1 INTRODUCE THE RESEARCH TOPIC Investment is the need of the day, every person who is earning wants to invest and safeguard him against uncertainties in the future. There are various modes of investments available and selecting the right investment to meet ones requirement is an art. As any investment comes with returns clubbed with a pot full of risk, one needs to be prudent while investing. Investment is the need of the day, every person who is earning wants to invest and safeguard him against uncertainties in the future. There are various modes of investments available and selecting the right investment to meet ones requirement is an art. As any investment comes with returns clubbed with a pot full of risk, one needs to be prudent while investing.




Analyzing Investment Pattern & Designing Portfolios for Bank Employees
“In life, nothing is permanent but change.” Cash, there today may disappear tomorrow. To avoid crisis in the future, people save and invest. The term “Savings” has created confusion in the minds of the people, as to what it means. The general norm that people have about savings is “the amount which is left over after meeting the monthly expenditure in the savings account is savings.” But in reality it is not the actual definition of savings. “Savings is that part of income which will be kept untouched even after meeting for all the unforeseen expenditure.” Investment comes into picture after the savings are made. It is really important to know when to invest, where to invest and how much to invest; the reason being every investment made has a certain amount of returns attached to it, which is complimented with an equal proportion of risk. Thus, investing into one mode of investment would prove risky and to avoid this risk the investor would rather choose a collection of investment modes that can help him in hedging this risk. Risk in terms of minimum assured returns, capital appreciation and abnormal profits. Such a collection of investment pattern is called ‘PORTFOLIO’. Understanding the difference between savings and investments: Savings alone will not help in attaining profits and increasing ones holdings as savings give only liquidity but no appreciation. To get the benefit on the savings made one need to invest. Investment therefore means assured regular minimum returns and capital appreciation.


For instance, Mr. A has made a savings of Rs. 10’ 000/- and he keeps it safely in his locker. Such an act will not give him any benefit on the savings he has made. Even after one year his holding will remain as Rs. 10’ 000/- only. On the other hand Mr. B has made an equal amount of savings and he has deposited it into his savings bank account which provides him with 3.5% interest per annum. After one year, his holdings will give him a return of Rs. 350/-, which would make his total holding after one year as Rs. 10’ 350/-. Thus, it is clear that Mr. B has made an earning of Rs. 350/- against his savings. Above all he has not faced any serious risk about loosing his investment. With the above example it is clear that to get an appreciation on ones savings one need to invest. Investment is thus, getting a regular return with capital appreciation with minimum possible risk. A step ahead one needs to find out the best mode of investment that will maximize his returns and appreciate his capital optimally. One can see the need of portfolio creation. As one needs to evaluate the degree of risk involved with each investment and analyze the investors’ capability to take risk. If both suit each other he can look forward to invest into that portfolio.




There have been a large number of studies made in the field of investment and creation of portfolios. All the studies made are in reference with income levels in general. Income levels even though same but the field of work and the life style of a particular segment differ from others, which in turn affects the saving and investment priorities. Employees of banking sectors are a segment which comprises all sorts of income groups. But the investment pattern of this segment has a uniqueness which is needed to be studied and find the investment priorities of this segment. Based on their investment pattern one needs to create portfolios that will cater to the need and encourage this segment to look forward for more investments. Thus it is really necessary to understand each segment separately.




Money is said to be the dirt of the hands which comes and disappears and if one don’t save it for tomorrow he will be left helpless at the time of emergency. Thus, every one should save and invest in order to gain profits. But as it is known no investment comes without a minimum risk and to avoid that risk one need to understand the market and invest accordingly. Everyone is not aware about the market and the risks involved. Thus they look forward to those people who are versed with this art of analyzing the market, risk and return. These people help the individuals to create a portfolio depending on the risk taking capabilities of these individuals. Portfolio is the combination of various investment alternatives and it is imperative to learn the various investment modes available individually. To understand portfolio better it will be really essential to understand the working of the mutual funds as they also follow the same principles that are required to create a portfolio. Thus, it is essential to have a deep insight of the mutual funds to get better familiarity with the portfolio creation and the different modes of investment available for the same.




Portfolio creation is the activity that not every individual can perform. Every individual has their own preferences in creating and selecting the portfolio. Invariably the selection of appropriate portfolio depends upon the risk and return involved in each portfolio. The sole objective of any investor is to maximize the returns with given market risk. Here an attempt has been made in order to assist the employees of banking institutions in creating appropriate portfolio.

2.2 REVIEW OF LITERATURE The purpose of review of literature is to understand each and every element that is involved in analyzing the investment pattern and designing portfolio for employees in banking institution. The literature gives an insight that will help to know not only the portfolio creation but also to understand the key role that risk and return plays in the economy and how each individual is affected by the risk and return factors. METHODOLOGY The data collected includes both primary data and secondary data. In this competitive world it is necessary to go forward for the primary data collection as there is a powerful element of choice available to the respondents and each respondent will have his/ her own reasons for the choice he/ she makes. At the same time the secondary data plays and important role as it is needed to support the findings and the theories that are used to reach a particular


conclusion, thus, secondary sources being text books by various authors and collection of dynamic data through the websites and search engine.

BENEFITS OF REVIEW OF LITERATURE As the study is being formulated on a particular segment it is very much essential to understand the elements that affect this segment and what are the criteria that this segment follows to safeguard their future. Review of Literature helped in understanding the segment preferences and the outlook that this segment has towards investment. At the same time the theory also helped in understanding the concept of portfolio creation. CONCLUSION The review of literature was beneficial for the successful completion of the project work and to carry out the survey in the right direction. The literature review updates the knowledge of the researcher on portfolio creation techniques and the need of the individual. It benefited in the learning of the profile of the respondents and their preferences.


2.3 OBJECTIVE OF THE STUDY • • • • • To analyze the income levels of the bank employees. To analyze the investment preferences of the bank employees To analyze the savings and investment potential of the. bank employees To analyze the risk and return preferences of the bank employees To generate a portfolio for the preferences of the bank employees

2.4 SCOPE OF STUDY The main focus of this study is to assess the bank employees in terms of their savings and investment potentiality and then identifying the sector or areas of investment for them. Thus, understanding of this segment and understanding of the market scenario that caters to the need of this segment is what research tries to do. The scope of the study was limited to some of the banks as they were situated close by and the number of respondents also on the availability of free time interest.

2.5 RESEARCH METHODOLOGY Research means defining, redefining problem, formulating hypothesis or suggested solution, collecting, organizing and evaluating data, making


deductions and reading conclusions to determine whether they fit the formulating hypothesis.” It is a way to systematic solution of the research problem. The researcher needs to understand the assumption underlying various techniques and procedures that will be applicable to certain problem. This means that it is necessary for the researcher to design its methodology. There are various factors such as the personal factors as well as the market factors that motivate a person to save and invest. Thus, the questionnaire will be directed towards the respondents to give the feed back about their savings interest and the various investment opportunities they are aware about and it also give respondents to rethink about their investment criteria and upgrade it to maximize their returns.

2.6 SAMPLING All items under study in any field of survey is known as a universe or population. A complete enumeration of all items in the population is census enquiry, which is not practically possible. Thus sample design is done which basically refers to the definition plan defined by any data collection for obtaining a sample from a given population. Sampling Technique This study is purposive in nature as the research is concentrating on the various issues that are related to this particular segment. Research is not trying to reach a conclusion by making any assumption and findings are based on the responses of the respondents that enriches our database with a focus on the creation of certain portfolios for this segment.


Convenient Sampling approach is adopted here. This is due to the fact that the respondents were available only at the banks and only at the duty time, to get the clear idea of their approach the nearest banks were selected and the study was made.

SAMPLING UNIT The population selected was of employees consisting of both males and females of different age groups, holding different qualifications. SAMPLING SIZE The sample size will consist of 50 respondents of various banking institutions. The sample size was drawn using convenience sampling method. SAMPLE DESIGN Sample design or sample procedure refers to a definite plan followed for the collection of sample from a given population. The process followed was, firstly a questionnaire was prepared with the objective in mind. The respondent from various banking institutions were determined. The second step includes convenience sampling whereby the selected population was considered and the questionnaire was administered. INSTRUMENTS An open-ended questionnaire will be administered supported by a personal interview to draw detailed explanations on the investment pattern. The instrument used to collect the data from primary source is structured questionnaires which consist of number of questions printed in a systematic form. Information was


collected from faculties of various institutions.



In dealing with real life problems it is often found that data at hand are inadequate, and hence, it becomes necessary to collect data that are appropriate. The data can be of two types- Primary data and Secondary data. In this study the Primary data is collected by means of personnel interview with the help of questionnaires which is designed in such a manner that the employees of all streams can use it easily. The secondary data are those data which already exist. This data is also an important input for the study, and in this case the secondary data is collected from various records, magazines, text books, and the internet .

2.8 LIMITATIONS OF THE STUDY  Only a percentage of total employees in each bank could be interviewed but the analysis is generalized.  Some of the employees were reluctant to disclose their financial data and the personal details.  The findings and conclusions drawn out of the study will reflect only existing trends in the sector.  The accuracy and authenticity of the observations made and conclusions drawn largely depend upon the corresponding accuracy and authenticity of the information supplied by the respondents at large. The respondents being employees, who are basically very busy people, most of them were in hurry during the survey. So some errors may have occurred in filling of the questionnaires.


2.9 PLAN OF THE ANALYSIS The data collected through questionnaire and the secondary data available was examined in detail; it was further classified and tabulated for the purpose of analysis to generalize percentages. Based upon the information and objectives of the study, conclusions were drawn, suggestions and recommendations are made which can be used in providing appropriate training and development programs. Graphs and Charts have been used wherever necessary. The tabulated data is being graphically represented for the better analysis.



3.1 INDUSTRY PROFILE Portfolio is the art of combining various alternative investment modes, available in the market. But to reach a conclusion regarding the selection of these modes one need to understand various factors terminology involved in it. Thus, to understand the procedure of portfolio construction one needs to understand the procedure that a mutual fund follows. As both the sector perform the same operations understanding of one would enlighten the working of the other. Working of Mutual Funds These days’ people hear more and more about mutual funds as a means of investment. Most people have most of their money in a bank savings account and their biggest investment may be a home. Apart from that, investing is probably something common people simply do not have the time or knowledge to get involved in. They are really large in number. This is why investing through mutual funds has become such a popular way of investing. Definition of Mutual Fund A mutual fund is a pool of money from numerous investors who wish to save or make money. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on their own. Investors can sell their shares when they want. Professional Management:


Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those.

Fund Ownership: As an investor, people own shares of the mutual fund, not the individual securities. Mutual funds permit them to invest small amounts of money, however much investors would like, but even so, they can benefit from being involved in a large pool of cash invested by other people. All shareholders share in the fund's gains and losses on an equal basis, proportionately to the amount they've invested. Mutual Funds are Diversified: By investing in mutual funds, investors could diversify their portfolio across a large number of securities so as to minimize risk. By spreading their money over numerous securities, which is what a mutual fund does, people need not worry about the fluctuation of the individual securities in the fund's portfolio. Chooses to invest in stable, well established, mutual fund objectives: There are many different types of mutual funds, each with its own set of goals. The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio. For example, an objective of a growth stock fund might be: This fund invests primarily in the equity markets with the objective of providing long-term capital appreciation towards meeting their long-term financial needs such as retirement or a child's education.


