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FINAL REPORT

ON

MANAGEMENT THESIS II

“An analysis of investors’ behavior for investment


preferences during normal time vis-à-vis recessionary
period with reference to 50 investors in vadodara city”

BY

KEYUR A. PRAJAPATI

8NBVD062

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FINAL REPORT

ON

MANAGEMENT THESIS II

SUBMITTED BY:

KEYUR A. PRAJAPATI

8NBVD062

(MBA 2008-2010)

A report submitted in partial fulfillment of the requirements of MBA Program

(Class of 2008-10)

VADODARA

Submitted to-
MR. AMOL RANADIVE

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TABLE OF CONTENTS:

Acknowledgement……………………………………………………………..04

Preface………………………………………………………………………….05

Introduction........................................................................................................06

Objectives of Study…………………………………………………………....08

Value addition…………………………………………………………………09

Research Methodology………………………………………………………..10

Limitations of the study...……………………………………………………..11

How to invest during recession……………………………………………….12

Strategy to make money during recession…………………………………...14

Investment avenues in India………………………………………………….15

Mutual Funds……………………………………………………15

Equity shares..…………………………………………………...24

Insurance…………………………………………………………26

Government Securities…………………………………………..29

Public Provident Funds……………………………………….…33

Bonds……………………………………………………………...35

Commodities……………………………………………………...38

Empirical analysis and interpretations……………………………………..40

Conclusion and recommendations…………………………………………..51

Bibliography..…………………………………………………………………56

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ACKNOWLEDGEMENT

This project report is an outcome of sincere efforts and cooperation of everyone who helped
me. I conducted this fieldwork program under the supervision of two respectful guides.

CENTRE HEAD : - MR. AURBINDO GHOSH

FACULTY GUIDE : - MR. AMOL RANADIVE

I also express my deep and heartily gratitude and respect to my soft skills trainer Mrs. Durba medam
and Centre Head Mr.Ghosh Sir for their continuous guidance and support.

I am also very much thankful to all for giving me support, guidance and cooperation in conducting
this project. I am grateful to my college and University which gave me an opportunity to get a
practical exposure and understand the theoretical aspects more clearly by placing me in such a reputed
an renowned company and helping me to understand more clearly marketing & finance concepts.

This training would not have been successful without the support and cooperation of my parents,
friends and everyone who ahs helped me in carrying out fieldwork successfully.

Last but no the least, thanks to the omnipresent GOD

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PREFACE

This is an accepted fact that each and every work has two aspects and this universal truth is
also applicable so far as education is concerned, it also has two aspects one is theoretical and the other
is practical. Theoretical knowledge with practical experience is must for every students of
management. Thus practical experience plays a vital role in acquiring the real knowledge in
management study.

After looking to the importance of the practical study, INC Baroda outlined the Management
Thesis – II in IV SEM which is helpful for me to explore my self and analyze investors’ behavior for
investment preferences during normal time vis-à-vis recessionary period with reference to 50
investors in vadodara city.

From this report I have learnt how to outline the best Thesis on time. How I draft a
management thesis in way that it include objective of this thesis, limitations of this thesis,
methodology of this thesis, schedule and reference of this thesis.

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INTRODUCTION

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

One needs to invest to and earn return on your idle resources and generate a specified sum of money
for a specific goal in life and make a provision for an uncertain future. One of the important reasons
why one needs to invest wisely is to meet the cost of inflation. Inflation is the rate at which the cost of
living increases.

The cost of living is simply what it cost to buy the goods and services you need to live. Inflation
causes money to lose value because it will not buy the same amount of a good or service in the future
as it does now or did in the past. The sooner one starts investing the better. By investing early you
allow your investments more time to grow, whereby the concept of compounding increases your
income, by accumulating the principal and the interest or dividend earned on it, year after year. The
three golden rules for all investors are:

• Invest early
• Invest regularly
• Invest for long term and not for short term

This project will also help to understand the investors facet before investing in any of the investment
tools and thus to scrutinize the important aspects of the investors before investing that further helped
in analyzing the relation between the features of the products and the investors’ requirements.

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What is investment?

Investment in Terms of Business Management:

According to business management theories, investment refers to tangible assets like machinery and
equipments and buildings and intangible assets like copyrights or patents and goodwill. The decision
for investment is also known as capital budgeting decision, which is regarded as one of the key
decisions.

Investment in Terms of Finance:

In finance, investment refers to the purchasing of securities or other financial assets from the capital
market. It also means buying money market or real properties with high market liquidity. Some
examples are gold, silver, real properties, and precious items.

Financial investments are in stocks, bonds, and other types of security investments. Indirect financial
investments can also be done with the help of mediators or third parties, such as pension funds,
mutual funds, commercial banks, and insurance companies.

Personal Finance:

According to personal finance theories, an investment is the implementation of money for buying
shares, mutual funds or assets with capital risk.

Real Estate:

According to real estate theories, investment is referred to as money utilized for buying property for
the purpose of ownership or leasing. This also involves capital risk.

Commercial Real Estate:

Commercial real estate involves a real estate investment in properties for commercial purposes such
as renting.

Residential Real Estate:

This is the most basic type of real estate investment, which involves buying houses as real estate
properties.

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OBJECTIVE OF THE STUDY
The purpose of the analysis is to determine the investment behavior of investors and investment
preferences for the same. Investors perception will provide a way to accurately measure how the
investors think about the products and services provided by the company. Today’s trying economic
conditions have forced difficult decisions for companies. Most are making conservative decisions that
reflect a survival mode in the business operations. During these difficult times, understanding what
investors on an ongoing basis is critical for survival. Executives need a 3rd party understanding on
where investor’s loyalties stand. More than ever management needs ongoing feedback from the
investors, partners and employees in order to continue to innovate and grow. The main objective of
the project is to find out the needs of the current and future investors. For this analysis, customer
perception and awareness level will be measured in important areas such as:

Ø To understand in depth about different investment avenues available in India.


Ø To find out how investors get information about the various financial instruments.
Ø To find out the saving habits of the different investors and the amount they invest in various
financial instruments.
Ø The type of financial instruments, they would prefer to invest.
Ø The duration for which they would prefer to keep their money invested.
Ø The rate of return they would likely to earn from the investment.
Ø What are the factors that they consider before investing.
Ø To find out risk profile of the investors.
Ø To give a recommendations to the investors that where they should invest.
Ø To evaluate the investors attitude towards savings and decision making regarding
investments.
Ø To analyze the impact of constant changing in external environment on their behavior pattern
over a period of time.

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VALUE ADDITION

This analysis will help to strengthen investor intimacy. This analysis will also throw light on various
investment avenues available in India that will help in many ways like,

Ø It will help to understand the expectations of the investors about their company from the
perspective of financial performance and corporate social responsibility.
Ø It will provide fresh insights which can help their business continue to flourish.
Ø The expectations of different types of investors regarding particular service requirements can
be identified.
Ø The common problem areas faced by the investors can be understood.
Ø It also enhances new services initiatives.
Ø This study will help in gaining a better understanding of what an investor looks for in an
investment option.
Ø It can be used by the financial sector in designing better financial instrument customized to
suit the needs of the investor.
Ø It will also help the agents and brokers in marketing the existing financial instruments.
Ø It will provide knowledge to the investors about the various financial services provided by the
company to their investors.
Ø It will also help the company to understand what is the requirement and expectations of
different categories of investors.

