ACKNOWLEDGMENT

I would like to thank wholeheartedly, my parents and all the people concerned
who have helped me continuously and gave moral support while preparing this
project.

It would be rather unfair on my part for not thanking my college Nagindas

Khandwala and University of Mumbai for giving us the opportunity. The help
and timely support given by the library staff of college cannot be ignored.

I am very grateful to and would like to thank my project guide, Prof. Kavita
Shah for proper guidance.

My acknowledgement would be incomplete without thanking all my professors

who have helped me at some stage or the other.

I look forward of having a favorable feedback from the readers.

1
 TABLE OF CONTENTS
SR NO. TOPIC PAGE NO.
Project report
1 Introduction to investment
2 The Emerging Investment Avenues
3 Needs and characteristics of wealthy investors
4 Investment alternatives in India
5 Marketable and Non-marketable securities
6 Equity shares
7 Bonds
8 Money market instruments
9 Mutual funds
10 Life insurance
11 Real estate

2
 Project Report

The project “Investment Avenues in India” gives a brief idea regarding the
various investment options that are prevailing in the financial markets in India.
With lots of investment options like banks, Fixed Deposits, Government bonds,
stock market, real estate, gold and mutual funds the common investor ends up
more confused than ever. Each and every investment option has its own merits
and demerits.

Any investor before investing should take into consideration the safety,
liquidity, returns, entry/exit barriers and tax efficiency parameters. We need to
evaluate each investment option on the above-mentioned basis and then invest.
Today an investor faces too much confusion in analyzing the various investment
options available and then selecting the best suitable one. In the present project,
investment options are compared on the basis of returns as well as on the
parameters like safety, liquidity, term holding etc. thus assisting the investor as
a guide for investment purpose.

The primary objective of the project is to make an analysis of various

investment decisions. The aim is to compare the returns given by various
investment decisions. To cater the different needs of investor, these options are
also compared on the basis of various parameters like safety, liquidity, risk,
entry/exit barriers, etc.

3
 RESEARCH METHODOLOGY.
There are two methods of collecting data for research and project work, they
are:

 Primary Data collection

 Secondary Data collection

Primary data is the data which is collected from the field under the control and
supervision of an investigator. It is the original data that has been collected
specially for the purpose in mind. It is collected by the researcher himself
through interview, observation, questionnaires and other such sources.

Secondary data is the data gathered and recorded by someone else prior to and
for a purpose other than the current project. It is the data that already exists and
is being reused. It is collected through previous research, official statistics, web
information and other sources.

In this project, the secondary data collection method is used wherein relevant
information from books, journals, magazines and websites is taken.

4
 INTRODUCTION TO INVESTMENT
“The poor make money by working for it, while the rich make money by
having their assets work for them”

The above is a simple message by Robert T Kiyosaki from his book ‘Rich Dad,
Poor Dad’ to motivate kids (new to investment) start investing, so that your
assets work for you.

In this modern era, money plays an important role in one’s life. In order to
overcome the problems in future they have to invest their money. Investment of
hard earned money is a crucial activity of every human being.

Investment is the commitment of funds which have been saved from current
consumption with the hope that some benefits will be received in future. Thus,
it is a reward for waiting for money. Savings of the people are invested in assets
depending on their risk and return demands, Safety of money, Liquidity, the
available avenues for investment, various financial institutions, etc.

Investment is a purchase of a financial product or other item of value with an

expectation of favorable future returns. Investing is a serious subject that can
have a major impact on investor’s future well-being. Virtually everyone makes
investments. Investors have a lot of investment avenues to park their savings.
The risk and returns available from each of these investment avenues differ
from one avenue to another. Even if the individual does not select specific

assets such as stock, investments are still made through participation in pension
plan, and employee saving programme or through purchase of life insurance or
a home. Employee behavior deals with analyzing the behavior of an employee
based on his psychographic and demographic factors like age, gender, education
and income groups. The respondents of this study will consist of only the
banking employees working in private and public sector as they are having
knowledge of financial products available at large. They have unique features of
safety, security, regular income, retirement benefit than the other occupation
people like business man. When it comes to investing, the volume of facts and
information available can be incredibly time consuming to wade through and
for many individuals it is just too confusing. Yet we need a good understanding

5
of the financial options available to us to be able to make good investment
decisions.

In India, many investment avenues are available where some are marketable and
liquid while others are non-marketable and some of them are highly risky while
others are almost riskless. The investor has to choose Proper Avenue depending
upon his specific need, risk preference, and returns expected.

Investors are a heterogeneous group, they may be large or small, rich or poor,
expert or lay man and not all investors need equal degree of protection. An
investor has three objectives while investing his money, namely safety of
invested money, liquidity position of invested money and return on investment.
The return on investment may further be divided into capital gain and the rate of
return on investment as interest or dividend. Among all investment options
available, securities are considered the most challenging as well as rewarding.
Securities include shares, debentures, derivatives, units of mutual funds,
Government securities etc. An investor may be an individual or corporate legal
entity investing funds with a view to derive maximum economic advantage
from investment such as rate of return, capital appreciation, marketability, tax
advantage and convenience of investment.

The Capital market facilitates mobilization of savings of individuals and pools

them into reservoir of capital which can be used for the economic development
of a country. An efficient capital market is essential for raising capital by the
corporate sector of the economy and for the protection of the interest of
investors in corporate securities. There arises a need to strike a balance between
raising of capital for economic development on one side and protection of
investors on the other. Unless the interests of investors are protected, raising of
capital, by corporates is not possible. Like, the primary objective of a senior
citizen’s asset allocation is the generation of regular income.

6
 Investment

Parking of funds (current) to earn benefits or securing growth in future can be

termed as Investments. It is a sacrifice from current income to gain returns at a
later stage/date. Investment should be done to yield more return than rate of
inflation. The current income of an individual can be put aside for two things –
either consumption or savings. The money once consumed is gone forever,
whereas the savings bears fruit.

Major element of any investment is time and risk. It purely depends upon
individual capacity to give importance to either of the two elements, on the
basis of one’s need. There are plenty of areas where money can be invested
like- government bonds, equities, gold, real estate, stocks, fixed deposits, etc.

A proper planning and analysis should be done in order to reach to a perfect

decision of investment/ or portfolio management. One’s skill improves with the
timely investments.

In this uncertain and volatile life, even the markets (secondary/commodity, etc.)
refuse to perform as per the expectations of the investor. Hence, one needs to
analyse well in advance which security can be considered worth to invest into;
which security is suitable to game for.

With the changing times, inclusion of youngster’s decision has also taken a
solid ground while deciding which investment avenue to exercise. There may be
a difference of opinion in selecting a good stock, a statistical approach may
solve the issue. A proper and systematic analysis of stock leads to the formation
of a flexible portfolio that may be churned easily as the needs of the hour. There
can be various investment avenues like T-Bills, 10 Yr G Security Bonds,
Mutual Funds, etc. Parking money in tax haven is a better/safer way of evading
tax. One needs to check out the pros and cons, before getting into any such
elements.

7
 The Emerging Investment Avenues

According to a study undertaken jointly by Merrill Lynch and Cap Gemini Ernst
and Young, High Net worth Individuals [HNIs] or wealthy investors are
proactive in portfolio management, risk management, consolidation financial
assets and use of diversification strategies as actively as large institutions. HNIs
are proactive in identifying new investment options and take inputs from
professional advisors in volatile market conditions.

HNIs are dynamic in modifying their asset allocation and were among the first
investors to move from equities to fixed income during 2001-2002 period of
downturn in equity markets. They shifted back to equities when they identified
favorable market trends.

8
 NEEDS AND CHARACTERISTICS OF WEALTHY INVESTORS

Needs

 Wealthy investors being aware of the emerging investment opportunities

use sophisticated investment strategies such as:-
 Leveraging on the professional advisors' capability to analyse market
trends and make appropriate investments
 Searching for innovative products to enhance value
 Diversifying across various types of assets
 Investing across emerging geographies
 Consolidating financial information and assets

Investment products and avenues:

 Managed products:

Managed product service is the most popular investment strategy adopted by

wealthy investors globally

 Real Estate:

Wealthy investors have found this asset class very attractive and have invested
directly in real estate and indirectly through real estate investment trusts.

 Art and passion:

Wealthy investors also have their investment in art, wine, antiques, and
collectibles

9
  Precious Metals:

Gold and other precious metals are attractive investment options to balance the
asset allocation

 Commodities:

Wealthy investors have turned to commodities to offset the lower returns from
fixed income securities.

 Alternative investments:

Hedge funds and Private equity investments such as venture funds are becoming
increasingly popular with wealthy investors to reduce the investment risks
related to stock market fluctuations. This is because these instruments have low
correlation with equity asset class performance. Investment in non correlated
assets, such as commodities helps to improve diversification of the portfolio
amidst volatile market conditions.

Characteristics

 Young, educated and knowledgeable

 Well informed about global trends
 Willing to take risks
 Demanding and quality conscious
 Performance oriented in taking decisions and less loyal
 Techno savvy and seeks information from various sources
 Smart in looking for the best deal
 Not attracted by traditional status symbols that do not add value
 Hands on in checking investments, making deals and getting personally
involved

10
 Special needs of investors

The strategies and characteristics of investors has led to financial institutions

innovating and expanding their product range to meet the growing demands of
such investors.

A financial advisor should keep in mind the following special needs and
expectations of the wealthy clients:-

 Demand broader range of services and skills:

Wealthy clients not only are on the look out for multiple investment avenues,
unlike other clients, but are also ready to face the risks associated with newer
products.

 Net worth and goals need to be matched and assets need to be planned tax
effectively:

Since investors have surplus funds that can be passed on to the next generations
and also come into the high tax paying category, investors need to advice them
on the best methods to transfer their assets after death as well as on the best tax
saving investments.

 Estate planning and tax planning:

In-depth knowledge about tools of estate planning such as wills, trusts, and
power of attorney is necessary. It is also important to know the succession rules
and tax rules to do effective tax planning resulting in minimal/no tax on transfer
of assets.

