Review Article IME Journal

Vol.12 No.1-2, 2018: P.51-60

ISSN 0974-0716

Investment Avenues in India and their Evaluation

Dr. Parul Mittal*

Author’s Affiliation:
Assistant Professor, Dept. of Commerce, KLP College, Rewari-123401, Haryana, India

*Corresponding Author:
Dr. Parul Mittal, Assistant Professor, Dept. of Commerce, KLP College, Rewari-123401, Haryana,
India
E-mail: palakmittal12@yahoo.co.in

Abstract

Investment is putting money after thorough analysis into something with the expectation of
gain. Investment is neither speculation nor gambling rather it is decision that is made after
analyzing economy, industry and company. There are ample investment avenues where
investors can deploy money in the expectation of earnings depending upon their risk tolerance
level. For examples; bank deposits, bonds, shares, money market instruments, mutual funds
schemes, insurance policies, real estate, precious objects, derivatives and many more. The
present paper explores the different investment avenues in India. Further, the paper evaluates
these avenues.

Keywords: Investment Avenues, Risk, Return, Investors and Assets.

1. Introduction

The sacrifice of present money or other resources for benefits in future is investment. The sacrifice
here means parting with money in present with the expectation of returns in future. Present sacrifice
is certain and but the future benefit is uncertain that makes time and risk, two key aspects of
investment. There are some investments where risk element is the dominant attribute and both risk
and time are important in some investments. This concept is further clarified in the following Table 1:

Table 1: Domination Factors

Domination Investment Alternatives

Time Government bonds, bank deposits, public provident fund etc.
Risk Stock Options
Both Time and Risk Equity Shares
Source: By author

Investment is putting money after thorough analysis into something with the expectation of gain
along with high degree of security for the principal amount and return within an expected period of
time. However, putting money into something with an expectation of gain without thorough analysis
and without considering about security about security of principal and return is speculation or
gambling. Those who fail to thoroughly analyze their stock purchases are speculators. The smart way
to avoid speculation is either directly backed by the pledge of sufficient collateral or insured by
Investment Avenues in India and their Evaluation

sufficient assets pledged by a third party. Investment is present sacrifice of money for future benefit.
It is based on analysis. It involves expectation of grain in term of security for the principal amount
and return within an expected period of time. Investors may be Institutional Investors like insurance
companies, pension funds, corporations, charities, educational establishments etc. and Private
Investors like mutual funds, exchange traded funds etc. Investors, either institutional or private, need
to follow the complex steps in management of their investment (Figure 1).

Specification of
Choice of Formulation Selection of
Investment
the Assets of Portfolio Securities
Objectives and
Mix Strata
Restraints

Portfolio Portfolio Performance

Execution Revision Evaluation

Figure 1: Process of Investment Management

Source: Made by Author

2. Investment Avenues

Nowadays, investors have ample avenues to part their money in the expectation of some future
benefits. There are two main broad categories of investment alternatives viz. real assets and financial
assets. Real assets are tangible assets whereas financial assets are paper claims or electronic claims on
issuer. Land and building either commercial or residential, agricultural land, jewellery and art objects
are examples of real assets. Shares, debentures, bank deposits, corporate deposits, government
securities, insurance policies and derivatives are financial assets. Knowledge of available investment
alternatives is the basic condition for investment/portfolio management. Unless investor is not aware
about different alternatives, he/she can’t take decision regarding the suitability of avenue according
to his/her investment strategy. Each alternative has its own pros and cons depending upon the plan
of investors. The different avenues in the present scenario are briefly discussed below:

2.1 Non-Marketable Financial Assets

These are financial assets that represent personal transactions between investor and the issuer. Bank
deposits, company deposited, post office deposits and provident fund deposits are examples of non
marketable financial assets (Table 2). These are held by investors.

Table 2: Kinds of Non-Marketable Financial Assets

Sr. Types of Assets Sub-Categories Features Evaluation

No.