This analysis will be originated in order to empower the investors with detailed research on various
investments avenues available in India. The impact of different stages of economic cycle such as
depression, recession, recovery and inflation, on the perception and behavior of the investors. The
awareness level of the investors about the various investment options and what is the perception of the
investors with regard to the investments they want to make. The analysis also includes investor’s
behavior patterns reflected under different circumstances placed in front of them.

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RESEARCH METHODOLOGY

Sampling technique

Initially, a rough draft will be prepared keeping in mind the objective of the research. A pilot study
will be undertaken in order to know the accuracy of the questionnaire. The final questionnaire will be
arrived at only after certain important changes are incorporated. Convenience sampling technique will
be used for collecting the data from different investors. The investors are selected by the convenience
sampling method. The selection of units from the population based on their easy availability and
accessibility to the researcher is known as convenience sampling. Convenience sampling is at its
best in surveys dealing with an exploratory purpose for generating ideas and hypothesis.

Sampling unit:

The respondents who will be asked to fill out the questionnaires are the sampling units. These
comprise of employees of MNC’s, government employees, self employed and other investors.

Sampling size:

The sample size will be restricted to only 50, which comprised of mainly people from different
regions of vadodara due to time constraints.

Sampling area:

The area of the research is vadodara.

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LIMITATIONS OF THE STUDY

This analysis is based upon investors’ behavior for investment preferences during normal time vis-à-
vis recessionary period. This analysis would be focusing on the information from the investors about
their knowledge, perception and behavior on different financial products. The various limitations of
the study are:

Ø The total number of financial instruments in the market is so large that it needs a lot of
resources to analyze them all. There are various companies providing these financial
instruments to the public. Handling and analyzing such a varied and diversified data needs a
lot of time and resources.

Ø As the analysis is based on primary as well as secondary data, possibility of unauthorized


information can not be avoided.

Ø Reluctance of the people to provide complete information about them can affect the validity
of the responses.

Ø Due to time and cost constraint, study will be conducted in only selected areas of vadodara.

Ø The lack of knowledge of customers about the financial instruments can be a major limitation.

Ø The information can be biased due to use of questionnaire.

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HOW TO INVEST DURING RECESSION?

During recession careful financial decisions should be done to ensure survival from the economic
challenges. Work and career is on the line and they are often thought to be very fragile since
businesses in certain industries will tank because of their inability to deal with recession.

No matter how hard one works for the company or the industry, there are external factors that will
close down the business. For that reason, investors have to be prepared for the worst – investors have
to save as much as they can today.

But saving is not a good way to get the most of money. If you take your money to the bank for your
savings account, you can be assured that your money is safely deposited and could be extracted
anytime. But considering the current unemployment and recession, inflation will slowly diminish your
money’s ability to buy things that you need. Even if your money collects an annual interest, it is not
enough to cushion the blow of inflation.

What you need to do is to SMARTLY invest your hard earned savings. Most people think that the
word investment would mean risking your money in stocks hoping without any assurance of success.
But there are actually ways on safe and smart investing. Through these options, you can safely
address inflation and have enough money to use during recession.

Some of the investment options you can consider are:

• Certificate of Deposit – Forget the savings and time-bound accounts, Certificate of Deposit is one
the smart ways bankers and investors do to stay afloat. In gist, COD enjoys better interest rates which
should be more than enough to address inflation. However, you should remember that this form of
investment is more like time bound accounts. You can withdraw the money earlier but the penalties
are higher.

• T-Bills - Treasury bills, especially in stable countries is a good way to ensure the safety of your
funds while gaining a little interest in return. This transaction could be done with a government
certified bank that sells T-Bills. In this transaction, you loan the government some money to use and
in return, you will be gaining some interest as the country improves. The interest rate is a low but if
you are thinking of investing for a very long time, this would be a viable option.

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• Pink Sheets – This type of investment could be as risky and safe depending on your preferences.
Pink sheets are an investment option for private companies or multi-national companies that are not
listed in public trading platforms such as NASDAQ.

What you will find here is small companies needing investment. This might be risky but the shares are
too low that a little investment is worth it. Different industries are well represented in pink sheets so
do your research a little bit in these companies before you commit your money. If done right, you
might be one of the shareholders of one of the biggest companies in the future.

Smart Investment

Investment is not like your regular savings account. For you to earn and gain enough interest, you
need to give it time. Before you agree to any of the mentioned investment options, you have to be
prepared to stick it its maturity date.

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STRATEGY TO MAKE MONEY DURING A RECESSION

STEP 1- Pick companies with low debt, steady growth, and strong earnings. In order to pick the best
stock from a list of strong companies, pick the one that is farthest from its 52 week high. This is called
Value Investing. Many of the country's wealthiest entities made their money from snatching up
bargained stocks and holding on to them until the market recovered. If you are able to leave your
investments to grow over a 5 to 10 year period, it is pretty likely that you will earn a decent profit.
You simply need to search for well established companies that are sure to be around and stable in the
next 5 to 10 years. Think of companies such as Coca-Cola, General Electric, Proctor and Gamble, and
the like.

STEP 2- Break up your purchasing throughout the year. Do not use all of your investing money to buy
up as many shares as you can at once. In a recession, stocks are likely to continue decreasing in price.
By the end of the year, you will have more stocks for your money than if you would have purchased
them all at once.

STEP 3- Look towards industries that thrive no matter how the economy is doing. People always need
to eat. People always need household supplies, even if they aren't spending as much on them. They
always need utilities. Invest in these companies.

STEP 4- Buy under priced stocks of a company that is estimated to thrive during a recession. These
will be companies that provide a product or service that is "needed" rather than "wanted". Also, since
people spend less money during a recession and usually hesitate to put out cash for large luxury items,
they will more than likely spend on accessories for the items they already have. This can include
video games, digital camera components, mp3 player accessories, etc. Look to invest in these types of
companies.

STEP 5- Implement these tips and use sound judgments before jumping into any investment, your
finances should begin to show promising growth and security in this unstable economic time.

Above mentioned strategy would surely be helpful in making profitable investment during
recessionary period. Now the further discussion will be diverted to the available investment avenues
in India as its detailed knowledge is also essential for selecting the best investment avenue.

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INVESTMENT AVENUES AVAILABLE
IN INDIA
MUTUAL FUND

Types of mutual funds:-

Mutual fund schemes may be classified on the basis of its structure and its objective:-

Based on structure:-

Open-ended Funds:-

An open-end fund is one that is available for subscription all through the year. These do not have a
fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related
prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is
open for subscription only during a specified period. Investors can invest in the scheme at the time of
the initial public issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where they are listed. 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.

Interval Funds:-
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale
or redemption during pre-determined intervals at NAV related prices.

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Money Market Funds:-
The aim of money market funds is to provide easy liquidity, preservation of capital and moderate
income. These schemes generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may
fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and
individual investors as a means to park their surplus funds for short periods.

Load Funds:-
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell
units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%.
It could be worth paying the load, if the fund has a good performance history.

No-Load Funds:-
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is
payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire
corpus is put to work.

Tax Saving Schemes:-


These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax
laws as the Government offers tax incentives for investment in specified avenues. Investments made
in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of
the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s
54EA and 54EB by investing in Mutual Funds, provided the capital asset has been sold prior to April
1, 2000 and the amount is invested before September 30, 2000.

