INVESTMENT

ALTERNATIVES
UNIT 1

INVESTMENT ALTERNATIVES

Non-marketable financial assets

Money market instruments

Bonds or Fixed Income Securities

Equity Shares

Mutual Funds

NON-MARKETABLE FINANCIAL
ASSETS

May not be bought or sold

Nonnegotiable security

Bank Deposits

Post Office Saving Schemes

Company Deposits

Public Provident Fund Scheme

Life Insurance Schemes

Unit Linked Insurance Plans (ULIPs)

BANK DEPOSITS

Very safe (schedule bank)

Guarantee provided by the deposit insurance credit guarantee scheme of India which
guarantees deposits up to rs 100,000 per depositor of a bank

Ceiling on the interest rate payable

Varying interest rate on fixed deposits

High liquidity

Loans can be raised on term deposit

Stable and fixed return on the invested money

Reduction in existing bank deposits too, when the market interest rates come down.

No capital appreciation

Not desirable as a long-term investment avenue

Tax chargeable on interest

POST OFFICE SAVING SCHEMES

Post Office Saving Schemes

Post Office Recurring Deposit Account

Post Office Time Deposit Account

National Saving Certificate

Senior Citizens Saving Scheme

POST OFFICE SAVING SCHEMES

Highly popular schemes in India

100% safety of money

Offers decent rate of interest

Tax benefits

Lack of good service due to much paper work, outdated procedures,

etc.

COMPANY DEPOSITS

Interest rates generally higher than bank interest rates

range from 9%-16%

Higher rate higher risk

Low risk when compared to stock market investments

Lock period 6 mths

No TDS for interest below rs. 5000 in one financial year

Unsecured deposit as no guarantee

Risky investment option

COMPANY DEPOSITS

Checklist for choosing right company deposit

Choose companies with the rating of AA or higher.

Choose the company with better reputation within a given rating grade.

Take the help of the qualified and reputed financial advisor in choosing the right company
deposit.

Company deposits need to be spread over a large number of companies in different industries.

You need to check on the servicing level and standard of the company. You need to ignore
companies that dont care or care little about issues like sending interest warrants and principal
cheques

PUBLIC PROVIDENT FUND

Government backed, long-term small savings scheme

An individual/Individual on behalf of minor

Not allowed to HUF, NRI

Allowed if account opened before NRI

Highest security on investment

Benefits under section 80C

Tax free interest

LIFE INSURANCE SCHEMES

Valuable tool in wealth building, tax reduction, and succession planning

Tax-free proceeds

Highly regulated sector (IRDA)

Long-term savings instrument

Option of taking loan against the policy

Attractive tax-benefits for both at the time of entry and exit under most of
the plans

An opportunity to participate in the economic growth without taking the

investment risk

UNIT LINKED INSURANCE PLANS

Market linked insurance plans

combine the safety of insurance protection with wealth creation opportunities

investment risk due to direct link to market performance

A part of the premium - provide insurance cover to the policy holder

the remaining portion - invested in various equity and debt schemes

3 broad variants

Aggressive ULIPs

Balanced ULIPs

Conservative ULIPs

MONEY MARKET INSTRUMENTS

RBI - A market for short terms financial assets that are

close substitute for money, facilitates exchange of
money in primary and secondary market

RBI - key role of regulator and controller of such money

markets

MONEY MARKET INSTRUMENTS

Benefits
Good

return on funds

Helpful
High

for overcoming short term deficits

liquidity

MONEY MARKET INSTRUMENTS

Treasury Bills (T-Bills)

Repurchase Agreements

Commercial Papers

Certificate of Deposit

Banker's Acceptance

Call money

Inter corporate deposits

TREASURY BILLS (T-BILLS)

Promissory notes by Indian Govt.

Issued at discount and are repayable at par

Safest money market instruments

Not large returns

Highly liquid maturity period 3-month, 6-month

and 1-year

REPURCHASE AGREEMENTS /
REPOS

Who deal in government securities use repos as a form of overnight

borrowing

A dealer or other holder of government securities (usually t-bills) sells the

securities to a lender and agrees to repurchase them at an agreed future
date at an agreed price

Usually very short-term, from overnight to 30 days or more

Short-term maturity and government backing

Extremely low risk

Repo From prospective of buyer of securities

Reverse Repo From prospective of supplier of funds

COMMERCIAL PAPERS

Promissory notes that are unsecured and issued by companies and financial
institutions

Issued at a discounted rate of their face value reflecting current market interest rates

Maturities no longer than nine months

Between one and two months being the average

Yield higher returns than t-bills

Very safe investment

Usually issued by companies with strong credit ratings

Not backed by collateral

Actively traded in the secondary market

CERTIFICATE OF DEPOSIT

Short-term borrowing note, like a promissory note, in the form of a certificate

Enables the bearer to receive interest

Term between 3 months and 5 years

Liquidated on payment of a penalty

Higher returns than t-bills as the risk is higher

Returns are based on an annual percentage yield (APY) or annual percentage rate
(APR).

