fsd assignment

8/7/2019 FSD Assignment

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Investment objectives, importance & need:-1 return: - investors always expect a good rate of return from their investment. So

he can complete and fulfill his future need & goal.

2) risk:- probability of actual return becoming less than the expected return.

Investments risk is just as important as measuring its expected rate of return

because minimizing risk and maximizing the rate of return are interrelated obj. in

the invest. Mgmt.

3). liquidity:- proportion of the investment could be converted into cash without

much loss of time, It would help the investor meet the eminencies.

4) Hedge against inflation:- return should be more the inflation rate otherwise the

investor will have loss in real term

5). Safety: - the selected investment avenue should be under the legal and

regulatory frame work. So investor can ensure that his investment is in a right

direction/ decision.

6). Promote savings: - investment gives the return in future so people attract

towards the invest. Invest encourages the savings.

7. it enhance economic growth:- with the help of future return people can start his

own work/business.

8). Additional income: - investment provides the extra income so people can fulfillhis objectives

9). Help in removing uncertainly in life.

10). Tax planning: - in various section are available. So investor can get rebate in

income tax and save the tax

11). It help in planning of future:- investment provide the big return in future so

with the help of people can get and fulfill his future needs and goal

12). reduces black money from market:-the help of investment people can

manage his money and allocates at a right place.

13). It help in channelization of resources.

14). It helps in maintaining life standard.

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Investment process:-The investment process involves a series of activities

leading to the purchase of securities or other investment alternatives.

1). Investment policy:- formulates the policy for systematic functioning

-> Investible funds – management of fund which are used in investment.

Objectives & knowledge:- required rate of return, need for regularity of

income, risk perception and the need for liquidity.

Investor should collect all into about the investment alternatives before

proceeding into investment.

2). Security analysis – through market, industry and company analysis

After formulating the invetment policy the security to be bought has to be

scrutinized.

3). Valuation- the valuation helps to determine the return and risk expected from

an investment in the common stock.

4). Construction of portfolio: - the portfolio so constructed in such manner to meet

the investor’s goals diversification his portfolio and allocates funds among the

securities.

5). Portfolio evaluation: - the portfolio has to be managed efficiently. Throughappraisal as revision process.

Mutual Fund

Mutual fund is a pool of money collected from investors and is invested according

to stated investment objectives Mutual fund investors are like shareholders and

they own the fund. Mutual fund investors are not lenders or deposit holders in a

mutual fund. Everybody else associated with a mutual fund is a service provider,who earns a fee. The money in the mutual fund belongs to the investors and

nobody else. Mutual funds invest in marketable securities according to the

investment objective. The value of the investments can go up or down, changing

the value of the investor’s holdings.NAV of a mutual fund fluctuates with market

price movements. The market value of the investors’ funds is also called as net

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assets. Investors hold a proportionate share of the fund in the mutual fund. New

investors come in and old investors can exit, at prices related to net asset value

per unit.

Mutual Funds now represent perhaps the most appropriate investment

opportunity for most small investors. As financial markets become more

sophisticated and complex, investor need a financial intermediary who provides

the required knowledge and professional expertise on successful investing. It is

no wonder then that in the birthplace of mutual funds-the U.S.A.-the fund industry

has already overtaken the banking industry, with more money under Mutual Fund

management than deposited with banks. The Indian Mutual Fund industry has

already opened up many exciting investment opportunities to Indian investors.Despite the expected continuing growth in the industry, Mutual Fund is a still new

financial intermediary in India.

Mutual Fund Industry in India

Mutual Fund is an instrument of investing money. Nowadays, bank rates have

fallen down and are generally below the inflation rate. Therefore, keeping large

amounts of money in bank is not a wise option, as option, as in real terms thevalue of money decreases over a period of time. One of the options is to invest

the money in stock market. But a common investor is not informed and

competent enough to understand

the intricacies of stock market. This is where mutual funds come to the rescue. A

mutual fund is a group of investors operating through a fund manager to

purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost

efficient and very easy to invest in. By pooling money together in a mutual fund,investors can purchase stocks or bonds with much lower trading costs than if

they tried to do it on their own. Also, one doesn't have to figure out which stocks

or bonds to buy. But the biggest advantage of mutual funds is diversification.

Diversification means spreading out money across many different types of

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investments. When one investment is down another might be up. Diversification

of investment holdings reduces the risk tremendously.

