INDEX

Sr.no 1.

Contents Introduction to Investment 1.1 What is an investment 1.2 What cannot be consider to be an investment 1.3 Main objectives of investments 1.4 When to start investing 1.5 What care one should take while investing

Pg.no

2. 3.

Financial options available for investing Bank Deposit 3.1 Savings account 3.2 Fixed deposit

4. 5.

Liquid and money market funds Smalls savings and post office savings 5.1 National Saving Certificate 5.2 Post Office Monthly Income Scheme 5.3 Public Provident Fund

6. 7. 8.

Investing in company fixed deposits Investing in bonds and debentures Mutual funds 8.1 The pros of mutual funds 8.2 Types of mutual funds 8.3 Frequently used terms

9.

Insurance 9.1 What is life insurance 9.2 Life insurance versus other savings 9.3 Unit Linked Insurance Plans (ULIP)

10. 11. 12. 13.

Government securities Commodities Market Real Estate Share Market 13.1 Investing in stocks 13.2 Stock indices 13.3 Five tips for stock market investments

14. 15. 16.

Tips by Warren Buffet Which Investing option is the best? Experts Opinion.

EXECUTIVE SUMMARY INVESTMENT TOOLS, is not just a project but an information warehouse where I have tried my best to simplify the content in such a manner that even a layman can understand it. This project has truly helped me a lot to gain insights about various investment instruments and avenues. I have tried to cover as much as possible information, but due to vastness of the subject, the in-depth study of the subject was not possible. So, the information is brief and in precise form. It covers various investment vehicles such as savings account, Fixed Deposit, Public Provident Funds, insurance, mutual funds, real estate, share market, etc. Lastly, I have tried to do a comparative analysis of all the investment instruments and have tried to prove that Share Market is the best long term option for investors (not speculator) who should have their fundamentals clear before entering the share market.

1 INTRODUCTION TO INVESTMENT

1.1 What is an investment? The act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit is investment. Its actually pretty simple: investing means putting your money to work for you. The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Investment is a term, which is frequently used in the field of economics, business management, finance and it means savings or savings made through delayed consumption. Investment can be divided into different types according to various theories and principles. In general purview, investment is the application of money for earning more money. A particular amount of money is invested in the bank or an asset is bought in the anticipation that some return will be received from the investment in the future. There can be a number of definitions of Investment. While dealing with the various options of investment, the definitional variations of investment need to be kept in mind. Investment in economical terms According to economic theories, investment is defined as the per unit production of goods, which have not been consumed, however, will be used for the purpose of future

production. Examples of this type of investments are tangible goods like construction of a factory or bridge and intangible goods like 6 months of on-job training. In terms of national production and income, Gross Domestic Product (GDP) has an essential constituent, which is called as gross investment. Investment in terms of Business and Management According to business management theories, investment refers to tangible assets like machinery and equipments and buildings and intangible assets like copyrights or patents and goodwill. The decision for investment is also known as capital budgeting decision, which is regarded as one of the key decisions. Investment in Financial terms In finance, investment refers to purchasing securities or any other financial assets from the capital market or money market or purchasing real properties with high market liquidity for example, gold, silver, real properties, and precious items. These are called investment vehicles. Financial investments are investment in stocks, bonds, commodities and many other types of security investments. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies. According to personal finance theories, an investment is the implementation of money for buying shares or mutual funds or purchasing an asset with the involvement of the factor of capital risk.

Here we are going to focus on investment in terms of finance, only. 1.2 What cannot be classified to be an Investment? Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a hot tip you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesnt happen without some action on your part. A real investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side. Why should one Invest Obviously, everybody wants more money. Its pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.

Nowadays, investments are the foundation of our future financial level. Bad investments can bring us negative turnovers and therefore decrease our future possibilities. You are looking at two options for your money, the first you can spend it or save it and second, invest it. In short, one needs to invest to: To beat inflation and earn return on your idle resources Generate a specified sum of money for a specific goal in life Make a provision for an uncertain future / for retirement. One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investments real rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually

decreased in value; that is, they wont buy as much today as they did last year. Investors can learn a lot from the famous Greek maxim inscribed on the Temple of Apollos Oracle at Delphi: Know Thyself. In the context of investing, the wise words of the oracle emphasize that success depends on ensuring that your investment strategy fits your personal

characteristics. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. Although there are many factors that determine which path is optimal for an investor, well look at two main categories: investment objectives, and investing personality.

1.3 Main objectives of investments The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorized according to three fundamental characteristics safety, income and growth - which also correspond to types of investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Generally speaking, investors have a few factors to consider when looking for the right place to park their money. Safety of capital, current income and capital appreciation are factors that should influence an investment decision and will depend on a persons age, stage/position in life and personal

circumstances. A 75-year-old widow living off of her

retirement portfolio is far more interested in preserving the value of investments than a 30-year-old business executive would be. Because the widow needs income from her investments to survive, she cannot risk losing her investment. The young executive, on the other hand, has time on his or her side. As investment income isnt currently paying the bills, the executive can afford to be more aggressive in his or her investing strategies. An investors financial position will also affect his or her objectives. A multi-millionaire is obviously going to have much different goals than a newly married couple just starting out. For example, the millionaire, in an effort to increase his profit for the year, might have no problem putting down $100,000 in a speculative real estate investment. To him, a hundred grand is a small percentage of his overall worth. Meanwhile, the couple is concentrating on saving up for a down payment on a house and cant afford to risk losing their money in a speculative venture. Regardless of the potential returns of a risky investment, speculation is just not appropriate for the young couple.

As a general rule, the shorter your time horizon, the more conservative you should be. For instance, if you are investing primarily for retirement and you are still in your 20s, you still have plenty of time to make up for any losses you might incur along the way. At the same time, if you start when you are young, you dont have to put huge chunks of your pay-check away every month because you have the power of compounding on your side.

On the other hand, if you are about to retire, it is very

important that you either safeguard or increase the money you have accumulated. Because you will soon be accessing your investments, you dont want to expose all of your money to volatility - you dont want to risk losing your investment money in a market slump right before you need to start accessing your assets.

Personality:-

Peter Lynch, one of the greatest investors of all time, has said that the key organ for investing is the stomach, not the brain. In other words, you need to know how

much volatility you can stand to see in your investments. Figuring this out for yourself is far from an exact science; but there is some truth to an old investing maxim: youve taken on too much risk when you cant sleep at night because you are worrying about your investments. Another personality trait that will determine your investing path is your desire to research investments. Some people love nothing more than digging into financial statements and crunching numbers. To others, the terms balance sheet, income statement and stock analysis sound as exciting as watching paint dry. Others just might not have the time to plough through prospectus and financial statements. The main factor determining what works best for an investor is his or her capacity to take on RISK.

Hence, the key to a successful financial plan is to keep apart a larger amount of savings and invest it intelligently, by using a longer period of time. The turnover rate in investments should exceed the inflation rate and cover taxes

as well as allow you to earn an amount that compensates the risks taken. Savings accounts, money at low interest rates and market accounts do not contribute significantly to future rate accumulation. While the highest rates come from stocks, bonds, and other types of investments in assets such as real estate. Nevertheless, these investments are not totally safe from risks, so one should try to understand what kind of risks are related to them before taking action. The lack of understanding as how stocks work makes the myopic point of view of investing in the stock market ( buying when the tendency to increase or selling when it tends to decrease) perpetuate. To understand the characteristics of each one of the different types of investment can or may help you determine which of them is the right one for your needs.

1.4 When to start Investing The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.

The three golden rules for all investors are: Invest early Invest regularly Invest for long term and not short term

1.5 What care one should one take while investing?

Before making any investment, one must ensure to: Obtain written documents explaining the investment. Read and understand such documents. Verify the legitimacy of the investment. Find out the costs and benefits associated with the investment. Assess the risk-return profile of the investment. Know the liquidity and safety aspects of the investment. Ascertain if it is appropriate for your specific goals. Compare these details with other investment

opportunities available. Examine if it fits in with other investments you are considering or you have already made. Deal only through an authorised intermediary. Seek all clarifications about the intermediary and the investment. Explore the options available to you if something were to go wrong, and then, if satisfied, makes the investment.