Depending on investment objectives, funds can be broadly classified in the following 5 types:

Aggressive growth means that people will be buying into stocks which have a chance for dramatic growth and may gain value rapidly. This type of investing carries a high element of risk with it since stocks with dramatic price appreciation potential often lose value quickly during downturns in the economy. It is a great option for investors who do not need their money within the next five years, but have a more long-term perspective. Should not choose this option when people are looking to conserve capital but rather when they can afford to potentially lose the value of their investment.

As with aggressive growth, growth seeks to achieve high returns; however, the portfolios will consist of a mixture of large-, medium- and small-sized companies. The fund portfolio blue-chip companies together with a small portion in small and new businesses. The fund manager will pick, growth stocks which will use their profits grow, rather than to pay out dividends. It is a medium - long-term commitment, however, looking at past figures, sticking to growth funds for the long-term will almost always benefit the investor. They will be relatively volatile over the years so they need to be able to assume some risk and be patient.

A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income while still keeping ahead of inflation. They are able to achieve multiple objectives which may be exactly what we are looking for. Equities provide the growth potential, while the exposure to fixed income securities provides stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate


potential for current income and growth. Investor need to be able to assume some risk to be comfortable with this type of fund objective.

Income funds. These funds will generally invest in a number of fixedincome securities. This will provide investor with regular income. Retired investors could benefit from this type of fund because they would receive regular dividends. The fund manager will choose to buy debentures, company fixed deposits etc. in order to provide investor with a steady income. Even though this is a stable option, it does not go without some risk. As interest-rates go up or down, the prices of income fund shares, particularly bonds will move in the opposite direction. This makes income funds interest rate sensitive. Some conservative bond funds may not even be able to maintain our investments' buying power due to inflation.

The most cautious investor should opt for the money market mutual fund which aims at maintaining capital preservation. The word preservation already indicates that gains will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits. These funds will pose very little risk but will also not protect investor’s initial investments' buying power. Inflation will eat up the buying power over the years when their money is not keeping up with inflation rates. They are, however, highly liquid so investor would always be able to alter their investment strategy.

Closed-End Funds: A closed-end fund has a fixed number of shares outstanding and operates for a fixed duration (generally ranging from 3 to 15 years). The fund would be open for subscription only during a specified period and there is an even balance of buyers and sellers, so someone would have to be selling in order for an investor to be able to buy it. Closed-end funds are also listed on the stock exchange so it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units.


Open-End Funds: An open-end fund is one that is available for subscription all through the year and is not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value.

Getting Started Start with investor’s financial needs: People have different investment needs depending on their financial goals, tolerance for risk and time frame—when they need the money they invested. Mutual funds are created with these needs in mind-it start with investor. Before choosing investments, think about financial goals, risk tolerance and time frame of the investor. Then choose investments that match them. The investment pyramid: There is a wide variety of mutual fund options to meet the equally wide variety of investment needs of investors. The investment pyramid below shows fund categories that are suitable for different time frames, with the longest time frames at the top and the shortest at the base of the pyramid.


Figure No 3.1

Investment experts recommend growth investments such as stocks and stock funds for long-term goals, where investors won’t need to sell their investment for 5 years or more. For short-term goals, where investor might sell their investment in 1 year or less, they recommend fixed income funds and other liquid 18

investments. Of course, their specific recommendations will depend on investors comfort with risk. Benefits of mutual funds: Stocks, bonds, money market instruments-as an investor, one have a wide variety of choices, and it would be difficult to find one type of investment vehicle that effectively takes advantage of all of to day investment options. That's why an investor may want to consider diversifying his portfolio over a variety of investment vehicles as mutual funds do for them. In addition to providing investors with the flexibility to create an investment plan based on their individual goals, mutual funds offer many other advantages such as professional management, affordability and diversification. Advantages of Mutual Fund: As an investor, one would like to get maximum returns on his/ her investments, but may not have the time to continuously study the stock market to keep track of them. Investors need a lot of time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don t. This is where mutual funds come in. Mutual funds offer investors the following advantages: Professional management: Qualified professionals manage investor’s money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to their investment. Fund managers are in a better position to manage their investments and get higher returns. Diversification: Diversification lowers investors’ risk of loss by spreading their money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector


funds spread the investment across only one industry so they are less diversified and therefore generally more volatile. More choice: Mutual funds offer a variety of schemes that will suit investor’s needs over a lifetime. When investor enter a new stage in his/ her life, all they need to do is sit down with their financial advisor who will help them to rearrange their portfolio to suit their altered lifestyle. Affordability: As a small investor, one may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. Investors can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis. Tax benefits: Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation. Liquidity: With open-end funds, investor can redeem all or part of his/ her investment any time he/ she wishes and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardized, making it quick and efficient so that investor can get his/ her cash in hand as soon as possible. Rupee-cost averaging: With rupee-cost averaging, investors invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, their money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows investor to discipline themselves by investing every month or quarter rather than making sporadic investments. 20

The Transparency: The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unit holder, investors are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy. Regulations: All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI. Equity Funds: Chances are that investor has at least one long-term goal. Whether it's saving for retirement or starting ones own business, equity funds may help them reach their financial goals. The mutual fund concept is simple: A number of people who share the same financial objective pool their money and have it invested and managed by professional portfolio managers. Equity funds invest this pooled money primarily in common stocks of public companies generally with long-term capital appreciation as a goal. A fund's risk and return depend on the types of companies it buys. The investor's risk and return are also affected by how long they keep their money invested in the fund. Investor stand the best chance of reaping the rewards of stocks if they keep their money invested for a long time. Types of Equity Funds: One fund may invest in only the stocks of wellestablished companies while others concentrate their investments in companies in one specific industry. Some examples:


Growth funds: These funds invest in rapidly growing companies which tend to use their profits to finance future growth instead of paying them out as dividends. Balanced funds: These funds invest in blue chip stocks-large, established companies with long histories of steady growth and reliable dividends. The income from the dividends can help reduce the fund's volatility over the long term. Sector funds: These funds concentrate their investments in a particular market sector or industry such as health care, communications or biotechnology. Because of their specific focus and lack of diversification, sector funds are generally best used as a complement to a well-diversified portfolio. Global funds: The ability to invest anywhere in the world is the biggest advantage global equity funds offer because they have the greatest number of stocks to choose from. Investing globally, however may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests. Investment Styles: Another dimension for looking at an equity fund is whether it's following a value or growth style of investing. Both growth- and value-oriented investments can be important components of a diversified portfolio. Value investing: Value managers tend to look for companies trading below their intrinsic value, but whose true worth they believe will eventually be recognized. These securities typically have low prices relative to earnings or book value, and often have a higher dividend yield. For example, these companies are found in out-of-favor industries. Growth investing: Growth managers look for companies with above-average earnings, growth and profits which they believe will be even more valuable in the future. They also look for companies that are well position to capitalize on longterm growth trends that may drive earnings higher. Because these companies


tend to grow earnings at a fast pace, they typically have higher prices relative to earnings. A Word about Risk: Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate in value more dramatically over the short term. These and other risks are discussed in each fund's prospectus. Advantages of Equity Funds Diversification: Equity mutual funds allow investors to spread their money across a larger number of securities than they probably could on their own. This diversification dramatically reduces the risk of anyone company s losses adversely affecting their investment as a whole. Professional Management: Professional money managers closely monitor the securities markets and individual companies, buying and selling securities as they see opportunities arise. Few individual investors can devote time or resources to daily management of a sizable portfolio or stay up to date on the thousands of securities available in the financial markets. Liquidity: Investors may sell some or all of their mutual fund shares at any time and receive their current value (net asset value). The value may be more or less than their original cost. Convenience: Mutual funds offer shareholders many services that make investing easier. Investor may buy or sell shares each business day, automatically add to or withdraw from their account each month, and have income dividends and capital gains paid out to them or automatically reinvested. Income Funds: Income funds invest their pool of money primarily in individual bonds which is why they are sometimes call bond funds. Income funds make loans to corporations and governments by investing in their bonds and other interest-


earning securities. In return, the corporations and governments pay interest to the fund. These funds are interest-rate sensitive, meaning that if interest rates fall, and the value of income fund shares may raise and if interest rates are rising, the value of a bond fund share may fall. Many bonds in which mutual funds invest have no guarantees but they have traditionally provided higher current income than other fixed-income alternatives such as money market funds and certificates of deposit. Portfolio managers constantly monitor the securities within the fund, buying and selling bonds to maintain or improve the fund's share value as they seek to achieve the best return that market conditions will allow. The share price of all mutual funds is calculated daily by dividing the total value of the securities held by the fund by the number of shares outstanding. Maturity: Maturities are the length of time in which a bond must be paid. Bonds can have short, intermediate or long-term maturities. Short-term bonds mature in less than 2 years, intermediate-term bonds mature in 2 to 10 years, and longterm bonds have maturities of 10 to 30 years. Generally, bonds with longer maturities pay higher interest rates to compensate investors for greater interest-rate risk. Longer-term bonds are more sensitive to interest rate movements than bonds with shorter maturities, causing longermaturity investments to experience a greater degree of price volatility. A bond fund's share price generally tends to fluctuate less than the price of an individual bond, however, due to the wide variety of maturities and individual characteristics of various bonds within a fund's portfolio. Bond Prices: Investors are often concerned about the fluctuation of their bond fund's share price. Because of changes in the market price of the bonds held the value of the bonds in a fund's portfolio changes daily.


The value of these bonds changes for a variety of reasons, primarily in response to the movement of interest rates. Bond prices and interest rates generally have an inverse relationship, moving up and down like a see-saw. When interest rates go down, the prices of bonds generally go up, and vice versa. For example, an Rs.1’000 bond with a fixed annual rate of 7% and current interest rates fell to 5%, the 7% bond becomes more attractive to other investors, thus increasing its resale value. However, if current interest rates climb to 10%, the bond would be less attractive, causing its value to fall. The prices of bonds are also affected by their credit quality and availability in the market. If there is an abundance of bonds paying a certain interest rate, demand may not meet supply, thus lowering prices. The reverse is also generally true. For example, as interest rates decline, people tend to look to corporate bonds for higher yields. Such increased demand can lead to increased prices in the corporate bond sector. The price of a given bond also depends on its credit quality, which may change. However, despite the rating that bonds are assigned by the rating agencies, their value is continually changing. If a corporation with questionable credit strength restructures, the value of any outstanding bonds may increase. Advantages of Income Funds:

Diversification. Income funds allow investors to spread their principal across a large number of securities, thus cushioning the effect that one bond can have on overall investment results. As market and economic conditions change, the portfolio managers can make adjustments in an attempt to meet the fund's stated objectives.

Active management. Experienced portfolio managers closely monitor a mutual fund, buying and selling securities when necessary. This takes the burden off investors who may not have the time to do in-depth research






Affordability. Bond mutual funds can be purchased with an initial investment which is sometimes as low as Rs.1,000, and subsequent investments are as low as Rs.250. Individual bonds usually require a minimum investment of Rs. 5,000 and sometimes more, depending on the type of bond.

Monthly income. For investors seeking a steady stream of income, bond mutual funds generally pay monthly dividends, whereas most individual bonds pay semi-annually. Interest payments from an individual bond are fixed; monthly dividends from a mutual fund will fluctuate with market conditions. A mutual fund pays fees to its manager, which does not apply to holders of individual bonds.