In 1963, the government of India took the initiative by passing the UTI act, under

which the Unit Trust of India (UTI) was set-up as a statutory body. The

designated role of UTI was to set up a Mutual Fund. UTI’s first scheme, called. In

1987 the other public sector institutions set up their Mutual Funds. In 1992,

government allowed the private sector players to set-up their funds. In 1994 the

foreign Mutual Funds arrives in Indian market. In 2001 there is a crisis in UTI and

in 2003 UTI splits up into UTI1and UTI 2. The history of Indian Mutual Fund

industry can be explained easily by various phases.

Benefits of Investing in Mutual Funds

• Professional Management

Mutual Funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team that

analyses the performance and prospects of companies and selects

suitable investments to achieve the objectives of the scheme.

• Diversification

Mutual Funds invest in a number of companies across a broad cross-

section of industries and sectors. This diversification reduces the risk

because seldom do all stocks decline at the same time and in the same

proportion. You achieve this diversification through a Mutual Fund with far

less money than you can do on your own.

• Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many

problems such as bad deliveries, delayed payments and follow up with

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brokers and companies. Mutual Funds save your time and make investing

easy and convenient.

• Return Potential

Over a medium to long-term, Mutual Funds have the potential to provide a

higher return as they invest in a diversified basket of selected securities.

• Low Costs

Mutual Funds are a relatively less expensive way to invest compared to

directly investing in the capital markets because the benefits of scale in

brokerage, custodial and other fees translate into lower costs for investors.

• Liquidity

In open-end schemes, the investor gets the money back promptly at net

asset value related prices from the Mutual Fund. In closed-end schemes,

the units can be sold on a stock exchange at the prevailing market price or

the investor can avail of the facility of direct repurchase at NAV related

prices by the Mutual Fund.

• Transparency

You get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the

proportion invested in each class of assets and the fund manager's

investment strategy and outlook.

• Flexibility

Through features such as regular investment plans, regular withdrawal

plans and dividend reinvestment plans, you can systematically invest or

withdraw funds according to your needs and convenience.

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• Affordability

Investors individually may lack sufficient funds to invest in high-grade

stocks. A mutual fund because of its large corpus allows even a small

investor to take the benefit of its investment strategy.

• Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a

lifetime.

• Well Regulated

All Mutual Funds are registered with SEBI and they function within the

provisions of strict regulations designed to protect the interests of

investors. The operations of Mutual Funds are regularly monitored by

SEBI.

Disadvantages of Investing Mutual Funds: -

• Professional Management:

Some funds doesn’t perform in neither the market, as their management is

not dynamic enough to explore the available opportunity in the market,

thus many investors debate over whether or not the so called

professionals are any better than mutual fund or investor himself, for

picking up stocks.• Costs:

The biggest source of AMC income is generally from the entry & exit load

which they charge from investors, at the time of purchase. The mutual

fund industries are thus charging extra cost under layers of jargon.• Dilution:

Because funds have small holdings across different companies, high

returns from a few investments often don't make much difference on the

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overall return. Dilution is also the result of a successful fund getting too

big. When money pours into funds that have had strong success, the

manager often has trouble finding a good investment for all the new

money.• Taxes:

When making decisions about your money, fund managers don't consider

your personal tax situation. For example, when a fund manager sells a

security, a capital-gain tax is triggered, which affects how profitable the

individual is from the sale. It might have been more advantageous for the

individual to defer the capital gains liability.

Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its

objective: -

By Structure

1. Open-ended Funds: -

An open-end fund is one that is available for subscription all through the year.These do not have a fixed maturity. Investors can conveniently buy and sell units

at Net Asset Value ("NAV") related prices. The key feature of open-end schemes

is liquidity 25

2. Closed-ended Funds: -

A closed-end fund has a stipulated maturity period which generally ranging from

3 to 15 years. The fund is open for subscription only during a specified period.

Investors can invest in the scheme at the time of the initial public issue and

thereafter they can buy or sell the units of the scheme on the stock exchanges

where they are listed. In order to provide an exit route to the investors, 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.

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3. Interval Funds: -

Interval funds combine the features of open-ended and close-ended schemes.

They are open for sale or redemption during pre-determined intervals at NAV

related prices.

4. Money Market Funds: -

The aim of money market funds is to provide easy liquidity, preservation of

capital and moderate income. These schemes generally invest in safer short-

term instruments such as treasury bills, certificates of deposit, commercial paper

and inter-bank call money. Returns on these to 2%. It could be worth paying the

load, if the fund has a good performance history.