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Various types of Mutual Funds:

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Based on Objectives:-
(A) Equity Funds:-
Equity funds are considered to be the more risky funds as compared to other fund types, but they also
provide higher returns than other funds. It is advisable that an investor looking to invest in an equity
fund should invest for long term i.e. for 3 years or more. There are different types of equity funds
each falling into different risk bracket. In the order of decreasing risk level, there are following types
of equity funds:-
• Aggressive growth funds:-
In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in
less researched shares of speculative nature. Because of these speculative investments Aggressive
Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.
• Growth funds:-
Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are
different from Aggressive Growth Funds in the sense that they invest in companies that are expected
to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds
invest in those companies that are expected to post above average earnings in the future.
• Specialty funds:-
Specialty Funds have stated criteria for investments and their portfolio comprises of only those
companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in
particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier
than diversified funds. There are following types of specialty funds:
a) Sector funds:-
Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The
exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking,
Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity
funds that invest in multiple sectors.
b) Foreign securities funds:-
Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign
securities funds achieve international diversification and hence they are less risky than sector funds.
However, foreign securities funds are exposed to foreign exchange rate risk and country risk.
c) Mid-Cap or Small-Cap Funds:-
Funds that invest in companies having lower market capitalization than large capitalization companies

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are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that
of big, blue chip companies (less than Rs. 2500 crore but more than Rs. 500 crore) and Small-Cap
companies have market capitalization of less than Rs. 500 crore. Market Capitalization of a company
can be calculated by multiplying the market price of the company's share by the total number of its
outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as
of Large-Cap Companies which gives rise to volatility in share prices of these companies and
consequently, investment gets risky.
d) Option income funds:-
While not yet available in India, Option Income Funds write options on a large fraction of their
portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a
risky instrument. These funds invest in big, high dividend yielding companies, and then sell options
against their stock positions, which generate stable income for investors.
• Diversified mutul funds:-
Except for a small portion of investment in liquid money market, diversified equity funds invest
mainly in equities without any concentration on a particular sector(s). These funds are well diversified
and reduce sector-specific or company-specific risk. However, like all other funds diversified equity
funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is
Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by
ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable
income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period
and in case of any redemption by the investor before the expiry of the lock-in period makes him liable
to pay income tax on such income(s) for which he may have received any tax exemption(s) in the
past.
• Equity Index Funds: -
Equity Index Funds have the objective to match the performance of a specific stock market index. The
portfolio of these funds comprises of the same companies that form the index and is constituted in the
same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty,
Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSE BANK
INDEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.
• Value funds:-
Value Funds invest in those companies that have sound fundamentals and whose share prices are
currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price
to Earnings Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value
(Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are

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exposed to lower risk level as compared to growth funds or specialty funds. Value stocks are
generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the
short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in
the long term, to a large extent, is reduced.
• Equity income or dividend yield funds:-
The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income
and steady capital appreciation for investors by investing in those companies which issue high
dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than
other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed
to the lowest risk level as compared to other equity funds.
(B) Debt/Income funds:-
Funds that invest in medium to long-term debt instruments issued by private companies, banks,
financial institutions, governments and other entities belonging to various sectors (like infrastructure
companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to
generate fixed current income (and not capital appreciation) to investors. In order to ensure regular
income to investors, debt (or income) funds distribute large fraction of their surplus to investors.
Although debt securities are generally less risky than equities, they are subject to credit risk (risk of
default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt
funds usually invest in securities from issuers who are rated by credit rating agencies and are
considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on
different investment objectives, there can be following types of debt funds:-
• Diversified Debt Funds:-
Debt funds that invest in all securities issued by entities belonging to all sectors of the market are
known as diversified debt funds. The best feature of diversified debt funds is that investments are
properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of
default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.
• Focused Debt Funds:-
Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to
investments in selective debt securities, issued by companies of a specific sector or industry or origin.
Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that
invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation,
focused debt funds are more risky as compared to diversified debt funds. Although not yet available in
India, these funds are conceivable and may be offered to investors very soon.

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• High Yield Debt funds: -
As we now understand that risk of default is present in all debt funds, and therefore, debt funds
generally try to minimize the risk of default by investing in securities issued by only those borrowers
who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different
strategy and prefer securities issued by those issuers who are considered to be of "below investment
grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from
these issuers. These funds are more volatile and bear higher default risk, although they may earn at
times higher returns for investors.
• Assured Return Funds: -
Although it is not necessary that a fund will meet its objectives or provide assured returns to investors,
but there can be funds that come with a lock-in period and offer assurance of annual returns to
investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset
Management Companies (AMCs). These funds are generally debt funds and provide investors with a
low-risk investment opportunity. However, the security of investments depends upon the net worth of
the guarantor (whose name is specified in advance on the offer document). To safeguard the interests
of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have
adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return
schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future.
UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government
had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers
assured return schemes to investors, though possible.
• Term Plan Fixed Series:-
Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less
than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike
closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually
invest in debt / income schemes and target short-term investors. The objective of fixed term plan
schemes is to gratify investors by generating some expected returns in a short period.
(C) GILT FUNDS:-
Also known as Government Securities in India, Gilt Funds invest in government papers (named dated
securities) having medium to long term maturity period. Issued by the Government of India, these
investments have little credit risk (risk of default) and provide safety of principal to the investors.
However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of

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debt securities are inversely related and any change in the interest rates results in a change in the NAV
of debt/gilt funds in an opposite direction.
(D) MONEY MARKET / LIQUID FUNDS:-
Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt
instruments. These securities are highly liquid and provide safety of investment, thus making money
market / liquid funds the safest investment option when compared with other mutual fund types.
However, even money market / liquid funds are exposed to the interest rate risk. The typical
investment options for liquid funds include Treasury Bills (issued by governments), Commercial
papers (issued by companies) and Certificates of Deposit (issued by banks).
• Hybrid funds:-
As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts
and money market securities. Hybrid funds have an equal proportion of debt and equity in their
portfolio. There are following types of hybrid funds in India:
• Balanced Funds:-
The portfolio of balanced funds includes assets like debt securities, convertible securities, and equity
and preference shares held in a relatively equal proportion. The objectives of balanced funds are to
reward investors with a regular income, moderate capital appreciation and at the same time
minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors
having a long term investment horizon.
• Growth-and-Income Funds:-
Funds that combine features of growth funds and income funds are known as Growth-and-Income
Funds. These funds invest in companies having potential for capital appreciation and those known for
issuing high dividends. The level of risks involved in these funds is lower than growth funds and
higher than income funds.
• Asset Allocation Funds:-
Mutual funds may invest in financial assets like equity, debt, money market or non-financial
(physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset
allocation strategy that allows fund managers to switch over from one asset class to another at any
time depending upon their outlook for specific markets. In other words, fund managers may switch
over to equity if they expect equity market to provide good returns and switch over to debt if they
expect debt market to provide better returns. It should be noted that switching over from one asset
class to another is a decision taken by the fund manager on the basis of his own judgment and
understanding of specific markets, and therefore, the success of these funds depends upon the skill of
a fund manager in anticipating market trends.

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(E) OTHERS:-
• Commodity funds:-
Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.)
or commodity companies or commodity futures contracts are termed as Commodity Funds. A
commodity fund that invests in a single commodity or a group of commodities is a specialized
commodity fund and a commodity fund that invests in all available commodities is a diversified
commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and
Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of
commodity funds.
• Real Estate Funds:-
Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized
assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of
these funds may be to generate regular income for investors or capital appreciation.
• Exchange Traded Funds (ETF):-
Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end
mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges
like a single stock at index linked prices. The biggest advantage offered by these funds is that they
offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same
time. Recently introduced in India, these funds are quite popular abroad.
• Fund of Funds:-
Mutual funds that do not invest in financial or physical assets, but do invest in other Mutual Fund
schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio
comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a
portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds
provide investors with an added advantage of diversifying into different mutual fund schemes with
even a small amount of investment, which further helps in diversification of risks. However, the
expenses of Fund of Funds are quite high on account of compounding expenses of investments into
different mutual fund schemes.