Easy access to ones money. Mutual funds allow investors to redeem shares at any time-at the current net asset value.

No maturity date. Individual bonds eventually mature, leaving the investor with a lump-sum that must then be reinvested-possibly at a lower interest rate. Bond funds never mature-portfolio managers constantly roll the proceeds from maturing securities into new bonds. However, the share prices of mutual funds fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Owners of individual bonds are generally paid their principal investment at maturity.

What are Money Markets and money market instruments? Money markets allow banks to manage their liquidity as well as provide the central bank means to conduct monetary policy. Money markets are markets for debt instruments with a maturity up to one year.


The most active part of the money market is the call money market (i.e. market for overnight and term money between banks and institutions) and the market for repo transactions. The former is in the form of loans and the latter are sale and buyback agreements - both are obviously not traded. The main traded instruments are commercial papers (CPs), certificates of deposit (CDs) and treasury bills (T-Bills). Commercial Paper: A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India corporate, primary dealers (PD), satellite dealers (SD) and financial institutions (FIs) can issue these notes. It is generally companies with very good ratings which are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular duration is 90 days. Companies use CPs to save interest costs. Certificates of Deposit: These are issued by banks in denominations of Rs.5 lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year. Treasury Bills: Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India treasury bills are issued in four different maturities—14 days, 90 days, 182 days and 364 days. Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate debentures, bills of exchange and promissory notes. Debt market instruments


Debt instruments typically have maturities of more than one year. The main types are government securities called G-secs or Gilts. Like T-bills, Gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years. Like T-Bills, Gilts are issued through auctions but RBI can sell/buy securities in its Open Market Operations (OMO). OMOs cover repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels: - Other types of government securities include:
• • •

Inflation-linked bonds Zero-coupon bonds State government securities (state loans)

What is the difference between bonds and debentures? A debenture is a debt security issued by a corporation that is not secured by specific assets, but rather by the general credit of the corporation. Stated assets secure a corporate bond, unlike a debenture, but in India these are used interchangeably. Bonds are IOUs between a borrower and a lender. The borrowers include public financial institutions and corporations. The lender is the bond fund or an investor when an individual buys a bond. In return for the loan, the issuer of the bond agrees to pay a specified rate of interest over a specified period of time. Typically bonds are issued by PSUs, public financial institutions and corporate. Another distinction is SLR (Statutory liquidity ratio) and non-SLR bonds. SLR bonds are those bonds which are approved securities by RBI which fall under the 28





Statutory Liquidity Ratio (SLR): It is the percentage of its total deposits a bank has to keep in approved securities

What affects bond prices? Bond prices are primarily affected by 2 factors:

The current interest rate. The price of a bond, and therefore the value of ones investment fluctuate with changes in interest rates. For example, investor buys a bond for Rs.1, 000 that pays 5% interest. If he/ she held’s the bond until maturity, he/ she will get his/ her Rs.1, 000 back plus the 5% interest payments the investor have received from the issuer. However, between the time investor bought the bond and the date it matures, the bond won't always be worth Rs.1, 000. If interest rates rise, investors bond is worth less than Rs.1, 000. If interest rates fall, investors bond is worth more than Rs.1,000.

The credit quality of the issuer. If the rating agencies change the credit rating of the issuer while investor holds the bond, the value of their bond will be affected. If the credit rating declines, the value of their bond will also decline. However, if investor holds the bond to maturity and the issuer doesn't default, investor will get his/ her entire Rs.1,000 back.

When the bonds are initially priced, the maturity also helps determine the price. Longer maturities tend to pay higher interest rates than shorter maturities. That's because investor’s investment is exposed to interestrate risk for a longer period of time.






The factors affecting interest rates are largely macro-economic in nature:

Demand/supply of money. When economic growth is high, demand for money increases, pushing the interest rates up and vice versa.

Government borrowing and fiscal deficit. Since the government is the biggest borrower in the debt market, the level of borrowing also determines the interest rates. On the other hand, supply of money is controlled by the central bank by either printing more notes or through its Open Market Operations (OMO).

RBI. RBI can change the key rates (CRR, SLR and bank rates) depending on the state of the economy or to combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates and the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determine the availability of credit & the level of money supply in the economy. CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets and SLR is the percentage of its total deposits a bank has to keep in approved securities. The purpose of CRR and SLR is to keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, it increases the money available for credit in the system. This eases the pressure on interest rates and these move down. Typically a higher inflation rate means higher interest rates. The interest

rates prevailing in an economy at any point of time are nominal interest rates, i.e., real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease in purchasing power of every rupee earned; therefore the interest rates must include a premium for expected inflation. What is the yield curve?


The relationship between time and yield on securities is called the yield curve. The relationship represents the time value of money-showing that people demand a positive rate of return on the money they are willing to part-with today for a payback into the future. A yield curve can be positive, neutral or flat.

A positive yield curve, which is most natural, is when the yield at the longer end is higher than that at the shorter end of the time axis. This is because people demand higher returns for longer term investments.

A neutral yield curve has a zero slope, i.e. is flat across time. This occurs when people are willing to accept more or less the same returns across maturities.

The negative yield curve (also called an inverted yield curve) occurs when the long-term yield is lower than the short-term yield. It is not often that this happens and has important economic ramifications when it does. It generally represents an impending downturn in the economy, where people are anticipating lower interest rates in the future.

What is yield to maturity? Yield to maturity is the annualized return an investor would get by holding a fixedincome instrument until maturity. It is the composite rate of return of all payouts and coupon. What is the average maturity period? It is a weighted average of the maturities of all the debt instruments in a portfolio.



LIBOR. Stands for the London Inter Bank Offered Rate. This is a very popular benchmark and is issued for US Dollar, GB Pound, Euro, Swiss Franc, Canadian Dollar and the Japanese Yen. The British Bankers Association (BBA) asks 16 banks to contribute the LIBOR for each maturity and for each currency. The BBA weeds out the best four and the worst 4, calculates the average of the remaining 8 and the value is published as LIBOR.

MIBOR. Stands for Mumbai Inter Bank Offered Rate and is closely modeled on the LIBOR. Currently there are 2 calculating agents for the benchmark-Reuters and the National Stock Exchange (NSE). The NSE MIBOR benchmark is the more popular of the two and is based on rates polled by NSE from a representative panel of 31 banks/institutions/primary dealers.

What is a credit rating? Rating organizations evaluate the credit worthiness of an issuer with respect to debt instruments or its general ability to pay back debt over the specified period of time. The rating is given as an alphanumeric code that represents a graded structure or creditworthiness. Typically the highest credit rating is AAA and the lowest is D (for default). Within the same alphabet class, the rating agency might have different grades like A, AA, and AAA and within the same grade AA+, AA- where the "+" denotes better than AA and "-" indicates the opposite. For short-term instruments of less than one year, the rating symbol would be typically "P" (varies depending on the rating



4 rating agencies in India
   


What is the "SO" in a rating? Sometimes, debt instruments are so structured that in case the issuer is unable to meet repayment obligations, another entity steps in to fulfill these obligations. A bond backed by the guarantee of the Government of India may be rated AAA (SO) with the SO standing for structured obligation. How is a currency valued? The floating exchange rate system is a confluence of various demand and supply factors prevalent in an economy such as:

Current account balance. The trade balance is the difference between the value of exports and imports. If India is exporting more than it is importing, it would have a positive trade balance with USA, leading to a higher demand for the home currency. As a result, the demand will translate into appreciation of the currency and vice versa.

Inflation rate. Theoretically, the rate of change in exchange rate is equal to the difference in inflation rates prevailing in the 2 countries. So, whenever, inflation in one country increases relative to the other country, 33




Interest rates. The funds will flow to that economy where the interest rates are higher resulting in more demand for that currency.

Speculation. Another important factor is the speculative and arbitrage activities of big players in the market which determines the direction of a currency. In the event of global turmoil, investors flock towards perceived safe haven currencies like the US dollar resulting in a demand for that currency.

The implications of currency fluctuations on debt markets? Depreciation of a currency affects an economy in 2 ways, which are in a way counter to each other. On the one hand, it makes the exports of a country more competitive, thereby leading to an increase in exports. On the other hand, it decreases the value of a currency relative to other currencies, and hence imports like oil become dearer resulting in higher deficits. Real Effective Exchange Rate (REER) and currency over valuation When RBI says that the rupee is overvalued, they mean that it has been appreciating against other major currencies as they weaken against the dollar, which might impact the competitiveness of India's exports. REER is the change in the external value of the currency in relation to its main trading partners. It is rupee's value on a trade-weighted basis. It takes into account the rupee's value not only in terms of major currencies such as the US dollar, Euro, Yen and Pound Sterling.


The exchange rates versus other major currencies are average weighted by the value of India's trade with the respective countries and are then converted into a single index using a base period which is called the nominal effective exchange rate. But the relative competitiveness of Indian goods increases even when the nominal effective exchange rate remains unchanged when the rate of price increases of the trading partner surpasses that of India's. Taking this into account, prices are adjusted for the nominal effective exchange rate and this rate is called the "real effective exchange rate." Assured Return Schemes: Some investors look for investment options which guarantee them a fixed amount of return year after year because they believe they stand to gain without taking any risk. However, they could be exposing themselves to a much bigger risk - the risk of not keeping ahead of inflation. This is why it may be wise to have an investment portfolio that consists of more than just guaranteed return schemes. Consider Fixed-Income Funds: Fixed-income funds have the potential to earn a rate of interest commensurate with market interest rates. Credit ratings of companies are rapidly changing. Well-diversified incomes funds are able to spread this risk as research analysts are were equipped to track company credit rating changes. Investing through a bond/ fixed income fund does not mean giving up liquidity as is normally required with fixed deposits such as assured returns schemes. For steady and regular income, mutual funds that invest primarily in bonds and other fixed income instruments may be the right addition to ones portfolio. Bonds have traditionally provided higher current income than bank fixed deposits, and they are also considered to be more conservative and less volatile than stocks in general. That is why many investors select fixed income/ bond funds to balance their investment portfolio.


Bear in mind though, that fixed income fund returns and NAV prices can fluctuate with changes in the debt market conditions. Historically, however, fixed income/ bond funds have offered a higher degree of price stability than stock funds. Money Market Funds: Money funds provide investors with current income and are managed to maintain a stable share price. Because of their stability, money funds are often used for cash reserves or money that might be needed right away. Money funds typically invest in short-term, high-quality, fixed-income securities, such as Treasury bills, short-term bank certificates of deposit (CDs), banker's acceptances and commercial paper issued by corporations. The average maturity of a money fund's portfolio must be 90 days or less to help protect against interest rate risk. The income money funds provide is generally determined by short-term interest rates. Choosing Funds: When it comes down to it, the decision to invest in a mutual fund is one that investor have to make on his own. When he/ she try to choose an investment, however, it is a good idea to seek the guidance of a financial advisor who will review its objective to make sure it supports his/ her financial goal. As an investor, individual’s goals are unique, and a financial advisor can help match them with the best funds. However, when investors are choosing funds, to consider how much risk they are comfortable with and when they'll need the money. If they have the time to weather the market's ups and downs, they may want to consider equity investments. Before selecting a mutual fund, it is essential to read the prospectus carefully to learn all about the fund's performance, investment goals, risks, charges and expenses.