1 Bank Deposits Current Deposit account held with a  Convenient to

Accounts banking institution use in terms of
Demand deposit accounts deposits and
Lowest interest rate withdrawals.
Savings To earn moderate interest rate  Maximum

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Dr. Parul Mittal

Accounts Can’t use cheques for security of principal

withdrawal and deposits. amount along with
Have to keep liquid assets in interest amount.
their portfolio  Proper records
Time Deposits Money deposited can’t be of transactions.
withdrawn before fixed period
of time.
Higher rate of interest
Longer the term, the better the
yield

2 Company - Higher rate of interest Risky because

Deposits Good source of regular income deposits are not safe
as monthly, quarterly, half-
yearly and yearly interest
incomes
Residents Indian of major age
can invest in company
deposits
Minimum investment Rs.
1000/- p.a. and no maximum
limit
Interest rate depends on tenure
of deposits
Nomination facility is also
available
Premature encashment of the
deposits is permissible
Have to obtain credit rating
through CRISIL, CARE, ICRA

3 Post Office Post Office Interest rate of 4.0% p.a. on  Interest

Deposits Savings individual/joint accounts received by
Account Minimum investment limit is depositors is tax
Rs.50/- and cheque facility is free.
also available  Tax rebate
5-years Post Interest rate is 8.40% on 6-12 months
Office Scheme can be continued for advance deposits.
Recurring another 5 years on year wise
Deposits basis
Account Minimum investment limit Rs.
10/- and in multiple of 5
No Maximum limit
One withdrawal upon the limit
of 50% of the balance is
allowed, that too after one year
In case of death of depositor,
full maturity value s allowed.
Post Office Interest varies according o
Time Deposit time period like 8.20%, 8.30%,
Account 8.40% and 8.50% for 1, 2, 3 and
5 years respectively w.e.f. 01-
04-2012.

53 IME Journal/ Vol.12 No.1-2/ January-December 2018

Investment Avenues in India and their Evaluation

Interest is calculated quarterly

but payable annually.
Minimum limit is Rs. 200/-
and no maximum limit.

Post Office Rate of interest is 8.50% p.a.

Monthly Minimum limit is Rs. 1500/-
Income Maximum limit is Rs. 4.5-9
Account lakh
Scheme Maturity period is 5 years.
Senior Citizens Interest rate is 9.30% p.a.
Savings Scheme Interest is payable from the
deposit date to 31st March, 30th
June, 30th September or 31st
December.
Minimum limit is Rs. 1000 and
maximum limit is Rs. 15 Lakh.
Maturity period is 5 years.
Tax is deducted at source if
interest is more than Rs. 10000
p.a.

4 National Saving NSC (VIII Interest rate is 8.60% p.a.  Assured

Certificate Issue) Minimum limit is Rs. 100/- return and tax
(NSC) and no maximum limit rebate under section
Certificates available in 80C of income tax
denomination of Rs. 100/-, act.
500, 1000, 5000 & 10000.  Transferable
NSC (IX Issue) Interest rate is 8.90% p.a. with a nominal fee
Minimum limit is Rs. 100/-  No
and no maximum limit maximum limit
Certificates available in  Up to Rs.
denomination of Rs. 100/-, 100000, fully tax free
500, 1000, 5000 & 10000.

5 Employee’s - EPFO is a body formed to take Tax exemption and

Provident Fund complete care of PF, insurance secured return
policies and Pension schemes.
12% salary is deducted from
government employee and
same is contributed by
employer.
Interest rate is 9.5%

6 Public - Statutory scheme of GOI  Tax

Provident Fund Time period is 15 years and exemption under
Account interest rate is 8.80% p.a. 80C and secured
Minimum limit is Rs. 500/- return
and no maximum limit  Deposits are
Minimum investment is exempted from
mandatory every year wealth tax
Nomination facility available
Interest on PPF is tax free
7 Pension Fund - It is an arrangement for an Beneficial for

54 IME Journal/ Vol.12 No.1-2/ January-December 2018

Dr. Parul Mittal

individual to provide income retirees

at the time of retirement.
Sponsored by private
employers, government and
labour union It may be funded
pension plan, unfunded
pension plan, defined business
pension plan, NPS, pay as you
go pension plan and PILF.