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EQUITY SHARES

ABOUT SHARES:-
At the most basic level, stock (often referred to as shares) is ownership, or equity, in a company.
Investors buy stock in the form of shares, which represent a portion of a company's assets (capital)
and earnings (dividends).
As a shareholder, the extent of your ownership (your stake) in a company depends on the number of
shares you own in relation to the total number of shares available For example, if you buy 1000 shares
of stock in a company that has issued a total of 100,000 shares, you own one per cent of the company.
While one per cent seems like a small holding, very few private investors are able to accumulate a
shareholding of that size in publicly quoted companies, many of which have a market value running
into billions of pounds. Your stake may authorize you to vote at the company's annual general
meeting, where shareholders usually receive one vote per share.
In theory, every stockholder, no matter how small their stake, can exercise some influence over
company management at the annual general meeting. In reality, however, most private investors'
stakes are insignificant. Management policy is far more likely to be influenced by the votes of large
institutional investors such as pension funds.

a) STOCKS SYMBOLS:-
A stock symbol, or 'Epic' symbol, is the standard abbreviation of a stock's name. You can find stock
symbols wherever stock performance information is published - for example, newspaper stock listings
and investment websites. Company names also have abbreviations called ticker symbols. However,
it's worth remembering that these may vary at the different exchanges where the company is quoted.

b) PERFORMANCE INDICATORS:-
Here is a list of the standard performance indicators

Closing price: - The last price at which the stock was bought or sold.
High and low: - The highest and lowest price of the stock from the previous trading day.
52 week range: - The highest and lowest price over the previous 52 weeks.
Volume: - The amount of shares traded during the previous trading day High and Low.
Net change: - The difference between the closing price on the last trading day and the
closing price on the trading day prior to the last.

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THE STOCK EXCHANGES:-
A marketplace in which to buy or sell something makes life a lot easier. The same applies to stocks. A
stock exchange is an organization that provides a marketplace in which investors and borrowers trade
stocks. Firstly, the stock exchange is a market for issuers who want to raise equity capital by selling
shares to investors in an Initial Public Offering (IPO). The stock exchange is also a market for
investors who can buy and sell shares at any time.

a) Trading shares on the stock exchange:


As an investor in the INDIA, you can't buy or sell shares on a stock exchange yourself. You need to
place your order with a stock exchange member firm (a stockbroker) who will then execute the order
on your behalf. The NSE AND BSE are the leading stock exchange in the INDIA. Trading is done
through computerized systems.

b) The trading process:-


If you decide to buy or sell your shares, you need to contact a stockbroker who will buy or sell the
shares on your behalf. After receiving your order, the stockbroker will input the order on the SETS or
SEAQ system to match your order with that of another buyer or seller. Details of the trade are
transmitted electronically to the stockbroker who is responsible for settling the trade. You will then
receive confirmation of the deal.

c) Types of shares available on the stock exchange:-


You cannot trade all stocks on the stock exchange. To be listed on a stock exchange, a stock must
meet the listing requirements laid down by that exchange in its approval process. Each exchange has
its own listing requirements, and some exchanges are more particular than others. It is possible for a
stock to be listed on more than one exchange. This is known as a dual listing.

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INSURANCE

People need insurance in the first place. An insurance policy is primarily meant to protect the income
of the family’s bread earners. The idea is if any one or both die their dependents continue to live
comfortably. The circle of life begins at birth follower by education, marriage and eventually after a
lifetime of work we look forward to life of retirement. Our finances too tend to change as we go
through the various phases of life. In the first twenty of our life, we are financially and emotionally
dependents on our parents and there are no financial commitments to be met. In the next twenty years
we gain financial independence and provide financial independence to our families. This is also the
stage when our income may be unable to meet the growing expenses of a young household. In the
next twenty as we see our investments grow after our children grow and become financially
independent. Insurance is a provision for the distribution of risks that is to say it is a financial
provision against loss from unavoidable disasters. The protection which it affords takes form of a
guarantee to indemnify the insured if certain specified losses occur. The principle of insurance so far
as the undertaking of the obligation is concerned is that for the payment of a certain sum the guarantee
will be given to reimburse the insured. The insurer in accepting the risks so distributes them that the
total of all the amounts is paid for this insurance protection will be sufficient to meet the losses that
occur. Insurance then provide divided responsibility. This principle is introduced in most stores where
a division is made between the sales clerk and the cashiers department the arrangement dividing the
risks of loss. The insurance principle is similarly applied in any other cases of divided responsibility.
As a business however insurance is usually recognized as some form of securing a promise of
indemnity by the payment of premium and the fulfillment of certain other stipulations.

Types of insurance
• Term insurance plans
Term insurance is the cheapest form of life insurance available. Since a term insurance contract only
pays in the event of eventuality the life cover comes at low premium rates . Term insurance is a usefu
tool to purchase against risk of early death and protection of an asset.
• Endowment plans
Endowment plans are savings and protection plans that provide a dual benefit of protection as well as
savings. Endowment plans pay a death benefit in the event of an eventuality should the customer
survive the benefit period a maturity benefit is paid to the life insured.

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• Whole of life plans
A whole of life plan provides life insurance cover to an individua upto a specified age . A whole of
life plan is suitable for an individual who is looking for an extended life insurance cover and /or wants
to pay premium over as long as tenure as possible to reduce the amount of upfront premium payment.

• Pension plans
Pension plans allow an individual to save in a tax deffered manner. An individual can either
contribute through regular premiums or make a single premium investments. Savings accumulate over
the deferment period. Once the contract reaches the vesting age , the individual has the option of
choosing an annuity plan from a life insurance company. An annuity is paid till the life the lifetime of
the insured or a pre-determined period depending upon the annuity option chosen by the life insured.

• Unit Linked Insurance Plans


Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk
protection and flexibility in investment. The investment is denoted as units and is represented by the
value that it has attained called as Net Asset Value (NAV). The policy value at any time varies
according to the value of the underlying assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for
risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to
form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy.
The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors
have the option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt
funds etc. It is important to remember that in a ULIP, the investment risk is generally borne by the
investor.
In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium
payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to
alter the premium amounts during the policy's tenure. For example, if an individual has surplus funds,
he can enhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option
of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP
investors can shift their investments across various plans/asset classes (diversified equity funds,
balanced funds, debt funds) either at a nominal or no cost.

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Expenses Charged in a ULIP

ü Premium Allocation Charge:


A percentage of the premium is appropriated towards charges initial and renewal expenses apart from
commission expenses before allocating the units under the policy.

ü Mortality Charges:
These are charges for the cost of insurance coverage and depend on number of factors such as age,
amount of coverage, state of health etc

ü Fund Management Fees:


A fee levied for management of the fund and is deducted before arriving at the NAV.

ü Administration Charges:
This is the charge for administration of the plan and is levied by cancellation of units.

ü Surrender Charges:
Deduction is made for pre-mature partial or full encashment of units.

ü Fund Switching Charge:


Usually a limited number of fund switches are allowed each year without charge, with subsequent
switches, subject to a charge.

ü Service Tax Deductions:


Service tax is deducted from the risk portion of the premium.