Decision-making Factors: Before looking at the mutual funds available to an investor, it may be best to decide the mix of stock, bond, and money market funds they prefer. Some experts believe this is the most important decision in investing. Here are some general points to keep in mind when deciding what their investment strategy should be. Diversify: It is a good idea to spread ones investment among mutual funds that invest in different types of securities. Stocks, bonds, and money market securities work differently. Each offers different advantages and disadvantages. One may also want to diversify within the same class of securities. Diversifying can keep investor from putting all his/ her eggs in one basket and therefore, may increase their returns over a long period of time. Consider the effects of inflation. Since the money investor set aside today may be intended to be used several years down the road, one need to look at inflation. Inflation measures the increase of general prices over time. Conservative investments like money market funds often may be popular because they are managed to keep a steady value. But their return after accounting for the inflation rate can be very low, perhaps even negative. For example, a 4% inflation rate over a period of many years could erase a money market fund's 3% yield over the same period of time. So even though such an investment may give some safety of principal, it may not be able to grow enough in value over the years or even keep up with the rate of inflation. Patience is a virtue. It's no secret—the prices of common stocks can change quite a bit from day to day. Therefore, the part of ones account invested in stock funds would likely fluctuate in value much the same way. If investor don't need his money right away (for at least 5 years), he/ she probably don't need to panic if the stock market declines or he/ she finds that his/ her quarterly statement shows the value of his/ her investment has fallen. In the past, the stock market has regained lost value over time. Although investors are 37

not assured it will do so in the future, try to be patient and allow their stock funds time to recover. Remember the saying, "Buy low, sell high." Switching out of a stock mutual fund when prices are low is usually not the way to make the most of ones investment. Of course, if a fund continues to under-perform over a period of time as well as investors other fund choices, he/ she may want to consider changing funds. Look at investor’s age. Younger investors may be more at ease with stock funds, because they have time to wait out the short-term ups and downs of stock prices. By investing in a stock fund, they might be able to receive high returns over the long-term. On the other hand, people who are closer to retirement may be more interested in protecting their money from possible drops in prices, since they'll need to use it soon. In this case, it may be wise to place a greater percentage of money in bond and/ or money market funds, which may not have such large changes in value. How can investor determine an investment mix appropriate for his/ her age? One way is to subtract investor’s age from 100. The answer they come up with may be a good number to start with in deciding what portion of their total investments to put into stock mutual funds. Risk: When investors are choosing funds, be sure to consider how much risk they are comfortable with and how close they are to retirement. If retirement is around the corner, they may want a portfolio with very little risk. On the other hand, if they are younger, and have the time to weather the market's ups and downs, they may want to choose a more aggressive investment strategy.


Read Fund Documents Investors’ primary source of data concerning the mutual fund will be the prospectus. It is a legal document illustrating the rules and regulations that a mutual fund must follow and contains information on the fund's goal and strategy, risks, performance, financial highlights fees and expenses, and a wide variety of information that investor should know before investing.

Fund's goal and strategy Goals vary from fund to fund, and they're important to understand so investor can decide if they match his/ her personal objectives. Some funds generate income for their shareholders, while others concentrate on capital appreciation. Some focus on a combination of the two, and others are oriented towards tax benefits or preservation of capital. Funds also implement differing strategies to help accomplish their goals. The Goals and Strategies section of a prospectus details the types of securities in which fund managers can invest and how managers analyze them Funds can be limited to domestic investments, focus on a certain country or region, or invest anywhere in the world. In addition, some funds invest only in specific industries or in particular types of companies. Others invest in large-, medium- or small-capitalization companies. The risks As with all investments, each fund, whether domestic, international or sector specific, carries different risks. The Main Risks section of a prospectus explains which ones are associated with the securities in that particular fund, which may help the investors to decide what level of risk they're comfortable having in their investment portfolio. 39

A fund’s performance While historical performance doesn't predict how a fund will do in the future, investor may be interested in how it performed in past market environments. Depending on the age of the fund, a prospectus will provide its 1- 5- and 10-year average annual returns, including a comparison to its benchmark index over the same period.

Financial highlights In this section a prospectus lists 5 years of annual financial information, if a fund is less than 5 years old, provides data since inception. Information includes net asset values at the beginning and end of each year, and details the gains or losses, dividends and distributions that account for any changes. Financial Highlights also show fund asset information such as net assets ratios to average net assets for expenses and net investment income, and portfolio turnover rates. The expenses of a fund Operating a fund entails some costs one should be aware of. The Fees and Expenses section breaks out these costs and who pays them. In addition, an example of fund expenses is provided to help investor compare the cost of investing in one fund versus another. Managing the fund In the Management section, a prospectus gives a brief biography of a fund's managers, including how long they've worked on the fund and their overall industry experience.


Why should one invest in mutual funds? These days between work, family, and friends, most of the people do not have the time to make or monitor personal investment decisions on a regular basis. Mutual funds have qualified professionals who do all this for the investor. This is the reason why, the world over, they have become the most popular means of investing. Mutual funds minimize risk by creating a diversified portfolio while providing the necessary liquidity. Additionally, investor benefit from the convenience of not having to bother with too much paperwork or repeat transactions. It is provider’s belief that investors differ in their investment needs based on their personal financial goals. It is recommended that investor should, at the very beginning, identify their own financial goals, be it planning for a comfortable retired life or children's education. After defining the financial goals, investor need to plan for them in an organized manner and look at investments that help achieve these goals. Mutual funds vary in their investment objectives, thus providing an investor with the flexibility to create an investment plan based on individual financial goals. Investment experts recommend growth investments such as equity funds and stocks as a good choice for funding needs that are five years or more away, income funds to meet medium-term needs and liquid funds for short-term requirements. What is net asset value? Net asset value (NAV) represents the market value of all assets per unit, held by the fund. For an investor, it simply signifies the current value of his or her investment in the fund. The NAVs of all the Templeton Funds are determined at the end of every business day.


The NAV is computed by dividing the fund's net assets by the number of units outstanding on the validation date and is illustrated below: Market value of the fund's investment + Other current assets + Deposits - All Current Liabilities except Unit Capital, Reserves and Profit & Loss Account No. of Units outstanding: Since, the value of the various securities keep changing, the NAV also changes on a daily basis. NAVs are updated daily on our website and are available from any of the Investor Service Centres or one can subscribe to receive daily NAVs through e-mail. In-person purchase or redemption requests received up to 3 p.m on any business day will be priced on the basis of the same day's closing NAV. Requests received after 3 p.m will be treated as having been received on the next business day, and will therefore be priced based on the next business day's NAV. Purchase or redemption requests received by mail will be priced based on the closing NAV of the day on which the request was received. What does an investor get as proof of his/ her holdings? Investor gets an "account statement" which is similar to a bank passbook. The account statement is a non-transferable document which shows details of all purchases and sales, along with the price at which the purchase or sale was made. It will also show the, amount invested and redeemed to date and the number of units held, helping him/ her track his/ her investments. A fresh account statement will be sent to the investor reflecting the updated holdings of the unit holder after every transaction. Under normal circumstances, the account statement will be sent within 3 working days after the date of receipt of the purchase or redemption request at any of the Investor Service Centre. If an applicant so desires, the Asset Management Company can issue a non-


transferable unit certificate to the applicant within 6 weeks of the receipt of request for the Certificate. Can an investor follow his/ her investments in the daily paper? Yes. Most mutual funds and publicly traded stocks are listed in the business section of local newspaper or in financial publications such as the Economic Times. Mutual funds are listed in a separate section and are categorized by the stock exchange on which they trade (e.g. the BSE Sensex).

Will investor have a switching facility between funds? Unitholders will have an option to switch all or part of their investment in one fund to another which is available for investment at that time. The Asset Management Company would currently not charge any fees for such switching. To process a switch, a unit holder must provide clear instructions. Such instructions may be provided by completing a form and lodging it on any business day with any of the Investor Service Centers or the office of the Registrar and Transfer Agent. The form may also be sent by post. An account statement reflecting the new holdings will be sent to the unit holder within 3 days of completion of the transaction. Tax implications for the mutual fund Tax benefit to the Fund. Templeton Mutual Fund is registered with SEBI and as such, the entire income of the Fund is exempt from income-tax under Section 10(23D) of the Act and is entitled to receive income without any deduction of tax at source.


Financial Basics Overview Individual investors are not alone if they feel like they have missed the class in school that taught financial basics. Even long-term investors occasionally want to brush up on the fundamentals. The bedrock concepts covered in this section can provide a sturdy foundation for meeting financial goals. Without a basic understanding of financial concepts, investors will find it difficult to make good investing decisions.

Start with financial goals Before investor chooses investments, he should write down his financial goalsretirement children's education and so forth. For each goal, be sure to consider: • • Risk tolerance Time frame

The more time investor has to reach his goal, the more choices he has. It's much easier to tolerate risk when he has plenty of time to ride out short-term volatility— the ups and downs in the value of his investment. A long time frame means he can choose to go after the higher long-term returns that equities have historically delivered. Another advantage of a long time frame is that the more years an investors money compounds, the less he needs to save to reach his goal. Understanding the investment options While there are hundreds of mutual funds to choose from, they mostly fall into 3 categories. • Equities (also called stocks)


• •

Fixed-income (also called bonds) Cash equivalents (a type of liquid investment such as a MMF.)

The risk of losing money with cash-equivalent investments is low, but so is the long-term return as compared with equities. With equities, the risk of losing money in the short run is much higher, but the potential for higher long-term returns is also there. The best asset mix is a very personal decision. One size definitely doesn't fit all investors. Being a long-term investor, investing solely in cash equivalents could leave the investor open to the risk of inflation. Short-term investors on the other hand, need to be more concerned with the risk posed by volatility. STRATEGIES FOR REDUCING RISK Successful investors use several strategies to reduce their investment risk including: • • • Diversification Asset allocation Rupee-cost averaging

Diversification is a big word that means it's not a good idea to put all your eggs in one basket. It’s not the same as asset allocation which is how one divides his money between stocks, bonds and liquid investments. The best asset allocation will give him the return he needs while not having more risk than he can tolerate. Even though his investment strategy is in place, he might be hesitant to start investing. Maybe the financial markets are ready to tumble. No one wants to invest at the wrong time, but investment professionals will tell that there are no ways to know the perfect time. That's where rupee-cost averaging comes in. It is an automatic investing technique-one put in the same amount at a regular frequency (monthly, for example).


INVESTMENT RISKS At least 10 types of investment risk exist, and there's no way to eliminate all of them. Playing it safe can be risky too, however. So the question isn't whether to take a risk, but what kind to take. Risk tolerance varies from person to person and can change over time with changes in investors personal and financial circumstances. Investor needs to assess his risk profile by evaluating whether he considers himself to be conservative, moderate or aggressive in his approach to investing. Types of investment risk Of the many kinds of investment risk, most investors only worry about one: the risk of losing money. With all the media hype about financial markets and the ease of checking on his/ her returns, it's easy to see why investors can become fixated on market swings. Market risk: Market risk is the risk of losing money when the financial markets go down. When investors think of losing money, they're thinking about volatility. Volatility can be especially uncomfortable when prices fall steeply or remain down for a long time. There are 3 strategies for combating market risk: diversification, asset allocation and rupee-cost averaging. Inflation risk: Inflation is a loss in the value of what a rupee will buy. And the fact that one can't see inflation eroding their principal makes it all the more dangerous. For long-term goals such as retirement or child's college education, biggest risk may be inflation. If the money doesn't grow enough, investors won t be able to stay ahead of inflation. If the investors are conservative and solely select


investments whose primary objective is to preserve rather than grow capital, they are especially at risk. The main strategy for combating inflation risk is to include stocks in ones portfolio, which means accepting some volatility. Growth and volatility go hand in hand—one can't have one without the other. Falling short of ones target for a long-term goal can be worse than living through market ups and downs.