8 Kisan Vikas - Risk free fixed income scheme No tax benefits

Patra offered by post office
department Doubled money in
8 years and 7 months
Ranked above NSC and PPF as
regard to liquidity.
Discontinued w.e.f. 01-12-2011
Source: By Author

2.2 Ordinary/Equity Shares

The smallest unit of the capital is known as equity shares. These are ownership securities.
Shareholders have voting rights. The equity shareholders bear the high risk. Companies may issue
equity non-voting shares also. Issue of equity shares are advantageous for company as dividend
payment on these shares is not mandatory and there is no requirement of refinance the capital raised
by the issue of ordinary shares. The shares price varies time to time. There are various sectors in the
share market like oil, real estate, finance, construction, telecommunication, steel, broking firms,
jewellary, packing, refineries, food & beverages, metals, consumer goods etc. The main motive of
investors is good return in short term as well as long term investments. If investors want to pull out
the invested money in short term, he/she should choose shares in the critical moving sectors. But if
the investors want investments for long term, then he should take investment decisions after
analyzing the pure fundamentals, dividend payout, capital of the company etc. So, the investors
should go for two types of investments i.e. long term and short term as well.

Nowadays, the shares are traded electronically and this process is done either through the brokerage
houses or from exchanges like BSE and NSE. Some of the well-known brokerage houses in India for
providing trading tips are ICICI direct, Share khan, Reliance Money, HDFC securities, India Info line
etc. The investment market is mainly divided into two parts- capital market and money market. The
investment market can further divided into the primary and secondary markets.

2.2.1 Primary Market

The listed shares are traded for the first time that is transferred to the investors from the listed
company. The primary market is a type of platform where new securities and stocks are dealt with.
This market is an ideal source for funding. All organizations in this market can make funding by
selling new shares, bonds and other types of securities through dealers. The primary market is the
place of IPO where any new stock is issued to the investors.

2.2.2 Secondary Market

It is simply known as stock market. It is a type of continuous market that offers a platform for trading
and business of securities and stocks. Generally, trading is done through a licensed broker, security
firms, stock and securities units and other financial institutions. The trading in stock market has to be
done according to the terms and conditions of specific stock exchanges. There are two main
exchanges in India:

2.2.2.1 Bombay Stock Exchange (BSE)

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Investment Avenues in India and their Evaluation

It is oldest stock exchange in Asia. It is also known as Mumbai Stock Exchange. It is located in the
Dalal Street area of Mumbai that is financial capital of India. The exchange is owned by the BSE
limited with a market cap amount of around US$ 1.1 trillion whereas the volume of stock exchange is
around US$980 billion. The currency dealt in BSE is Indian national rupees. The index on which the
stock exchange operates is BSE Sensitive Index.

2.2.2.2 National Stock Exchange (NSE)

NSE of India is also located in Mumbai. NSE is the largest exchange in India in terms of daily
turnover and the number of trades. It has fully automated, electronic and screen-based trading system
in India. The equity shares are classified as blue chip shares, growth shares, income shares, cyclical
shares, defensive shares and speculative shares by the stock market depending upon their return
potential and risk exposure.

2.3 Preference Shares

Preference shares are hybrid instruments containing the features of ordinary shares and debentures.
These are ownership securities that carry fixed rate of return. The preference shareholders are entitled
to receive the dividend after meeting the claims of the creditors before the ordinary shareholders
(Figure 2).

Preference
Shares

Cumulative and Participating and Convertible and Redeemable and

non cumulative non participating non convertible non redeemable
preference shares preference shares preference shares preference shares

Figure 2: Type of Preference Shares

Source: By Author

The participating with cumulative rights preference shares are mostly issued in India. Preference
shareholders carry limited voting rights. Preference shares are less risky as they offer a certainty of
income but the marketability and liquidity is less active and narrow.

2.4 Private Equity

The equity securities in private companies that are not publicly traded on stock exchange are known
as private equity. These investment alternatives are generally made by a venture capital firm, a
private equity firm or an angel investor. Private equity is expanding at a fast pace in India that
acquired US$ 13.5 billion in 2008 under equity shares and India featured among the top & nations in
the world. The total equity investment was predicted to be US$20 billion in 2010. Indian equities
promise satisfactory returns to investors and have more than 365 equity investments firms
functioning under it. The top ten largest private equity firms in the world as ranked by the PEI 300 are
TPG Capital, The Carlyle group, Goldman Sachs Principal Investment Area, Kohlberg Kravis Roberts,
Appolo Global Management, The Blackstone Group, First Reserve Corporation, Bain Capital, CVC
Capital Partners and Hellman & Friedman.