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GOVERNMENT SECURITIES

Government securities (G-secs) are sovereign securities which are issued by the Reserve Bank of
India on behalf of Government of India, in lieu of the Central Government's market borrowing
program.
The term Government Securities includes:
• Central Government Securities.
• State Government Securities
• Treasury bills
The Central Government borrows funds to finance its 'fiscal deficit'.The market borrowing of the
Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction
or by floatation of loans.
In addition to the above, treasury bills of 91 days are issued for managing the temporary cash
mismatches of the Government. These do not form part of the borrowing program of the Central
Government.

Types of Government Securities


Government Securities are of the following types:-

(a) Dated Securities are generally having fixed maturity and fixed coupon securities usually
carrying semi-annual coupon. These are called dated securities because these are identified by
their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government
security maturing in 2012, which carries a coupon of 11.03% payable half yearly. The key
features of these securities are:
• They are issued at face value.
• Coupon or interest rate is fixed at the time of issuance, and remains constant till
redemption of the security.
• The tenor of the security is also fixed.
• Interest /Coupon payment is made on a half yearly basis on its face value.
• The security is redeemed at par (face value) on its maturity date.

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(b) Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These
were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95
and 1995-96 respectively. The key features of these securities are:
• They are issued at a discount to the face value.
• The tenor of the security is fixed.
• The securities do not carry any coupon or interest rate. The difference between the
issue price (discounted price) and face value is the return on this security.
• The security is redeemed at par (face value) on its maturity date.
(c) Partly Paid Stock is stock where payment of principal amount is made in installments over a
given time frame. It meets the needs of investors with regular flow of funds and the need of
Government when it does not need funds immediately. The first issue of such stock of eight
year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been
issued a few more times thereafter. The key features of these securities are:
• They are issued at face value, but this amount is paid in installments over a specified
period.
• Coupon or interest rate is fixed at the time of issuance, and remains constant till
redemption of the security.
• The tenor of the security is also fixed.
• Interest /Coupon payment is made on a half yearly basis on its face value.
• The security is redeemed at par (face value) on its maturity date.
(d) Bonds with Call/Put Option: First time in the history of Government Securities market RBI
issued a bond with call and put option this year. This bond is due for redemption in 2012 and
carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in
year 2007. In other words it means that holder of bond can sell back (put option) bond to
Government in 2007 or Government can buy back (call option) bond from holder in 2007.
This bond has been priced in line with 5 year bonds.
(e) Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a
benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and
minimum interest rate payable on it. Floating rate bonds of four year maturity were first
issued on September 29, 1995, followed by another issue on December 5, 1995. Recently
RBI issued a floating rate bond, the coupon of which is benchmarked against average
yield on 364 Days Treasury Bills for last six months. The coupon is reset every six
months.

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The key features of these securities are:
• They are issued at face value
• Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at
the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc.
• Though the benchmark does not change, the rate of interest may vary according to the
change in the benchmark rate till redemption of the security. The tenor of the security
is also fixed.
• Interest /Coupon payment is made on a half yearly basis on its face value.
• The security is redeemed at par (face value) on its maturity date.
(f) Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale
price index. These provide investors with an effective hedge against inflation. These bonds
were floated on December 29, 1997 on tap basis. They were of five year maturity with a
coupon rate of 6 per cent over the wholesale price index. The principal redemption is linked
to the Wholesale Price Index. The key features of these securities are:

• They are issued at face value.


• Coupon or interest rate is fixed as a percentage over the wholesale price index at the
time of issuance. Therefore the actual amount of interest paid varies according to the
change in the Wholesale Price Index.
• The tenor of the security is fixed.
• Interest /Coupon payment is made on a half yearly basis on its face value.
• The principal redemption is linked to the Wholesale Price Index.

Benefits of Investing in Government Securities

Ø No tax deducted at source


Ø Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals
Ø Qualifies for SLR purpose
Ø Zero default risk being sovereign paper
Ø Highly liquid.
Ø Transparency in transactions and simplified settlement procedures through
CSGL/NSDL

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National Savings Certificate

National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that
combines adequate returns with high safety. NSCs are an instrument for facilitating long-term
savings. A large chunk of middle class families use NSCs for saving on their tax, getting double
benefits. They not only save tax on their hard-earned income but also make an investment which are
sure to give good and safe returns.

ü How to Invest
National Savings Certificates are available at all post-offices. The application can be made either in
person or through an agent. Post office agents are active in nooks and corners of the country.
Following types of NSC are issued:
Single Holder Type Certificate: This can be issued to: (a) An adult for himself or on behalf of a
minor (b) A Trust.
Joint 'A' Type Certificate: Issued jointly to two adults payable to both holders jointly or to the
survivor.
Joint 'B' Type Certificate: Issued jointly to two adults payable to either of the holders or to the
survivor.

ü Who can Invest


o An adult in his own name or on behalf of a minor
o A trust
o Two adults jointly

ü Denominations and Limit


National Savings Certificates are available in the denominations of Rs. 100 Rs 500, Rs. 1000, Rs.
5000, & Rs. 10,000. There is no maximum limit on the purchase of the certificates. So it is for you to
decide how much you want to put in the NSCs. This is of course a huge benefit for you can decide as
much as your budget allows.

ü Maturity
Period of maturity of a certificate is six years. Presently interest paid is 8 % per annum half yearly
compounded. Maturity value of a certificate of any other denomination is at proportionate rate.

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Premature encashment of the certificate is not permissible except at a discount in the case of death of
the holder(s), forfeiture by a pledgee and when ordered by a court of law.

ü Tax Benefits
Interest accrued on the certificates every year is liable to income tax but deemed to have been
reinvested.
Income Tax rebate is available on the amount invested and interest accruing under Section 88 of
Income Tax Act, as amended from time to time.
Income tax relief is also available on the interest earned as per limits fixed vide section 80L of Income
Tax, as amended from time to time.

Public Provident Fund


Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves
as a retirement planning tool for many of those who do not have any structured pension plan covering

them. The balances in PPF account cannot be attached by any authority normally.

ü How to Open Account


Public Provident Fund account can be opened at designated post offices throughout the country and at
designated branches of Public Sector Banks throughout the country.

ü Who can Open Account


The account can be opened by an individual in his own name, on behalf of a minor of whom he is a
guardian.

ü Tabs on Investment
Minimum deposit required in a PPF account is Rs. 500 in a financial year. Maximum deposit limit is
Rs. 70,000 in a financial year. Maximum number of deposits is twelve in a financial year.

ü Maturity
The maturity period of the account is 15 years.
Rate of interest is 8% compounded annually.
One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.

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The amount of deposit can be varied to suit the convenience of the account holders.
The account holder can retain the account after maturity for any period without making any further
deposits. In this case the account will continue to earn interest at normal rate as admissible till the
account is closed.
The account holder also has an option to extend the PPF account for any period in a block of 5 years
at each time, after the maturity period of 15 years.

ü Lapse in Deposits
If deposits are not made in a PPF account in any financial year, the account will be treated as
discontinued. The discontinued account can be activated by payment of the minimum deposit of
Rs.500/- with default fee of Rs.50/- for each defaulted year.

ü Premature Closure or Withdrawal


Premature closure of a PPF Account is not permissible except in case of death. Nominee/legal heir of PPF
Account holder cannot continue the account after the death.
Premature withdrawal is permissible in the 7th year of the account subject, to a limit of 50% of the
amount at credit preceding three year balance. Thereafter one withdrawal in every year is permissible.

ü Account Transfer
The Account is transferable from one post Office / bank to another and from post Office to bank or from a bank
to a post office.

ü Tax Benefits
Ø Deposits in PPF are eligible for rebate under section 80-C of Income Tax Act.
Ø The interest on deposits is totally tax free.
Ø Deposits are exempt from wealth tax.

