of 8% plus a bonus of 10 per cent on maturity.
However, this 10 per cent bonus is not available in case of premature withdrawals. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts
Deposit Rs 5,000 10,000 50,000 1,00,000 2,00,000 3,00,000
Monthly Interest 33 66 333 667 1333 2000
Amount returned on maturity 5,500 11,000 55,000 1,10,000 2,20,000 3,30,000
6.5.4 Advantages Premature closure of the account is permitted any time after the expiry of a period
of one year of opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be made when the account is prematurely closed. Investors can withdraw money before three years, but a discount of 5%. Closing of account after three years will not have any deductions. Monthly interest can be automatically credited to savings account provided both the accounts standing at the same post office. The interest income accruing from a post-office MIS is exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt from Wealth Tax.
6.5.5 How to Open You can buy a post office MIS at any post-office in India. When you open an
MIS, you will get a certificate issued by the post office. In addition, the investor is provided with a passbook to record his transactions against his MIS.
MODERN INSTRUMENTS OF INVESTMENT
1. 2. 3. 4. MUTUAL FUNDS SIP (Systematic investment plan) RBI Bonds Infrastructure Bonds
1.MUTUAL FUNDS 1.1 Introduction
Different investments avenues are available to investors. Mutual funds also offer good investment opportunity to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustments 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. With objectives to make the investors aware of functioning of mutual funds, an Attempt has been made to provide information in question-answer format which may help the investors in taking investments decisions.
1.2 Definition of mutual fund
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because4 all stocks may not move in the same direction bin the same proportion at the same time. mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The investors in proportion to their investments share the profits or losses. The mutual funds normally come out with a number of schemes with different investments objectives, which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.
1.3 History of Mutual Fund in India and role of SEBI in mutual funds industry
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990’s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are- to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993.Therefore, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended therefore from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002)
1.4 Mutual fund set up
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefits of the unit holders. Asset Management Company (AMC) approved buy SEBI manages the funds by making investments in various types of securities. A custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustee must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any schemes. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).
1.5 Net Asset Value (NAV) Of Schemes
The performance of a particular scheme of a mutual fund is denoted by net asset value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the schemes. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the schemes on any particular date. For example, if the market value of securities of a mutual fund schemes is Rs 200 lakes and the mutual fund has issued 10 lakes units of Rs. 10 each to the investors, then the NAV per units of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis- daily or weekly –depending on the type of scheme.
1.6 Different types of mutual fund schemes 1.6(1)Schemes according to Maturity Period:
A mutual fund schemes can be classified into open-ended schemes or close-ended scheme depending on its maturity period.
Open- ended Fund/ Scheme
An open –ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close –ended Fund/Schemes
A close –ended fund or schemes has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the schemes at the time of the initial public issue and therefore they can buy or sell the units of the scheme on the stock exchange where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. This mutual funds scheme discloses NAV generally on weekly basis.
1.6(2)Schemes according to Investment Objective:
Schemes can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
o Growth /Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income/ Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors may not bother about these fluctuations.
Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60%in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVS of such funds are likely to be less volatile compared to pure equity funds. MONEY Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds, which are traded in the stock exchanges.
Sector Specific funds/ schemes
These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),Petroleum stocks, etc. the returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may gibe higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/ industries and must exit at an appropriate time. They may also seek advice of an expert.
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
Load or no–load Fund
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs. 10. if the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs. 10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track
record and service standards of the mutual fund, which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/ scheme at NAV and no additional charges are payable on purchase or sale of units.
Sales or repurchase/ redemption price
The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unit holders. It may include exit load, if applicable.
Assured return scheme
Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.
1.7 Ways to invest in a scheme of a mutual fund
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a day, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given to them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission. /gifts given by agents/ distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.
1.8 Can non-resident Indians (NRIs) invest in mutual funds or not
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes. also help in this regard.
1.9 Procedure to fill up the application form of a mutual fund scheme
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque / draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.