These are called the Twelve Important Steps to Investing.

2 FINANCIAL OPTIONS ARE AVAILABLE FOR INVESTMENT

Short-term:Briefly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options.

Long-term:National Savings Certificate, Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds, Insurance etc., are long term financial investment options. We will study all the available option in detail in further chapters

3 BANK DEPOSIT

Retail investor in India need no introduction to debt instrument like bank deposit, Government bonds, and other fixed income securities. They have been popular and continued to remain so because they carry low risk fixed deposit also known as term deposit. Bank deposit can be placed for Flexible time period ranging from a weak to 5 years and more interest on these fixed deposit. Grater the tenure higher the Interest offered

3.1 Saving Account A Saving Bank account (SB account) is meant to promote the habit of saving among the people. It also facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever required, without any condition. Hence a savings account is a safe, convenient and affordable way to save your money. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters. Bank also pays you a minimal interest for keeping your money with them. Features:

The minimum amount to open an account in a nationalized bank is Rs 100. If cheque books are also issued, the minimum balance of Rs 500 has to be maintained. However in some private or foreign bank the minimum balance is Rs

500 or more and can be up Rs. 10,000. One cheque book is issued to a customer at a time. Savings account can be opened either individually or jointly with another individual. In a joint account only the sign of one account holder is needed to write a cheque. But at the time of closing an account, the sign of the both the account holders are needed. Return: The interest rate of savings bank account in India varies between 2.5% and 4%. In Savings Bank account, bank follows the simple interest method. The rate of interest may change from time to time according to the rules of Reserve Bank of India. One can withdraw his/her money by submitting a cheque in the bank and details of the account, i.e. the Money deposited, withdrawn along with the dates and the balance, is recorded in a passbook. Advantages: Its much safer to keep your money at a bank than to keep a large amount of cash in your home. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters. The federal Government insures your money. Saving Bank account does not have any fixed period for deposit. The depositor can take money from his account by writing a cheque to somebody else or submitting a cheque directly. Now most of the banks offer various facilities such as ATM card, credit card etc. Through debit/ATM card one can take money from any of the ATM centres of the

particular bank which will be open 24 hours a day. Through credit card one can avail shopping facilities from any shop which accept the credit card. And many of the banks also give internet banking facility through with one do the transactions like withdrawals, deposits, statement of account etc. 3.2 Fixed deposit A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India. Features:Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate.

The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making one big deposit. In case of any premature withdrawal of partial amount, then only one or two deposit need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to consider before investing in an FD is the rate of interest and the inflation rate. A high inflation rate can simply chip away your real returns. Returns: -

The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested. Interest rate also varies between each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, and 1.5 years to 10 years.

Bank deposits are the safest investment after Post office savings because all bank deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India. It is possible to get loans up to75- 90% of the deposit amount from banks against fixed deposit receipts. The interest charged will be 2% more than the rate of interest earned by the deposit. With effect from A.Y. 1998-99, investment on bank deposits, along with other specified incomes, is exempt from income tax up to a limit of Rs.12, 000/- under Section 80L. Also, from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The 1995 Finance Bill Proposals introduced tax deduction at source (TDS) on fixed deposits on interest incomes of Rs.5000/- and above per annum.

4 LIQUID AND MONEY MARKET FUNDS

Liquid Funds Liquid funds are used primarily as an alternative to shortterm fix deposits. Liquid funds invest with minimal risk (like money market funds). Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches.

Liquid funds score over short term fix deposits. Banks give a fixed rate in the range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are taxable depending on the tax bracket of the investor, which considerably pulls down the actual return. Dividends from liquid funds are tax-free in the hands of investor, which is why they are more attractive than deposits.

Money Market Funds A money market fund is a type of mutual fund that is required by law to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates. Unlike a money market deposit account at a bank, money market funds are not federally insured. Money market funds typically invest in government securities, certificates of deposits, commercial paper of companies, and other highly liquid and low-risk securities. They attempt to keep their net asset value (NAV) at a constant $1.00 per shareonly the yield goes up and down.

But a money markets per share NAV may fall below $1.00 if the investments perform poorly. While investor losses in money market funds have been rare, they are possible. Its an investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of shortterm (less than one year) securities representing highquality, liquid debt and monetary instruments A money market funds purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Because of their relatively low returns, investors, such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option.

5 Smalls savings and post office savings.

Targeted at the small, retail investor. Small saving instruments offer risk free investments that promise steady returns .including the likes of National saving certificate, Post office deposits, Kisan vikas patra. They are saving programs managing by the government and its agencies. Being government backed they carry almost zero default risk and a verity of tax break .The return of these schemes higher than those bank deposits on a post-tax basis

5.1 National Saving Certificate

What is National Saving Certificate?

National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years. Features: NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper limit on investment. Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One person can be nominated

for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co-operative society, a corporation or a government company, a housing finance company approved by the National Housing Bank etc with the permission of the concerned post master. Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16 it is possible after the expiry of three years from the date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. Return: It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years. Interest rates for the NSC Certificate of Rs 1000

Year 1 year 2 year 3 year 4 years 5 years 6 years

Rate of Interest Rs 81.60 Rs 88.30 Rs 95.50 Rs103.30 Rs 111.70 Rs 120.80

Advantages: Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks associated with your investment. How to start? Any individual or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office. The issue of

certificate will be subject to the realization of the cheque, pay order, DD. The date of the certificate will be the date of realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by the post-office on payment of the prescribed fee.

5.2 Post Office Monthly Income Schemes The post-office monthly income scheme (MIS) provides for monthly payment of interest income to investors. It is meant for investors who want to invest a sum amount initially and earn interest on a monthly basis for their livelihood. The MIS is not suitable for an increase in your investment. It is meant to provide a source of regular income on a long term basis. The scheme is, therefore, more beneficial for retired persons.

Features: Only one deposit is available in an account. Only individuals can open the account; either single or joint. (Two or three). Interest rounded off to nearest rupee i.e., 50 paisa and above will be rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,500 for both single and joint accounts. The maximum investment for a single account is Rs 4.5 lakh and Rs 9 lakh for a joint account. The duration of MIS is six years.

Returns: The post-office MIS gives a return of 8% interest on maturity. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts.

Deposit Rs

Monthly Interest

Amount

returned

on maturity 5,000 10,000 50,000 1,00,000 2,00,000 3,00,000 6,00,000 33 66 333 667 1333 2000 4000 5,000 10,000 50,000 1,00,000 2,00,000 3,00,000 6,00,000

Advantages: Premature closure of the account is permitted any time after the expiry of a period of one year of opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be made when the account is prematurely closed. Investors can withdraw money before three years, but a discount of 5%. Closing of account after three years will not have any deductions. Post maturity Interest at the rate applicable from time to time (at present 3.5%). Monthly interest can be automatically credited to savings account provided both the accounts standing at the same post office. Deposit in Monthly Income Scheme and invest interest in Recurring Deposit to get 10.5% (approx) interest. 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.

5.3 Public Provident Funds

PPF is among the most popular small saving schemes. Currently, this scheme offers a return of 8 per cent and has a maturity period of 15 years. It provides regular savings by ensuring that contributions (which can vary from Rs.500 to Rs.70, 000 per year) are made every year. For efficient tax saving there is nothing better than PPF! But for those who are looking for liquidity, PPF is NOT a good option. Withdrawals are allowed only after five years from the end of the financial year in which the first deposit is made. PPF does not provide any regular income and only provides for accumulation of interest over a 15year period, and the lump-sum amount (principal + interest) is payable on maturity. The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free!! One can deposit upto Rs 70,000 per year in the PPF account and this money will also not be taxed and be removed from your taxable income. If you are relatively young and have time on your side, then PPF is for you.