Financial professionals see risk differently Mutual fund managers, on the other hand, look at risk more broadly. To them, risk is more about the factors that contribute to volatility, such as: Business risk: Anything that can harm a company's profitability, from poor management to obsolete products, can be called a business risk. Credit risk: When bond issuers fail to make their promised interest payments or don't repay principal when it comes due, investors are experiencing credit risk. Interest rate risk: Rising interest rates are bad news for fixed-income investments. Interest rate risk measures how sensitive an investment's price is to interest rate fluctuations. Currency risk: The possibility that international investments will suffer because the rupee (or dollar depending on the fund) gains strength against the currencies of other countries is known as currency risk. Country risk: Political instability, financial woes and other problems that weaken a country's economy can spell trouble for money managers who invest there.


Why do people take investment risks? Often called the risk-return tradeoff, investors accept greater investment risk because they are seeking higher returns. If investors wish to reduce risk, they must be willing to accept lower returns. They just can't get a high return from a low-risk investment. How much risk can investor accept? The amount of investment risk one can tolerate is a personal matter. If investment risk worries won't let one get a good night's sleep, he may have taken on more risk than one can live with. An investment advisor can help an investor develop realistic expectations of riskadjusted returns by discussing with him the risks and rewards of each of his investments while matching his goals and objectives with appropriate mutual funds. Mutual funds can help to reduce risk Mutual funds have experienced and skilled professionals who determine and monitor risks on an ongoing basis. In addition, various bodies evaluate mutual fund returns by the risks they carry. Diversification is one of the risk-reducing strategies mentioned above. Mutual funds are an excellent way to diversify ones portfolio. Each fund invests in more companies and industries than one could probably own by oneself. The fund managers carefully research the individual companies and industries before adding them to the fund's holdings. Volatility reflects the daily ups and downs in the value of investments. Much maligned by investors and the media when prices plummet, volatility is welcomed when investment values head upward. Yet, when was the last time one heard anyone use the word "volatile" to describe prices going up? 48

How volatility differs from a roller coaster Volatility is often equated with riding a roller coaster, but there's one key difference. When investors roller coaster ride ends, he is exactly where he started from. Stock values have trended higher over the long term despite steep periodic declines. From a long-term perspective the declines don't look nearly as steep as they probably felt at the time.

Living with volatility's downside Most people can get reasonably comfortable with volatility by using 4 basic investment strategies: • • • • Focus on the long term Invest regularly Diversify investments Keep in touch with financial advisor

Focus on the long term. One key to living with volatility is focusing on long-term results rather than the daily bumps along the way. This can be especially difficult during prolonged market declines fed by daily injections of bad news. Invest regularly. Also called rupee-cost averaging, an automatic investment program is another strategy for living with volatility's downside and taking advantage of its upside. Investors don't need to worry about the best time to invest when he puts away the same amount every month, but like most investing strategies, it doesn't guarantee a profit or prevent losses and some people find it difficult to continue buying shares through prolonged market slumps.


Diversify investments. None of the asset categories does well all the time, so it can be a good idea to put your eggs in a variety of baskets. If some of the investments are down, others may be up. Keep in touch with financial advisor. The last strategy for putting volatility in perspective may be the most important. Financial advisors are trained to focus on the financial goals, time frame and comfort with volatility of the investor. Why evaluate a fund's volatility? Volatility is how risk manifests itself, so all the common "risk" measurements that are seen below actually gauge how volatile an investment has been in the past not how "risky" it is. It's not enough to evaluate a fund based on performance alone. Financial professionals must also look at its risk-adjusted return, especially for clients with time frames of less than 10 years or those who are very uncomfortable with volatility. That's why advisors also look at common volatility measures such as Rsquared, beta Sharpe ratio and standard deviation. Common measures of volatility R-squared. It is the statistical measure of how closely the portfolio's performance correlates with the performance of a benchmark index. R-squared is a proportion that ranges between 0.00 and 1.00. For example, an R-squared of 1.00 indicates perfect correlation to the benchmark index, while an R-squared of 0.00 indicates no correlation. Therefore, a lower R-squared indicates that fund performance is significantly affected by factors other than the market. Let's take an example: A fund has an R-squared of 1(typically an index fund) with the S&P CNX 500 index. This means that when the index has gone up, so has the fund, and when it has gone down, the fund has too.


A fund which doesn't try to track an index, will have an R-squared less than 1. The behavior of this fund will not match the index. All diversified equity funds have high correlation with their respective benchmark indices, but not perfect correlation. The reason for this is simple-the stocks and their individual weightings in fund portfolios are not identical to their benchmark indexes. All our diversified equity funds have high correlation with their respective benchmark indices, but not perfect correlation. The reason for this is simple—the stocks and their individual weightings in fund portfolios are not identical to their benchmark indexes.

Beta: It is the statistical measure of a portfolio's sensitivity to market movements. For example, a benchmark index such as the BSE Sensex or S&P CNX 500 has a beta of 1.0. A beta of more or less than 1.0 shows that a fund's historical returns have fluctuated more or less than the relevant benchmark. For example, if a fund has a beta of 1.1 and the market index declines 10%, one could expect the security to decline 11% (on average). A fund with a beta less than 1.0 is less volatile than the market, and could be expected to rise and fall at a slower rate. Typically one needs to use beta in conjunction with R-squared for a better understanding of the fund's risk-adjusted performance. The lower the R-squared (which means less correlation between the fund and the benchmark utilized), the less reliable beta is as a measure of volatility. Sharpe Ratio: It is the statistical measure of a portfolio's historic "risk-adjusted" performance and is calculated by dividing a fund's excess return (ones investment's annualized return in excess of the risk-free rate of return availablethe extra return received by assuming some risk) by the standard deviation of


those returns, as a measure of reward per unit of total risk, the higher the ratio, the better. The main drawback of the Sharpe ratio is that it is expressed as a raw number. Consequently, it's difficult for one to evaluate the Sharpe ratio of an individual fund by itself. It is known that the higher the Sharpe ratio the better, but given no other information, we don't know whether a Sharpe ratio of 1.5 is good or bad. Only when one compares one fund's Sharpe ratio with that of another fund (or group of funds) one can get a feel for its risk-adjusted return relative to other investment options.

Standard deviation: It is a statistical measure of the historic volatility of a portfolio. It measures the dispersion of a fund's periodic returns (often based on 36 months of monthly returns), the wider the dispersions, the larger the standard deviation and the higher the risk. For example: Fund ‘A’ posts annual returns of 8%, 10%, and 12%. Over the 3 years, it earns an average annual return of 10%, with a standard deviation of 1.63. Fund ‘B’ returns 1%, 9%, and 20%. It, too, earns an average return of 10%, but its standard deviation is 7.79. Thus it is known that Fund ‘B’ has been more volatile than Fund ‘A’. Standard deviation, like the other measures, cannot be used in isolation, one need to check the standard deviations of other funds to get a better picture of the fund's relative volatility. A problem with standard deviation is that it rewards consistency above all else and hence, even if a fund loses money but does it so very consistently it can have a very low standard deviation. 52

Given the investment objective of a diversified equity funds, Bluechip Fund is the least volatile as it invests in large-cap stocks that tend to be less volatile. Prima Fund, which invests in mid-cap and turnaround stocks, has high volatility given that such stocks are more sensitive to market sentiments and speculation. Conclusion All risk measures have limitations. First, they are based on past performance. Second, no single measure paints a complete picture of risk. Investors should also consider qualitative risk factors such as investment style and portfolio concentration. Keeping in mind that investing is not solely about numbers. Nor is it about "avoiding" risk. These measures are intended to help one understand risk. Diversification Simply put, diversification means choosing several baskets for ones investment eggs. Sure, one could hit it big during good times by investing solely in one stock or sector. But this strategy can be devastating if the market crashes and leaves one with a basket of broken eggs. Diversification is a little like buying insurance. By investing in multiple asset categories-stocks, bonds, cash and real estate to name a few – investor is less likely to get hurt if one fares poorly. Different ways to diversify Investor can diversify within an asset category, across asset categories and investment styles, and globally.


Diversifying within an asset category: By diversifying, one can reduce the impact on his investments when a specific security does poorly. Investor could do this by purchasing many bonds, for example, instead of one or two. Investor is not really diversified, however, if all those bonds have short maturities. Diversification means owning different types of bonds-long term, short term, government, corporate and possibly high yield. Diversifying among asset categories: Diversifying can also reduce the risk that an entire asset category, such as stocks, will do poorly for an extended period of time. One can select investments from several asset categories-stocks, bonds, cash and real estate. For example: Diversifying across investment styles. Value and growth stocks do not usually move in tandem. In one year, one style typically outperforms the other. It's somewhat like shopping, sometimes there's nothing better than a bargain and other times it's better to spend a little more for something special. Growth stocks tend to be more volatile than value stocks and are associated with higher levels of risk and return. Diversifying globally: Another advantage of diversifying is that investors reduce the risk that local financial markets will suffer an extended bear market. While global investing includes some additional risks, such as currency fluctuations and political uncertainty, diversifying globally can help offset overall portfolio volatility.


Mutual funds-the easiest way to diversify Many people simply don't have enough money to invest in a broad array of individual stocks, bonds and other assets, much less the time and energy to research and monitor them. For these investors, mutual funds may represent the most sensible option. Mutual funds are, by definition, diversified. A single fund can hold securities from hundreds of issuers. Funds are professionally managed providing an easy and cost-effective way to invest within asset categories, across asset categories and investment styles, and globally. Asset Allocation Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain time is very difficult, it can make sense to divide ones investments among asset categories. Understanding this strategy can be a key to investment success. What is Asset Allocation? Asset allocation means diversifying investor’s money among different types of investment categories, such as stocks, bonds and cash. The goal is to help reduce risk and enhance returns. This strategy can work because different categories behave differently, Stocks, for instance, offer potential for both growth and income, while bonds typically offer stability and income. The benefits of different asset categories can be combined into a portfolio with a level of risk one find acceptable. Establishing a well-diversified portfolio may allow one to avoid the risks associated with putting all your eggs in one basket.


What allocation is right for an individual investor? Asset allocation decisions involve tradeoffs among 3 important variables:
• • •

Time frame Risk tolerance Personal Circumstances

Depending on investor’s age, lifestyle and family commitments, their financial goals will vary. One needs to define his investment objectives—buying a house, financing a wedding, paying for ones children's education or retirement. Besides defining his objectives, one also needs to consider the amount of risk one can tolerate. For example, when one retires and are no longer receiving a paycheck, he/ she might want to emphasize bonds and cash for income and stability. On the other hand, if one won't need his money for 25 years and are comfortable with the ups and downs of the stock market, a financial advisor might recommend an asset allocation of 100% stocks.