1.10 Factors an investor look into an offer document
Am abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBIhas prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
1.11 The investor gets certificate or statement of account after investing in a mutual fund after the following period Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document. 1.12 Can a mutual fund change the nature of the scheme from the one specified in the offer document or not
Yes, however, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit holder and an advertisement is given in one English daily having nationwide circulation and in a newspaper
published in the language of the region where the head office of the mutual fund is situated. The unit holders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds required similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.
1.13 Ways in which an investor come to know about the changes, if any, which may occur in the mutual fund
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unit holders. Apart from it, many mutual funds send quarterly newsletters to their investors. At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.
1.14 Ways to know the performance of a mutual fund scheme
The performance of a schemer is reflected units net asset value (NAV), which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www. Amfiindia.com and thus the investors can access NAVs of all mutual funds at on e place. The mutual funds are also required to publish their performance in the form of halfyearly results which also include their returns/ yields over a period of time i.e. last six months, 1 year, 3 year, 5 year and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year. The financial newspapers on a weekly basis are publishing various studies on mutual fund schemes including yields of different schemes. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equityoriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.
1.15 Ways to know where the mutual fund scheme has invested money mobilized from the investors
The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis, which are published in the newspapers. Some mutual funds send the portfolios to their unit holders. The scheme portfolio shows investment made in each security i.e. equity, debentures money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required disclosing illiquid securities in the portfolio, investment made in rated and unrated debt securities, nonperforming assets (NPAs), etc. Some of the mutual funds send newsletters to the unit holders on quarterly basis, which also contain portfolios of the schemes.
1.16 Ways to choose a scheme for investment from a number of schemes available
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt-oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments, which is reflected in their rating. A scheme with lower rate of return but having investments in better-rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.
1.17 The higher net worth of the sponsor a guarantee for better returns or not
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company, which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.
1.18 An investor look out for information on mutual funds through:
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.
Investors can log on to the web site of SEBI www.sebi.gov.in and go to “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites, which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. investors may approach their agents and distributors to guide them in this regard.
1.19After mutual fund scheme is wound up, money invested becomes
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustments of expenses. Unit holders are entitled to receive a report on winding up from the mutual funds, which gives all necessary details.
MUTUAL FUND Vs FD
From the very beginning, people find it very convenient to invest their money in fixed deposits. But have we ever noticed the results that we get after investing in fixed deposits that is our money get blocked till the completion of that fixed period of time. Moreover the fixed and less return that we get after the completion of that fixed period are also taxable. On the other hand the emergence of Mutual funds as a strongest tool of investment gets unnoticed and most of the people have never made efforts to increase their awareness regarding this particular investment option. People are still unaware that there is a big margin in between the returns that we get while investing in fixed deposits & Mutual funds. Fixed deposits provide us with a 5.5% rate of return while Mutual funds gives us up to 12-14%. Availability of tax rebate is also a big feature of Mutual fund investment. Along with it, we can have our invested amount back whenever we feel like without any condition of time I.e. Liquidity. Risk is also substantially reduced while investing in Mutual funds because Mutual funds provides you for investing in not just one particular investment but in a combination of investments like some money in equity shares, some in government securities, some in Bonds so on while investing in Fixed deposits provides you for holding all your money in just one investment which is more risk prone. For e.g.: It might happen that price of equity shares may decline but at the same time the price in debt market may be stable which is being offered by Mutual funds.
2.S Y S T E M A T I C I N V E S T M E N T P L A N
2.1 What is Systematic investment plan?
Systematic Investment Plan is a feature specifically designed for those who are interested in building wealth over a long-term and plan out a better future for themselves and their family. Anyone can enroll for this facility by starting an account with (minimum investment amount) and giving 4/6 post-dated cheques of periodic investment based on one’s convenience
2.2 Features :
Disciplined approach to investment Periodic & regular investment outflow. Buy more when NAV is low & less when NAV is & less when NAV is high. -Help overcome market volatility. Power of compounding Longer the period, the more wealth you accumulate No entry load Minimum investment of Rs1000/- through a standing instruction. Rupee cost averaging
2.3 BENEFITS OF A MONTHLY INVESTMENT PLANS
THE HDFC Mutual fund systematic investment plan (SIP) is similar to a recurring deposit. Every month an amount you choose is invested in a mutual fund scheme of your choice. You’ll be amazed to learn about the many benefits of investing through HDFC MF SIP.