5. No-Load Funds: -

A No-Load Fund is one that does not charge a commission for entry or exit. That

is, no commission is payable on purchase or sale of units in the fund. The

advantage of a no load fund is that the entire corpus is put to work.

6. Tax Saving Schemes: -

These schemes offer tax rebates to the investors under specific provisions of the

Indian Income Tax laws as the Government offers tax incentives for investment

in specified avenues. Investments made in Equity Linked Savings Schemes

(ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income

Tax Act, 1961. The Act also provides opportunities to investors to save capital

gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital

asset has been sold prior to April 1, 2000 and the amount is invested before

September 30, 2000

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InsuranceCharacteristic: - life is a roller coaster ride and is full of twists and turns, you

cannot take anything for granted in life. Insurance policies are a safeguard

against the uncertainties of lifeInsurance is system by which the losses suffered by a few are spread over many,

expose to similar risks. Insurance is a protection against financial loss arising on

the happening of an unexpected event. Insurance policy helps in not only

mitigating risks but also provides a financial cushion against adverse financial

burdens suffered.

Advantages of insurance:-

1). protection :- saving through life insurance guarantees fill protection against

risk of death of the saver the full assured sum is paid, where as in other schemes

only the amount saved is paid.

2). Easy payment: - for the salaried people salaries saving schemes are

introduced further there is an easy installment facility method of payment through

monthly, quarterly, half yearly on yearly mode.

3). Liquidity: - loans can be raised on the security of the policy

4). Tax relief:- in income tax and wealth tax is available for amount paid by way

of premium for life insurance subject to the tax rates in force.5). Choice of schemes:- many policies are available.

Schemes of LIC:-

• Basic life insurance plan-

Whole life insurance plan – it is a low cost insurance plan where the sum assured

is payable on the death of the life assured and premium are payable throughout

life.

Endowment assurance plan – the sum assured is payable on the date of maturity

or on the death of the life assured it earlier.

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• Term assurance plan –

Two year temporary assurance plan- the sum assured is payable only on the

death of the life assured during the term.

Convertible term assurance plan- An option to purchase a new scheme Bimasandesh & bima kiran are another term assurance plan.

Plan for children- various children’s deferred assurance plans are avail. Jaaven

balaya, jeevan kishore, jeevan sukanya.etc.

Pension plans – these plans provides for either immediate or deferred pension

for life. The pension payments are made till the death of life annuitant. Both the

deferred annuity and immediate annuity plans are available with the return of the

given amount on death after vesting under the jeevan dharma plan return of pur.

Price on death under the jeevan akshay plan.

Jeevan sarita: - this is a joint life last survivor- annuity cum assurance plan

Unit linked insurance plans:- the investment is denoted as units and is

represented by the value that it has attained called as NAV

ULIP provides multiple benefits to the consumer:-

Life protect in Investment & saving Flexibility, disability Tax planning Adjustable

life cover

Tax benefits from life insurance:-At present, deductions are allowed up to Rs. 1500/- under sec. 80 did in respect

of medical treatment of handicapped dependents and another amount up to Rs

20000/- under sec 80 DDA in respect of deposit made for maintenance of

handicapped dependents under any scheme framed for their behalf by LIC.

A deduction to an individual for any amt. paid or deposited by him in the jeevan

suraksha plan for receiving pension is allowed.The deduction will be restricted to Rs. 10000/- according to sec 88, the amt. of

income tax payable on the total taxable income can be reduced by 20% of the

aggregate amt. paid towards premium subject to the max. Of Rs. 70000/-

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Premium paid under jointly insurance policy on the lives of a husband & wife –

deduction under section 88.

Securities:Various types of securities are available in the market include shares,

debentures, bonds etc.

Equity shares

About shares -At the most basic level, stock (often referred to as shares) is ownership, or

equity, in a company. Investors buy stock in the form of shares, which represent

a portion of a company's assets (capital) and earnings (dividends). As ashareholder, the extent of your ownership (your stake) in a company depends on

the number of shares you own in relation to the total number of shares available

For example, if you buy 1000 shares of

Stock in a company that has issued a total of 100,000 shares, you own one per

cent of the company. While one per cent seems like a small holding, very few

private investors are able to accumulate a shareholding of that size in publicly

quoted companies, many of which have a market value running into billions of

pounds. Your stake may authorize you to vote at the company's annual general

meeting, where shareholders usually receive one vote per share. In theory, every

stockholder, no matter how small their stake, can exercise some influence over

company management at the annual general meeting. In reality, however, most

private investors' stakes are insignificant. Management policy is far more likely to

be influenced by the votes of large institutional

Investors such as pension funds

a) Stock symbol -A stock symbol, or 'Epic' symbol, is the standard abbreviation of a stock's name.