How to invest in PPF? A PPF account can be opened with a minimum deposit of Rs.100 at any branch of the State Bank of India (SBI) or branches of its associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at

the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans. However, be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one persons name. Of course, the person who opens an account is free to appoint nominees.

6 Investing in company fixed deposits

Company Fixed Deposit is the deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest. Company Fixed Deposit have always offered interest which is 2-3% higher than Bank Deposit rate, because they have to pay higher interest to banks for borrowing money. Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and is sent either through cheque or ECS facility. TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year. At the end of deposit period principal is returned to the deposit holder. How to choose a good company deposit scheme? Ignore the unrated Company Deposit Schemes. Ignore deposit schemes of little known manufacturing companies. For NBFCs, RBI has made it mandatory to have an A rating to be eligible to accept public deposits, one should go further and look at only AA or AAA schemes. Within a given rating grade, choose the company with a better reputation.

Once you decide on a company, next choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative to regular income option since the interest earned automatically gets reinvested at the same coupon rate giving upon better yields. It also gives you a lump-sum amount at one go.

It is better to make shorter deposit of around 1 year to 3 years. This way you not only can keep a watch on the companys rating and servicing but can also plan to have your money back in case of emergency.

Check on the servicing standards of the company. You should not oblige companies that care little about investor services like promptly sending interest warrants or the principal cheque. Involve your reputed financial planner / Investment Advisor like us for advice in all your transactions. Do not bypass and invest directly just to earn an extra incentive. For investors living in outstation city, check whether the company accepts outstation cheques and make payment through at par cheques.

Which companies can accept Deposit? Companies registered under Companies Act 1956, such as: Manufacturing Companies. Non-Banking Finance Companies, Housing Finance Companies. Financial Institutions. Government Companies.

Up to what limits can a company accept deposit? A Non-Banking Non-Finance Company (Manufacturing Company) can accept deposit subject to following limits.

 Up to 10% of aggregate of paid-up share capital and free reserves if the deposits are from shareholders or guaranteed by directors. Otherwise up to 25% of aggregate of paid-up share capital and free reserves.

A Non-Banking Finance Company can accept deposits up to following limits: Equipment Leasing Company can accept four times of its net owned fund. Loan or Investment Company can accept deposit up to one and half time of its net owned funds.

What is the period of the deposit? Company Fixed Deposits can be accepted by a

Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Company can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.

Where not to invest? Companies which offer interest higher than 15%. Companies which are not paying regular dividends to the shareholder. Companies whose Balance Sheet shows losses. Companies which are below investment grade (A or under) rating.

There is an old saying DONT PUT All YOUR EGGS IN ONE BASKET. The company deposits should be spread over a large number of companies. This will help the investor to diversify his risk among various companies/industries. Investors should not put more than 10% of their total Investible funds in one company.

7 Investing in bonds and debentures

Debt instruments can be further classified into the following categories based on the different characteristics with which they are floated in the market: Debentures Bonds Debenture

Main characteristics They are fixed interest debt instruments with varying period of maturity. Can either be placed privately or offered for subscription. May or may not be listed on the stock exchange. If listed on the stock exchanges, they should be rated prior to the listing by any of the credit rating agencies designated by SEBI. When offered for subscription a debenture redemption reserve has to be maintained. The period of maturity normally varies from 3 to 10 years and may also be more for projects with a high gestation period. Types of debentures: There are different kinds of debentures, which can be offered. They are as follows:

Non-convertible debentures (NCD) Partially convertible debentures (PCD) Fully convertible debentures (FCD)

The difference in the above instruments is regarding the redeemability of the instrument:

In case of NCDs, the total amount of the instrument is redeemed by the issuer,

In case of PCDs, part of the instrument is redeemed and part of it is converted into equity,

In case of FCDs, the whole value of the instrument is converted into equity. The conversion price is stated when the instrument is issued.

Debentures might be either callable or portable:Callable debenture is a debenture in which the issuing company has the option of redeeming the security before the specified redemption date at a pre-determined price. Similarly, a portable security is a security where the holder of the instrument has the option of getting it redeemed before maturity.

BONDS Bonds may be of many types - they may be regular income, infrastructure, tax saving or deep discount bonds. These are financial instruments with a fixed coupon rate and a definite period after which these are redeemed. The fundamental difference between debentures and bonds is that the former is normally secured whereas the latter is not. Hence in

general bonds are issued at a higher interest rate than debentures. This avenue of financing is mainly availed by highly reputed corporate concerns and financial institutions. The three main kinds of instruments in this category are as follows: Fixed rate Floating rate Discount bonds

The bonds may also be regular income with the coupons being paid at fixed intervals or cumulative in which the interest is paid on redemption.

Unlike debentures, bonds can be floated with a fixed interest or floating interest rate. They can also be floated without interest and are called discount bonds as they are issued at a discount to the face value and an investor is paid the face value on redemption, and if offered for longer terms are known as deep discount bonds.

The main advantage with interest bearing bonds is the floating interest rate, which is stipulated based on certain mark-up over stock market index or some such index.

From the point of view of the investor bonds are instruments carrying higher risk and higher returns as compared to debentures.

This has to be kept in mind while floating bond issues for financing purposes. With the current buoyancy in capital markets for equity instruments the demand for corporate bonds is low.

8 MUTUAL FUNDs

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital

appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

ORGANIZATION OF A MUTUAL FUND There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

The Pros OF MUTUAL FUNDS: The Pros of investing in a Mutual Fund are: Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

TYPES OF MUTUAL FUND SCHEMES: Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

BY STRUCTURE: Open - Ended Schemes Close - Ended Schemes Interval Schemes

BY INVESTMENT OBJECTIVE: Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

OTHER SCHEMES Tax Saving Schemes Special Schemes Index Schemes Sector Specific Schemes

Equity Funds: -

Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds:-

AGGRESSIVE GROWTH FUNDS:-

In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.

GROWTH FUNDS: -

Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.

SPECIALTY FUNDS: -

Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than diversified funds. There are following types of specialty funds:

Sector Funds:-

Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.

Foreign Securities Funds:-

Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

Mid-Cap or Small-Cap Funds:-

Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of MidCap companies is less than that of big, blue chip companies (less than Rs. 2500 crore but more than Rs. 500 crore) and Small-Cap companies have market capitalization of less than Rs. 500 crore. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

Option Income Funds:-

While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.

DIVERSIFIED EQUITY FUNDS: -

Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.

Equity Index Funds: -

Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc.). Narrow indices are less diversified and therefore, are more risky.

VALUE FUNDS:-

Value Funds invest in those companies that have sound fundamentals and whose share prices are currently undervalued. The portfolio of these funds comprises of shares that are trading at a low Price to Earnings Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or specialty funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.

EQUITY INCOME OR DIVIDEND YIELD FUNDS: -

The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.

DEBT / INCOME FUNDS:-

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:-

Diversified Debt Funds: -

Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

Focused Debt Funds: -

Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.

High Yield Debt funds: -

As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.

Assured Return Funds: -

Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfil its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.

Fixed Term Plan Series: -

Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-

term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.

GILT FUNDS:-

Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

MONEY MARKET / LIQUID FUNDS:-

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

HYBRID FUNDS:-

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:

Balanced Funds: -

The portfolio of balanced funds includes assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon.

Growth-and-Income Funds: -

Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.

ASSET ALLOCATION FUNDS: -

Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.

COMMODITY FUNDS:-

Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold

futures or shares of gold mines) are common examples of commodity funds.

REAL ESTATE FUNDS:-

Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.

EXCHANGE TRADED FUNDS (ETF):-

Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

FUND OF FUNDS:-

Mutual funds that do not invest in financial or physical assets, but do invest in other Mutual Fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non-financial assets. Fund of Funds provide

investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.