SAMPLE ASSET ALLOCATIONS Here are examples of 3 model portfolios that can give a sense of how to approach selecting an own asset mix. When reviewing the sample portfolios, consider risk tolerance and other assets, income and investments.

Figure No 3.2

Aggressive portfolio: This portfolio emphasizes growth, suggesting 65% in stocks or equity funds, 25% in bonds of fixed-income funds and 10% in short-term money market funds or cash equivalents. Investment experts recommend this portfolio for people who have a long investment time frame. The portfolio provides for short-term emergencies and a mid-term goal such as building a home, but otherwise assumes the investor has long-term goals such as retirement in mind.


Figure No 3.3

Moderate portfolio: The portfolio seeks to balance growth and stability. It recommends 50% in stocks or equity funds, 30% in bonds or fixed-income funds and 20% in short-term money market funds or cash equivalents. This portfolio would seek to provide regular income with moderate protection against inflation. The equity component provides the potential for growth, whereas the component in bonds and short-term instruments helps balance out fluctuations in the stock market.


Figure No 3.4

Conservative portfolio: This portfolio suggests 25% in stocks or equity funds, 50% in bonds or fixedincome funds, and 25% in money market funds or cash equivalents. This portfolio appeals to people who are very risks averse or who are retired. The 25% equity component is intended to help investors stay ahead of inflation. Asset allocation plans change with time While an asset allocation plan eliminates a lot of the day-to-day decisions involved in investing, it doesn't mean that an investor should just "set it and forget it." Reviewing the portfolio regularly with financial advisor to monitor and rebalance asset allocation can help make sure to stay on track to meet goals. The savings programs chosen, it's important to review portfolio every 6-12 months to assess progress. Financial advisor can provide with expert help in determining the best way to allocate assets.


Investment Strategy Finding the right investment has become quite a challenge. Investors fall prey to buying the latest top performers and accumulating a few shares of this and that without really considering financial goals, timeframe and tolerance for risk. Whether planning for individual retirement, investing to meet the expenses of child's higher education, or simply building cash reserves, it is important to match financial goals with a mix of assets that may help meet those goals. To build a successful investment strategy one should carefully structure his plan to achieve his goals without taking more risk than one can afford or are comfortable with. One also needs to consider in how much time he have to reach his various goals. What financial goals does an investor want to achieve? The first step is to define financial goals. The choice of investments should always be driven by what investor wants his money to do for him, and when. One may want to invest to fulfill specific needs such as buying a house or a car, paying children's education costs or simply building a comfortable retirement nest egg. Goals may be more general—like building cash reserves or accumulating wealth. Either way, spending time to determine ones financial goals will help one choose the most appropriate investments.

When does an investor hope to reach them? The next step is to identify the approximate time frame within which one wish to achieve the goals he have listed. For example, does investor aim to buy a house in five years, or retire in the next twenty years? Setting time frames for ones goals is critical.


Different time frames require different investment strategies. The sooner is the need to spend the money now invested; the greater is the need to invest for principal stability and liquidity. Conversely, the longer one can leave his money invested, the less he needs to worry about short-term price fluctuations and the more he can focus on earning a high return over time. Risk, return and timing are all related. Generally, the riskier an investment, the higher its potential return over time and the more suitable it is for an investor with a long time frame. How much money will one need to invest to achieve his goals? Investors fail to take into account inflation and taxes. Therefore, it would be advisable to spend some time and take into consideration, the future cost of the goal. Can one achieve his goals with amounts that he have already invested? How much risk can one afford to take? Each and every individual has a personal tolerance for risk and in order to set an investment course that one will be comfortable with—and will not abandon prematurely—one need to think about his willingness to accept fluctuations in the value of his investments. As one assesses his own risk tolerance, he will need to consider how soon he needs to reach every investment goal. Long-term goals allow one to pursue more aggressively and potentially more rewarding strategies because the investment has time to recover from market setbacks. Financial goals that need to be met sooner, rather than later call for lower or moderate risk approaches. Whatever the investment profile may be, one of the best ways to reduce overall risk is to diversify investments.


Does the investor need to rethink his investments periodically? No single asset class (stocks, bonds, or money market instruments) is appropriate for all of ones goals. At any given point in ones life, he will probably want to keep part of his money secure and accessible, part invested for income and part invested for growth. But the proportions will change as he prepare for and achieve successive investment objectives. It is a good idea to review goals and investments once a year, keeping in mind the objectives each time a new investment is made. As circumstances change, so will investing strategy. Start Early The key to building wealth is to start investing early and regularly. Regular investments, however small, can grow into a substantial amount of wealth over the long-term. Most of the investors tend to delay investing till the last moment. But the longer the delay, the more they'll need to put away in order to reach their goal. The Cost of Delaying Sunita, Anil and Sunil begin their careers together at the age of 25 but have different attitudes towards savings. Sunita is a conservative spender and believes in saving. Anil and Sunil believe that with good careers ahead of them it does not really matter when they start saving. Sunita gets into the habit of saving regularly from day one. She successfully saves Rs.10,000 in the first year. She continues saving Rs.10,000 per year for 35 years till her retirement. Anil gets married at the age of 27. With new responsibilities ahead of him, he gets into the habit of saving Rs.10,000 every year and continues saving Rs.10,000 per year for 33 years till his retirement. 62

Sunil is the last one to start saving. He gets married and becomes a father at the age of 30. He, too, realises that he cannot delay his savings decision any more. He gets into the habit of saving Rs.10,000 every year and continues with this for 30 years till his retirement. Sunita began at age 25 and saved Rs.350,000; Anil began at age 27 and saved Rs.330,000 and Sunil began at age 30 and saved Rs.300,000.
Figure No 3.5


It seems quite obvious who saved more and who would have more wealth on their retirement. But consider this. If each of them got a compounded return of 15% per year on their savings, Sunita would have over Rs.1 Crore, Anil approximately Rs.75 lacs and Sunil approximately Rs.49 lacs. It does matter when one start saving… the earlier the better! COMMON INVESTMENT MISTAKES Investing wisely? Knowing about some common investment mistakes can help prevent them from happening to common investors. 1. Investing without a clear plan of action. Many people neglect to take the time to think about their needs and long-term financial goals before investing. Unfortunately, this often results in their falling short of their expectations. One should decide whether one is interested in price stability, growth, or a combination of these. Determine investment goals. Then, depending on timeframe and tolerance for risk, select mutual funds with objectives similar to that. 2. Meddling with ones account too often. One should have a clear understanding of his investments so that he is comfortable with its behaviour. If one keep transferring investments in response to downturns in prices, he may miss the upturns as well. Even in the investment field, the "tortoise" who is more patient, may win over the "hare". While past performance does not necessarily guarantee future performance, ones understanding of the behaviour of various investments over time can help prevent him from becoming short-sighted about his long-term goals.


3. Losing sight of inflation. While one may be aware of the fact that the cost of goods and services is rising, people tend to forget the impact inflation will have on investments in the long-term. One have to keep in mind that inflation will eat into his savings faster than he can imagine. 4. Investing too little too late. People do not "pay themselves first". Most people these days have too many monthly bills to pay, and planning for their future often takes a backseat. Regardless of age or income, if one does not place long-term investing among his top priorities, he may not be able to meet his financial goals. The sooner one starts, the less he has to save every month to reach his financial goals. 5. Putting all your eggs in one basket. When it comes to investing, most of the investors do not appreciate the importance of diversification. While it is known that, one should not "put all his eggs in one basket", investors often do not relate this concept to stocks and bonds. Investors should take the time to discuss the importance of diversifying investments among different asset categories and industries with the financial advisor. When one diversifies, one do not have to rely on the success of just one investment. 6. Investing too conservatively. Because they are fearful of losing money, many people tend to rely heavily on fixed-income investments such as bank fixed deposits and company deposits. By doing this, however, one exposes self to the risk of inflation. Consider diversifying with a combination of investments. Include stock funds, which may be more volatile, but have the potential to produce higher returns over the long term.


Rupee-Cost Averaging Understanding rupee-cost averaging Some investors like to speculate on the right moment to invest. But predicting whether the market is going to move up, down or sideways is difficult even for professionals. With rupee-cost averaging one can opt out of the guessing game of trying to buy low and sell high. With rupee-cost averaging, one invests a specific dollar amount at regular intervals regardless of the investment's share (unit) price. By investing on a regular schedule, one can take advantage of market dips without worrying about when they'll occur. Investors money buys more shares when the price is low and fewer when the price is high, which can mean a lower average cost per share over time. The most important element of rupee-cost averaging is commitment. How frequently one invests (monthly, quarterly or even annually) is less important than sticking to his investment schedule. Does it work when prices are rising and falling? The purpose of rupee-cost averaging is to take the guesswork out of investing by providing one with an average cost per share that's lower over the long term. Examples: to see what average price per share would be when prices are rising and when prices are falling. When unit price is rising: Rs.500 is invested in a mutual fund on the first of each month. The investor is this example would methodically acquire 109.89 units at an average cost of Rs.27.83 each. And there's no guesswork or worry about what the price is about to do.

Rupee-Cost Averaging when Unit Prices Rise: 66

Table No: 3.1

MONTH 01 – JAN 01 – FEB 01 – APR 01 - JUN

AMT. INVESTED Rs. 500/Rs. 500/Rs. 500/Rs. 500/TOTAL: Rs. 3000/-

UNIT PRICE Rs. 22/Rs. 26/Rs. 26/Rs. 28/Rs. 31/Rs. 34/Avg. 27.83/Cost:




PURCHASED 22.73 19.23 19.23 17.86 16.13 14.71 Rs. TOTAL: 109.89

01 – MAR Rs. 500/01 – MAY Rs. 500/-

Source: Secondary Data

When unit price is falling: Rupee-cost averaging in this scenario can reduce loss compared to making a lump-sum investment. Rs.500 is invested in a mutual fund on the first of each month. The investor in this scenario would have bought 98.63 units at an average cost per unit of Rs.30.83. The investment's value at the end of the period would be Rs.2 564.38. By comparison, someone who invested the entire Rs.3 000 in January at Rs.38 per unit would have owned only 78.94 units, and the investment would have been worth only Rs.2 052.44 at the end of the period.

Rupee-Cost Averaging when Unit Prices Fall MONTH 01 – JAN 01 – FEB 01 – MAR 01 – APR 01 – MAY 01 - JUN AMT. INVESTED Rs. 500/Rs. 500/Rs. 500/Rs. 500/Rs. 500/Rs. 500/TOTAL: Rs. 3000/UNIT PRICE Rs. 38/Rs. 31/Rs. 29/Rs. 32/Rs. 29/67 Rs. 26/Avg. Cost: Rs. 30.83/NO. OF UNITS

PURCHASED 13.16 16.13 17.24 15.63 17.24 19.23 TOTAL: 98.63

Table No: 3.2

Source: Secondary Data

Is rupee-cost averaging right for individual investor? Rupee-cost averaging is popular among people who invest in volatile funds. If a fund's share price fluctuates a lot, rupee-cost averaging can help reduce the average cost per share over time when one is investing, and increases his profit when he is systematically withdrawing his money. It's not for everyone but many investors believe this systematic approach to investing and withdrawing is an effective way to accumulate wealth over the long term. Rupee-cost averaging doesn't guarantee a profit or eliminate risk, and it won't protect one from losses if one sells shares at a market low. Before adopting this strategy, one should consider his ability to continue investing through periods of low price levels.