You can find stock symbols wherever stock performance information is published

- for example, newspaper stock listings and investment websites. Company

names also have abbreviations called ticker symbols. However, it's worth

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remembering that these may vary at the different exchanges where the company

is quoted.

b) Performance indicators -

Here is a list of the standard performance indicators

Performance Indicator Definition

Closing price: The last price at which the stock was bought or sold.

High and low: The highest and lowest price of the stock from the previous trading

day.

52 week range: The highest and lowest price over the previous 52 weeks.

Volume: The amount of shares traded during the previous trading day High and

low.Net change: The difference between the closing price on the last trading day and

the

Closing price on the trading day prior to the last.

The stock exchange -

A marketplace in which to buy or sell something makes life a lot easier. The

same applies to stocks. A stock exchange is an organization that provides amarketplace in which investors and borrowers trade stocks. Firstly, the stock

exchange is a market for issuers who want to raise equity capital by selling

shares to investors in an Initial Public Offering (IPO). The stock exchange is also

a market for investors who can buy and sell shares at any time.

a) Trading shares on the stock exchange: -

As an investor in the INDIA, you can't buy or sell shares on a stock exchange

yourself. You need to place your order with a stock exchange member firm (a

stockbroker) who will then execute the order on your behalf. The NSE AND BSE

are the leading stock exchange in the INDIA. Trading is done through

computerized systems.

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b) The trading process: -

If you decide to buy or sell your shares, you need to contact a stockbroker who

will buy or sell the shares on your behalf. After receiving your order, the

stockbroker will input the order on the SETS or SEAQ system to match your

order with that of another buyer or seller. Details of the trade are transmitted

electronically to the stockbroker who is responsible for settling the trade. You will

then receive confirmation of the deal.

c) Types of shares available on the stock exchange: -

You cannot trade all stocks on the stock exchange. To be listed on a stock

exchange, a stock must meet the listing requirements laid down by that

exchange in its approval process. Each exchange has its own listing

requirements, and some exchanges are more particular than others. It is possible

for a stock to be listed on more than one exchange. This is known as a dual

listing.

Preference shares –Characteristics – Those which carry preferential right in respect of payment of

dividend and repayment of capital in case of winding up at the company div. rate

fixed. Preference shareholders have restricted voting right.

Advantage of preference shares –1. Regular fixed income – fixed rate of dividend.

2. Preferential right and min. risk – they enjoy the right regarding the

payment of div. repayment of principal in case of winding up of companyetc.

3. Voting right for safety of interests.

4. Fair security against depression.

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5. Minimum capital losses – pre. Right to repayment of their capital.

Disadvantage of pre. Shares –1. Restricted booting rights – don’t enjoy are voting right except in matters

dire city affecting their interests.

2. Fixed income – they get a fixed div. irrespective of higher learning of the

comp.

3. No claim over surplus – they are only entitled for repayment of their

investment on preferential basis.

4. Uncertainty of income – comp. can redeem the redeemable pre. Shares

on or after a certain date as per terms of their issue.

5. Unsecured investments – are not provided with any security of assets in

respect of their investment.

Types of pre. Shares –1. Cumulative or non-cumulative – cum. Ore. Share give the right to the pre.

Shareholders to demand the unpaid divided in any year during thesubsequent year of year when the profits are avail. For distribution but

non. Com. Pre. Share holder not has any right.

2. Redeemable and non-redeemable – redeemable share which have to be

repaid by the company offer the term for which the pre-share have been

issued non-redeemable shares need not be repaid by the comp. except on

winding up.

3. Participating preference share and non-participating pre. Shares –

participating shares which are entitled to a pref. dividend at a fixed rate

with the right to participate further in the profits either along with or after

payment of certain rate of div. with or after payment of certain rate of div.

on equity shares.

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4. Convertible and non-convertible pre. Shares – shares are gives a right to

convert their shares into equity shares within a specified period which

cannot be converted into equity called non-convertible.

DebenturesDebentures are creditor ship securities issued by companies for raising long term

funds on loan basis. Deb. Are the acknowledgement of a debt by a comp. it is

also an instrument executed by a company under its common seal

acknowledging indebtedness to some person and persons to secure the sumadvanced.