 Educate the client:

Educating the client on various and different types of investment avenues that
will suit him the best will prove very beneficial for the financial advisor.
Wealthy clients, especially those who are self made, may assume that if they
can make wealth in one industry they can manage their own portfolio as well. In
11
such cases it is best to educate the client about the best investment options
rather than trying to push a product; because if one is trying to push a product,
the client is unlikely to get interested since he/she will be having enough people
chasing him/her for investments.

Risk appetite shows the capacity of an investor to bear losses related to his
investments. Risk appetite is unique for each investor as it depends on various
personal factors such as age of the investor, earnings stability, financial
condition of his family etc.

It is important to understand the risk appetite to decide on the allocation in your

investment portfolio to high risk and high returns instruments as against the low
risk and low returns instruments.

12
 INVESTMENT ALTERNATIVES IN INDIA

 Marketable and Non marketable securities:-

Marketable securities:

 Money market securities

 Capital market securities
 Derivatives
 Indirect investments

Non marketable securities:

 Savings Account
 Government Savings Bonds
 Non-negotiable Certificates of Deposits (CDs)
 Money Market Deposit Accounts (MMDAs)

 Equity shares:

These are shares of company and can be traded in secondary market. Investors
get benefit by change in price of share and dividend given by companies. Equity
shares represent ownership capital. As an equity shareholder, a person has an
ownership stake in the company. This essentially means that the person has a
residual interest in income and wealth of the company. These can be classified
into following broad categories as per stock market:

 Blue chip shares

 Growth shares
 Income shares
 Cyclic shares
 Speculative shares

 Bonds

Bonds are the instruments that are considered as a relatively safer investment
avenues.

 G sec bonds
 GOI relief funds
 Govt. agency funds
13
  PSU Bonds
 RBI BOND
 Debenture of private sector co.

 Money market instrument

By convention, the term "money market" refers to the market for short-term
requirement and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one year.

 T-Bills
 Certificate of Deposit
 Commercial Paper

 Mutual Funds

A mutual fund is a trust that pools together the savings of a number of investors
who share a common financial goal. The fund manager invests this pool of
money in securities, ranging from shares, debentures to money market
instruments or in a mixture of equity and debt, depending upon the objective of
the scheme. The different types of schemes are

 Balanced Funds
 Index Funds
 Sector Fund
 Equity Oriented Funds

 Life insurance

Now-a-days life insurance is also being considered as an investment avenue.

Insurance premiums represent the sacrifice and the assured sum the benefit.
Under it different schemes are:

 Endowment assurance policy

 Money back policy
 Whole life policy
 Term assurance policy

14
  Real estate

One of the most important assets in portfolio of investors is a residential house.

In addition to a residential house, the more affluent investors are likely to be
interested in the following types of real estate:

 Agricultural land
 Semi urban land
 Farm House

15
 Marketable and Non marketable securities
Demystifying Securities

In the financial world, securities can be defined as financial instruments

that have some financial value, and they can be traded amongst investors,
governments and private enterprises. Securities in a financial market are
traded legally and are bound by stipulated laws. So, if you buy some
securities (say five stocks of a blue-chip company), then you're entitled to
receive the future gains on your investment (from the five stocks in which
you have invested your money) under some stated terms and conditions.
Further, suppose that you have two billion dollars in your account, and
you buy few bonds of the US government. Now, as a legal proof of your
purchase (and it happens in any transactions), you'll be provided with a
share certificate or bond, which is nothing but the acknowledgment of
your security. Now, we have got some idea about basics of securities. But
what are the different types of securities? What are their characteristics?
Why it is easy to sell one type of security, while the other aren't traded
frequently? Let us explore more into the concept of securities, that form
the foundation stone of world's financial market.

Characteristics of Securities

Since a security is a financial instrument, it has some characteristic

features that make it valuable in the market and it is sold or purchased
keeping in mind its basic features. As an investor, the three must-know
features of a security are:

 Return on Investments (ROI)

It is a human habit to calculate the gains or losses incurred in a

transaction. In financial markets, ROI is the factor that motivates people
to buy and sell securities.

 Risk Inherent in It

All investments carry some degree of risk. Many people stake a

significant fraction of their money in stock markets even when they are
16
 aware of the risks! If their estimates work, they earn many times their
investments but if it fails, they go bankrupt. So, risk in securities is
another factor which promotes its buying and selling.

 Liquidity

Liquidity of a financial product or asset or financial instrument is the ease

with which it is traded in the market. What does it mean for an investor if
a security can be traded with ease? It means that there are lots of potential
buyers and sellers who're interested in that particular security and so, it
can be traded frequently, thereby, increasing the scope of negotiation in
price (value) of the security. Generally, investors prefer to have assets
with high liquidity!

Generally 'assets' and 'securities' are used interchangeably. However, there are
small differences between the two. Assets are often classified as 'hard' and 'soft'
assets. When we talk about hard assets, we are actually referring to physical
investments like oil, metals, real estate, natural gas, diamonds, gold, etc. Soft
assets, on the other hand, are financial products or the rights exclusively stated
in official documents like credit balances, patents, trademarks and financial
contracts, to name a few. Securities are distinctively soft assets in the form of
bonds or stocks of a company. The noteworthy point is that hard assets can be
transformed into soft assets to facilitate the trade in structured financial markets.

A. Marketable Securities

Stocks, bonds or any other types of securities which can be traded easily in
organized financial markets or between two investors with the help of brokers,
are known as marketable securities. The chief feature of marketable securities is
that it is easier to trade them and they can be converted into cash whenever
required by the investor. From the figure given below, it can be observed that
marketable securities are classified into four types- money market securities,
capital market securities, derivatives, and indirect investments. Each of these
four marketable securities comprise several trade and financial instruments. We
will discuss all of these in detail.

17
1. Money Market Securities
One of the most reliable and highly liquid assets, money market securities are
short-term bonds issued by governments or large financial corporations.
Transactions are generally very large, to the tune of US$100,000 and the
maturity period is one year or less. Since transactions of very high value are
involved in these, only major financial institutions are able to trade in such
securities. For investors with limited risk potential, such securities can be
accessed by investing in mutual funds. Let us know in more detail about what
constitutes these securities.

 Treasury Bills

• What are They: Short-term securities issued by the government.

• Issued By: Governments
• Risk Factor: Least Risky
• Face Value: $1,000 - $1mn
• Maturity Period: 3, 6 months or yearly

Commercial Papers

18
• What are they: Short-term promissory note
• Issued By: Corporations
• Risk Factor: Safe
• Face Value: $100,000
• Maturity Period: 270 days or less

 Euro Dollars

• What are They: Deposits in Non-US banks or banks outside U.S.A.,

denominated in US$
• Issued By: Financial Institutions
• Risk Factor: Not totally risk-free
• Face Value: Varies
• Maturity Period: Short-term

Negotiable Certificates

• What are They: Certificates of deposits

• Issued By: Commercial Banks
• Risk Factor: Low risk
• Face Value: $100,000 or more
• Maturity Period: 14 days to 1 year

 Banker's Acceptance

• What are They: Same as treasury bills, short-term credit investments, bank
guarantee
• Issued By: Non-financial firms
• Risk Factor: Least Risky
• Face Value: $100,000
• Maturity Period: 30 - 180 days

19
  Purchase Agreement

• What are They: Selling the security with an agreement with the seller to
repurchase them later at a fixed time
• Issued By: Securities dealers
• Risk Factor: Residual credit risks
• Face Value: Varies
• Maturity Period: Very short-term (overnight!)

2. Capital Market Securities

The common stocks in which we trade in the open market are classic examples
of a capital market security. In such securities, the maturity period is greater
than one year and for some securities (for example, stocks), there is no defined
maturity period. Let us know more about several capital market securities.

 Fixed Income Securities

These are investments that promise guaranteed income on the amount
invested, though at a lower rate of return. Suppose you invest US$100 in
a bond at 10% fixed interest annually. So, it will give you a $10 return
every year until maturity when you would receive the US$100 back.
 Bonds
They are a form of fixed-income securities, and payments are made as per
the time and depending on the conditions mentioned in the deal. The
investor can sell the purchased bond before maturity, depending on the
market conditions and how that particular bond is rated.
 Treasury Notes and Bonds
Another types of fixed-income securities are treasury notes and bonds,
that are issued by the US government for longer maturity periods (10-30
years). The terms of treasury notes are usually between 1 to 10 years
while for the treasury bonds, it is between 10-30 years. These securities
offer higher interests, and they also repay the principal on maturity.
 Federal Agencies Securities
To raise funds for carrying out public infrastructure related tasks, the
federal agencies securities are issued by the federal government and by
Government-Sponsored Enterprises (GSEs). While the bonds issued by
federal agencies are backed by the US government, the bonds of GSEs

20
 are not backed by the same guarantee by US government. So, while
buying bonds of GSEs, don't forget to check the credential of the
sponsored agencies. Investment in these bonds generally, starts from
US$10,000.
 Municipal Bonds
These are tax-exempted investments and hence, one of the most sought
after bonds issued by the government. To raise funds for public work
several counties, states and municipalities issue bonds. If you buy these
bonds, you will not only be entitled tax exemption, you will also be able
to get back your invested money, along with the interest at a good rate.
 Corporate Bonds
These are almost similar to the treasury bonds with the major difference
that they are issued by corporate entities, so the risk of default is higher.
 Common Stocks
Most of us must know about stock investments. Stocks are divided into
two types- preferred stocks and common stocks. The general trading we
see in stock markets is done in common stocks. Stocks in essence,
represent a share of ownership in the companies, and they are also a
proportionate claim on profit of the corporations. However, suppose if a
company shuts down or goes broke, common stock shareholders are the
last investors to get compensated. Dividend, if it is distributed at all, first
goes to creditors, bondholders, and preferred shareholders. With preferred
stocks, you may have a larger share of the profit but your ownership
rights are very limited.