In APY, interest is gained by compounded interest calculation

In APR simple interest calculation is done to calculate the return

BANKER'S ACCEPTANCE

Short-term investment plan created by a company or

firm with a guarantee from a bank to make a payment

A good credit rating is required by the company

Terms usually 90 days, but period can vary between 30

and 180 days.

Liquidity as can be sold off in the secondary markets

CALL MONEY

Call or notice money is an amount borrowed or lent on demand

for a very short period

If the period is greater than one day and upto 14 days it is

called notice money

Investor work through a brokerage firm

Unsecured and callable

Riskier than other loans

Short-term liquidity

INTER CORPORATE DEPOSITS

Unsecured loan extended by one corporate to another

Tenor of ICD may range from 1 day to 1 year

Unsecured, and hence the risk inherent in high

Uncollateralized basis

A higher rate of interest demanded by the lender

Annual interest rate assigned for this type of deposit is 15%

Decisions of lending - largely governed by personal contacts

Not well organised

Maintains secrecy

BONDS OR FIXED INCOME

SECURITIES

Long term debt instruments

Issuer of a bond promises to pay a stipulated stream of

cash flows

Periodic interest payments over the life of the

instrument

Principal payment at the time of redemption

BONDS OR FIXED INCOME

SECURITIES

Government Securities

RBI Relief Bonds

Private Sector Debentures

Public Sector Undertaking Bonds

Preference Shares

GOVERNMENT SECURITIES

Tradable instrument issued by the central government or the state

governments

Issued at face value

No default risk as the securities carry sovereign guarantee

Ample liquidity - sell the security in the secondary market

No tax deducted at source

Can be held in Demat form

Maturity ranges from of 2-30 years

Interest payment on a half yearly basis on face value

RBI SAVINGS BONDS

Permit the investor to save his money on tax

Individuals, HUFs, NRIs can invest in these bonds

Minimum investment Rs. 1000 no upper limit

Exempted from Wealth tax

Interest payment - cumulative and non-cumulative

6.5% tax free savings bonds and 8% taxable savings bonds

5 years for tax free and 6 years in case of taxable

PRIVATE SECTOR DEBENTURES

Similar to that of borrower

Issued in denominations as low as Rs 1000

Maturities ranging between one and ten years

Generally secured

Less risk

Rate of interest fixed or floating

Also available in Demat form

Listed on a stock exchange

PUBLIC SECTOR UNDERTAKING

BONDS

Medium and long term obligations

Built in redemption

With put or call options

Many of these are issued by infrastructure related

companies

Issued in denominations of Rs 1,000 each

Two types of bonds: tax free and taxable bonds

PREFERENCE SHARES

Higher level of income than debt holders

Higher risk involved

Not always guaranteed a dividend payout

Rate of dividend is prefixed and pre communicated

Less volatile than common stock and less risky

No voting right

Guarantee of specified percentage dividends if the company makes

a profit.

EQUITY SHARES

Advantages

Greater liquidity due to transferability clause.

Limited liability to the extent of investment.

Dividend totally tax free

Value of share appreciates in long term

Right to vote and participation in decision making of the company

Preemptive right to apply for shares if the company comes up with fresh
issue of shares.

EQUITY SHARES

Disadvantages

High degree of risk

Dividend rate at discretion of management

Not informed decisions normally based on tips from consultant

or even friends.

STOCK MARKET CLASSIFICATION

OF EQUITY SHARES

Blue chip shares

Large, well-established and financially strong companies with an impressive record of

earnings and dividends.

Growth shares

Fairly entrenched position in a growing market

Above average rate of growth as well as profitability.

Income shares

Fairly stable operations, relatively limited growth opportunities, and high dividend
payout ratio.

STOCK MARKET CLASSIFICATION

OF EQUITY SHARES

Cyclical shares

Defensive shares

A pronounced cyclicality in their operation

Relatively unaffected by the ups and downs in general business conditions.

Speculative shares

Tend to fluctuate widely due to lot of speculative trading in them

MUTUAL FUNDS

Intermediary that pools money from a number of

investors and invests in the same in a variety of different
financial instruments

Losses and gains accrue to the investors only

Investors lack time, the inclination and skills required to

manage their own investment

Asset management company

Supervised and regulated by SEBI

TYPES OF MUTUAL FUND

By maturity period

By investment objective

Growth/Equity

Open ended

Income/Debt

Close ended

Balanced/Hybrid

Interval

Money market/Liquid

Gilt

Index

Sector specific

Tax saving

Load or no load

Assured return

OPEN-ENDED SCHEME

Available for subscription and repurchase on a continuous basis

Creation and issue of new units if demand

Elimination of old units if redemption pressure

Buy & sell units at net asset value (NAV) related prices which are
declared on a daily basis

Key feature - liquidity.

CLOSE-ENDED SCHEME

Open for subscription only during a specified period at the time of launch of the
scheme

Initial public issue then on the stock exchanges where the units are listed.