Advantages of debentures of investors –1. Safety and security of investment – debentures holders have a specific or

general or floating charge on the assets of the comp.

2. Regular fixed income or their principal even out of capital if the company

incurs losses.

3. Liquidity- they can be used as collateral security for raising loan from any

financial institution, and can also be sold in a stock exchange.

4. Convert into shares after she expiry at a specific period.

Disadvantages –1. No control – on the affairs of the company as they have no voting rights.

2. No extra income – they entitled to get fixed interest even company earnedhuge profit.

Types of debentures –1. Secured & unsecured debentures – secured having fixed or floating

change on the assets of the company but unsecured net having.

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2. Redeemable & irredeemable debentures

3. Registered and bearer debentures – registered deb. Which are registered

with the comp. in the name of deb. Holders and are trans. Only by a

regular trans. Deed. But bearer deb. Are payable to the bearer and aretransferable by delivery.

4. Convertible and non-convertible debentures

5. Equitable and legal debentures

6. Preferred and ordinary debentures

BondsBonds are a long term debt instrument that promises to pay a fixed annual

sum as interest for specified period at time.

Bonds have face value / par value. May be issued at par or at discount.

The interest rate is fixed. Some time floating.

Bonds are traded in the stock market.

Types of bonds –1. Secured bond and unsecured bonds

2. Perpetual bond and redeemable bonds – bonds that do not mature or

never mature are called perpetual bonds.

3. Fixed interest rate bonds & floating int. rate which bonds int. rate floating,

charge according to the prefixed norms called floating.

4. Zero coupon bonds – these bonds sell at a dis. And the face value is

repaid at maturity.

5. Capital indexed bonds – the principal amount of the bond is adjusted for

inflation for every year.

GOVERNMENT SECURITIES

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Government securities (G-secs.) are sovereign securities which are issued by the

Reserve Bank of India on behalf of Government of India, in lieu of the Central

Government's market borrowing program.

The term Government Securities includes:

Central Government Securities.

Central Government Securities.

State Government Securities

Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit’. The market

borrowing of the Central Government is raised through the issue of dated

securities and 364 days treasury bills either by auction or by floatation of loans.

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

borrowing program me of the Central Government.

Types of Government SecuritiesGovernment Securities are of the following types: -

Dated Securities: They are generally fixed maturity and fixed coupon securities

usually carrying semiannual coupon. These are called dated securities because

these are identified by their date of maturity and the coupon, e.g., 11.03% GOI

2012 is a Central Government security maturing in 2012, which carries a coupon

of 11.03% payable half yearly. The key features of these securities are:

They are issued at face value.

Coupon or interest rate is fixed at the time of issuance, and remains constant till

Redemption of the security.

The tenor of the security is also fixed.Interest /Coupon payment is made on a half yearly basis on its face value.

The security is redeemed at par (face value) on its maturity date.

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Zero Coupon bonds : These are bonds issued at discount to face value and

redeemed at par. These were issued first on January 19, 1994 and were followed

by two subsequent issues in 1994-95 and 1995-96 respectively. The key features

of these securities are:

They are issued at a discount to the face value.

The tenor of the security is fixed.

The securities do not carry any coupon or interest rate. The difference between

the issue price (discounted price) and face value is the return on this security.


Partly Paid Stock: This is stock where payment of principal amount is made in

installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds

immediately. The first issue of such stock of eight year maturity was made on

November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few

more times thereafter. The key features of these securities are:

They are issued at face value, but this amount is paid in installments over a

specified period.

Coupon or interest rate is fixed at the time of issuance, and remains constant till

Redemption of the security.

The tenor of the security is also fixed.

Interest /Coupon payment is made on a half yearly basis on its face value.


Floating Rate Bonds: These are bonds with variable interest rate with a fixed

percentage over a benchmark rate. There may be a cap and a floor rate attached

thereby fixing a maximum and minimum interest rate payable on it. Floating rate

bonds of four year maturity were first issued on September 29, 1995, followed by

another issue on December 5, 1995. Recently RBI issued a floating rate bond,

the coupon of which is benchmarked against average yield on 364 Days

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Treasury Bills for last six months. The coupon is reset every six months. The key

features of these securities are:


Coupon or interest rate is fixed as a percentage over a predefined benchmark

rate at the time of issuance. The benchmark rate may be Treasury bill rate,

bank rate etc.