o Become a disciplined investor
Being disciplined –it’s the key to investing success. with the HDFC MF Systematic investment plan you commit an amount of your choice(minimum of Rs 500&in multiples of Rs 100 thereof)to be invested in one of the schemes. think of each SIP Payment as laying a brick. one by one, you’ll see them transform into a building. It’s as simple as giving at least 6 post-dated monthly cheques to us for a fixed amount in a scheme of your choice. It’s the perfect solution for irregular investors.
o Reach your financial goals
Imagine you want to buy a car a year from now, but you don’t know where the down payment will come from. The HDFFC SIP is a perfect tool for people who have a specific future financial requirement. By investing an amount of your choice every month, you can plan for and meet financial goals, like funds for a child’s education ,a marriage in the family or a comfortable post retirement life.
Do all this effortlessly
Investing with HDFC MF SIP is easy. Simple give us post dated Cheques amount of your choice (minimum of Rs. 500 and in multiples Of for an Rs 100
there of) and we’ll invest the money every month in a fund of your choice. The plans are completely flexible. You can invest for a minimum of six months, or for as long as you want. You can also decide to invest quarterly and will need to invest for a minimum of two quarters. With the HDFC MF SIP no loads are charged for investment up to Rs 1 lakh (per
investor, per due date, per scheme/plan/option). You can even change your monthly investment amount. All you have to do after that is sit back and watch your investments accumulate.
o Grow your investments with compounded benefits
It is far better to invest a small amount of money regularly,rather than save up to make one large investment. This is because while you are saving the lump-sum , your saving may not earn much interest. With HDFC MF SIP , each amount you invests grow through compounding benefits as well.That is, the interest earned on your investment also earns interest. The following example illustrates this: Imagine Neha is 20 years old when she starts working. Every month she saves and invests Rs 5,000 till she is 25 years old. The total investment made by her over 5 years is Rs. 3 lakhs. Arjun also starts working when he is 20 years old.But he dosen’t invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and decides to invests the entire amount. Both of them decides not to withdraw these investments till they turn 50. At 50,Neha’s investments have grown to Rs.46,68,273 where as Arjun’s investments have grown to Rs.36,17,084. Neha’s small contribution to a SIP and her decision to start investing earlier than Arjun have made her wealthier by over Rs.10 lakhs. (Figures based on 10% p.a. interest compounded monthly)
3.3 What are RBI Bonds?
RBI Bonds are tax saving bonds that have a special provision that allows the investor to save on tax. These Bonds are instruments that are issued by the RBI, and currently has two options – one carrying an 8% rate of interest p.a., which is taxable and the other one carries a 6.5% (tax-free) interest p.a. The interest is compounded halfyearly and there is no maximum limit for investment in these bonds. The maturity period of the 8%(taxable) bond is 6 years and that of the 6.5%(tax-free) bond is 5 years. Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the SBI, and designated branches of nationalised banks across the country.
The minimum investment on RBI Savings Bonds is Rs 1,000. You can apply in multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your investment in this instrument.
Under the cumulative option of the 6.5%(tax-free) RBI Relief Bond issued at a face value of Rs 1,000 would be redeemed at Rs 1,377 on maturity (after 5 years). And in case of the cumulative option of the 8% (taxable) RBI Relief Bond issued at a face value of Rs 1,000 would be redeemed at Rs 1,601 on maturity (after 6 years). You can opt to receive interest either on a half-yearly basis or on maturity of the instrument, along with the principal invested. If you opt to receive interest on a halfyearly basis, you will receive interest every six months from the date of issue of the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.
The period of holding of 6.5 per cent (tax-free) RBI Relief Bond is 5 years from the date of issue. And for the 8 per cent (taxable) RBI Relief bond, the maturity period is 6 years. The bonds are repayable on the expiration of the maturity.