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BONDS

A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on
the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later
date, termed maturity. It is a formal contract to repay borrowed money with interest at fixed intervals.
Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the coupon is
the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in
the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or
commercial paper are considered to be money market instruments and not bonds. Bonds must be
repaid at fixed intervals over a period of time. Bonds are issued by public authorities, credit
institutions, companies and supranational institutions in the primary markets. The most common
process of issuing bonds is through underwriting. In underwriting, one or more securities firms or
banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors.
The security firm takes the risk of being unable to sell on the issue to end investors. However
government bonds are instead typically auction.

Different types of bonds available in India.

(a) The convertible bond lets a bondholder exchange a bond to a number of shares of the
issuer's common stock.
(b) The exchangeable bond allows the exchange for shares of a corporation other than the
issuer.
(c) The Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
(d) The Floating rate notes (FRNs) have a coupon that is linked to an index. Common indices
include: money market indices, such as LIBOR or Euribor, and CPI (the Consumer Price
Index). Coupon examples: three month USD LIBOR + 0.20%, or twelve month CPI + 1.50%.
FRN coupons reset periodically, typically every one or three months. In theory, any Index
could be used as the basis for the coupon of an FRN, so long as the issuer and the buyer can
agree to terms.
(e) Zero-coupon bonds don't pay any interest. They are issued at a substantial discount to par
value. The bond holder receives the full principal amount on the redemption date. An
example of zero couponbonds are Series E savings bonds issued by the U.S. government.

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Zero-coupon bonds may be created from fixed rate bonds by a financial institutions separating
"stripping off" the coupons from the principal. In other words, the separated coupons and the
final principal payment of the bond are allowed to trade independently. See IO (Interest Only)
and PO (Principal Only).
(f) Inflation linked bonds, in which the principal amount and the interest payments are indexed
to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable
maturity (this position briefly reversed itself for short-term UK bonds in December 2008).
However, as the principal amount grows, the payments increase with inflation. The government of
the United Kingdom was the first to issue inflation linked Gilts in the 1980s. Treasury Inflation-
Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the
U.S. government. Other indexed bonds, for example equity-linked notes and bonds indexed on a
business indicator (income, added value) or on a country's GDP.
(g) Asset-backed securities are bonds whose interest and principal payments are backed by
underlying cash flows from other assets. Examples of asset-backed securities are mortgage-
backed securities (MBS's), collateralized mortgage obligations (CMOs) and collateralized
debt obligations (CDOs).Subordinated bonds are those that have a lower priority than other
bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of
creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line
to be paid are those holding what is called senior bonds. After they have been paid, the
subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated
bonds usually have a lower credit rating than senior bonds. The main examples of
subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The
latter are often issued in tranches. The senior tranches get paid back first, the subordinated
tranches later.
(h) Perpetual bonds are also often called perpetuities. They have no maturity date. The most
famous of these are the UK Consols, which are also known as Treasury Annuities or Undated
Treasuries. Some of these were issued back in 1888 and still trade today, although the
amounts are now insignificant. Some ultra long-term bonds (sometimes a bond can last
centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are
virtually perpetuities from a financial point of view, with the current value of principal near
zero.
(i) Bearer bond is an official certificate issued without a named holder. In other words, the
person who has the paper certificate can claim the value of the bond. Often they are registered
by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very

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risky because they can be lost or stolen. Especially after federal income tax began in the
United States, bearer bonds were seen as an opportunity to conceal income or assets. U.S.
corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982,
and state and local tax-exempt bearer bonds were prohibited in 1983. Registered bond is a
bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a
transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon
maturity, are sent to the registered owner.
(j) Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their
agencies. Interest income received by holders of municipal bonds is often exempt from the
federal income tax and from the income tax of the state in which they are issued, although
municipal bonds issued for certain purposes may not be tax exempt.Book-entry bond is a
bond that does not have a paper certificate. As physically processing paper bonds and interest
coupons became more expensive, issuers (and banks that used to collect coupon interest for
depositors) have tried to discourage their use. Some book-entry bond issues do not offer the
option of a paper certificate, even to investors who prefer them.
(k) Lottery bond is a bond issued by a state, usually a European state. Interest is paid like a
traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds
within the issue according to a schedule. Some of these redemptions will be for a higher value
than the face value of the bond.
(l) War bond is a bond issued by a country to fund a war.
(m) Serial bond is a bond that matures in installments over a period of time. In effect, a $100,000,
5-year serial bond would mature in a $20,000 annuity over a 5-year interval.
(n) Revenue bond is a special type of municipal bond distinguished by its guarantee of
repayment solely from revenues generated by a specified revenue-generating entity associated
with the purpose of the bonds. Revenue bonds are typically "non-recourse," meaning that in
the event of default, the bond holder has no recourse to other governmental assets or
revenues.

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COMMODITIES

A commodity is a normal physical product used by everyday people during the course of their lives,
or metals that are used in production or as a traditional store of wealth and a hedge against inflation.
For example, these commodities include grains such as wheat, corn and rice or metals such as copper,
gold and silver. The full list of commodity markets is numerous and too detailed. The best way to
trade the commodity markets is by buying and selling futures contracts on local and international
exchanges. Trading futures is easy, and can be accessed by using the services of any full or on-line
futures brokerage service. Traditionally, there is an expectation when trading commodity futures of
achieving higher returns compared to shares or real estate, so successful investors can expect much
higher returns compared to more conventional investment products.

The process of trading commodities, as mentioned above, must be facilitated by the use of trading
liquid, exchangeable, and standardized futures contracts, as it is not practical to trade the physical
commodities. Futures contracts give the investor ease of use and the ability to buy or sell without
delay. A futures contract is used to buy or sell a fixed quantity and quality of an underlying
commodity, at a fixed date and price in the future. Futures contracts can be broken by simply
offsetting the transaction. For example, if you buy one futures contract to open then you sell one
futures contract to close that market position.

The execution method of trading futures contracts is similar to trading physical shares,
but futures contracts have an expiry date and are deliverable.Futures contracts have an expiry date and
need to be occasionally rolled over from the current contract month to the following contract month.
The reason is because the biggest advantage to trading commodity futures, for the private investor is
the opportunity to legally short-sell these markets. Short-selling is the ability to sell commodity
futures creating an open position in the expectation to buy-back at a later time to profit from a fall in
the market.

If you wish to trade the up-side of commodity futures, then it will simply be a buy-to-open and sell-to-
close set of transactions similar to share trading.

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The commodity markets will always produce rising of falling trends, and with the
abundance of information and trading opportunities available there is no reason for any investor to
exclusively trade the share market when there is potential profits from trading commodity futures.
The increased use of commodity trading vehicles in investment management has led practitioners to
create investable commodity indices and products that offer unique performance opportunities for
investors in physical commodities. As is true for stock and bond performance, as well as investment
in managed futures and hedge fund products, commodity-based products have a variety of uses.
Besides being a source of information on cash commodity and futures commodity market trends, they
are used as performance benchmarks for evaluation of commodity trading advisors and provide a
historical track record useful in developing asset allocation strategies. However, the investor benefits
of commodity or commodity-based products lie primarily in their ability to offer risk and return trade-
offs that cannot be easily replicated through other investment alternatives. Previous research that
direct stock and bond investment offers little evidence of providing returns consistent with direct
commodity investment. Commodity-based firms may not be exposed to the risk of commodity price
movement. Thus for investors, direct commodity investment may be the principal means by which
one can obtain exposure to commodity price movements.