FUND STRUCTURE AND CONSTITUENTS:-

Mutual funds in India have a 3-tier structure of SponsorTrustee-AMC .Sponsor is the promoter of the fund. Sponsor creates the AMC and the trustee company and appoints the Boards of both these companies, with SEBI approval. A mutual fund is constituted as a Trust. A trust deed is signed by trustees and registered under the Indian Trust Act. The mutual fund is formed as trust in India, and supervised by the Board of Trustees. The trustees appoint the asset management company (AMC) to actually manage the investors money. The AMCs capital is contributed by the sponsor. The AMC is the business face of the mutual fund. Investors money is held in the Trust (the mutual fund). The AMC gets a fee for managing the funds, according to the mandate of the investors. The trustees make sure that the funds are managed according to the investors mandate. Sponsor should have at least 5-year track record in the financial services business and should have made profit in at least 3 out of the 5 years. Sponsor should contribute at least 40% of the capital of the AMC. Trustees are appointed by the sponsor with SEBI approval. At least 50% of trustees should be independent. At least 50% of the AMCs Board should be of independent members. An AMC cannot engage

in any business other than portfolio advisory and management. An AMC of one fund cannot be Trustee of another fund. AMC should have a net worth of at least Rs. 10 crore at all times. AMC should be registered with SEBI AMC signs an investment management agreement with the trustees. Trustee Company and AMC are usually private limited companies. Trustees oversee the AMC and seek regular reports and information from them. Trustees are required to meet at least 4 times a year to review the AMC the investors funds and the investments are held by the custodian. Sponsor and the custodian cannot be the same entity. R&T agents manage the sale and repurchase of units and keep the unit holder accounts. If the schemes of one fund are taken over by another fund, it is called as scheme take over. This requires SEBI and trustee approval. If two AMCs merge, the stakes of sponsors changes and the schemes of both funds come together. High court, SEBI and Trustee approval needed. If one AMC or sponsor buys out the entire stake of another sponsor in an AMC, there is a takeover of AMC. The sponsor, who has sold out, exits the AMC. This needs high court approval as well as SEBI and Trustee approval. Investors can choose to exit at NAV if they do not approve of the transfer. They have a right to be informed. No approval is required, in the case of open ended funds. For close-ended funds the investor approval is required for all cases of merger and takes over.

FREQUENTLY USED TERMS: Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price Is the price you pay when you invest in a scheme? Its also called Offer Price. It may include a sales load.

Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load? This is also called Bid Price.

Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity? Such prices are NAV related.

Sales Load Is a charge collected by a scheme when it sells the units? Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load Is a charge collected by a scheme when it buys back the units from the unit holders?

9 INSURANCE

Life insurance in India made its debut well over 100 years ago. In our country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be. What follows is an attempt to acquaint readers with some of the concepts of life insurance, with special reference to LIC. It should, however, be clearly understood that the following content is by no means an exhaustive description of the terms and conditions of an LIC policy or its benefits or privileges.

For more details, please contact our branch or divisional office. Any LIC Agent will be glad to help you choose the life insurance plan to meet your needs and render policy servicing.

What Is Life Insurance? Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against.

The contract is valid for payment of the insured amount during: The date of maturity, or Specified dates at periodic intervals, or Unfortunate death, if it occurs earlier. Among other things, the contract also provides for the payment of premium periodically to the Corporation by the

policyholder. Life insurance is universally acknowledged to be an institution, which eliminates risk, substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of the breadwinner. By and large, life insurance is civilisations partial solution to the problems caused by death. Life insurance, in short, is concerned with two hazards that stand across the life-path of every person. That of dying prematurely is leaving a dependent family to fend for itself. That of living till old age without visible means of support.

Life Insurance Vs. Other Savings Contract of Insurance: A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance. At the time of taking a policy, policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.

Protection: Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other

savings schemes, only the amount saved (with interest) is payable.

Aid to Thrift: Life insurance encourages thrift. It allows long-term savings since payments can be made effortlessly because of the easy instalment facility built into the scheme. (Premium payment for insurance is monthly, quarterly, half yearly or yearly). For example: The Salary Saving Scheme popularly known as SSS provides a convenient method of paying premium each month by deduction from ones salary.

In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions.

Liquidity: In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.

Tax Relief: Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force. Assesse can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.

Money When You Need It: A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time. Childrens education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.

Alternatively, policy money can be made available at the time of ones retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).

Who Can Buy A Policy? Any person who has attained majority and is eligible to enter into a valid contract can insure himself/herself and those in whom he/she has insurable interest.

Policies can also be taken, subject to certain conditions, on the life of ones spouse or children. While underwriting proposals, certain factors such as the policyholders state of health, the proponents income and other relevant factors are considered by the Corporation.

Insurance for Women: Prior to nationalization (1956), many private insurance companies would offer insurance to female lives with some extra premium or on restrictive conditions. However, after

nationalization of life insurance, the terms under which life insurance is granted to female lives have been reviewed from time-to-time. At present, women who work and earn an income are treated at par with men. In other cases, a restrictive clause is imposed, only if the age of the female is up to 30 years and if she does not have an income attracting Income Tax.

Medical and Non-Medical Schemes Life insurance is normally offered after a medical examination of the life to be assured. However, to facilitate greater spread of insurance and also to avoid

inconvenience, LIC has been extending insurance cover without any medical examination, subject to certain conditions.

With Profit and Without Profit Plans An insurance policy can be with or without profit. In the former, bonuses disclosed, if any, after periodical valuations are allotted to the policy and are payable along with the contracted amount. In without profit plan the contracted amount is paid without any addition. The premium rate charged for a with profit policy is therefore higher than for a without profit policy.

Key man Insurance: Key man insurance is taken by a business firm on the life of key employee(s) to protect the firm against financial losses, which may occur due to the premature demise of the Key man.

Unit Linked Insurance Plans

Unit Linked Insurance Plan (ULIP) is life insurance solution that provides for the benefits of risk protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have the option of investing across various schemes, i.e., diversified equity funds, balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium amounts during the policy's tenure. For example, if an individual has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift their investments across various plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no cost.

Expenses Charged in a ULIP

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

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

Fund Management Fees: Fees levied for management of the fund and is deducted before arriving at the NAV.

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

Surrender Charges: Deducted for premature partial or full encashment of units.

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

Service Tax Deductions: Service tax is deducted from the risk portion of the premium.

10 GOVERNMENT SECURITIES

Government securities (G-sec) are sovereign securities which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme.

The term Government Securities includes: Central Government Securities. State Government Securities Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit. The market borrowing of the Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans.

In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing programme of the Central Government

Types of Government Securities

Government Securities are of the following types:-

Dated Securities: are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. These are called dated securities because these are

identified by their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a coupon of 11.03% payable half yearly. The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date. Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively. The key features of these securities are: They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The difference between the issue price (discounted price) and face value is the return on this security. The security is redeemed at par (face value) on its maturity date.

Partly Paid Stock is stock where payment of principal amount is made in instalments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. The key features of these securities are: They are issued at face value, but this amount is paid in instalments over a specified period. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.

Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which is benchmarked against average yield on 364 Days Treasury Bills for last six months. The coupon is reset every six months. The key features of these securities are:

 They are issued at face value. Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc. Though the benchmark does not change, the rate of interest may vary according to the change in the benchmark rate till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.

Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in year 2007. In other words it means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy back (call option) bond from holder in 2007. This bond has been priced in line with 5 year bonds.

Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale price index. These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. The principal

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

Features of Government Securities Nomenclature The coupon rate and year of maturity identifies the government security. Example: 12.25% GOI 2008 indicates the following: 12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, and 2008 is the year of maturity.

Eligibility All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to purchase Government Securities.

Availability Government securities are highly liquid instruments available both in the primary and secondary market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary Dealer in the government securities market, and is actively involved in the trading of government securities.

Forms of Issuance of Government Securities Banks, Primary Dealers and Financial Institutions have been allowed to hold these securities with the Public Debt Office of Reserve Bank of India in dematerialized form in accounts known as Subsidiary General Ledger (SGL) Accounts. Entities having a Gilt Account with Banks or Primary Dealers can hold these securities with them in dematerialized form. In addition government securities can also be held in dematerialized form in demat accounts maintained with the Depository Participants of NSDL.