3.5 PREMATURE WITHDRAWL
While the 8 per cent taxable Savings Bond cannot be redeemed prematurely and must be held for the entire duration (6 years), the 6.5 per cent tax-free Savings bond can be redeemed before the maturity period of 5 years. In this case, after a minimum lock in period of 3 years from the date of issue, an investor can surrender the bond any time after the 6th half year but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment will be 1st July and 1st January every year. However, 50% of the interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative Bonds.
RBI Savings Bonds are not eligible as collateral for loans from banks, financial institutions and Non-Banking Financial Company (NBFC) etc. 3.7 TRANSFERRABLE: RBI Savings Bonds are not tradable in the secondary market. The Bonds in the form of Bond Ledger Account and Stock Certificate are not transferable except by way of gift to a relative by execution of appropriate Transfer Form and execution of an affidavit by the holder.
3.8 DETERMINATION OF MARKET VALUE OF RBI SAVINGS
Market value of RBI Relief Bonds is determined on the basis of prevailing (6.5 p per cent and 8 per cent, as applicable) interest rates and market conditions.
3.9MODE OF HOLDING:
RBI Savings Bonds can be held at the credit of the holder in an account called BLA or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder of bonds in the BLA. The bonds in the form of BLA are issued and held with the public debt offices of the RBI or any branch of a scheduled bank authorized by the RBI. The bonds in the form of PN are issued only at the offices of RBI. However, bonds issued in one form will not be eligible for conversion into the other. 3.10
In case of the 6.5 per cent RBI Savings Bond, the interest received is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. But, In case of the 8 per cent RBI Savings Bond, the interest will be taxable under the Income-Tax Act, 1961 as applicable according to the relevant tax status of the bondholder. RBI Savings Bonds are exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds. With most investment avenues such as stocks, deposits in banks and NBFCs losing their sheen, investors are seen with a sigh of relief by heading towards bonds issued by the Reserve Bank of India. Currently there are two such bonds available in the market, the already existing 8% relief bonds and the recently launched 7% savings bonds. Both these bonds offer a moderate rate of return and are a safe haven to lock one’s funds with.
4. INFRASTRUCTURE BONDS
4.1What are Infrastructure Bonds?
4.1 Infrastructure bonds provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, up to an investment of Rs.1,00,000, subject to the bonds being held for a minimum period of three years from the date of allotment. Investments in infrastructure bonds from various financial institutions qualify for a tax rebate under Section 88 of the Income Tax Act. The maximum investment limit to claim rebate under Section 88 has now been enhanced to Rs 1 lakh, subject to a minimum investment of Rs 30,000 in infrastructure bonds. An attractive feature of infrastructure bonds is that the lock-in period is only three years. ICICI and IDBI are the major players in this segment; others like the Rural Electrification Corporation Ltd. have also received the permission to come up with the issues.
The minimum lock-in period of only three years makes this scheme attractive for people who do not want their money locked in for too long.
Deduction on account of interest on infrastructure bonds under section 80L is not available. Returns on investments in these bonds work out to much lower than the returns offered by Public Provident Fund (PPF) and National Savings Certificates (NSC). In fact, with the falling interest rates the return on infrastructure bonds has also fallen, to the extent that investing in this instrument doubts one's financial prudence.
Infrastructure bonds, though they offer you an additional rebate on the investment under section 88, do not make financial prudence any longer. Though it has a lock-in period of
as low as three years (the lowest among various other tax saving instruments), the rate of interest is very near to what one would get on a one-year fixed deposit with banks. Moreover, deduction under section 80L is not available here. It makes more sense to pay tax and use the money to generate better returns than to lock the amount for three years and lose out to inflation. Infrastructure bonds are essentially for those who do not care to study better investment avenues and would be satisfied with bank fixed deposits. Moreover, they being issued by infrastructure companies (and not the government) are quite unsecured. Some study in the financial markets can be well worth the effort. Tax planning? Try infrastructure bonds
For most investors who are conducting their annual tax-planning exercise, claiming tax benefits under Section 88 of the Income Tax Act means utilising conventional options which include taking insurance and investing in Public Provident Fund and National Savings Certificate. From the total Rs 100,000 that can be claimed as rebates, the aforementioned avenues account for only Rs 70,000; the balance Rs 30,000 is reserved for investments in infrastructure bonds amongst others. These investments are in the form of shares/bonds/debentures and are issued by public financial institutions like IDBI and ICICI Bank. Also they are subject to a 3-year lock-in period and any redemption prior to this tenure nullifies the tax benefits claimed at the time of making the investment.