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Dr. Parul Mittal

2.5 Debentures/Bonds

They represent long-term debt instruments. The bond issuer promises to pat a stipulated stream of
cash flows in terms of interest payment over the life of the instruments. The principal payments of
these instruments are made at the time of redemption. The different types of bonds are as follows
(Table 3).

Table 3: Types of Bonds

Type Description
Government Debt instruments issued by central, state and quasi government
Securities Gilt-edged or bearer securities
commercial banks and insurance companies are major holders
RBI Savings Bonds Individuals, HUF and NRIs can invest in these bonds
Minimum limit is Rs. 1000/- and no maximum limit
Rate of interest is 8% p.a. payable half yearly
Interest earned is taxable
Debentures Creditor ship securities with fixed maturity period, fixed rate of interest, low
capital uncertainty with perfect income certainty.
Corporate bonds/debentures return their face value when they mature and
in the meantime their value fluctuates daily.
The highest quality bonds are graded AAA or AA on down to C, D and even
non rated issues.
Debentures may be different types i.e. registered and bearer, redeemable and
perpetual, convertible, non convertible and partially convertible and callable.
Source: By Author

2.6 Mutual Funds

Mutual Funds are money managing systems introduced to professionally y money collected from the
public. The AMCs manage different types of Mutual Funds Schemes. Mutual Funds come in various
types that provide choice to investor as per their own personal investment objectives. All mutual
funds have annual management fees attached. Investment in these funds means pooling money in
bonds, stocks and securities, short term money market, financial institutions. Fund managers are also
called portfolio managers. They manage mutual fund in India. Mutual Funds may be classified as
open ended, close ended, equity Mutual Funds, value funds, growth funds, large cap funds, mid cap
funds, balanced funds, exchange traded funds, money market funds, international Mutual Funds,
index funds and regional mutual funds. Some of the popular companies that deal in mutual funds in
India are Reliance Mutual Funds, ABN Amro, Bank of baroda, Canara Bank, HDFC, AIG, Birla Sun
Life, DBS Chola Mandalam, DSP Merrill Lynch, Escorts Mutual, ICICI Prudential, LIC, Lotus India,
JM Financial, Morgan Stanley, JP Morgan, Kotak Mahindra, SBI, Sahara Mutual Funds, Tata, UTI and
Standard Chartered. Some top Mutual Funds in India are:
 Reliance Mutual Funds
 SBI Magnum Contra Fund
 The DSP ML Tiger Fund
 HDFC Equity Fund
 SBI Mutual Fund
 Prudential ICICI Dynamic Fund

2.7 Money Market Instruments

These are debt instruments that have a maturity of less than one year at the time of issue. The
important debt instruments are commercial papers, treasury bills, certificates of deposits. These are
discussed below:

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Investment Avenues in India and their Evaluation

2.7.1 Commercial Papers

These are short-term promissory notes with fixed maturity issued mostly by the nationally reputed,
leading, highly rated and creditworthy corporations. These are unsecured and negotiable by
endorsement and delivery. These are simple and flexible instrument in terms of documentation. They
have very flexible maturity and highest quality investment alternative available for private sector.
The maturity period of commercial papers varies from 30-180 days. The rate of commercial papers is
determined by market.

2.7.2 Treasury Bills

These are financial bills or promissory notes issued by the government to raise shot term funds. These
bills are highly liquid and having assured yield with no risk of default. There is low transactions cost
and negligible capital depreciation. There are 14, 91, 182 and 364- day treasury bills.

2.7.3 Certificates of Deposits (CDs)

CDs are money market instruments of a relatively short duration. These instruments pay a fixed rate
of interest till the maturity date. The amount invested in this alternative cannot be usually
withdrawn. CDs provide substantial investment security as money is held with reputable and insured
financial institutions. CDs usually offer a relatively low/nominal rate of return.