3. Derivatives
These class of marketable securities represent those investments values of
which are dependent on the performance of several other securities. That
means, their values are derived from the value of other investment
instruments and hence, the name derivatives.
 Options
It is an interesting security that provides the holder the right, but not
obligation to buy or sell securities at some fixed point of time in the
future. Now, the buying is typically known as 'a call option' while selling
is popular as 'a put option'. In case, the holder doesn't carry the
transaction within the specified time constraints, the deal expires. The

21
 point to be noted is that stock options are very speculative and hence, are
not for everyone. It is only ideal for sophisticated investors.

 Futures
Futures securities are just like options, however, the major difference
between the two is that in future securities, the buyer is obligated to fulfill
the terms of contract unlike the options. The futures market is extremely
liquid, risky and very complex. Again, this is not for investors do not like
to take risks.
 Rights and Warrants
Similar to options and futures are rights and warrants that grant the
shareholders some rights of ownership and profit from the company's
performance. Rights and warrants are issued by the companies for raising
money. By issuing rights, these companies allow shareholders to buy
more of their shares at a price lower than the original share price. It thus
favors, to the existing shareholders. Warrants are further attached to
rights or preferred issues to make them more attractive trading prospects
for the shareholders. What differentiates rights and warrants? Rights are
generally for short-term and expire within a week, while warrants may be
traded for one to a few years.

4. Indirect Investments
Investments in securities that are made by purchasing shares of an
investment company, are known as indirect investments. Just like any
other company, even an investment company tries to diversify its
portfolio and generate funds for its business purposes. Three popular
indirect investments are:
 Unit Trusts
A unit trust functions under a trust deed and is looked after by fund
managers. Also known as open-ended investments, the value of a unit
trust depends on the number of units issued and the price of each unit.
The cost of fund management (fee of the fund managers, costs incurred in
running the company) is adjusted to the inflow of funds. The success of a
unit trust depends on the expertise and experience of the fund managers
handling it. Unit trusts can be purchased from fund managers.
 Investment Trusts

22
 One of the most popular investment instruments are the mutual funds.
Investment trusts, like mutual funds, also known as open-end investment
companies sell shares of the companies even after the Initial Public
Offering (IPO) gets over. Mutual fund companies pool money from
investors, and it is then invested in a variety of investment options like
stocks, bonds, short-term assets, etc. All investors of a mutual fund have a
proportionate ownership in the company. Another type of marketable
securities are in the form of closed-end investments. These are the
companies under trusts that don't sell the shares after the IPO of a
company gets over. The initial shares that have been purchased by
investors are the ones which are later on traded in stock market.
 Hedge Funds
One of the most popular funds that have gained attention of financial
wizards and investors are hedge funds. Since these marketable securities
are traded aggressively, and are limited to a few accredited investors, they
are not ideal for average investors. The private capital pooled in hedge
funds is generally, very large and is invested by few sophisticated
investors. Here's a word about hedge funds from the official website of
the US Securities and Exchange Commission - Hedge fund is a general,
non-legal term used to describe private, unregistered investment pools
that traditionally have been limited to sophisticated, wealthy investors.
Hedge funds are not mutual funds and, as such, are not subject to the
numerous regulations that apply to mutual funds for the protection of
investors - including regulations requiring a certain degree of liquidity,
regulations requiring that mutual fund shares be redeemable at any time,
regulations protecting against conflicts of interests, regulations to assure
fairness in the pricing of fund shares, disclosure regulations, regulations
limiting the use of leverage, and more."

B. Non-Marketable Securities

Now that we know the definition of marketable securities, it is easier to

define non-marketable securities. Securities that are difficult to trade in a
normal financial market are generally called non-marketable securities. It
is difficult to get a potential buyer for non-marketable securities and
hence, some of the financial instruments that comprise non-marketable
securities are traded in private transactions. Although these securities

23
 can't be traded easily, they from a significant portion of an investor's
portfolio. These securities are traded between investors and large
financial institutions like commercial banks, so it is a risk-free and safe
investment. Different types of these securities are as follows.

a. Savings Account
As we all know, savings accounts are a common mode of deposits in banks.
They are a form of non-marketable securities that earn an interest over a period.
The interest rates and maturity period depends on the banks. Withdrawing
money is possible at any point of time, however for the account to function,
investor needs to maintain some minimum balance as per the directives of the
bank. It is a safe and simple form of investment although, the returns are not
very high.

b. Government Savings Bonds

Those government bonds that can't be traded in the open market, constitute a
part of government savings bonds. These government debt instruments are
traded amongst investors and financial institutions (banks) indirectly. These
bonds earn interest only when they are redeemed.

c. Non-negotiable Certificates of Deposits (CDs)

CDs are promissory notes (the bearer is promised some return on investment
with interest) that are issued by commercial banks. CDs are insured by the
Federal Deposit of Insurance Corporation (FDIC), so they are relatively a safe

24
investment. CDs have a maturity period of one month to five years and any
withdrawal prior to maturity attracts penalty. To understand it more closely, let
us say, you buy a $100 CD with an interest rate of 10%, compounded annually
and a term of one year. At the end of the year, you will earn $110 ($100 plus
10% of 100, i.e. $110).

d. Money Market Deposit Accounts (MMDAs)

MMDA securities are another type of savings account, but with very high
interest rates along with some restrictions. For instance, in MMDAs, an investor
is allowed a limited number of transactions every month. In some of these
accounts, it is also mandatory to maintain a minimum balance that is normally
higher than that in normal savings account. The minimum balance criteria
differs from bank to bank.

So, this was all about classification of marketable and non-marketable

securities. As you can observe, each topic in these classifications can be a
subject of PhD. If you have investment related concerns, it is best to contact
professionals in this field.

Investment is the process of risking one's savings in the hope of a monetary

gain. An investment involves the act of using a good or its money equivalent to
create another good or fetch the returns of the invested amount in terms of
interest or profit share. The basic purpose of an investment is to hold an asset in
order to obtain recurring or capital gains. Take a look at the various types of
investments.

 Aggressive Investment

Aggressive investors invest in stock markets and business ventures. This type of
investment can involve the act of investing in a real estate, renovating it, and
renting it out. Aggressive investment involves a greater amount of risk.

 Business Management

The value of the business assets is determined after which they are used to
generate revenue. Business assets can be physical, financial, or intangible.
Physical assets include property and machinery that is in possession of the

25
business. Financial assets include the liquid assets of a business and the
company stocks and bonds.

 Conservative Investment

Conservative investors invest in cash. They put their money in investment

accounts like savings, mutual funds, and certificates of deposit.

 Economics:

In context of economics, investment is the per unit time production of goods,

which are not consumed and are rather used for production in the future.
Tangibles like property, as also intangibles such as the costs incurred in on-the-
job trainings are included in this type of investment. Income and interest rates
form the determinants of an investment decision. A growth in income boosts
investments while a rise in the rates of interest is not conducive to greater
investments as it makes borrowing money costlier.

 Finance

Investments in finance refer to the cost of capital invested in buying financial

assets and securities. They include investments made in shares, bonds, and
equities. Investments in the finance sector are made through banks, insurance
companies, and other investment schemes. Learn all about the different types of
insurance.

 Foreign Direct Investment

When a company from one country invests in another country, it is known as

foreign direct investment. This investment is generally of the physical form with
the intent to build a factory in another country.

 Investing in Gold
Investments in gold can be done through ownership or by means of
certificates and shares. Here is a list of the types of gold investments.
Bar: Buying gold bars in one of the very traditional ways of investing in
gold. It is practiced in Argentina, Austria, and Switzerland where gold
bars can be purchased from major banks in these nations.
Coins: Coins, which are priced according to their weight, are purchased
in this form of investment in gold. The British gold sovereign and the
Swiss Vreneli are some examples of bullion coins.

26
 Accounts: Swiss banks provide the customers with gold accounts which
can deal in gold transactions.
Gold Exchange-traded Funds: In this scheme of investing in gold, gold
can be traded on major stock exchanges.
Spread Betting: Firms in the UK offer spread betting in gold investments.
Spread betting is about predicting the rise or fall in the prices of gold
before investing in it.
 Investing with the Mining Companies
Trading in the shares of gold mining companies is one of the means of
investing in gold.
Investing in Silver: Investing in silver is similar to investing in gold. The
various ways in which one can invest in silver are also the same as those
for gold investments.
 Land Investment

Land investment can turn out to be a long-term and rewarding investment if the
purchased land is developed properly.

 Moderate Investment

The investments made in cash and bonds and those which involve low or
moderate amounts of risk, are known as moderate investments.

 Personal Finance

Personal finance includes the money that is put aside on a regular basis with the
aim of saving it. Mere saving of money involves only the risk arising out of
devaluation of the saved amount due to inflation. However, saving money and
investing it involves the investment risks like capital loss. Learn more about
personal finance planning.

 Philatelic Investment

The investments made in collectible postage stamps with the intent of making
profits are known as philatelic investments. Rare stamps can serve as unique
pieces of art and excellent collectibles. Investors dealing in stamps have chances
of benefiting from the nation's growing wealth. Know more about philatelic
investment.

 Real Estate

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Investment in real estate is the one made in purchasing property. Property is
purchased with the intent of holding or leasing. Residential real estate
investment involves the process of buying other people's houses while the
investment in commercial real estate involves the purchase of a large property
that can be rented to a company. Commercial real estate investment is riskier
than that in residential real estate.

 Socially Responsible Investing

This investment strategy aims at fetching financial gains for a social cause.
Investors prefer investing in practices that promote human rights, equality,
environmental awareness, and other social concerns.

 Stock Investment

There is a rising interest among the masses for investing in the stock market.
Stock investments can prove to be rewarding if share trading is done wisely.

 Value Investing

It involves buying securities whose shares seem under-priced.

Investment is after all, the means to channelize money in order to secure one's
future. I am sure you would want to consult an efficient investment adviser for
guidance on investing wisely.

Equity shares
In accounting and finance, equity is the residual value or interest of the most
junior class of investors in assets, after all liabilities are paid; if liability exceeds
assets, negative equity exists. In an accounting context, shareholders' equity (or
stockholders' equity, shareholders' funds, shareholders' capital or similar terms)
represents the remaining interest in the assets of a company, spread among
individual shareholders of common or preferred stock; a negative shareholders'
equity is often referred to as a positive shareholders' deficit.