Small savings with big tax benefits!
How to invest and save tax
In case a sale/redemption is made prior to the 3-year period, the tax rebate previously claimed is treated as investor's income for the year of sale. So how good an option are infrastructure bonds and should investors contemplate using the same. Let's perform a cost-benefit analysis to answer this question. Unlike small savings schemes that fall under the gamut of Section 88, returns offered by infrastructure bonds are modest at best. For the purpose of our study let's consider the previous issue of infrastructure bonds by a leading public financial institution. Under the cumulative option, the following two variants i.e. coupon rate 5.50% and 5.64%, respectively, were available:
Invest Rs 5,000 and get Rs 6,030 after 3 years and 6 months. Invest Rs 5,000 and get Rs 6,580 after 5 years.
While the aforementioned scheme is not available at present, we have assumed that a similar one will be made available shortly when the tax-planning season kicks in. Another assumption is that inflation will continue to spiral northwards as a result investors will be compensated with a coupon rate of 50 basis points above the previous issue. Hence the first option would carry a coupon rate of 6.00% while it would be 6.14% for the second one.
If the tax benefits for both the options were factored in, the returns on a compounded annualised growth rate (CAGR) basis would be as shown in Table 1. Table 1: Are they good enough? Annual Income Tax Rebate Effective Return* 3.5-Yr 5-Yr 12.98% 10.98% 15% 11.04% 9.65% 6.00% 6.14%
Upto Rs 150,000 20% Rs 150,000 – 500,000 Over Rs 500,000 Nil
Even after assuming a generous 50 basis point hike in the coupon rate which may not fructify, the returns are far from impressive. Now factor in the loss of liquidity, which is another dampener since liquidating these investments before the 3-year lock-in would imply losing the tax rebates claimed. Barring the tax breaks, one can safely conclude that the infrastructure bonds are far from attractive. The second option for investors is to pay up their tax liability and invest the balance sum in alternate avenues. Hence an investor, who would have invested Rs 30,000 in infrastructure bonds, will instead incur an additional tax liability of Rs 6,000 or Rs 4,500 depending on his tax bracket. The balance (Rs 24,000 or Rs 25,500) should be invested in other investment avenues like mutual funds. Returns of some of the top performers across categories have been listed in Table 2.
Table 2: Risky but attractive! Returns* 3-Yr 5-Yr
Diversified Equity Funds HDFC Top 200 Franklin India Bluechip Sundaram Growth Balanced Funds HDFC Prudence Fund DSP ML Balanced FT India Balanced
50.84% 45.89% 43.22% 41.57% 32.58% 32.27%
NA 25.04% 18.66% 21.45% 13.02% NA
At the outset we would like to state that historical returns (in case of mutual funds) have been compared with future assured returns for infrastructure bonds. Investments in mutual funds are market-linked and not assured; therefore historical returns may not be repeated in the future. But a 3-year period indicates reasonably well, what they are capable of delivering going forward. Secondly the risks associated with mutual fund investing are exponentially higher vis-àvis those in infrastructure bonds.A large number of investors who are habituated to riskfree investing might be unwilling to venture into market-linked products and rightly so. Investments should be governed by investors' risk-appetite and not how attractive the returns are However the motive behind investing in infrastructure bonds, i.e. to save taxes, should not be so overbearing that it proves to be an infeasible proposition. If you are an investor with an appetite for risk; paying the taxes and investing in a welldiversified equity/balanced scheme may not be a bad proposition. The solution probably lies in striking a balance between the two, i.e. the benefits of an investment avenue that offers assured yet modest returns coupled with tax benefits on one hand and a high risk-high return proposition on the other. Find out where you priorities lie and get invested accordingl
ANALYSIS AND INTERPRETATION
1. If you have invested in any investment scheme till yet, if yes, then which – Table1Response Fixed deposits Savings Mutual funds No. of respondents 20 25 15 Percentage 40% 50% 30%
Graph1No. of Respondents 30 25 20 15 10 5 0 Fixed deposits Savings Responses Mutual funds
(HOLDERS OF DIFFERENT INVESTMENT SCHEMES)
Interpretation Out of 60 respondents, 20 respondents has invested in Fixed
deposits, 25 in Savings & 15 in Mutual Funds.