2.8 Life Insurance Policies

The traditional purpose of life insurance is the protection of income for dependents in the event of
death of policy holder. The newer forms of life insurance combine the traditional purpose with
various investment programmes. Insurance policies may offer a wide variety of investment options,
including stocks, bonds, balanced mutual funds, international mutual funds and money market
accounts. Insurance is among the best investment alternatives because it offers services to indemnify
investor’s life, assets and money besides providing the satisfactory and risk free profits. Insurance
market in India offers various investment options with very reasonably priced premium. The popular
insurance policies are life insurance policies, health insurance policies, home insurance policies and
car insurance policies. The top insurance firms in India offering various insurance schemes are LIC,
SBI Life, Bajaj Allianz, ICICI Prudential, HDFC Standard Life, MetLife, Birla Sun life, Reliance Life,
Max New York Life, ING Life Insurance, TATA AIG, Kotak Mahindra Life etc. Some of the most
popular investment plans in India are Jeevan Anand (LIC), Monthly Income Plan (Metlife), Maha Life
Gold (Tata AIG) etc.

2.9 Real Estate

The investment in real estate has not only a bright prospect but also a magnified dimension; it is a
potential opportunity to optimize the benefits of the economic growth in India. Real Estate in India
has been one of the most successful investment alternatives in the last few decades. The real estate
developments consist of constructing houses, residential complexes, townships, office buildings, IT
parks, shopping malls etc. The laws relating to real estate in India are Indian Transfer of Property Act,
Indian Urban Land (Ceiling & Regulation) Act, 1976, Indian Registration Act, 1908, Property Tax and
Stamp Duty.

2.10 Derivatives

Derivatives are nothing but a breed of security whose price form or value is determined by the value
of its underlying assets. They can be in the form of future, alternatives and exchanges. Generally,
derivatives enjoy high leverage and less risk. The value of derivative is affected by the volatility in the
rates of the underlying assets. The widely known underlying assets are CPI, Stock market index,
bonds, currencies, exchange rates, interest rates, equities and commodities. The most derivatives are
four types (Table 4).

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Dr. Parul Mittal

Table 4: Type of Derivative

Types Description
Forward Contract It is a tailor made (standardized) contract between two parties in which a
settlement is done on a scheduled future date at today’s predefined rate.
Futures It is a customized exchange traded agreement between two entities to purchase
or sell an asset at a given time in the future at a given price that is specified
today.
Swaps These are contract between two entities to exchange assets/financial
obligations/series of cash flows for a specified period of time at predetermined
intervals. It may be interest rate swaps, currency swaps and equity swaps.
Options This derivative gives its owner the right to sell or buy an underlying asset on or
before a given future date at a predetermined price. It may be call (buy) option
and put (sell) option.
Source: By Author

3. Concluding Remarks

In nutshell, there are various investment avenues for an investor. Evaluation of an investment avenue
is not an easy task rather it includes five aspects, viz. risk, return, marketability, tax shelter and
convenience. Investors have to create and draft their own investment plan depending upon their risk
tolerance level, expectations and convenience. In any investment decision sometimes investor is right
and makes correct decisions and sometimes wrong and prone to errors. Investors are prone to these
errors as they don’t have a correct perspective of the environment and they are unable to correctly
assess the current situations in the environment. Every investor should form investment strategy that
serves as a framework to guide future decisions. The personal investment plan is made by setting
goals and objectives, determining relevance of risk, deciding appropriate benchmarks, proper
allocation of assets and appropriate diversification. Investors should analyze the fundamentals of the
company and industry. Investors should look critically at the prospects for future performance of a
given investment rather than relying only on past performance.

4. Acknowledgement

While bearing full responsibility for any remaining error and inadequacy, authors would like to
thanks Prof. Tej Singh (IGU, Meerpur) and Prof. Narender Kumar Garg (MDU, Rohtak) for
enlightening conversations and suggestions on the draft version of paper.

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11. http://www.zenithresearch.org.in/images/stories/pdf/2012/Jan/EIJMMS/24%20_EIJMMS_VO
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