Minimum Amount In terms of RBI regulations, government dated securities can be purchased for a minimum amount of Rs.10, 000/-only. Treasury bills can be purchased for a minimum amount of Rs 25000/- only and in multiples thereof. State Government Securities can be purchased for a minimum amount of Rs 1,000/- only.

Repayment Government securities are repaid at par on the expiry of their tenor. The different repayment methods are as follows: For SGL account holders, the maturity proceeds would be credited to their current accounts with the Reserve Bank of India. For Gilt Account Holders, the Bank/Primary Dealers would receive the maturity proceeds and they would pay the Gilt Account Holders. For entities having a demat account with NSDL, the maturity proceeds would be collected by their DP's and they in turn would pay the demat Account Holders.

Day Count For government dated securities and state government securities the day count is taken as 360 days for a year and 30 days for every completed month. However for Treasury bills it is 365 days for a year.

Example : A client purchases 7.40% GOI 2012 for face value of Rs. 10 lakhs.@ Rs.101.80, i.e. the client pays Rs.101.80 for every unit of government security having a face value of Rs. 100/- The settlement is due on October 3, 2002. What is the amount to be paid by the client? The security is 7.40% GOI 2012 for which the interest payment dates are 3rd May, and 3rd November every year. The last interest payment date for the current year is 3rd May 2002. The calculation would be made as follows: Face value of Rs. 10 lakhs. @ Rs.101.80%.

Therefore the principal amount payable is Rs.10 lakhs X 101.80% =10, 18,000 Last interest payment date was May 3, 2002 and settlement date is October 3, 2002. Therefore the interest has to be paid for 150 days (including 3rd May, and excluding October 3, 2002)

(28 days of May, including 3rd May, up to 30th May + 30 days of June, July, August and September + 2 days of October). Since the settlement is on October 3, 2002, that date is excluded. Interest payable = 10 lakhs X 7.40% X 150 = Rs. 30833.33. 360 X 100 Total amount payable by client =10, 18,000+30833.33=Rs. 10, 48,833.33

Benefits of Investing in Government Securities No tax deducted at source Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals Qualifies for SLR purpose Zero default risk being sovereign paper Highly liquid. Transparency in transactions and simplified settlement procedures through CSGL/NSDL

Methods of Issuance of Government Securities Government securities are issued by various methods, which are as follows:

Auctions: Auctions for government securities are either yield based or price based. In a yield based auction, the Reserve Bank of India announces the issue size (or notified amount) and the tenor of the paper to be auctioned. The bidders submit bids in terms of the yield at which they are ready to buy the security. In a price based auction, the Reserve Bank of India announces the issue size (or notified amount), the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing government securities. The basic features of the auctions are given below: Method of auction: There are two methods of auction which are followed Uniform price Based or Dutch Auction procedure is used in auctions of dated government securities. The bids are accepted at the same prices as decided in the cut off. Multiple/variable Price Based or French Auction procedure is used in auctions of Government dated securities and treasury bills. Bids are accepted at different prices / yields quoted in the individual bids.

 Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at the time of auction. Cut off yield: is the rate at which bids are accepted. Bids at yields higher than the cut-off yield is rejected and those lower than the cut-off are accepted. The cutoff yield is set as the coupon rate for the security. Bidders who have bid at lower than the cut-off yield pay a premium on the security, since the auction is a multiple price auction. Cut off price: It is the minimum price accepted for the security. Bids at prices lower than the cut-off are rejected and at higher than the cut-off are accepted. Coupon rate for the security remains unchanged. Bidders who have bid at higher than the cut-off price pay a premium on the security, thereby getting a lower yield. Price based auctions lead to finer price discovery than yield based auctions. Notified amount: The amount of security to be issued is notified prior to the auction date, for information of the public. The Reserve Bank of India (RBI) may participate as a non-competitor in the auctions. The unsubscribed portion devolves on RBI or on the Primary Dealers if the auction has been underwritten by PDs. The devolvement is at the cut-off price/yield.

Underwriting in Auctions For the purpose of auctions, bids are invited from the Primary Dealers one day before the auction wherein they indicate the amount to be underwritten by them and the underwriting fee expected by them. The auction committee of Reserve Bank of India examines the bids and based on the market conditions, takes a decision in respect of the amount to be underwritten and the fee to be paid to the underwriters. Underwriting fee is paid at the rates bid by PDs, for the underwriting which has been accepted. In case of the auction being fully subscribed, the underwriters do not have to subscribe to the issue necessarily unless they have bid for it. If there is a devolvement, the successful bids put in by the Primary Dealers are set-off against the amount underwritten by them while deciding the amount of devolvement.

On-tap issue

This is a reissue of existing Government securities having pre-determined yields/prices by Reserve Bank of India. After the initial primary auction of a security, the issue remains open to further subscription by the investors as and when

considered appropriate by RBI. The period for which the issue is kept open may be time specific or volume specific. The coupon rate, the interest dates and the date of maturity remain the same as determined in the initial primary auction. Reserve Bank of India may sell government securities through on tap issue at lower or higher prices than the prevailing market prices. Such an action on the part of the Reserve Bank of India leads to a realignment of the market prices of government securities. Tap stock provides an opportunity to unsuccessful bidders in auctions to acquire the security at the market determined rate.

Fixed coupon issue

Government Securities may also be issued for a notified amount at a fixed coupon. Most State Development Loans or State Government Securities are issued on this basis.

Private Placement

The Central Government may also privately place government securities with Reserve Bank of India. This is usually done when the Ways and Means Advance (WMA) is near the sanctioned limit and the\ market conditions are not conducive to an issue. The issue is priced at market related yields. Reserve Bank of India may later offload these securities to the market through Open Market Operations (OMO).

After having auctioned a loan whereby the coupon rate has been arrived at and if still the government feels the need for funds for similar tenure, it may privately place an amount with the Reserve Bank of India. RBI in turn may decide upon further selling of the security so purchased under the Open Market Operations window albeit at a different yield.

Open Market Operations (OMO)

Government securities that are privately placed with the Reserve Bank of India are sold in the market through open market operations of the Reserve Bank of India. The yield at which these securities are sold may differ from the yield at which they were privately placed with Reserve Bank of India. Open market operations are used by the Reserve Bank of India to infuse or suck liquidity from the system. Whenever the Reserve Bank of India wishes to infuse the liquidity in the system, it purchases government securities from the market, and whenever it wishes to suck out the liquidity from the system, it sells government.

11 COMMODITIES

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

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

The execution method of trading futures contracts is similar to trading physical shares, but futures contracts have an expiry date and are deliverable. Futures contracts have an expiry date and need to be occasionally rolled over from the current contract month to the following contract month.

The reason is because the biggest advantage to trading commodity futures, for the private investor is the opportunity to legally short-sell these markets. Short-selling is the ability to sell commodity futures creating an open position in the expectation to buy-back at a later time to profit from a fall in the market. If you wish to trade the up-side of commodity futures, then it will simply be a buy-to-open and sell-to close set of transactions similar to share trading.

The commodity markets will always produce rising of falling trends, and with the abundance of information and trading opportunities available there is no reason for any investor to exclusively trade the share market when there is potential profits from trading commodity futures. The increased use of commodity trading vehicles in investment management has led practitioners to create investable commodity indices and products that offer unique performance opportunities for investors in physical commodities. As is true for stock and bond performance, as well as investment in managed futures and hedge fund products, commodity-based products have a variety of uses. Besides being a source of information on cash commodity and futures commodity market trends, they are used as performance benchmarks for evaluation of commodity

trading advisors and provide a historical track record useful in developing asset allocation strategies. However, the investor benefits of commodity or commodity-based products lie primarily in their ability to offer risk and return tradeoffs that cannot be easily replicated through other investment alternatives. Previous research that direct stock and bond investment offers little evidence of providing returns consistent with direct commodity investment. Commodity-based firms may not be exposed to the risk of commodity price movement. Thus for investors, direct commodity investment may be the principal means by which one can obtain exposure to commodity price movements. The commodities that are traded in the market Gold Copper Silver Sugar Wheat Zeera Guar

12 REAL ESTATE

Indian Real Estate: Undeniably tremendous! And, that is the undeniable verdict of a Price Waterhouse Coopers study conducted on the investment environment in terms of Indian real estate. Ever since the Government of India gave its stamp of approval to 100% foreign direct investment (FDI) in housing and real estate, NRIs, overseas real estate developers, hoteliers, and others have been tracking a path to the sub-continent. Sensing the business potential for developing serviced plots, constructing residential / commercial complexes, business centres / offices, mini-townships, investments in infrastructure

facilities e.g. roads, bridges, manufacture of building materials, etc., FDI is flooding in to take advantage of the tremendous real estate opportunities.