At the very start of a business, owners put some funding into the business to
finance operations. This creates a liability on the business in the shape
of capital as the business is a separate entity from its owners. Businesses can be
28
considered, for accounting purposes, sums of liabilities and assets; this is
the accounting equation. After liabilities have been accounted for, the positive
remainder is deemed the owners' interest in the business.

This definition is helpful in understanding the liquidation process in case

of bankruptcy. At first, all the secured creditors are paid against proceeds from
assets. Afterwards, a series of creditors, ranked in priority sequence, have the
next claim/right on the residual proceeds. Ownership equity is the last
or residual claim against assets, paid only after all other creditors are paid. In
such cases where even creditors could not get enough money to pay their bills,
nothing is left over to reimburse owners' equity. Thus owners' equity is reduced
to zero. Ownership equity is also known as risk capital or liable capital.

An equity investment generally refers to the buying and holding of shares

of stock on a stock market by individuals and firms in anticipation of income
from dividends and capital gains, as the value of the stock rises. Typically
equity holders receive voting rights, meaning that they can vote on candidates
for the board of directors (shown on a proxy statement received by the investor)
as well as certain major transactions, and residual rights, meaning that they
share the company's profits, as well as recover some of the company's assets in
the event that it folds, although they generally have the lowest priority in
recovering their investment. It may also refer to the acquisition of equity
(ownership) participation in a private (unlisted) company or a startup company.
When the investment is in infant companies, it is referred to as venture
capital investing and is generally regarded as a higher risk than investment in
listed going-concern situations.

The equities held by private individuals are often held as mutual funds or as
other forms of collective investment scheme, many of which have quoted prices
that are listed in financial newspapers or magazines; the mutual funds are
typically managed by prominent fund management firms, such
as Schroder’s, Fidelity Investments or The Vanguard Group. Such holdings
allow individual investors to obtain the diversification of the fund(s) and to
obtain the skill of the professional fund managers in charge of the fund(s). An
alternative, which is usually employed by large private investors and pension
funds, is to hold shares directly; in the institutional environment many clients

29
who own portfolios have what are called segregated funds, as opposed to or in
addition to the pooled mutual fund alternatives.

A calculation can be made to assess whether an equity is over or underpriced,

compared with a long-term government bond. This is called the yield gap or
Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-
term bond.

An equity share, commonly referred to as ordinary share also represents the

form of fractional ownership in which a shareholder, as a fractional owner,
undertakes the maximum entrepreneurial risk associated with a business
venture.

The holders of such shares are members of the company and have voting rights.
A company may issue such shares with differential rights as to voting, payment
of dividend, etc.

The various kinds of equity shares are as follows –

• Rights Issue/ Rights Shares

The issue of new securities to existing shareholders at a ratio to those already

held.

• Bonus Shares

Shares issued by the companies to their shareholders free of cost by

capitalization of accumulated reserves from the profits earned in the earlier
years.

• Preferred Stock/ Preference shares

Owners of these kind of shares are entitled to a fixed dividend or dividend

calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity share.

They also enjoy priority over the equity shareholders in payment of surplus. But
in the event of liquidation, their claims rank below the claims of the company’s
creditors, bondholders / debenture holders.
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• Cumulative Preference Shares

A type of preference shares on which dividend accumulates if remains unpaid.

All arrears of preference dividend have to be paid out before paying dividend on
equity shares.

• Cumulative Convertible Preference Shares

A type of preference shares where the dividend payable on the same

accumulates, if not paid. After a specified date, these shares will be converted
into equity capital of the company.

• Participating Preference Share

The right of certain preference shareholders to participate in profits after a

specified fixed dividend contracted for is paid. Participation right is linked with
the quantum of dividend paid on the equity shares over and above a particular
specified level.

Security Receipts: Security receipt means a receipt or other security, issued by a

securitization company or reconstruction company to any qualified institutional
buyer pursuant to a scheme, evidencing the purchase or acquisition by the
holder thereof, of an undivided right, title or interest in the financial asset
involved in securitization.

Government securities (G-Secs): These are sovereign (credit risk-free) coupon

bearing instruments 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. These securities have a fixed coupon that is paid on specific dates
on half-yearly basis. These securities are available in wide range of maturity
dates, from short dated (less than one year) to long dated (upto twenty years).

Debentures: Bonds issued by a company bearing a fixed rate of interest usually

payable half yearly on specific dates and principal amount repayable on
particular date on redemption of the debentures. Debentures are normally
secured/ charged against the asset of the company in favor of debenture holders.

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  Stock market classification of Equity Shares

 Blue chip shares

Shares of large, well-established, and financially strong companies with an

impressive record of earnings and dividends.

Definition

Stock of a large, well-established and financially sound company that has

operated for many years. A blue-chip stock typically has a market capitalization
in the billions, is generally the market leader or among the top three companies
in its sector, and is more often than not a household name. While dividend
payments are not absolutely necessary for a stock to be considered a blue-chip,
most blue-chips have a record of paying stable or rising dividends for years, if
not decades. The term is believed to have been derived from poker, where blue
chips are the most expensive chips.

A blue-chip stock is generally a component of the most reputable market

indexes or averages, such as the Dow Jones Industrial Average, the S&P 500
and the Nasdaq-100 in the United States, the TSX-60 in Canada or the FTSE
index in the United Kingdom.

While a blue-chip company may have survived several challenges and market
cycles over the course of its life, leading to it being perceived as a safe
investment, this may not always be the case. The bankruptcy of General Motors
and Lehman Brothers, as well as a number of leading European banks, during
the global recession of 2008, is proof that even the best companies may
sometimes be unable to survive during periods of extreme stress.

 Growth shares

Shares of companies that have a fairly entrenched position in a growing market

and which enjoy an above average rate of growth as well as profitability.

Definition

Shares in a company whose earnings are expected to grow at an above-average

rate relative to the market.

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Also known as a "glamor stock".

A growth stock usually does not pay a dividend, as the company would prefer to
reinvest retained earnings in capital projects. Most technology companies are
growth stocks.

Note that a growth company's stock is not always classified as growth stock. In
fact, a growth company's stock is often overvalued.

 Income shares

Shares of companies that have fairly stable operations, relatively limited growth
opportunities, and high dividend payout ratios.

Definition

A class of shares offered by a dual purpose fund that has little room for capital
appreciation but gives the holder a portion of all income earned in the portfolio.

This type of share typically attracts those investors looking for a steady stream
of income rather than capital appreciation. The holders receive their portion of
all income created in the portfolio plus any additional returns on the stocks' par
value at the time of the fund's dissolution.

 Cyclical shares

Shares of companies that have a pronounced cyclicality in their operations.

Definition

An equity security whose price is affected by ups and downs in the overall
economy. Cyclical stocks typically relate to companies that sell discretionary
items that consumers can afford to buy more of in a booming economy and will
cut back on during a recession. Contrast cyclical stocks with counter-cyclical
stocks, which tend to move in the opposite direction from the overall economy,
and with consumer staples, which people continue to demand even during a
downturn.

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Cyclical stocks rise and fall with the business cycle. This seeming predictability
in the movement of these stock's prices leads some investors to try to time the
market by buying these stocks at the low point in the business cycle and selling
them at the high point. Examples of companies whose stocks are cyclical
include car manufacturers, airlines, furniture retailers, clothing stores, hotels
and restaurants. When the economy is doing well, people can afford to buy new
cars, upgrade their home furnishings, go shopping and travel. When the
economy is doing poorly, these discretionary expenses are some of the first
things consumers will cut. If a recession is bad enough, cyclical stocks can
become completely worthless as companies go out of business.

 Defensive shares

Shares of companies that are relatively unaffected by the ups and downs in
general business conditions.
Definition

A stock that provides a constant dividend and stable earnings regardless of the
state of the overall stock market.

This is not to be confused with a "defense stock", which refers to stock in

companies which manufacture things like weapons, ammunition and fighter
jets.

Defensive stocks remain stable during the various phases of the business cycle.
During recessions they tend to perform better than the market; however, during
an expansion phase it performs below the market. Betas of defensive stocks are
less than one.

To illustrate this phenomenon, consider a stock with a beta of 0.5. If the market
is expected to drop 15%, and the existing risk-free rate is 3%, a defensive stock
will only drop 9% (0.5*(-15%-3%)). On the other hand, if the market is
expected to increase 15%, with a risk-free rate of 3%, a defensive stock will
only increase 6% (0.5*(15%-3%)).

The utility industry is an example of defensive stocks because during all phases
of the business cycle, people need gas and electricity. Many active investors
will invest in defensive stocks if a market downturn is expected. However, if the
34
market is expected to prosper, active investors will often choose stocks with
higher betas in an attempt to maximize return.

Also known as a "non-cyclical stock" because it is not highly correlated with the
business cycle.

 Speculative shares

Shares that tend to fluctuate widely because there is a lot of speculative trading
in them.

Definition

A stock with a high degree of risk. A speculative stock may offer the possibility
of substantial returns to compensate for its higher risk profile. Speculative
stocks are favored by speculators and investors because of their high-reward,
high-risk characteristics. Such stocks usually have a very low share price, and
often trade on smaller exchanges like the OTC Markets in the U.S. or the TSX-
Venture Exchange in Canada. A necessary condition for investing in speculative
stocks is a high tolerance for risk. This means an investor in a speculative stock
should be prepared for the possibility of losing the full amount invested if the
stock price goes down to zero.

The low share price of speculative stocks and the possibility – albeit remote – of
windfall profits are two of their most appealing characteristics. A share price of
a few cents means that speculators can load up on thousands of shares. If the
company is successful and the shares eventually trade at a significantly higher
price, the potential profit can be much more than that offered by most other
investments.

Speculative stocks tend to be clustered in sectors such as mining, energy and

biotechnology. While there is significant risk involved in investing in early-
stage companies in these sectors, the possibility that a small company may find
a giant mineral deposit or oil field, or discover a cure for a disease, offers
enough incentive for speculators to take a punt on it.