Table No 4.0

Monthly Income Between 5000 - 15000 between 15001 - 25000 between 25001 - 35000 Total
Source: Primary Data

Frequency 35 13 02 50

Percent 70.0 26.0 04.0 100.0

Figure No 4.0


MONTHLY INCOME OF THE RESPONDENTS 40 35 30 25 20 15 10 5 0 Between 5000 15000
Source: Primary Data


Frequency 13

2 between 15001 25000 between 25001 35000

It is clear that 70% of the respondents have monthly income between Rs. 5,000/to Rs. 15,000/- , 26% have monthly income between Rs. 15,000/- to Rs.25,000 and rest 4% more than Rs.25000 .

Table No 4.1

Family Income Between 60000 - 180000 Between 180001 – 300000 Between 300001 – 420000 Between 420001 – 540000 Between 540001 – 660000 Above 660000 Total
Source: Primary Data

Frequency 18 11 09 07 05 00 50

Percent 36.0 22.0 18.0 14.0 10.0 00.0 100.0

Figure No 4.1


FAMILY INCOME OF THE RESPONDENTS 20 18 16 14 12 10 8 6 4 2 0 18

11 9 7 5 Frequency

Between 60000 180000
Source: Primary Data

Between 180001 – 300000

Between 300001 – 420000

Between 420001 – 540000

Between 540001 – 660000

It is clear from the graph that almost 72% of the respondents have annual family income between Rs. 60,000/- to Rs. 180,000/-. 22% of the respondents have a family annual income between Rs. 180,001/- to Rs. 300,000/-. 18% of the respondents have a family income between Rs.300,001/- to Rs.420,000/-.14% of the respondents have a family income between Rs.420,001/- to Rs.540,000/- and 10% of the respondents have a family income more than Rs.540,000/-. SAVINGS
Table No 4.2

Savings Below 20% Between 20% - 40% Between 40% - 70% Above 70% Total
Source: Primary Data

Frequency 22 18 08 02 50

Percent 44.0 36.0 16.0 04.0 100.0

Figure No 4.2




4% 44% Below 20% Between 20% - 40% Between 40% - 70% Above 70%


Source: Primary Data

It is clear form the bar graph that 44% of the respondents have a savings of below 20%, 36% of the respondents save between 20% ad 40%, 16% of the respondents save between 40% and 70% and 4% of the respondents save more than 70%.

Table No 4.3

Investment Below 20% Between 20% - 40% Between 40% - 70% Above 70% Total
Source: Primary Data

Frequency 18 24 07 01 50

Percent 36.0 24.0 08.0 04.0 100.0

Figure No 4.3




2% 36% Below 20% Between 20% - 40% Between 40% - 70% Above 70%


Source: Primary Data

It is evident from the pie above that 36% of the respondents invest below 20% of their savings.48% of the respondents invest between 20% & 40% of their savings, 14% 0f the respondents invest between 40% & 70% of their savings and 2% invest above 70% of their savings. PRESENT RETURNS
Table No 4.4

Returns between 0.0 - 5% between 5 -10% between 10 - 15% above 15% Total
Source: Primary Data

Frequency 08 28 09 05 50

Percent 16.0 56.0 18.0 10.0 100.0

Figure No 4.4



30 25 20 15 10 5 0 between 0.0 between 5 - between 10 - 5% 10% - 15% above 15% Frequency

Source: Primary Data

It is clear from the figure that 56% of the respondents have invested for a return between 5% & 10%. There are16% respondents who are getting returns on their investments as low as 0% to 5%.

Table No 4.5

Risk Yes No Not sure Total
Source: Primary Data

Frequency 22 26 02 50

Percent 44.0 52.0 04.0 100.0

Figure No 4.5



4% 44% Yes No 52% Not sure

Source: Primary Data

The above pie clearly states that 44% of the respondents are willing to take risk while 52% of the respondents are not willing to take risk.

INVESTMENT MODES SELECTED The investors were given a choice of selecting various investment modes from the market, to know where they invest the most. The following figures give us the clear idea about there investment pattern. EQUITY
Table No 4.6

Equity not invested invested Total

Frequency 46 04 50

Percent 92.0 08.0 100.0


Source: Primary Data

Figure No 4.6
E quity


not inv ested inv este d

9 2%

Source: Primary Data

8% of the total respondents has invested into equity, thus making it quite unpopular investment for this segment.

Table No 4.7

Bond/fixed Income Not invested Invested Total
Source: Primary Data

Frequency 47 03 50

Percent 94.0 06.0 100.0

Figure No 4.7


Bond/Fixed Incom e


not inv ested inv ested


Source: Primary Data

6% of the total respondents showed their interest to invest into bonds or fixed income securities, thus making it quite unpopular investment for this segment.

Table No 4.8

Insurance Not invested Invested Total
Source: Primary Data

Frequency 19 31 50

Percent 38.0 62.0 100.0

Figure No 4.8



38% Not inv ested Inv ested 62%

Source: Primary Data

The above pie chart clearly shows that 62% of the respondents have invested in to insurance segment.

Table No 4.9

Mutual Fund Not invested Invested Total
Source: Primary Data

Frequency 34 16 50

Percent 68.0 32.0 100.0


Figure No 4.9

Mutual Fund

32% Not invested Invested 68%

Source: Primary Data

Mutual Funds from the above figure show a limited interest of the respondents in this security .

Table No 4.10

Real Estate Not invested Invested Total
Source: Primary Data

Frequency 50 0 50

Percent 100.0 00.0 100.0


Figure No 4.10

Real Estate


Not invested Invested


Source: Primary Data

The investors have totally ignored this segment.

Table No 4.11

Chit Funds Not invested Invested Total
Source: Primary Data

Frequency 43 07 50

Percent 86.0 14.0 100.0


Figure No 4.11

Chit Funds


Not invested Invested


Source: Primary Data

14% of the investors have invested into chit funds but most of them have not shown interest in this mode of investment.

Table No 4.12

Post Office Savings Not invested Invested Total
Source: Primary Data

Frequency 40 10 50

Percent 80.0 20.0 100.0

Figure No 4.12


Post Office Savings

20% Not invested Invested 80%

Source: Primary Data

Post Office Savings is one of the desired investment modes but due to the availability of insurance and higher return bank deposits it has not been able to attain the interest of the investors at a higher degree. Just 20% of the respondents are looking forward to this mode of savings.

Table No 4.13

Deposits Not invested Invested Total
Source: Primary Data

Frequency 24 26 50

Percent 48.0 52.0 100.0


Figure No 4.13


48% 52%

Not invested Invested

Source: Primary Data

The most liquid form of investment that can be realized even at odd hours today is deposits (savings). The security provided and the guarantee makes it desiring investment for 52% of the respondents.

Table No 4.14




Not invested







Source: Primary Data



Figure No 4.14



Not invested Invested


Source: Primary Data

The investors have identified one more mode of investment which is totally risk free. 2% of the respondents felt provident funds as one of the interesting option they have to avoid risk.

SUMMARY OF FINDINGS, CONCLUSION & SUGGESTIONS 5.1 FINDINGS: • • 70% of the respondents have a monthly income between Rs. 5,000/- & Rs. 15,000/-. 36% of the respondents have a total family income between Rs. 60,000/- & Rs. 180,000/-


• • • •

44% of the respondents make a savings of below 20%. 36% of the respondents make an investment of below 20%. 56% of the respondents are getting a return between 5% & 10% on their investment. 44% of the respondents are willing to take a maximum risk .

5.2 CONCLUSION: Looking at the interpretation made for every piece of data it is concluded that employees in banking sectors are risk averters. Now to address the need of this segment, appropriate portfolio is created with low risk and average returns with small amounts of investments. 5.3 SUGGESTIONS: To cater the need of this segment the following modes of investments are suggested. 1. Banking. 2. Post Office Savings. 3. Insurance.

It is out of these above mentioned modes of investment, it is suggested that the respondents can select the area of investment they want to invest into. Here the following portfolio is suggested based on their risk and return factors that suits the respondent’s choice and ability to invest into to get maximum returns.


BANKING Since the respondents are risk averters, bank deposits are suggested to invest into. Saving Bank Account Rate in both Private and Public Sector is 3.5%. The following table shows the interest rates on domestic bank deposits.



Table No: 5.1

Interest Rate on Deposits









7 days to 14 days 15 days to 45days 46 days to less 3 months 3 months to less than 4 months 4 months to less than 6 months 6 months to less than 9 months 9 months to less than 1 year 1 year to less than 2 years 3 Years to less than 5 years 2 years to less than 3 years 5 Years upto 10 years

0 4.5

3.75 4.75 5.5 5.75 5.75 6.4 6.4 6.75 7 6.75 8

0 4.5 5.25 5.5 5.5 7.25 7.25 7.5 8 7.75 8

5.5 5.5 6.25 6.25 6.5 7 6.75 7

POST OFFICE DEPOSITS AT A SNAPSHOT Another attractive portfolio for the respondents is post office deposits which provide regular return with low risk. The following table provides the various schemes available in post office deposits.
Table No 5.2










Individuals or on behalf of minors, trusts


No limit

8% compounded semiannually




YES,SEC. 88, SEC 80 (L)


Individuals, and on behalf of minors, trusts Individuals



8% compounded annually







8% P.A. +10% BONUS





Individuals, trusts, welfare and regiment funds



8%compound ed annually





All categories of investors


1 LAC.

6.257.5%Compou nded quarterly


Cheque facility available; accepted by scheduled banks


NATIONAL SAVINGS CERTIFICATES (NSC) National Savings Certificates (NSC) is an assured return scheme, armed with powerful tax rebates under Section 88 of the Income Tax Act, 1961. Interest is payable at 8 per cent, compounded half-yearly for a duration of 6 years. NSC combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The scheme offers a coupon of 8 per


cent, compounded semi-annually. So, Rs 1,000 invested in NSCs become Rs 1,586.87 on maturity after 6 years. Who can invest? NSC application forms are available at all post-offices. The application can be made either in person or through an agent of small savings schemes. The following types of certificates are issued: 1. Single i) An Holder adult Type for Certificate: himself or This on can behalf be of issued a to:


ii) A Trust. 2. Joint 'A' Type Certificate: This may be issued jointly to two adults payable to both holders jointly or to the survivor. 3. Joint 'B' Type Certificate: This may be issued jointly to two adults payable to either of the holders or to the survivor. Investment and range of investment in NSC NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. There is no prescribed upper limit on investment in NSCs. Interest: Interest is payable at 8 per cent, compounded half-yearly for a duration of 6 years. Maturity: The maturity period (duration) of a NSC scheme is 6 years. Premature withdrawal: NSCs do not offer any scope of premature withdrawal except on death or forfeiture by pledge or by court order. However, NSCs can be transferred from 88

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. If a certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by the post-office on payment of the prescribed fee. Borrowing: One can borrow against his NSC by pledging it after the permission of the concerned One can pledge his NSC to any of the post-master. following:

· The President of India or Governor of a State in his official capacity. · The RBI or a scheduled bank or a co-operative society (including a co-operative bank). · · A corporation A or a local government company. authority

· A Housing Finance Company approved by the National Housing Bank and notified by the Central Government. Tradable: NSCs cannot be traded in the secondary market. But they can be transferred from one person to another through the post office on payment of a prescribed fee.