The commodities that are traded in the market


• Gold
• Copper
• Silver
• Sugar
• Wheat
• Zeera
• Guar

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EMPIRICAL ANALYSIS AND INTERPRETATIONS

(A) Table showing different age group of the respondents (investors).

AGE NUMBER OF RESPONDENTS


18-25 6
26-35 22
36-51 15
51 & Above 7

Inference: the sample consists of 50 investors belonging to different age group. As the chart shows
that the majority of respondents belong to the age group of 26-35 years i.e., 44%, followed by the age
group of 36-51 years i.e., 30% and then 14% contribution by the age group of 51 years & above and
12% by the age group of 18-25 years. The major long term decisions generally executed between the
ages of 26-45 years.

(B) Educational Qualification of the respondents.

Educational qualification No. of investors


Undergraduate 07
graduate 26
Post graduate and above 17

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Inference: the total 26 number of respondents are graduate i.e. 52% of total population, followed by
17 number of respondents who are post graduate covering 34% of total population and 7 respondents
are undergraduate.

(C) Occupation of investors.

Occupation Number of respondents


Government service 12
Private service 27
Entrepreneurs 02
others 09

Inference: as per the above chart, its evident that the majority is dominated by the respondents
engaged in private service i.e., 27(54%), followed by government employees i.e., 12 (24%). The
analysis also covers up 2 entrepreneurs and 9 respondents engaged in other businesses not falling
under above categories.

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(D)Yearly gross income of the investors.

Income groups Number of investors


Below 120000 08
120000 – 300000 14
300000 – 500000 17
500000 & above 11

Inference: according to income group of investors, maximum no. of investors is in income group of 3
lac – 5 lac i.e., they constitute approximately 34% which is followed by the income group falls in the
range between 1.2 lac – 3 lac (28%) and 22% are in the income group of 5 lac & above and remaining
falls in the income group of below 1.2 lac.

(E)Percentage of income investors invest.

% of income invested No. of investors


5% - 10% 10
10% - 20% 21
20% & above 19

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Inference: as per the graph, it can be seen that 21 investors like to invest 10% to 20% of their income,
followed by 19 investors who would prefer 20% or more of their income to be invested. The rest 10
investors have restricted the corpus to 5% to 10% of their income. One can conclude that increased
income would lead to considerable amount of saving as the marginal increase in expenditures would
be less than marginal increase in income which would result into more saving and boost investment.

(F) Most ideal or preferred investment avenues.

Investment avenues Degree of preference given

Mutual funds 87%

Equity shares 24%

Insurance 92%

Government securities 97%

Real estate 60%

commodities 17%

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Inference: from the above graph, it can be concluded that the most ideal or preferred investment for
majority of investors are mutual funds (87%), insurance (92%) and government securities (97%). If I
need to explain why these three avenues are dominating the rest is because of the features that they
carry along with them like diversification, security, liquidity, trust and reliability. There wasn’t even a
single investor who didn’t invest in any of these avenues. The preference of the investors measured in
percentage is itself witnessed to the fact that today’s investors reliance on such investment avenues is
unaffected no matter whether economy is going through recession or depression. The strategy may
change but the proportion allocated to such securities would remain unaffected to considerable level.
The next ideal investment is real estate, which has got 60% preference by the investors, followed by
equity shares and commodities which have been awarded 24% and 17% preferences respectively by
the investors.

(G) While investing, which of the following factor or factors would you consider the
most?

Factors degree of preferences

Liquidity 80%

Low risk 100%

High and regular return 100%

Capital appreciation 75%

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Inference: as the graph clearly indicates that the major concern for any investor is to have maximum
return considering minimum amount of risk. Different investors have different purposes to achieve by
way of investing their money. Some may prefer to invest short term to achieve short term objectives;
such investors may not consider capital appreciation as vital features of investment but may prefer to
earn high return with low risk. On the other hand if the purpose of investment is of long term in nature
then such investor would obviously go for capital appreciation. Liquidity is also a vital aspect of any
investment but still it depends on the nature of investment and the objective for which it is made. If
the nature of investment is long term then the investor may not concerned about its present level of
liquidity but it’s not the same in case of short term investment. When the economy is going through
the phase of recession, most of the investors’ concern is about liquidity and capital appreciation as
such investments are tied up with long maturity duration.

(H) What induces to invest in a particular investment avenues?

Factors Degree of preference

Tips 10%

News 45%

Research report 80%

Personal homework 15%

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Inference: most of the investors believe that the most reliable source of information is research report
as it is a mix of in-depth analysis based on past performance and future expectations measured in
terms of probabilities, as a result 80% preference were given to research report by investors. The next
trustable source of information was news, on which 45% of investors would like to rely. The rest
sources namely personal homework and tips were not given as important as the previous sources.
Such situation arises only in case of equity stocks and that too when investor is willing to go for long
term investment. In case of mutual funds, the portfolio of investor is managed and directed by
professionals, so there is no need for investors to worry about once he clearly specifies the objectives
of his investment.

(I) Risk appetite of the investors.

types Degree of preference

High risk 30%

Medium risk 45%

Low risk 95%

No risk/safe investment 60%

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Inference: there is not doubt that if the investors were given an option then they would obviously go
for low risk. The most preferred risk appetite as per the analysis is low risk with 95% degree of
preference. The next preference was given to no risk and safe investment which was 60%, followed
by 45% awarded to medium risk and 30% to high risk. Every individual has different risk tolerance
capacity and its one of the major factor determining the choice of investment to be made. The
uncertainty may give unexpected returns to the investors but the question arises whether he is willing
to risk his principle amount in such volatile market. As a result the risk tolerance level has a vital role
to play in deciding risk appetite of any investor.

(J) Pattern of investing or trading.

patterns No. of investors

Repeatedly invest in same set of stocks 14

Invest in variety of stocks 29

Depends on other factors 07

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Inference: as the chart shows, there were 29 investors who liked to invest in variety of stocks and the
reason or the benefit they derive out of is because of the element of diversification present in such
varieties. During recession also, there are some stocks which perform better then others for e.g.
FMCG. The degree of diversification is very crucial to cope up with unsystematic risk. 14 investors
would like to invest repeatedly in same set of stocks and remaining would prefer to rely on other
factors for investing.

(K) While investing what are your investment objectives?

a) To receive regular income

b) To plan for future commitment(child education, marriage etc)

c) To have safe retirement period

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Inference: as the graph shows, the majority of investors prefer to safeguard their retirement period.
Out of 50 respondents 39 respondents are engaged in employments with different sectors so no doubt
about this decision. Respondent falling under the age group of 18 – 25 years would also like to receive
regular income along with those who are at and above 51 years of age. The behavior of the group
falling under 18 – 25 years is also willing to take considerable amount of risk by investing into equity
funds. I have found that they are rather risk takers and not risk avoiders.

(L) What is the preferred portfolio of investment?

portfolio Preference of investors

Equity 20%

Debt 55%

balanced 90%

Inference: as it can be witnessed from the above graph that 90% preference is given to the balanced
portfolio because of simple reason that is diversification among debt and equity stocks in such a way
that it will provide optimum return for the degree of risk undertaken by the investors. The second
preference is given to debt as it provides steady return no matter how volatile the market is. And
investment in equity is awarded with 20% weight, as such investment would be made by short term
investors anticipating to get volatile return and they commonly have short position over such
investment.

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(M) The reaction of investors in recession (bear market).