Although most speculative stocks tend to be early-stage companies, a blue-chip

can occasionally become a speculative stock if it falls upon hard times and has

35
rapidly deteriorating prospects for the future. Such a stock is known as a “fallen
angel” and may offer an attractive risk-reward payoff if it can manage to turn its
business around.

Speculative stocks outperform in very strong bull markets, when investors have
abundant risk tolerance. They underperform in bear markets, because investors’
risk aversion causes them to gravitate towards larger-cap stocks that are more
stable.

Typical valuations metrics like the price/earnings and price/sales ratios cannot
be used for most speculative stocks, since they are generally unprofitable and
may have minimal sales. For such stocks, alternative techniques like discounted
cash flow (DCF) valuation or peer valuation may need to be used.

Speculative stocks often account for a small portion of diversified portfolios

held by experienced investors, since such stocks may improve the return
prospects for the overall portfolio without adding too much risk. Experienced
investors who dabble in speculative stocks typically look for companies that
have experienced management, strong balance sheets, and excellent long-term
business prospects.

BONDS

In finance, a bond is an instrument of indebtedness of the bond issuer to the

holders. It is a debt security, under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest (the coupon)
and/or to repay the principal at a later date, termed the maturity date.[1] Interest
is usually payable at fixed intervals (semiannual, annual, sometimes monthly).
Very often the bond is negotiable, i.e. the ownership of the instrument can be
transferred in the secondary market. This means that once the transfer agents at
the bank medallion stamp the bond, it is highly liquid on the second market. [2]

Thus a bond is a form of loan or IOU (sounded "I owe you"): the holder of the
bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and
the coupon is the interest. Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of government bonds, to finance
current expenditure. Certificates of deposit (CDs) or short term commercial

36
paper are considered to be money instruments and not bonds: the main
difference is in the length of the term of the instrument.

Bonds and stocks are both securities, but the major difference between the two
is that (capital) stockholders have an equity stake in the company (i.e. they are
investors), whereas bondholders have a creditor stake in the company (i.e. they
are lenders). Being a creditor, bondholders have absolute priority and will be
repaid before stockholders (who are owners) in the event of
bankruptcy.[3] Another difference is that bonds usually have a defined term, or
maturity, after which the bond is redeemed, whereas stocks are typically
outstanding indefinitely. An exception is an irredeemable bond, such
as Consols, which is a perpetuity, i.e. a bond with no maturity.

Just as people need money, so do companies and governments. A company

needs funds to expand into new markets, while governments need money for
everything from infrastructure to social programs. The problem large
organizations run into is that they typically need far more money than the
average bank can provide. The solution is to raise money by issuing bonds (or
other debt instruments) to a public market. Thousands of investors then each
lend a portion of the capital needed. Really, a bond is nothing more than a loan
for which you are the lender. The organization that sells a bond is known as the
issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a
lender (the investor).

Of course, nobody would loan his or her hard-earned money for nothing. The
issuer of a bond must pay the investor something extra for the privilege of using
his or her money. This "extra" comes in the form of interest payments, which
are made at a predetermined rate and schedule. The interest rate is often referred
to as the coupon. The date on which the issuer has to repay the amount
borrowed (known as face value) is called the maturity date. Bonds are known
as fixed-income securities because you know the exact amount of cash you'll get
back if you hold the security until maturity.

For example, say you buy a bond with a face value of $1,000, a coupon of 8%,
and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%)
of interest per year for the next 10 years. Actually, because most bonds pay
interest semi-annually, you'll receive two payments of $40 a year for 10 years.

37
When the bond matures after a decade, you'll get your $1,000 back.

Debt Versus Equity

Bonds are debt, whereas stocks are equity. This is the important distinction
between the two securities. By purchasing equity (stock) an investor becomes
an owner in a corporation. Ownership comes with voting rights and the right to
share in any future profits. By purchasing debt (bonds) an investor becomes
a creditor to the corporation (or government). The primary advantage of being a
creditor is that you have a higher claim on assets than shareholders do: that is, in
the case of bankruptcy, a bondholder will get paid before a shareholder.
However, the bondholder does not share in the profits if a company does well -
he or she is entitled only to the principal plus interest.

To sum up, there is generally less risk in owning bonds than in owning stocks,
but this comes at the cost of a lower return.

Why Bother With Bonds?

It's an investing axiom that stocks return more than bonds. In the past, this has
generally been true for time periods of at least 10 years or more. However, this
doesn't mean you shouldn't invest in bonds. Bonds are appropriate any time you
cannot tolerate the short-term volatility of the stock market. Take two situations
where this may be true:

1) Retirement

The easiest example to think of is an individual living off a fixed income. A

retiree simply cannot afford to lose his/her principal as income for it is required
to pay the bills.

2) Shorter time horizons

Say a young executive is planning to go back for an MBA in three years. It's
true that the stock market provides the opportunity for higher growth, which is
why his/her retirement fund is mostly in stocks, but the executive cannot afford
to take the chance of losing the money going towards his/her education.
Because money is needed for a specific purpose in the relatively near future,
38
fixed-income securities are likely the best investment.

These two examples are clear cut, and they don't represent all investors. Most
personal financial advisors advocate maintaining a diversified portfolio and
changing the weightings of asset classes throughout your life. For example, in
your 20s and 30s a majority of wealth should be in equities. In your 40s and 50s
the percentages shift out of stocks into bonds until retirement, when a majority
of your investments should be in the form of fixed income.

Different Types Of Bonds

 Government Bonds
In general, fixed-income securities are classified according to the
length of time before maturity. These are the three main categories:

Bills - debt securities maturing in less than one year.

Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.

Marketable securities from the U.S. government - known

collectively as Treasuries - follow this guideline and are issued
as Treasury bonds, Treasury notes and Treasury bills (T-bills).
Technically speaking, T-bills aren't bonds because of their short
maturity. (You can read more about T-bills in our Money
Market tutorial.) All debt issued by Uncle Sam is regarded as
extremely safe, as is the debt of any stable country. The debt of
many developing countries, however, does carry substantial risk.
Like companies, countries can default on payments.
 Municipal Bonds
Municipal bonds, known as "munis", are the next progression in
terms of risk. Cities don't go bankrupt that often, but it can happen.
The major advantage to munis is that the returns are free from
federal tax. Furthermore, local governments will sometimes make
their debt non-taxable for residents, thus making some municipal
bonds completely tax free. Because of these tax savings, the yield
on a muni is usually lower than that of a taxable bond. Depending
on your personal situation, a muni can be a great investment on an
after-tax basis.

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  Corporate Bonds
A company can issue bonds just as it can issue stock. Large
corporations have a lot of flexibility as to how much debt they can
issue: the limit is whatever the market will bear. Generally, a short-
term corporate bond is less than five years; intermediate is five to
12 years, and long term is over 12 years.

Corporate bonds are characterized by higher yields because there is

a higher risk of a company defaulting than a government. The
upside is that they can also be the most rewarding fixed-income
investments because of the risk the investor must take on. The
company's credit quality is very important: the higher the quality,
the lower the interest rate the investor receives.

Other variations on corporate bonds include convertible bonds,

which the holder can convert into stock, and callable bonds, which
allow the company to redeem an issue prior to maturity.
 Zero-Coupon Bonds
This is a type of bond that makes no coupon payments but instead
is issued at a considerable discount to par value. For example, let's
say a zero-coupon bond with a $1,000 par value and 10 years to
maturity is trading at $600; you'd be paying $600 today for a bond
that will be worth $1,000 in 10 years.

Money Market Instruments

In the financial marketplace, a distinction is made between the capital

markets and the money markets. The capital market is a source of intermediate-
term to long-term financing in the form of equity or debt securities with
maturities of more than one year. The money market provides very short-term
funds to corporations, municipalities and the United States government. Money
market securities are debt issues with maturities of one year or less.

 Characteristics
Money market instruments give businesses, financial institutions and
governments a means to finance their short-term cash requirements.
Three important characteristics are:

40
  Liquidity

Since they are fixed-income securitieswith short-term maturities of a year or

less, money market instruments are extremely liquid.

 Safety

They also provide a relatively high degree of safety because their issuers have
the highest credit ratings.

 Discount Pricing

A third characteristic they have in common is that they are issued at a

discount to their face value.

The money market is the arena in which financial institutions make available to
a broad range of borrowers and investors the opportunity to buy and sell various
forms of short-term securities. There is no physical "money market." Instead it
is an informal network of banks and traders linked by telephones, fax machines,
and computers. Money markets exist both in the United States and abroad.

The short-term debts and securities sold on the money markets—which are
known as money market instruments—have maturities ranging from one day to
one year and are extremely liquid. Treasury bills, federal agency notes,
certificates of deposit (CDs), Eurodollar deposits, commercial paper, bankers'
acceptances, and repurchase agreements are examples of instruments. The
suppliers of funds for money market instruments are institutions and individuals
with a preference for the highest liquidity and the lowest risk.

The money market is important for businesses because it allows companies with
a temporary cash surplus to invest in short-term securities; conversely,
companies with a temporary cash shortfall can sell securities or borrow funds on
a short-term basis. In essence the market acts as a repository for short-term
funds. Large corporations generally handle their own short-term financial
transactions; they participate in the market through dealers. Small businesses,
on the other hand, often choose to invest in money-market funds, which are
professionally managed mutual funds consisting only of short-term securities.

Although securities purchased on the money market carry less risk than long-
term debt, they are still not entirely risk free. After all, banks do sometimes fail,
and the fortunes of companies can change rather rapidly. The low risk is

41
associated with lender selectivity. The lender who offers funds with almost
instant maturities ("tomorrow") cannot spend too much time qualifying
borrowers and thus selects only blue-chip borrowers. Repayment therefore is
assured (unless you caught Enron just before it suddenly nose-dived).
Borrowers with fewer credentials, of course, have difficult getting money from
this market unless it is through well-established funds.