2. Please rate your satisfaction on the return, of the investment you have made on the scale of 1 to 10Table2Response No. of respondents 35 25 Percentage 70% 50%
Less than 5 More than
Graph240 30 20 10 0 More than 5 Less than 5 Responses Series1
Interpretation: Out of 60 respondents, 25 respondents have given more than 5
points on the returns they get out of 10 & 35 have given less than 5 points.
No. of Respondents
(SATISFACTION FROM RETURN OF DIFFERENT INVESTMENTS)
3. Do you think that mutual fund is a better option than FD’S –? Table3Response Yes No No. of respondents 40 20 Percentage 80% 40%
Graph3No.of Respondents 50 40 30 20 10 0 Yes Responses No Series1
(COMPARISON BETWEEN MUTUAL FUNDS AND FD’S)
Interpretation Out of 60 respondents , 40 respondents think that Mutual funds
is a better investment option than Fixed deposits& 20 think that Fixed deposits is better.
4. What factor would you consider most important while investing in any investment schemeTable4Responses Risk Returns Tenure No. of respondents 25 20 15 Percentage 50% 40% 30%
No. of Responses
30 25 20 15 10 5 0 Risk Returns Responses Tenure Series1
(FACTORS TO BE CONSIDERED WHILE INVESTING IN SCHEMES)
Interpretation Out of 60 respondents, 25 respondents think that Risk is the
important factor to be considered while investing in an investment option ,20 of them think that Returns is important & 15 think that Tenure is important.
Do you invest in mutual fund?
Table5Responses Yes No Graph5No. of respondents 50 40 30 20 10 0 Yes Responses No Series1
No. of respondents 15 45
Percentage 30% 90%
(HOLDERS OF MUTUAL FUNDS)
Out of 60 respondents, 15 respondents have invested in
Mutual funds scheme & 45 respondents have not.
5. Are you satisfied with the results of mutual funds scheme? Table6Responses Satisfied Unsatisfied Neither Satisfied unsatisfied Graph6No. of Respondents 14 12 10 8 6 4 2 0 Satisfied Neither satisfied nor Unsatisfied Responses
No. of Respondents 12 0 nor 3
Percentage 24% 0 6%
(SATISFACTION WITH RESULTS OF MUTUAL FUNDS)
Out of 15 respondents who have invested in mutual funds, 13 are satisfied with the results & 3 respondents are neutral that is they are neither satisfied nor dissatisfied.
7. Are you aware that mutual fund industry is regulated by SEBI? Table7Responses Yes No Graph7No. of Respondents 60 50 40 30 20 10 0 Yes Responses No Series1
No. of Respondents 55 5
Percentage 110% 10%
(AWARENESS REGARDING REGULATION OF MUTUAL FUNDS)
fund industry is
Out of 60 respondents, 55 respondents are aware that Mutual regulated by SEBI & 5 are unaware.