Indian Real Estate: Growing Potential The increasing demand for Indian real estate has not only generated employment, it has also been instrumental in the growth of steel, cement, bricks and other related industries. Estimated to be in the region of US $12-billion, real estate development in India is growing by as much as 30% each year. Already, eighty per cent of Indian real estate has been developed for residential space, and 20% comprises of shopping malls, office space, hospitals and hotels. Fuelled largely due to off-shoring / outsourcing of BPOs, call centres, high-end technology consulting and software

development and programming firms, real estate growth in India has great investment prospective.

Indian Real Estate: Investment Opportunities Tax reform measures in the last few years have ensured real estate in India is one of the most productive investment sectors, with money invested in real estate offering regular returns on investment including appreciating in value. And, the Government of India by opening up 100% foreign direct investment, and fiscal reforms like stamp duty and property tax reductions, setting up real estate mutual funds has turned real estate into a promising investment option. Already, it has approved the first Rs. 100-crore FDI project in Gurgaon. With urban populations expected to grow from 290-million to 600-million by 2021, housing requirements are expected to top 68-million by 2021, which means Indias urban housing sector could do with an investment of US $25-billion over a 5-year period. Poised for rapid urbanisation, 3 out of 10 of the worlds largest cities are in India. An influx of jobs due to off-shoring / outsourcing has resulted in rising disposable incomes, increased

consumerism, factors responsible for changing the face of residential and commercial real estate in India. Wishing to take advantage of real estate investment opportunities, banks and housing finance companies are falling over themselves to tie-up with developers or offer project loans at competitive rates.

13 SHARE MARKET

The Stock Market is a market which deals in stocks of companies belonging to both the public sector as well as private. The Indian Stock Market is mostly referred to as the Share Market because it deals primarily with shares of various companies listed in for trading. The stock market is a viable investment option at hands for investors in India. Since Indian Stocks market is showing strength and making steady gains over last few years barring few low ebbs it is wise to prefer stock market as reliable mode of investment than other investment options.

13.1 INVESTING IN STOCKS Many of us would like to try our luck in the Stock markets. Yes, Why Not? Trading stocks is one of the most lucrative methods of making money.

Heres why:

You do not need a lot of money to start making money, unlike buying property and paying a monthly mortgage. It requires very minimal time to trade - unlike building a conventional business.

 Its fast cash and allows for quick liquidation (You can convert it to cash easily, unlike selling a property or a business). Its easy to learn how to profit from the stock market.

But you need to have your basics clear. Unless you do.you will be wasting your time and losing money. You need to be crystal clear of each and every aspect of Investments, stock options, Stock Trading, Company, Shares, Dividend & Types of Shares, Debentures, Securities, Mutual Funds, IPO, Futures & Options, What does the Share Market consist of? Exchanges, Indices, SEBI , Analysis of Stocks How to check on what to buy?, Trading Terms (Limit Order, Stop Loss, Put, Call, Booking Profit & Loss, Short & Long), Trading Options Brokerage Houses etc.

You must have heard stories of the fabulous returns made in the stock markets in recent months. And you longed wishfully for a piece of the action. But you could also have heard horror stories of how a friend lost his shirt in the stock market. And were promptly thankful that you didnt lose yours.

Lets set the record straight. Wisely chosen (those are the key words), stocks are a must for any serious investor. They add that extra zing to your collection of investments.

Study after study has revealed that over the long term, stocks outperform all other assets. That means you can expect to earn more from shares than from bonds, fixed deposits or gold. No doubt the risk is higher with shares. But if you are in for the long haul, so are the potential returns. But before you take the plunge and invest in the stock market, get your basics right. Stocks are not only for the brilliant Stocks are far from being rocket science. The strategies you need to know to maximise your wealth and the pitfalls you need to avoid are not beyond comprehension. Even if you feel that you dont have the time, and prefer to entrust your money to a portfolio manager or mutual fund, the least you need to know is which funds are better, how to choose your fund manager, and keep a tab on his performance. So what is a share? Any business has a lot of assets: The machinery, buildings, furniture, stock-in-trade, cash, etc. It will also have liabilities. This is what the company owes other people. Bank loans, money owed to people from whom things have been bought on credit, are examples of liabilities. Take away the liabilities from the total assets, and you are left with the capital. Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital. This capital is subdivided into shares (or stocks). So if a companys capital is Rs 10 crore (Rs 100 million), that could be divided into 1 crore (10 million) shares of Rs 10 each. Part of this capital, or some of the shares, is held by the people who started the business, called the promoters.

The other shares are held by investors. These investors could be people like you and me or mutual funds and other institutional investors. What does this mean for me? You must have realised by now that owning a share means owning a share in the business. When you invest in stocks, you do not invest in the market. You invest in the equity shares in a company. That makes you a shareholder or part owner in the company. Since you own part of the assets of the company, you are entitled to the profits those assets generate. Or bear the loss. So, if you own 100 shares of Gujarat Ambuja Cement, for example, you own a very small part -- since Gujarat Ambuja has millions of shares -- of the company. You own a share of its assets, its liabilities, its profits, its losses, and so on. Owning shares, therefore, means having a share of a business without the headache of managing it. Your Gujarat Ambuja shares, for instance, will rise in value if the company makes good profits, or may do badly if people stop building houses and demand for cement falls. What do mean by rise in value? If the company has divided its capital into shares of Rs 10 each, then Rs 10 is called the face value of the share. When the share is traded in the stock market, however, this value may go up or down depending on supply and demand for the stock. If everyone wants to buy the shares, the price will go up. If nobody wants to buy them, and many want to sell the shares, the price will fall. The value of a share in the market at any point of time is called the price of the share or the

market value of a stock. So the share with a face value of Rs 10, may be quoted at Rs 55 (higher than the face value), or even Rs 9 (lower than the face value). If the number of shares in a company is multiplied by its market value, the result is market capitalisation. For instance, a company having 10 million shares of a face value Rs 10 and a market value of Rs 30 as on November 1, 2004, will have a market capitalisation of Rs 300 million as on November 1, 2004. So how does one buy shares? Alright, you have decided you want part of the action. Shares are bought and sold on the stock exchanges -- the two main ones in India are the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE). You can use three different routes to buy shares: Through your broker, trade directly online, or buy shares when a company comes out with a fresh issue of shares. This is called an initial public offering (IPO). Clear the jargon first!

If a brand new company or a company already in existence, but with no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an Initial Public Offering (IPO). It is the first time that it is approaching the public for money. That is why the company is also referred to as going public. If a company that is already listed (has its shares for buying and selling on the stock exchange) is coming out with a fresh

tranche of shares, it is called the new issue (like the current Dena Bank issue). Then, there are the disinvestments -- where the government sells its stakes in public sector companies in the market. Although these are not technically new issues, they too create a buzz in the market.

Every company needs money

A company needs money to grow and expand -- to purchase new machinery, land or even repay its loans. To do that, one of the options it has is to ask the public for money. It comes out with a public or new issue. The company offers shares and the public buys those shares. These shares are listed on the Stock Exchange. People who invest in the company get rewarded (as dividends) by the company, or sell the shares as the share price rises.

How can I buy these shares?