 TYPES OF MONEY MARKET INSTRUMENTS

 Treasury Bills

Treasury bills (T-bills) are short-term notes issued by the U.S. government.
They come in three different lengths to maturity: 90, 180, and 360 days. The
two shorter types are auctioned on a weekly basis, while the annual types are
auctioned monthly. T-bills can be purchased directly through the auctions or
indirectly through the secondary market. Purchasers of T-bills at auction can
enter a competitive bid (although this method entails a risk that the bills may not
be made available at the bid price) or a noncompetitive bid. T-bills for
noncompetitive bids are supplied at the average price of all successful
competitive bids.

 Federal Agency Notes

Some agencies of the federal government issue both short-term and long-term
obligations, including the loan agencies Fannie Mae and Sallie Mae. These
obligations are not generally backed by the government, so they offer a slightly
higher yield than T-bills, but the risk of default is still very small. Agency
securities are actively traded, but are not quite as marketable as T-bills.
Corporations are major purchasers of this type of money market instrument.

 Short-Term Tax Exempts

These instruments are short-term notes issued by state and municipal

governments. Although they carry somewhat more risk than T-bills and tend to
be less negotiable, they feature the added benefit that the interest is not subject
to federal income tax. For this reason, corporations find that the lower yield is
worthwhile on this type of short-term investment.

 Certificates of Deposit

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Certificates of deposit (CDs) are certificates issued by a federally chartered
bank against deposited funds that earn a specified return for a definite period of
time. They are one of several types of interest-bearing "time deposits" offered
by banks. An individual or company lends the bank a certain amount of money
for a fixed period of time, and in exchange the bank agrees to repay the money
with specified interest at the end of the time period. The certificate constitutes
the bank's agreement to repay the loan. The maturity rates on CDs range from
30 days to six months or longer, and the amount of the face value can vary
greatly as well. There is usually a penalty for early withdrawal of funds, but
some types of CDs can be sold to another investor if the original purchaser
needs access to the money before the maturity date.

Large denomination (jumbo) CDs of $100,000 or more are generally negotiable

and pay higher interest rates than smaller denominations. However, such
certificates are only insured by the FDIC up to $100,000. There are also
eurodollar CDs; they are negotiable certificates issued against U.S. dollar
obligations in a foreign branch of a domestic bank. Brokerage firms have a
nationwide pool of bank CDs and receive a fee for selling them. Since brokers
deal in large sums, brokered CDs generally pay higher interest rates and offer
greater liquidity than CDs purchased directly from a bank.

 Commercial Paper

Commercial paper refers to unsecured short-term promissory notes issued by

financial and nonfinancial corporations. Commercial paper has maturities of up
to 270 days (the maximum allowed without SEC registration requirement).
Dollar volume for commercial paper exceeds the amount of any money market
instrument other than T-bills. It is typically issued by large, credit-worthy
corporations with unused lines of bank credit and therefore carries low default
risk.

Standard and Poor's and Moody's provide ratings of commercial paper. The
highest ratings are A1 and P1, respectively. A2 and P2 paper is considered high
quality, but usually indicates that the issuing corporation is smaller or more debt
burdened than A1 and P1 companies. Issuers earning the lowest ratings find few
willing investors.

Unlike some other types of money-market instruments, in which banks act as

intermediaries between buyers and sellers, commercial paper is issued directly
by well-established companies, as well as by financial institutions. Banks may
43
act as agents in the transaction, but they assume no principal position and are in
no way obligated with respect to repayment of the commercial paper.
Companies may also sell commercial paper through dealers who charge a fee
and arrange for the transfer of the funds from the lender to the borrower.

 Bankers' Acceptances

A banker's acceptance is an instruments produced by a nonfinancial corporation

but in the name of a bank. It is document indicating that such-and-such bank
shall pay the face amount of the instrument at some future time. The bank
accepts this instrument, in effect acting as a guarantor. To be sure the bank does
so because it considers the writer to be credit-worthy. Bankers' acceptances are
generally used to finance foreign trade, although they also arise when
companies purchase goods on credit or need to finance inventory. The maturity
of acceptances ranges from one to six months.

 Repurchase Agreements

Repurchase agreements—also known as repos or buybacks—are Treasury

securities that are purchased from a dealer with the agreement that they will be
sold back at a future date for a higher price. These agreements are the most
liquid of all money market investments, ranging from 24 hours to several
months. In fact, they are very similar to bank deposit accounts, and many
corporations arrange for their banks to transfer excess cash to such funds
automatically.

MUTUAL FUNDS

A mutual fund is a trust that pools the savings of a number of investors who
share a common financial goal and investments may be in shares, debt
securities, money-market securities or a combination of these. Those securities
are professionally managed on behalf of the unit holders and each investor holds
a pro-rata share of the portfolio, that is, entitled to profits as well as losses.
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.
A mutual fund is the most suitable investment scope for common people as it
offers an opportunity to invest in a diversified, professionally managed basket
of securities at a relatively lower cost.
The flow chart below describes broadly the working of a Mutual fund:

44
There exist various mutual fund schemes to cater to the needs such as financial
position, risk tolerance and return expectations etc.
The content below gives an overview of the existing types of mutual fund
schemes in the industry.

 By Structure

 Open-Ended Schemes
Open-ended schemes are mutual funds that can issue and redeem their
shares at any time. Open-ended funds do not have restriction on the
amount of shares the fund will issue. They offer units for sale without
specifying any duration for redemption. If demand is high enough, the
fund will continue to issue shares, no matter how many investors are
there. Open-ended funds also buy back shares when investors wish to
sell. Investors can conveniently buy and sell units of open-ended funds
directly from the fund house at the prevalent Net Asset Value (NAV)
prices. One of the key features of open-end schemes is the liquidity that
these funds offer to investors.
 Close-Ended Schemes
Close-ended schemes are mutual funds with a fixed number of shares (or
units). Unlike open-ended funds, new shares/units are not created by
managers to meet demand from investors but the shares can only be
purchased (and sold) in the secondary market.

45
 Close-ended funds raise a fixed amount of capital through a New Fund
Offer (NFO). The fund is then structured, listed and traded like a stock,
on a stock exchange. The price per share is determined by the market and
is usually different from the underlying value or net asset value (NAV)
per share of the investments held by the fund. The price is said to be at a
discount or premium to the NAV when it is below or above the NAV,
respectively. A premium might be due to the market's confidence in the
investment manager’s ability to produce above-market returns. A
discount might reflect the charges to be deducted from the fund in future
by the fund managers.
Some close-ended funds give an option of selling back the units to the
mutual fund through periodic repurchase at NAV related prices. SEBI
regulations stipulate that at least one of the two exit routes is provided to
the investor, that is, either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV generally on
weekly basis.
 Interval Schemes
Interval schemes are those that combine the features of both open-ended
and close-ended schemes. The units may be traded on the stock exchange
or may be open for sale or redemption during pre-determined intervals at
NAV-related prices.

 By Investment objective

 Growth or Equity-Oriented Schemes

The aim of growth funds is to provide capital appreciation over medium to

long- term. These schemes normally invest a major part of their portfolio in
equities and have comparatively high risks. They provide different options to
the investors like dividend option, capital appreciation, etc. and investors
may choose one depending on their preferences. The mutual funds also allow
the investors to change the options at a later date. Growth schemes are good
for investors having a long-term outlook seeking appreciation over a period
of time.
It can be further classified into following depending upon objective:

46
Large-Cap Funds: These funds invest in companies from different sectors.
However, they put a restriction in terms of the market capitalization of a
company, i.e., they invest largely in BSE 100 and BSE 200 Stocks.

Mid-Cap Funds: These funds invest in companies from different sectors.

However, they put a restriction in terms of the market capitalization of a
company, i.e., they invest largely in BSE Mid Cap Stocks.

Sector Specific Funds: These are schemes that invest in a particular sector, for
example, IT.

Thematic: These schemes invest in various sectors but restrict themselves to a

particular theme e.g., services, exports, consumerism, infrastructure etc.

Diversified Equity Funds: All non-theme and non-sector funds can be classified
as equity diversified funds.

Tax Savings Funds (ELSS): Investments in these funds are exempt from income
tax at the time of investment, up to a limit of Rs 1 lakh.

 Income or Debt oriented Schemes

The aim of income funds is to provide regular and steady income to
investors. These schemes generally invest in fixed-income securities such
as bonds, corporate debentures, Government Securities and money-
market instruments and are less risky compared to equity schemes.
However, opportunities of capital appreciation are limited in such funds.
The NAVs of such funds are impacted because of change in interest rates
in the economy. If the interest rates fall, NAVs of such funds are likely to
increase in the short run and vice versa. However, long-term investors do
not bother about these fluctuations.
 Balanced Schemes
The aim of the balanced funds is to provide both growth and regular
income as such schemes invest both in equities and fixed income
instruments in the proportion indicated in their offer documents. These
are appropriate for investors looking for moderate growth. They generally
invest between 65% and 75% in equity and the rest in debt instruments.
They are impacted because of fluctuation in stock markets but NAVs of
such funds are less volatile compared to pure equity funds.
 Money Market or Liquid Funds
These funds are also income funds and their aim is to provide easy

47
 liquidity, preservation of capital and moderate income. These schemes
invest exclusively in safer short-term instruments such as Treasury Bills,
Certificates of Deposits, Commercial Paper and inter-bank call money,
Government Securities, etc. Returns of these schemes fluctuate much less
than other funds. These are appropriate for investors as a means of short-
term investments.
 Gilt Funds
These funds invest exclusively in Government Securities. NAVs of these
schemes also fluctuate due to change in interest rates and other economic
factors as is the case with income or debt-oriented schemes.
 Fund of Funds Schemes
Fund of Funds invests in other mutual fund schemes. A traditional mutual
fund comprises a portfolio of shares, but a Fund of Funds comprises a
portfolio of different mutual fund schemes. A Fund of Funds helps the
investor to reduce his chances of selecting the wrong mutual fund. Gold
 Exchange Traded Funds
It is an open-ended Exchange Traded Fund. The investment objective of
the scheme is to generate returns that are in line with the returns on
investment in physical gold, subject to tracking error.
 Floating Rate Funds
These are open-ended income schemes seeking to generate reasonable
returns with commensurate risk from a portfolio which comprises floating
rate debt instruments and fixed rate debt instruments swapped for floating
rate returns. The scheme may also invest in fixed rate money market and
debt instruments

 Other schemes:

 Tax-saving schemes
These schemes offer tax rebates to the investors under specific provisions
of the Income Tax Act, 1961 as the Government offers tax incentives for
investment in specified avenues like Equity Linked Savings Schemes
(ELSS). ELSS is a type of diversified equity mutual fund, which is
qualified for tax exemption under Section 80C of the Income Tax Act,
and offers the twin-advantage of capital appreciation and tax benefits. It
comes with a lock-in period of three years.