8 What do you think about the future of mutual fund in India? Is it? Table8Responses Very Bright Bright Very Bleak Bleak Doesn’t Know No. of Respondents 3 9 0 1 2 Percentage 6% 18% 0 2% 4%
Graph 8No. of Respondents 10 8 6 4 2 0
ht Br Ve igh t ry Bl ea k Do Bl ea se k n' tK no w Br ig
(VIEWS REGARDING FUTURE OF MUTUAL FUNDS)
Interpretation Out of 15 Respondents who have invested in Mutual funds,3
think that it has very bright future,9 think that it has bright future,1 think that it has bleak future&2 doesn’t hold any opinion.
9. Why you have not invested in mutual fund?. Table9Responses Lack of information High Risk Any other No. of Respondents 40 15 5 Percentage 80% 30% 10%
Graph 9No. of Respondents 50 40 30 20 10 0 Lack of information High Risk Response s Any other Series1
(REASONS FOR NOT INVESTING IN MUTUAL FUNDS)
Interpretation Out of 60 Respondents, 40 respondents have not invested in
mutual funds because of lack of information, 15 due of high risk& 5 due to any other reason.
10.. Would you consider investing in mutual fund? Table10Responses Yes No No. of Respondents 10 5 Percentage 20% 10%
Graph10No. of Respondents 12 10 8 6 4 2 0 Yes Responses No Series1
(PREFERANCE TOWARDS MUTUAL FUNDS)
Interpretation Out of 15 respondents who have not invested in mutual funds,10
would consider investing in it & 5 would not.
11. Which information do you rely on? Table11Responses Newspapers Banks Investment advisors Friends/relatives Self analysis Graph11No. of Respondents 60 50 40 30 20 10 0 News papers Relatives/Friends Responses Series1
No. of Respondents 35 40 45 25 50
Percentage 70% 80% 90% 50% 100%
(SOURCES OF INFORMATION) Interpretation Most of the respondents rely on Self analysis before
investing in any investment scheme & then on Banks & Investment advisors.
At last to conclude my study at the HDFC Bank, Ambala Cantt, it was found that in this new emerging business scenario people still are investing their hard earned cash in Traditional instruments of investment like FD’s rather than in modern instruments like Mutual Funds. This is very surprising and is due to the unawareness of people regarding the latest available investment options. Also, people are not satisfied with the low and taxable returns they are getting after a certain time period by investing in fixed deposits but they have no other choice because people are unaware about modern techniques of investment. After making them aware about the existence of these techniques and their features they have shown keen interest in these. The factors responsible for their unawareness are lack of qualitative efforts by banks, their rigid ness in investing in traditional techniques& high risk & uncertainty in returns etc. Thus a decision can be drawn is that demand of modern techniques can be introduced by creating awareness in the minds of people regarding these investment opportunities available.
1) Awareness regarding Mutual funds scheme should be enhanced. 2) For Home loans and Personal loans separate counters should be made to avoid confusion. 3) Advertising should be done to make people aware about the E-ages like phone banking, net banking. 4) More ATM machines should be there in the city. 5) The bank needs to have dedicated, dynamic, self-contained and comprehensive websites. 6) To ensure maximum profitability, bank need to adequately charge for each service with proper cost-benefit analysis. Also due steps should be taken to charge for such services in commensurate with other non-banking financial institutions, nationalized and foreign banks. 7) The bank staff shall have to be imparted requisite technical and psychological training for handling these services products and to offer the best of services to valuable clients. 8) The bank may consider tapping and targeting big players, who do not have their own pinup. The most important such target group is of NRIs.
Jha S.M; Bank Marketing; Himalayan Publishing House; 3rd edition; 1-12 Kothari C.R.; Research Methodology; Wishawa Parkashan; 2nd edition; 68-84 Natrajan Gorden; Banking Theory law and practice; Himalayan Publishing House;16th edition; 500-511 Shekhar &Shekhar; Banking theory and Practice; Vikas Publishing House Pvt. Ltd.; 18th edition; 348372 WEBSITES www.hdfcbank.com www.pnb.com www. Finance. Indiamart.com www. tribuneindia.com www.ingvysyabank.com Annual-report of HDFC (2004-05) Broachers of HDFC Journals Economic and Political Weekly; A Sameeksha Trust Publication; March 19-25, 2005; Vol XL No 12; 12831289.