There are two ways: If you want the shares of a company that is already listed, you can buy them from the Stock Exchange through brokers. This is called buying from the secondary market.

 Buying from the primary market means that you buy them directly from companies when they make new issues of shares or come out with IPOs. You can also get rights issues and bonus shares, but more on that later.

Why would you pick up shares through IPOs, rather than buy them from the market? Because, often, companies issue their shares cheaply and, later, when these shares are listed on the Stock Exchange, they list at a premium (higher than the price at which they were issued). So you could make a lot of money if you sell those shares. What if you dont want to sell the shares soon? Sure. It also happens that companies who are going public or listing their shares for the first time also usually offer their shares cheap, and could go on to become very successful. IPOs thus offer investors the chance to participate in their prosperity cheaply. These listing gains are the chief attractions of buying in the primary market. So whats the catch?

The trouble is, there are usually plenty of applicants for good IPOs. And they are heavily oversubscribed (the demand for the number of shares is more than the number being offered for sale). And although 25% of the issue has to be reserved mandatorily for the retail investor (those who apply for shares of a value less than Rs 50,000), even the

retail portion is oversubscribed several times for good issues. In this scenario, lots are drawn and only a few individuals are allotted shares. Hence, you may not get the number of shares you asked for. There is also a chance that you may also not get an allotment at all, in which case your money will be returned to you. If you dont get any shares, your money will be returned to you within 21 days. This is true even if you get partial allotment (you get only some of the shares you applied for), and the extra money you have paid is returned. If you do get an allotment, your demat account will be credited with the shares. Once the shares are listed, you can sell them in the market and pocket the gains. Of course, you can also hold your shares for the long term if you want, but most people opt out if the price on listing is well above the price at which you were allotted the stocks. Remember, you need to have a demat account before applying for IPOs. Else your form will be rejected.

13.2 Lets know about Stock Market Indices:

A stock index represents the change in the value of a set of stocks, which constitute the index. More precisely, a stock index number is the current relative value of the weighted average of the prices of a pre-defined group of stocks. For example, if an index is assigned an arbitrary base value of 100 on a given date with a certain number of stocks assigned to it, this date onwards, the change in index would be measured in terms of changes that the base value of 100

acquires. A good stock market index is one, which is well diversified and is adequately liquid. Some of the prominent indices in India are: Sensex Nifty Nifty Junior BSE 200 etc.

Among all these indices, BSE Sensex and Nifty deserve special mention. Brief details about these indices are as follows: BSE Sensex: The Bombay Stock Exchange is the oldest stock market of India. Sensex stands for sensitive index. It was created in 1978-79 with a base value of 100. It comprises of thirty stocks of leading Indian companies and is well diversified with representation of almost all the sectors of the economy like Banking, Information Technology, Cement, Autos,

Manufacturing, Capital Goods, etc. The Sensex is revised from time to time to incorporate companies belonging to emerging sectors of the economy. The movement in Sensex values on working days is computed on a real time basis. Nifty: Nifty is the stock market index of National Stock Exchange. It comprises the stocks of 50 of the largest and the most liquid companies from about 25 sectors in India. It was introduced in 1995 keeping in mind that it would be used for modern applications such as index funds and index derivatives, besides

reflecting

the

stock

market

behaviour.

NSE

maintained it till July 1998 and subsequently it has been managed by IISL (India Index Services and Products Ltd.) Sectoral Indices: Sectoral Indices are those indices, which represent a specific industry sector. All stocks in a sectoral index belong to that sector only. Hence an index like the NSE Bankex is made of Banking Stocks. Sectoral Indices are very useful in tracking the movement and performance of particular sector.

13.3 5 simple tips for stock market investors Investment is very easy if you approach stock markets with an open mind. Dont clutter your mind with numbers like support, resistance and volumes etc. Those are meant for traders. We are investors then why should we waste time in thinking about them. Invest in good companies with sound business prospects at reasonable valuations and give

management sufficient time. Treat every short term fall as an investment opportunity. Sincerely believe in fundamentals. Read every good article on businesses and

companies. Listen to every expert. Analyse them in your own way then invest in good stocks. Dont follow any one blindly. I daily spend 6-8 hours in reading and 1-2 hours in listening about stocks and

companies. I am passionate about stocks and companies. So I enjoy every moment of reading. Never follow herds and broker tips. Buy good companies when no one is talking about them and sell the scrip when all are buying it. Quarterly results and balance sheets will help you in picking good companies. I bought metal stocks, Bartronics and Tanla Solutions in the last week in spite of steep fall as I believe in their fundamentals and growth prospects. Allocate 25% of money to buy emerging stocks and contra stocks. Those who bought sugar stocks? (Select companies) in 2007 got more than 100% returns in just 10 months. Emerging stocks will take 3-5 years but sometimes give more than 500% returns.

14 Tips and advice for smart investors by Warren Buffet: Beware of companies displaying weak accounting. Unintelligible usually footnotes indicate

untrustworthy management. Be suspicious of companies that trumpet and earnings growth

projections expectations.

Suspect those CEO's who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to make the numbers will at some point be tempted to make up the numbers. Derivatives destruction. A director whose moderate income is heavily dependent on directors fees is highly unlikely to offend a CEO or fellow directors, who in a major way will determine his reputation in corporate circles. If regulators believe that significant money taints independence (and it certainly can), they have overlooked a massive class of possible offenders. (Referring to outside directors) Those attributes are two legs of our entrance strategy, the third being a sensible purchase price. We have no exit to strategy we buy to keep. That is one reason why Berkshire Hathaway is usually the first- and sometimes the only are financial weapons of mass

choice for sellers and their managers. This is the synopsis of Warren Buffet speech in 2003.

15 Which investing option is the best? Here, Im going to compare share market against most of the other lucrative investment options!!!!!!! Give me a stock clerk with a goal and III gives you a man who will make history. Give me a man with no goals and III gives you a stock clerk. -James Cash.

Great investment opportunities come around when excellent companies are surrounded by unusual

circumstances that cause the stock to be misappraisal. Warren Buffet.

Wisely chosen (those are the key words), stocks are a must for any serious investor. They add that extra zing to your collection of investments. Study after study has revealed that over the long term, stocks outperform all other assets. That means you can expect to earn more from shares than from bonds, fixed deposits or gold. No doubt the risk is higher with shares. But if you are in for the long haul, so are the potential returns.

Why do people buy shares against many other available investment options? In a line: Because they can make big money on it.

Theres a huge difference between the gains and losses you can make by investing in the stock market as compared to your returns from bank fixed deposits, insurance, mutual funds and other investments. In stocks, you can make unbelievable money -- its not uncommon for people to have doubled their money in the last one year. On the flip side (there is always one), when the markets crashed in May, many people lost more than a quarter of their investment. Compare this with your bank fixed deposit. Your FD will only fetch you around five to six per cent per annum, but you can be sure of getting your money back. When you put your money in a bank deposit, you loan the money to a bank for a fixed return (rate of interest) and a fixed tenure (number of months or years). At the end, you get back your original amount and you are paid interest on the same. When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder or part-owner in the company. The good news is that since you own a part of the assets of the company, you are entitled to a share in the profits those assets generate. The bad news is that you are also expected to bear the losses, if any. Now, if you are a shareholder, there are two ways you can benefit from the profits of the company: capital appreciation or dividend.

Dividend

usually, a company distributes a part of the profit it earns as dividend.

For example: A company may have earned a profit of Rs 1 crore in 2007-08. It keeps half that amount within the company. This will be utilised on buying new machinery or more raw materials or even to reduce its borrowing from the bank. It distributes the other half as dividend. Assume that the capital of this company is divided into 10,000 shares. That would mean half the profit -- i.e. Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend would then be Rs 500 per share. If you own 100 shares of the company, you will get a cheque of Rs 50,000 (100 shares x Rs 500) from the company. Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50 per cent. Its important to remember that this dividend is a percentage of the shares face value. This means, if the face value of your share is Rs 10, a 50 per cent dividend will mean a dividend of Rs 5 per share. However, chances are you would not have paid Rs 10 (the face value) for the share. Lets say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. That, in percentage terms, means you got just five per cent as your dividend and not the 50 per cent the company announced. Or, lets say, you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. That means, in percentage terms, you got just 55.55 per cent as dividend yield and not the 50 per cent the company announced.