48
 The Rajiv Gandhi Equity Savings scheme (RGESS), which was revised
in the Union Budget 2013-14, would provide a 50% tax deduction on
investments up to Rs. 50,000 to first time investors in equity whose
annual taxable income is below Rs. 12 lakh.
 Index Schemes
Index funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc. NAVs of such schemes
would rise or fall in accordance with the rise or fall in the index, though
not exactly by the same percentage due to some factors known as
"tracking error". Necessary disclosures in this regard are made in the
offer document of the scheme.
There are also exchange traded index funds launched by the mutual funds
which are traded on the stock exchanges.
 Sector Specific schemes
These are the funds which invest in the securities of only those sectors or
industries as specified in the offer documents like Pharmaceuticals,
Software, FMCG, Petroleum stocks etc. The returns of these funds are
dependent on the performance of the respective sectors/industries. While
these funds may give higher returns, they are more risky compared to
diversified funds. Investors need to keep a watch on the performance of
those sectors/industries and must exit at an appropriate time.
 Load or No-Load Funds
A load fund is one that charges a percentage of NAV for exit. That is,
each time one sells units in the fund, a charge will be payable. This
charge is used by the Mutual fund for marketing and distribution
expenses.
A no-load fund is one that does not charge for exit. It means the investors
can exit the fund at no additional charges during sale of units. In
accordance with the SEBI circular no. SEBI/IMD/CIR No.4/168230/09
dated June 30, 2009, no entry load will be charged for purchase /
additional purchase / switch-in accepted by the fund with effect from
August 1, 2009. Similarly, no entry load will be charged with respect to
applications for registrations under Systematic Investment Plan/
Systematic Transfer Plan / Systematic Investment Plan Plus accepted by
the fund with effect from August 1, 2009.
 Dividend Payout Schemes
Mutual Fund companies as when they keep on making profit, distribute a

49
 part of the money to the investors by way of dividends. If one wants to
keep on taking part of profit regularly, he may select this option.
 Dividend Reinvestment Schemes
This option is similar to the first option except that the dividend declared
is re-invested in the same fund on the same day’s NAV.

LIFE INSURANCE

(Life Wire) - By investing in life insurance, almost anyone can transfer the
financial risks of dying early, guaranteeing a payout for family members who
might otherwise be left in economic turmoil. Today's life insurance policies,
however, often come with features borrowed from the investment world,
blending traditional insurance with attributes of a fund account.

Vehicles for Investing in Life Insurance

Those who haven't purchased a policy may be familiar only with "term" life
insurance, which covers the owner for a set period of time, say, until their child
graduates from college. If the owner lives past that date, the plan expires and is
worthless.

But some life insurance policies are "cash value," which means the fees, or
premium, initially are greater at the start of the policy than they would be in a
term policy. The excess premium is then invested in a "separate account," either
by the insurer or in an account controlled by the policy holder, building up cash
value. Any investment gains can be used in a few ways: to increase the death
benefit, to borrow against for any use or to keep the policy in effect if you stop
paying monthly premiums. Policies that offer this investment feature come with
significantly more complex terms, and are offered by salespeople who may earn
a significant commission off your initial premium.

In variable life insurance policies, the cash value and benefits may actually
decrease or go away completely depending upon the performance of your
investments. The National Association of Insurance Commissioners
website offers a downloadable consumer guide to life insurance policies that
urges prospective buyers of variable life policies to obtain a prospectus from the
company and to read it carefully.

50
Tax Benefits of Investing in Life Insurance

Tax benefits are chief among the advantages of a variable universal life
insurance policy. Each year's earnings on the investment portion of the policy
are not taxed, and the taxable gains on policies that are later cashed out can be
reduced by the amount of insurance protection the plan provided. And if the
policy holder dies, the gains are not usually taxed.

Similar tax benefits are also offered through pure investment accounts, such
as 401k plans, IRAs and Roth IRAs; some financial advisers recommend that
these choices be funded to the maximum amount before an investment-oriented
insurance policy is considered.

In addition, insurance policies may offer a wide variety of investment options,

including stocks, bonds, balanced mutual funds, international mutual funds and
money market accounts. Investments may also be tied to a major stock market
index, like the Standard & Poor's 500. These are often similar to what might be
found in a retirement investment account.

Flexibility of Investing in Life Insurance

The death benefit on a variable universal plan may be increased with a lump-
sum payment, or borrowed against in the event of a pressing financial need like
a medical emergency. The ability to skip payments is also considered an
advantage. In addition, the investment account may be shifted to more
conservative or aggressive options.

Fees and Complexity of Life Insurance

Critics of variable universal life insurance plans say that the tax benefits are
outweighed by a variety of fees that eat away at returns. These fees may be
misunderstood by the policy holder, disclosed in long prospectus documents but
glossed over in sales pitches. These policies may charge a fee, often 4% to 6%,
on each deposit; annual contract fees; administrative charges on the account,
and expenses on the investment options themselves. Many of these plans come
with "surrender" charges of $10,000 or more in the event the policy is cashed
out before a certain number of years. While other investment accounts come
with a variety of fees, critics of life insurance policies say the true cost of the
plans are difficult for many buyers to comprehend.

51
Tips for Investing in Life Insurance

If you decide that a variable universal life insurance policy offers appropriate
benefits, you might consider purchasing a plan directly from the insurer and
skipping the salesperson. These include Ameritas, USAA life and TIAA-CREF.
Though you won't be enriching a salesperson, there are still sales costs that
should be explained by the company's agent. Here are some other tips:

Consider funding your other tax-advantaged retirement accounts before opening

a variable universal life insurance policy. Term life insurance, however,
continues to provide a unique benefit.

Holding a cash value insurance plan until death or retirement increases the
likelihood that the plan will be an appropriate investment.

Dodge big fees, commissions, and surrender charges by investigating "low-

load" insurers.

Read the prospectus, which explains the benefits and risks in relatively plain
language, without the spin of a sales pitch.

 TYPES OF LIFE INSURANCE

Life insurance protection comes in many forms, and not all policies are
created equal, as you will soon discover. While the death benefit amounts
may be the same, the costs, structure, durations, etc. vary tremendously
across the types of policies.

 Whole Life
Whole life insurance provides guaranteed insurance protection for the
entire life of the insured, otherwise known as permanent coverage. These
policies carry a "cash value" component that grows tax deferred at a
contractually guaranteed amount (usually a low interest rate) until the
contract is surrendered. The premiums are usually level for the life of the
insured and the death benefit is guaranteed for the insured's lifetime.

With whole life payments, part of your premium is applied toward the
insurance portion of your policy, another part of your premium goes

52
 toward administrative expenses and the balance of your premium goes
toward the investment, or cash, portion of your policy. The interest you
accumulate through the investment portion of your policy is tax-free until
you withdraw it (if that is allowed under the terms of your policy). Any
withdrawal you make will typically be tax free up to your basis in the
policy. Your basis is the amount of premiums you have paid into the
policy minus any prior dividends paid or previous withdrawals. Any
amounts withdrawn above your basis may be taxed as ordinary income.
As you might expect, given their permanent protection, these policies
tend to have a much higher initial premium than other types of life
insurance. But, the cash build up in the policy can be used toward
premium payments, provided cash is available. This is known as a
participating whole life policy, which combines the benefits of permanent
life insurance protection with a savings component, and provides the
policy owner some additional payment flexibility.

 Universal Life
Universal life insurance, also known as flexible premium or adjustable
life, is a variation of whole life insurance. Like whole life, it is also a
permanent policy providing cash value benefits based on current interest
rates. The feature that distinguishes this policy from its whole life cousin
is that the premiums, cash values and level amount of protection can each
be adjusted up or down during the contract term as the insured's needs
change. Cash values earn an interest rate that is set periodically by the
insurance company and is generally guaranteed not to drop below a
certain level.

 Variable Life
Variable life insurance is designed to combine the traditional protection
and savings features of whole life insurance with the growth potential of
investment funds. This type of policy is comprised of two distinct
components: the general account and the separate account. The general
account is the reserve or liability account of the insurance provider, and is
not allocated to the individual policy. The separate account is comprised
of various investment funds within the insurance company's portfolio,
such as an equity fund, a money market fund, a bond fund, or some

53
 combination of these. Because of this underlying investment feature, the
value of the cash and death benefit may fluctuate, thus the name "variable
life.

 Variable Universal Life

Variable universal life insurance combines the features of universal life
with variable life and gives the consumer the flexibility of adjusting
premiums, death benefits and the selection of investment choices. These
policies are technically classified as securities and are therefore subject
to Securities and Exchange Commission (SEC) regulation and the
oversight of the state insurance commissioner. Unfortunately, all the
investment risk lies with the policy owner; as a result, the death benefit
value may rise or fall depending on the success of the policy's underlying
investments. However, policies may provide some type of guarantee that
at least a minimum death benefit will be paid to beneficiaries.

 Term Life
One of the most commonly used policies is term life insurance. Term
insurance can help protect your beneficiaries against financial loss
resulting from your death; it pays the face amount of the policy, but only
provides protection for a definite, but limited, amount of time. Term
policies do not build cash values and the maximum term period is usually
30 years. Term policies are useful when there is a limited time needed for
protection and when the dollars available for coverage are limited. The
premiums for these types of policies are significantly lower than the costs
for whole life. They also (initially) provide more insurance protection per
dollar spent than any form of permanent policies. Unfortunately, the cost
of premiums increases as the policy owner gets older and as the end of
the specified term nears.