MODE OF HOLDING: NSCs are held physically in the form of Certificates issued to the investors by the post office. Tax Implications:


NSCs offer tax benefits as per the provisions of the Income Tax Act, 1961. Rebates are available under Section 88 of the Income Tax Act, 1961 on both the principal as well as the interest income. Under the provisions of this Section, an investor can reduce his tax liability by Rs 12,000 by investing the maximum permissible sum of Rs 60,000 in one financial year. Moreover, the annual interest income (till five years) is deemed reinvested under Section 88, and is eligible for tax rebate as indicated below:
Table No 5.3

Gross Total Income (Rs) 0 - 150,000 150,001 - 500,000 500,001 & Above

Rebate 20% 15% Nil

Moreover, the annual interest income (till five years) is deemed reinvested under Section 88, and is eligible for a 20 per cent tax rebate. The rebate is calculated @ 30 per cent if ones gross annual salary is upto Rs 1,00,000. However, the interest income at the end of the sixth year is not eligible for tax breaks. The interest income every year also qualifies for exemption under Section 80L of the Income Tax Act, which means that interest income upto Rs 12,000 is tax-exempt. Thus, while one can claim 20 per cent tax rebate on reinvested interest income, the entire interest income will be tax-free if it is lower than Rs 9,000. An added advantage is that TDS (Tax Deductible at Source) is not applicable on the NSC. Since NSC offers regular assured returns and tax benefits, it is suggested to invest respondent funds in this scheme. Besides NSC the respondents can invest their funds in the following post office schemes, which offers regular assured returns with low risk. KISAN VIKAS PATRA


Kisan Vikas Patra (KVP) doubles ones money in 8 years and 7 months with the advantage of premature withdrawal. KVP is sold through all Head Post Offices and other authorized post offices throughout India. The rate of return is 8.41 per cent, compounded annually. Interest rates affect the decision to buy, hold, or sell (encash prematurely) relating to KVP. The Government of India has reduced the interest rates on KVP and other post office schemes in the Budget 2003-04. Consequently, the tenure of this "Double Your Money" scheme has been increased from 7 years 8 months to 8 years and 7 months. Who can invest? KVP is not meant for regular income. It is for those looking for a safe avenue of investment without the pressing need for a regular source of income. Investment: The minimum investment in KVP is Rs 100. Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000. The denomination of Rs 50,000 is sold through head post offices only. There is no limit on holding of these certificates. Any number of certificates can be purchased. A KVP is sold at face value; the maturity value is printed on the Certificate.

Maturity: The KVP has tenure of 8 years and 7 months, in which time your principal investment doubles in value. However, there are options for premature encashment, subject to certain rules and loss of interest. Premature Withdrawal:


--If the premature encashment takes place within a period of one year from the date of purchase of the certificate, only the face value of the certificate shall be payable. No interest is payable in this case. --After the expiry of one year, but before two years and six months from the date of the issue of the certificate, the face value of the certificate together with simple interest at the specified rate for the completed months for which the certificate has been held, shall be payable. --If a certificate is encashed any time after expiry of two-and-a-half years, the amount payable is as specified by the government from time to time. Borrowing Facility: Depending on whether the finance company or the bank from where you are raising the loan accepts it or not, some banks accept it for raising house loans. Transferable: KVP is not a bearer certificate, and is not easily transferable. Permission of the postmaster is required for any transfer. These cannot be traded in the secondary market. Mode of Holding: KVP is held physically in the form of certificates that are issued to the investors by the post office. The option of holding KVP in demat form is not available. Tax Implications: Although no TDS is applicable on the interest income from KVP, there are no tax incentives as per the provisions of the Income Tax Act, 1961. MONTHLY INCOME SCHEME


The post-office monthly income scheme (MIS) provides for monthly payment of interest income to investors. The post-office MIS gives a return of 8 per cent plus a bonus of 10 per cent on maturity. However, this 10 per cent bonus is not available in case of premature withdrawals. It is meant to provide a source of regular income on a long-term basis. Who can buy? It is meant for investors who want to invest a lump-sum amount initially and earn interest on a monthly basis for their livelihood. The scheme is, therefore, a boon for retired persons. Minimum Investment: The minimum investment in a Post-Office MIS is Rs 6,000 for both single and joint accounts. The maximum investment for a single account is Rs 3 lakhs and Rs 6 lakhs for a joint account. Maturity: The duration of the MIS is six years. Premature withdrawal: Investors can withdraw money before three years, but at a discount of 5 per cent. No such deduction will be made if an account is closed after three years. 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. Borrowing Facility: Depends, if the banker accepts it as a security. Mode of Holding: 93

Post office MIS is held physically in the form of a certificate issued by the post office. In addition, the investor is provided with a passbook to record his transactions against his MIS. Tax Implication: 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.

RECURRING DEPOSIT A Post-Office Recurring Deposit Account (RDA) is akin to a Recurring Deposit in a bank, where you invest a fixed amount on a monthly basis. The deposit has a fixed tenure, and the scheme is a powerful tool for regular savings. As the name says, the RDA is a systematic way of saving money. Recurring Deposits 94

accumulate money at a fixed rate of interest (currently 7.5 per cent per annum), compounded quarterly, and your investment appreciates in five years. The scheme is meant for investors who want to deposit a fixed amount regularly, in order to get a tidy sum after five years. If you invest Rs 10 every month, you will get back Rs 728.90 after 5 years. A post-office RDA can be opened at any post office in the country by filling up the appropriate forms. Who can buy? An RDA can be opened by an individual adult as a single person account, two adults in a joint mode, or by a guardian on behalf of the minor who has attained the age of 10 years in his own name. RDA can also be held by a HUF, Trust, regimental fund, welfare fund, company, banking company, corporation, association, institution, registered society, or local authority. Accounts can also be opened in the name of a minor or a person of unsound mind. Minimum Investment: The minimum investment in a post-office RDA is Rs 10. There is no prescribed upper limit on your investment.

Interest: The advantage with post-office deposits is that it offers a fixed rate of return at 7.5 per cent while banks constantly change their recurring deposit rates depending on their demand supply position. The only disadvantage is that you will have to visit the post office every month whereas in the case of banks, the amount will be automatically deducted from your account.


Maturity: The post-office RDA scheme has tenure of five years. This can be extended for a further five years if you so desire. Premature Withdrawal: Only one withdrawal is allowed after one year of opening a post-office RDA. You can withdraw upto half the balance lying to your credit. On premature closure (after one year), interest is payable as per the rate for the Post Office Savings Bank Account. Borrowing: The borrowing facility is not available in the post office RDA scheme. Tax Implications: Although the investment in post-office RDA is itself not subject to tax benefits, interest income upto Rs 12,000 per annum is exempt from tax under Section 80L of the Income Tax Act, 1961.

TIME DEPOSIT On opening a Time Deposit, you will receive an account statement stating the amount deposited and the duration of the account. These are suitable for capital appreciation in the sense that your money grows at a pre-determined rate. Unlike certain other investment options, where returns are commensurate with the risks, the rate of growth is also high; Time Deposits return a lower, but safer, growth in


investment. Therefore, Time Deposits are one of the better ways to get a relatively high interest rate for your savings. The only condition is that they are bound for some specific period of time. Who can apply? All categories of investors are eligible to open an account. Minimum Investment: The minimum investment in a Time Deposit could be as low as Rs 50. There is no upper limit on investment. Interest: A Time Deposit is an investment option that pays annual interest rates between 6.25 and 7.5 per cent, compounded quarterly, and is available through postoffices across the country.

Maturity: Time Deposits have a term ranging between 1 and 5 years. The scheme pays annual interest, but it is compounded quarterly, thus giving a higher yield. Time deposit for 1 year offers a coupon rate of 6.25 per cent, a 2-year deposit offers an interest of 6.5 per cent, 3 years is 7.25 per cent while a 5-year Time Deposit offers 7.5 per cent return. Premature Withdrawal: While 2, 3, and 5-year Time Deposits can be closed after one year, they entail a loss in the interest accrued for the time the account has been in operation.


Borrowing: You can borrow against a Time Deposit. The balance in your account can be pledged as a security for a loan. Tax Implications: Interest income upto Rs 9,000 from Time Deposits is exempt under section 80L of the Income Tax Act, 1961, and no tax is deducted at source, i.e., the interest income from a Time Deposit is also exempt from TDS

INSURANCE The most viable schemes for the respondents are Insurance Schemes, which provide regular return and capital appreciation. The following tables provide information regarding the various schemes available which are suitable for the respondent.


Balanced Fund
Table No 5.4


Name of Plan

One month Apr ‘07

Last 3 months (Feb’07 - Apr’07)

Last 12 months (May’06 - Apr’07)

HDFC Std life Defensive Managed Birla Sunlife Individual Builder MetLife Max York ING Vysya Reliance Life AVIVA Moderator New Conservative Fund Secure Plan Balanced Fund Secure Fund







1.83% 1.37%

4.25% 4.11%

17.54% 15.92%

1.37% 1.62% 1.45%

3.71% 4.94% 3.67%

14.94% 18.58% 13.51%

Growth Fund
Table No 5.5


Name of Plan

One month Apr ‘07

Last 3 months (Feb’07-Apr’07)

Last 12 months (May’06- Apr’07)








Balanced Fund




Bajaj Allianz

Unit Plus

Gain 3.13%



Balanced Max York ICICI Prudential ING Vysya Plus Fund New Balanced Fund Life Time 2.38% 8.46% 29.36% 2.16% 7.57% 30.55%

Balancer Balance Plan 1.37% 5.81% 27.21%

Birla Sunlife Enhancer Individual Reliance Life Growth Fund







Equity Fund
Table No 5.6


Name of Plan

One month Apr ‘07

Last 3 month (Feb’07-

Last month



Apr’07) SBI Life HDFC Stdlife Bajaj Allianz HorizonEquity Fund Growth Unit Plus Index ICICI Prudential MetLife Life Time 5.71% 21.65% 3.56% 6.28% 21.64% 23.27% 24.11%

(May’06Apr’07) 130.70% 102.38% 90.39%

Gain 7.78% Equity


Maximiser Multiplier 4.57% 16.86% 77.87%

Tata AIG

Invest Assure Equity Fund




Reliance Life

Equity Fund




Table No 5.7


Name of Plan

One month Apr ‘07

Last 3 month (Feb’07-

Last month





ICICI Prulife

Invest Shield 0.89% Cash



Kotak Mahindra

Safe Inv Plan 0.65% Money Market



Bajaj Allianz

Unit Plus

Gain 0.57% Cash



Plus Fund HDFC Stdlife Unit Linked 0.47% 1.38% 5.64%

Endow Liquid Fund Tata AIG Reliance Life Liquid Fund Capital Secure fund 0.40% 0.50% 1.17% 1.48% 4.92% 5.65%



BIBLIOGRAPHY Books Referred: • S. Kavin, Portfolio Management, Edition – February 2001, Prentice Hall of India Private Limited – New Delhi.


Punithavathy Pandian, Security Analysis and Portfolio Management, Edition – 2005, Vikas Publishing House Private Limited – New Delhi.

V. K. Bhalla, Investment Management, 10th Edition – 2004, S. Chand & Company Limited, Ramnagar, New Delhi.

Websites Visited: www.franklintempleton.com www.sbi.com www.ingvysya.com www.google.com



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