Price per share determined by the market

Usually different from the underlying value or net asset value (NAV) per share

Price said to be at a discount or premium to the NAV when below or above the
NAV, respectively

Disclose NAV generally on weekly basis

It has fixed maturity period

INTERVAL SCHEMES
Combination
Purchase

of both

or redeem their shares from the fund house

At

pre-determined intervals

At

NAV related prices

GROWTH/ EQUITY SCHEMES

Aimed at capital appreciation over the medium to long term

Major portion of the portfolio in equities

Comparatively high risks

Provide different options like dividend option, capital appreciation, etc

Allow the investors to change the options at a later date

Good for investors having a long-term outlook seeking appreciation

over a period of time

INCOME/DEBT ORIENTED SCHEMES

Aim - to provide regular, steady income to investors and preservation of

capital

Generally invest in fixed income securities

Less risky compared to equity schemes

Limited opportunities of capital appreciation

NAVs of such funds affected due to change in interest rates in the

country

Effect in short run so long term investors may not bother

BALANCED/HYBRID SCHEMES

Aim - to provide both growth and regular income

Invest both in equities and fixed income securities (40-60%)

Appropriate for investors looking for moderate growth

Affected due to fluctuations in share prices in the stock markets

Likely to be less volatile compared to pure equity funds

MONEY MARKET / LIQUID SCHEMES

Aim - to provide easy liquidity, preservation of capital and moderate

income

Invest exclusively in safer short-term instruments

Comparatively Less fluctuations in returns

Appropriate for corporate and individual investors as a means to

park their surplus funds

GILT FUND

Invest exclusively in government securities

No default risk

Fluctuate due to change in interest rates and other

economic factors

INDEX FUNDS

Replicate the portfolio of a particular index

BSE Sensitive index, S&P NSE 50 index (Nifty), etc

Invest in the securities in the same weightage

comprising of an index

NAVs rise or fall in accordance with the rise or fall in

the index

SECTOR SPECIFIC FUNDS/SCHEMES

Invest in the securities of only those sectors or industries as

specified in the offer documents

Returns dependent on the performance of the respective

sectors/industries

Higher returns, more risky compared to diversified funds

Need to keep a watch on the performance of those

sectors/industries

Must exit at an appropriate time

Also seek advice of an expert

TAX SAVING SCHEMES

Aim - offering tax rebates under specific provisions of IT act, 1961

Equity linked savings schemes (ELSS) and pension schemes are

applicable for deduction u/s 80C of the IT act, 1961

Growth oriented and invest pre-dominantly in equities

Risk and growth like equity oriented scheme

LOAD OR NO-LOAD FUND

Load

fund

Charges a percentage of NAV for exit

A charge payable each time of units sale

Used by the mutual fund for marketing and distribution expenses

No-load

fund

Does not charge for exit

ASSURED RETURN SCHEME

Assure a specific return to the unit holders irrespective of

performance of the scheme

Fully guaranteed by the sponsor or AMC

Required to be disclosed in the offer document

Make sure whether return assured for the entire period of the
scheme or only for a certain period

TYPES OF RETURNS

Dividends on stocks and interest on bonds

Capital gain

Shares increase in price

ADVANTAGES OF MUTUAL FUNDS

Professional

Management

Diversification
Economies
Liquidity
Simplicity

of Scale

DISADVANTAGES OF MUTUAL
FUNDS
Professional
Costs

Management

(entry & exit load)

Dilution
Taxes

(capital gain)

REAL ESTATE PROPERTIES

Advantages
Necessity
Acts

of life; pleasure to all family members

as an asset can be used in case of need

Substantial

profit provided the owner is willing to wait till

appropriate time
Bright

chances of capital appreciation

Security
Avails

for raising loan.

tax benefit

Protection

against inflation.

REAL ESTATE PROPERTIES

Disadvantages

Due to huge investment, benefits of diversification not possible

Profitability available at the cost of liquidity

Risk in investment more as compared to investment in banks, UTI, etc.

Tax burden in the form of stamp duty, capital gains tax at the time of sale

Government rules and regulations regarding buying and selling are troublesome

Repairs and maintenance, etc. constitute additional expenditure and botheration

to the owner.

PRECIOUS OBJECTS

Advantages of investment in Gold and Silver

Acts

as secret assets and useful as store of wealth

Highly
Acts

liquid

as a hedge against inflation.

Benefit
High

of capital appreciation available

degree of prestige value.

Quite

safe and secured as possibility of loss is practically nil

PRECIOUS OBJECTS

Disadvantages of investment in Gold and Silver

Risky due to theft, etc.

Dead type of investment as profit available only when it is sold out

Regular income not available.

Not useful for capital formation and economic growth.

TAX SAVING INVESTMENTS

Life insurance premium

Unit-linked Insurance Plan (ULIP)

Public Provident Fund

Pension plans

Equity Linked Savings Schemes (ELSS) of mutual funds

Home loan principal repayment

Infrastructure Bonds

National Savings Certificates

Fixed deposit with any scheduled bank or post office for 5 years

Senior citizens savings scheme