Term polices can have some variations, including, but not limited to:

Annual Renewable and Convertible Term: This policy provides

protection for one year, but allows the insured to renew the policy for
successive periods thereafter, but at higher premiums without having to
furnish evidence of insurability. These policies may also be converted
into whole life policies without any additional underwriting.

54
 Level Term: This policy has an initial guaranteed premium level for
specified periods; the longer the guarantee, the greater the cost to the
buyer (but usually still far more affordable than permanent policies).
These policies may be renewed after the guarantee period, but the
premiums do increase as the insured gets older.

Decreasing Term: This policy has a level premium, but the amount of the
death benefit decreases with time. This is often used in conjunction with
mortgage debt protection.

Many term life insurance policies have major features that provide
additional flexibility for the insured/policyholder. A renewability feature,
perhaps the most important feature associated with term policies,
guarantees that the insured can renew the policy for a limited number of
years (ie. a term between 5 and 30 years) based on attained age.
Convertibility provisions permit the policy owner to exchange a term
contract for permanent coverage within a specific time frame without
providing additional evidence of insurability.

 Food for Thought

Many insurance consumers only need to replace their income until
they've reached retirement age, have accumulated a fair amount of
wealth, or their dependents are old enough to take care of themselves.
When evaluating life insurance policies for you and your family, you
must carefully consider the purchase of temporary versus permanent
coverage. As you have just read, there are many differences in how
policies may be structured and how death benefits are determined. There
are also vast differences in their pricing and in the duration of life
insurance protection.

Many consumers opt to buy term insurance as a temporary risk protection

and then invest the savings (the difference between the cost of term and
what they would have paid for permanent coverage) into an alternative
investment, such as a brokerage account, mutual fund or retirement plan.

55
 REAL ESTATE

Chances are, when you think about investing in real estate the first thing that
comes to mind is your home. For many people, their home is the single largest
investment they will ever make. But have you ever stopped to consider that
once you purchase a home it becomes part of your overall portfolio of
investments? In fact, it's one of the most important parts of your portfolio
because it serves a dual role as not only an investment but also a centerpiece to
your daily life.

Though a home is one of the largest investments the average investor will
purchase, there are other types of real estate investments worth investing in. The
most common type is income-producing real estate. Large income-producing
real estate properties are commonly purchased by high net-worth individuals
and institutions, such as life insurance companies, real estate investment
trusts (REITs) and pension funds. (To read more about REITs, see What Are
REITs?, Basic Valuation Of A Real Estate Investment Trust (REIT)and The
REIT Way.)

Income-producing properties are also purchased by individual investors in the

form of smaller apartment buildings, duplexes or even a single family homes or
condominiums that are rented out to tenants. (To find out more about being a
landlord, see Tips For The Prospective Landlord, Tax Deductions For Rental
Property Owners and Investing In Real Estate.)

In the context of portfolio investing, real estate is traditionally considered an

"alternative" investment class. That means it is a supplementary investment
used to build on a primary portfolio of stocks, bonds and other securities.

One of the main differences between investing in a piece of real estate as

compared to stocks or bonds is that real estate is an investment in the "bricks
and mortar" of a building and the land it is built upon. This makes real estate
highly tangible, because unlike most stocks you can see and touch your
property. This often creates substantial pride of ownership, but tangibility also
has its downside because real estate requires hands-on management. You don't
need to mow the lawn of a bond or unplug the toilet of a stock!

56
In this chapter, we will discuss the types and characteristics of real estate, things
to think about when buying and owning property, and the rationale for adding
real estate to your portfolio.

The most basic definition real estate is "an interest in land". Broadening that
definition somewhat, the word "interest" can mean either an ownership interest
(also known as a fee-simple interest) or a leasehold interest. In an ownership
interest, the investor is entitled to the full rights of ownership of the land (for
example, to legally use and transfer the title of the land/property), and must also
assume the risks and responsibilities of a landowner (for example, any losses as
a result of natural disasters and the obligation to pay property taxes). On the
other side of the relationship, a leasehold interest only exists when a landowner
agrees to pass some of his rights on to a tenant in exchange for a payment of
rent. If you rent an apartment, you have a leasehold interest in real estate. If you
own a home, you have an ownership interest in that home. Some jurisdictions
recognize other interests beyond these two, such as a life estate, but those
interests are less common in the investment arena.

As a real estate investor, you will most likely be purchasing ownership interests
and then earning a return on that investment by issuing leasehold interests to
tenants, who will in turn pay rent. It is also not uncommon for an investor to
acquire a long-term leasehold interest in land, which then has a building
constructed upon it. At the end of the land lease, the land and building become
the property of the original land-owner.

 TYPES OF REAL ESTATE

 Income-Producing and Non-Income-Producing Investments

There are four broad types of income-producing real estate: offices, retail,
industrial and leased residential. There are many other less common types
as well, such as hotels, mini-storage, parking lots and seniors care
housing. The key criteria in these investments that we are focusing on is
that they are income producing.

Non-income-producing investments, such as houses, vacation properties

or vacant commercial buildings, are as sound as income-producing
57
 investments. Just keep in mind that if you invest equity in a non-income
producing property you will not receive any rent, so all of your return
must be through capital appreciation. If you invest in debt secured by
non-income-producing real estate, remember that the borrower's personal
income must be sufficient to cover the mortgage payments, because there
is no tenant income to secure the payments.

 Office Property
Offices are the "flagship" investment for many real estate owners. They
tend to be, on average, the largest and highest profile property type
because of their typical location in downtown cores and sprawling
suburban office parks.

At its most fundamental level, the demand for office space is tied to
companies' requirement for office workers, and the average space per
office worker. The typical office worker is involved in things like
finance, accounting, insurance, real estate, services, management and
administration. As these "white-collar" jobs grow, there is greater
demand for office spaces.

Returns from office properties can be highly variable because the market
tends to be sensitive to economic performance. One downside is that
office buildings have high operating costs, so if you lose a tenant it can
have a substantial impact on the returns for the property. However, in
times of prosperity, offices tend to perform extremely well, because
demand for space causes rental rates to increase and an extended time
period is required to build an office tower to relieve the pressure on the
market and rents.

 Retail Property
There is a wide variety of Retail properties, ranging from large enclosed
shopping malls to single tenant buildings in pedestrian zones. At the
present time, the Power Center format is in favor, with retailers
occupying larger premises than in the enclosed mall format, and having
greater visibility and access from adjacent roadways.

Many retail properties have an anchor, which is a large, well-known

58
 retailer that acts as a draw to the center. An example of a well-known
anchor is Wal-Mart. If a retail property has a food store as an anchor, it is
said to be food-anchored or grocery-anchored; such anchors would
typically enhance the fundamentals of a property and make it more
desirable for investment. Often, a retail center has one or more ancillary
multi-bay buildings containing smaller tenants. One of these small units
is termed a commercial retail unit (CRU).

The demand for retail space has many drivers. Among them are: location,
visibility, population density, population growth and relative income
levels. From an economic perspective, retails tend to perform best in
growing economies and when retail sales growth is high.

Returns from Retails tend to be more stable than Offices, in part because
retail leases are generally longer and retailers are less inclined to relocate
as compared to office tenants.

 Industrial Property
Industrials are often considered the "staple" of the average real estate
investor. Generally, they require smaller average investments, are less
management intensive and have lower operating costs than their office
and retail counterparts.

There are varying types of industrials depending on the use of the

building. For example, buildings could be used for warehousing,
manufacturing, research and development, or distribution. Some
industrials can even have partial or full office build-outs.

Some important factors to consider in an industrial property would be

functionality (for example, ceiling height), location relative to major
transport routes (including rail or sea), building configuration, loading
and the degree of specialization in the space (such as whether it has
cranes or freezers). For some uses, the presence of outdoor or covered
yard space is important.

 Multi-family Residential Property

Multi-family residential property generally delivers the most stable

59
returns, because no matter what the economic cycle, people always need
a place to live. The result is that in normal markets, residential occupancy
tends to stay reasonably high. Another factor contributing to the stability
of residential property is that the loss of a single tenant has a minimal
impact on the bottom line, whereas if you lose a tenant in any other type
of property the negative effects can be much more significant.

For most commercial property types, tenant leases are either net or
partially net, meaning that most operating expenses can be passed along
to tenants. However, residential properties typically do not have this
attribute, meaning that the risk of increases in building operating costs is
borne by the property owner for the duration of the lease.

A positive aspect of residential properties is that in some countries,

government-insured financing is available. At the expense of a small
premium, insured financing lowers the interest rate on mortgages, thereby
enhancing potential returns from the investment.

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 CONCLUSIONS

From the detailed analysis following conclusions were drawn:

1. From the study it is concluded that most of the investors are highly educated
and therefore, they consider ‘own study and observation’ as an important factor
for their investment decisions.

2. Though the investors are highly educated they face difficulties in

differentiating various investment avenues also they lack in knowledge and
skills of investing.

3. The investors consider relatives and friends as reliable source for information
about investment and investment avenues followed by news paper / magazines.

4. Large portion of investor’s portfolio belongs to safe investment avenues.

5. Investors prefer safe and secured investment avenues to save tax and also
they give preference to investment avenues which will help them to get dual
benefit like Real estate/ buying a house against loan.

6. Considering current scenario of real estate market it is concluded that every

investor must have real estate as a part of their portfolio.

7. It has been observed that the investors are investing in residential property
along with commercial property because it acts as extra income source.

8. It is concluded that investors still prefer banks over other kinds of fixed
deposits.

9. Considering past, present and future prospects of Gold and silver it is

concluded that every investor must have precious metals as a part of their
portfolio.

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 BIBLIOGRAPHY

www.investmentavenues.com

www.efinancemanagement.com

www.economictimes.indiatimes.com

www.indianmba.com

A study on investment avenues for investor

Portfolio management

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