Capital Gain As the company expands and grows, acquires more assets and makes more profit, the value of its business increases. This, in turn, drives up the value of the stock. So, when you sell, you will receive a premium over (more than) what you paid. This is known as capital gain and this is the main reason why people invest in stocks. They want to make money by selling the stock at a profit. It is not as easy as it sounds. A stocks price is always on the move. It could either appreciate (increase in value) or depreciate (decrease in value) with respect to the price at which you purchased it. If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 per cent. Or, if you buy a stock for Rs 10 and sell it for Rs 9, you lose Rs 1, or your loss is 10 per cent.

Now look at both: Dividend and Capital Gain If you buy a stock for Rs.10 and sell it for Rs.20 after a year, then your return from that stock is Rs.10, or 100 per cent. Add the Rs.5 per share you have received as dividend, and your total return will be Rs 10 plus Rs.5 = Rs.15 or 150 per cent (Rs.15 divided by Rs.10 multiplied by 100).If you buy a stock for Rs 10 and sell it for Rs 9 after a year, you would lose Rs 1 per share. However, you would have got Rs 5 as dividend. So you would net Rs 4 as earnings from the company. In percentage terms, your return would be 40 per cent (Rs 4 divided by Rs 10 multiplied by 100).

Tax one last point. If you are a tax payer, the finance minister has made it very easy for you to invest in the stock market. There is no tax on dividend. Neither will you be taxed on long-term capital gains. This means, if you buy a share, hold it for at least a year and sell it at a profit, you dont have to pay any tax on the profit your make. If you sell it within a year, the short-term capital gains tax is only 10 per cent. Contrast this with fixed deposits, where you have to pay tax on the interest at your marginal tax rate. This means that, if you are in the 30 per cent tax bracket and your interest income exceeds Rs 12,000 in a year, youll have to pay tax on your interest income at that rate (including the surcharge, the cess, etc., the rate works out to almost 35 per cent). Investing in stocks may be more risky, but it is more tax-friendly. Besides, there is the potential to get a higher return on your investment.

Understanding return expectations While some investments like PPF, FDs and post office savings deposits are categorised as fixed income securities, others such as equities, MFs and real estate are variable income assets. Fixed income securities offer a fixed return, which largely depends on government policy. For example, PPF fetches a return of 8 per cent per annum, as of now; this has been fixed by the government. In case of variable income securities, the rate of return is market determined.

Hence, the returns continuously change with market dynamics.

You, therefore, need to examine the pros and cons of both, variable and fixed income securities, to create an asset mix based on your risk profile and return expectations. Empirical evidence shows that among all the asset classes, equities provide the maximum return. The table below illustrates exactly that.

Returns from Investment Assets: A comparison

Last years Equity Gold PPF Bank Deposits 34.72% 10% 9.5% 6.39%

5 Last years

10 Last years 12.7% 15% 12%

15

16.11% 7% 12% 12.55%

13.00%

The above table proves that equities have outperformed all other popular assets in the last ten years. The reason why equities lag in the last fifteen years is primarily because of a series of scams in the stock market between 1992 and 2000 and also because the level of participation in the Indian securities market was nowhere close to what it is today. It is

also important to note is that the Sensex is not a static value and its composition continues to change. Hence, returns generated by the index may not always talk about the same company.

Performance of the Sensex in the last 15 years: Sensex (Closing Value) 3561 4305 3244 4795 10609 14400 May, 1992 June, 1997 June, 2002 June, 2004 June, 2006 June(22nd 2007) , Year

The case for long term investment in equities: The movement during these fifteen years shows that it is rewarding to stay invested in equities for the long term. The following factors justify this: Industries and businesses, to which companies belong, mature over a period of time. As industries grow, so do the profits of companies belonging to them. The best example of this can be found in the Indian

telecommunications industry. Hence, investors start reaping the benefit of their investment over a period of time. While markets undergo cyclical phases, which follow a series of peaks and troughs, over a period of time these factors get negated and returns from stocks present a valid picture. So, although you may incur some losses in the short term, if you are looking to invest in equities you must always think long-term. Equities are the only investment asset, which are exempt from long-term capital gains tax, which means that you own all the returns generated. All other investments, excluding PPF and life insurance, are taxed for the gains made. This reduces the overall return in investment assets like NSC, bank deposits etc. An investor can ill-afford to ignore that India is a fast growing economy and it is widely perceived that this robust growth would continue for many more years to come. The biggest beneficiary of this growth story would be the industries and service sector. It is almost certain that the Index of Industrial Production (IIP) would grow at a rate of over 10 per cent in the next few years. This would enhance profit growth of companies and it would get reflected in the upward movement of their share price.

16 INTERVIEWS

Interview with Mr Manish R. Nagrecha, Branch Manager of Share khan Ltd. (11/08/2010) Given the present rate of inflation, what kind of investment instrument do you prefer? I always prefer investment in securities and derivatives over other instruments. Why? Because I prefer high returns. Here the risks are quite high and hence the dividends too are high. I have the required knowledge to trade in securities and derivatives and hence I know where I am betting my money. Why dont you go for investments with a fixed rate of return like fixed deposits and post-office savings, etc.? The rate of return you get after investing in such instruments is quite low. The most disappointing fact about these instruments is that they arent liquid. So you mean to say that the share market is the best bet? For me, yes. But for others, it depends. It depends on your capacity to take risk and your retaining power. People should invest in share market only if their fundamentals are clear and they have done some research about the company

they are planning to invest in because one wrong decision can lead to severe losses. Given a lump-sum of Rs.10 lakhs, where would you invest? I would invest a minor sum of money in gold and bonds and a major sum in shares of A-grade companies.

Cautions to be taken while investing in shares and debentures? You should have your fundamentals clear before entering the market. If you rely on others to make your investment decisions (in stock exchange), you are headed for disaster. Think for the long term if you want good returns. Dont speculate. Never depend on tips. A sound investor is one who takes his own decisions.

Interview with Mr Sumit Beria, Senior Relationship Manager of ICICI Securities. (13/08/2009)

What kind of investment instrument do you prefer to invest your money in? I personally prefer to invest in securities and derivatives. I am also inclined towards insurance and gold. But for people who dont have sufficient knowledge to invest in stocks and

adequate funds should go for mutual funds, as they provide professional service as well as good returns.

Why do you prefer stocks and derivatives when the returns are not fixed and the risks quite high? Risks are high but when you know where you are putting your money, you can be certain that your money will return. If you invest your money in fundamentally sound companies you can be sure about the returns. Here, the liquidity is also high; hence you can take away the invested money whenever required.

Can you give examples of some fundamentally strong companies? All the A-grade companies are fundamentally sound. Even may medium and small-cap companies prove to be good investment avenues? If proper research is done before investing your money you can be certain that you lose a penny, but that requires a lot of effort on the part of investors. My personal favourites are TATA Motors, Larsen & Toubro, Reliance Industries, ICICI and DLF.

How do you find out which companies are sound to invest in?

As I said earlier, by doing some research. Your research should include finding the EPS of the company, the operations of the company, the growth rate of the entire sector, comparison of the company with its competitors (balance sheets, cash flow statements, etc.)

Can you elaborate on the future of share market? As Indian economy is booming and our GDP is also rising, the stock exchange should remain positive. But as we know the share market is very volatile and hence no one can predict the future trends.

BIBLIOGRAPHY

www.economictimes.com www.sharekhan.com www.mutualfundsindia.com www.finance.yahoo.com www.nseindia.org www.bseindia.com www.equitymaster.com www.indianmba.com Start investing book by CNBC TV18 Stock market investment by CNBC TV18 Complete guide LEACH to investment by ANDREW