Options Preference

To take advice from professionals 22

To withdraw 05

To wait till market recover 09

To invest 14

Inference: as the graph depicts that 22 investors would like to take the advice of professionals in case
of bear market situation. There are 9 investors who would like to wait till market recovers. There are
14 investors who believe that this is the right time to invest money keeping in mind long term
objectives in mind and 5 investors would like to withdraw from the market before situation gets more
worst for their investments. Here one interesting fact is that mutual fund has become the most
convenient source of investment over the past couple of years because it provides variety of stocks
under one roof and the investment can be made according to the objectives of individual. This distinct
feature has changed the behavior of investors to a considerable extent.

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CONCLUSION AND RECOMMENDATIONS

UNDERSTANDING INVESTOR BEHAVIOR

In order to understand investor behavior while executing investment decision, I have qualified three
major elements that an investor has to consider or take into consideration. These three elements are
given below:

1. The importance of having the right mix


2. Common investing behaviors
3. Overcoming the pitfalls that undermine success

I have made an attempt to understand each of the above mentioned elements in detail and tried to
explain the same with some unique examples under different situations to reflect how investor
behaves in respective situations.

1. The importance of having the right mix

Asset allocation not only matters, it is one of the most important factors driving long-term
performance. Yet, many investors are not applying the principle of asset allocation and diversification
as beneficially as they could.

• Asset allocation matters

A majority of financial advisors believe that effective asset allocation:

• Could cut investors losses in a bear market.


• Is more important to investment returns than individual stock selection and
• Should be the primary basis of a client’s portfolio.

• Investors on diversification

A majority of investors believe that they:

• Can create a proper asset allocation plan


• But have held on to an investment too long and
• Believe it’s harder to sell a winner than admit they are wrong to a loved one.

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The challenge of diversification

A majority of financial advisors believe that:

• Very few investors rebalance as often as they should


• Attention to top performers causes clients to lose focus and
• Volatile markets can make hard for client to stick to their plan.

2. Common investing behaviors

All too often decision making about investing is influenced by emotions and unconscious biases that
cause people to make sub-optimal choices. Among the most damaging are those biases that drive
individuals to chase strong investment returns, which make investors reluctant to rebalance portfolios
and cause them to overreact to short-term volatility. Following are some sample of behaviors that
undermine success.

• Investor certainty bias

The certainty effect

Choice A Choice B

Rs. 4000 Probability 80% Rs. 3000 Probability 100%

Expected value Rs. 3200 Rs. 3000

popularity 20% 80%

In the example shown above, an investor can choose option A, wherein there is an 80% chance of
receiving Rs. 4000 and a 20% chance of receiving nothing (expected value Rs. 3200) or the investor
can choose option B and receive Rs. 3000 with certainty. It shows that 80% chose the option B even
though option A had a greater expected value.

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• Investor loss-averse bias

People gamble to avoid loss

Choice A Choice B

Rs. (4000) Probability 80% Rs. (3000) Probability 100%

Expected value Rs. (3200) Rs. (3000)

popularity 92% 8%

In this example, an investor can choose option A, wherein there is an 80% chance of losing Rs. 4000,
but a 20% chance of experiencing no loss (expected loss Rs. 3200) or the investor can choose option
B, wherein the investor will incur a Rs. 3000 loss. The result shows that 92% chose option A over the
certain loss even though the expected value of the gamble is actually a larger loss.

• A disproportionate trade-off

It is evident that the losses loom larger than the gains. For most of the investors, the pain of a given
loss significantly exceeds the pleasure of an equivalent gain. In fact, analysis shows that investors
equate losses and gains in a ratio of about 2:1.

• The importance of feelings secure

Loss aversion distorts asset allocation

Investors receiving

Monthly returns Annual returns

Frequency of negative reports 40% 15%

Stock allocation 41% 70%

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If two groups are asked to form a portfolio of two investments, weighting each as they saw fit. The
first group received returns based on monthly outcomes and the second group received returns based
on yearly results, in both cases covering the same time frame. Even though the track record is
identical over the period, because of the frequency of negative reports say 40% with monthly returns
and only 15% with the yearly returns, the amount allocated to stocks by each group differed
significantly.

• The impact of negative returns

Investors receiving

Monthly returns Annual returns

Frequency of negative reports 0% 0%

Stock allocation 72% 72%

In this case when two groups, monthly returns and yearly returns, received data that never included a
negative report, this resulted in identical stock allocations for each group. It is clear that excessive
emphasis on near-term returns will almost surely lead investors to make sub-optimal choices when it
comes to volatile assets.

• Misjudging longevity

Another less than optimal decision is made by investors when they are asked to estimate their life
expectancy. The majority of retiring males think they will live to age 80 or less years.

3. How to overcome the pitfalls of investing

One way to take the emotion out of investing is to invest in diversified portfolios with low-correlation
assets. There are five basic steps to maximize investor returns over the long run.

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The strategy

Step 1: diversify across asset classes

Step 2: blend growth and value styles

Step 3: globalize the portfolio

Step 4: rebalance

Step 5: maximize after-tax returns

Asset allocation Geographic mix Style blend

50% in value appreciation

Bonds (40%) India (70%) 50% in growth

Stock (60%) International (30%) 50% in value appreciation

50% in growth

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BIBLIOGRAPHY

Books & Magazine


BUSINESS OUTLOOK.
BUSINESS INDIA.
BOOKS - THE FINANCIAL MANAGEMENT.
THE PERSONAL FINANCIAL MANAGEMENT.

Websites
www.mutualfundsindia.com
Search engine www.google.com
www.bseindia.com
www.investopedia/aboutus/html

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Questionnaire

1. From the following age group, could you tell me which applies to you?

o a) 18 - 25

o b) 26 -35

o c) 36 - 50

o d) 51 Above

2. Educational qualification of the investor?

o a) Undergraduate

o b) Graduate

o c) Post graduate & above

3. Occupation of the investor?

o a) Government service

o b) Private Service

o c) Entrepreneurs

o d) Others

4. Yearly income of the investor?

o a) Below 120000

o b) 120000 - 300000

o c) 300000 - 500000

o d) 500000 & above

5. Percentage of income the investor invests?

o a) 5% - 10%

o b) 10% - 20%

o c) 20% & above

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6. Most ideal or preferred investment avenues?

o a) Mutual funds

o b) Equity shares

o c) Insurance

o d) Government securities

o e) Real estate

o f) Commodities

7. While investing, which of the following factor or factors would you consider the most?

o a) Liquidity

o b) Low risk

o c) High and regular return

o d) Capital appreciation

8. Which factors from the below induces you to invest in a particular investment avenues?

o a) Tips

o b) News

o c) Research report

o d) Personal homework

9. Risk appetite of the investor?

o a) High risk

o b) Medium risk

o c) Low risk

o d) No risk/safe investment

10. Which pattern from the below would suit your pattern of investing or trading?

o a) Repeatedly invest in same set of stocks

o b) Invest in variety of stocks

o c) Depends on other factors

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11. While investing what are your investment objectives from mentioned below?

o a) To receive regular income

o b) To plan for future commitment

o c) To have safe retirement period

12. According to you, which is the preferred portfolio of investment?

o a) Equity

o b) Debt

o c) Balanced

13. According to you, what would you prefer from the mentioned below options during bear market
situation?

o a) To take advice from professionals

o b) To withdraw

o c) To wait till market recover

o d) To invest

14. In what kind of stocks do you trade or invest in?

o a) Large Caps

o b) Mid Caps

o c) Small Caps

o d) Depends

15. Are you a panic buyer or seller while investing or trading in a stock?

o a) Yes

o b) No

o c) Depends on Stocks

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