Though the benchmark does not change, the rate of interest may vary according

to the Change in the benchmark rate till redemption of the security. The tenor of

the security is also fixed.



Bonds with Call/Put Option : First time in the history of Government Securities

market RBI issued a bond with call and put option this year. This bond is due for

redemption in 2012 and carries a coupon of 6.72%. However the bond has call

and put option after five years i.e. in year 2007. In other words it means that

holder of bond can sell back (put option) bond to Government in 2007 or

Government can buy back (call option) bond from holder in 2007. This bond has

been priced in line with 5 year bonds.

Capital indexed Bonds: These are bonds where interest rate is a fixed

percentage over the wholesale price index. These provide investors with an

effective hedge against inflation. These bonds were floated on December 29,

1997 on tap basis. They were of five year maturity with a coupon rate of 6 per

cent over the wholesale price index. The principal redemption is linked to the

Wholesale Price Index. The key features of these securities are:


Coupon or interest rate is fixed as a percentage over the wholesale price index at

the time of issuance. Therefore the actual amount of interest paid varies

according to the change in the Wholesale Price Index.

The tenor of the security is fixed.

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The principal redemption is linked to the Wholesale Price Index.

Features of Government Securities

Nomenclature

The coupon rate and year of maturity identifies the government security.

Example: 12.25% GOI 2008 indicates the following:

12.25% is the coupon rate, GOI denotes Government of India, which is the

borrower, 2008 is the year of maturity.

Eligibility

All entities registered in India like banks, financial institutions, Primary Dealers,

firms, companies, corporate bodies, partnership firms, institutions, mutual funds,

Foreign Institutional Investors, State Governments, Provident Funds, trusts,

research organizations, Nepal Rashtra bank and even individuals are eligible to

purchase Government Securities.

AvailabilityGovernment securities are highly liquid instruments available both in the primary

and secondary market. They can be purchased from Primary Dealers. PNB Gilts

Ltd., is a leading Primary Dealer in the government securities market, and is

actively involved in the trading of government securities.

DerivativesDerivatives are contract which derive these values form the value of one or more

of other assets (known as underling assets).

The underlying assets could be a fin. Security, a security index or some

combination of sec., indexes and commodities, derivatives are financial

instrument that have no intrinsic value.

“In the Indian context the securities contract regulation Act, 1956”

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Defines ‘derivative’ to include –

1. A security derived from a debt instrument, share loan whether se cured or

unsecured, risk instrument or contract for difference or any other form of

security.

2. A contract which derives its value from the prices or index of prices of

underlying securities.

Characteristics –1. Future contract – between two parties and the same to be fulfilled in

future.

2. Parties obligation – the counter parties have specified obligation under the

derivative contract.

3. No delivery of assets – in derivatives trading the taking or making of

delivery of underlying asset is not involved

4. Derived contract – the value which derived from the values of other

underlying assets, such comedies, metals, fin. Assets etc.

5. Secondary market instrument – derivatives have little usefulness inmobility fresh capital by the corporate world, however warrant &

convertibles are exception in this respect.

6. Deferred payment instrument – it means that it is easier to take short or

long position in derivatives in comparison to other assets or securities.

Derivative instrument –

1. Forwards

2. Future

3. Options

4. Swaps

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Advantage of derivatives1. Reflect perception of market participants about the future and lead the

prices of underlying to the perceived future level.

2. Help of transfer risks.

3. Higher trading volumes – derivatives, due to their interest nature, are

linked to the underlying cash market wish the introduction at derivates.

The participation by more players who would not otherwise participate for

lack of an arrangement to trans. Risk.

4. Controlled environment – speculative trades shift to a more controlled

environment at derivatives market.5. Attract entrepreneurial activity – derivatives attracting many bright,

creative well educated people with an entrepreneurial attitude.

Disadvantages of derivatives1. Speculative and gambling motives – promotes the speculative activity in

the market.

2. Increase in risk – it is particularly customized privately managed and

negotiated and thus they are highly risky.

3. Instability of financial system – derivatives are also risky for whole fin.

System. The rears of micro and macro financial crises have caused to the

cheeked growth of derivatives which have turned many players into big

losers.

4. Price instability – it all works activity are not accrue in a well organized

way, follows standard code of conduct than it will result in price instability.

5. Increased regulatory burden- on the govt. or regulatory authorizes to

control the activities of the traders in fin. Derivatives.

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Non-negotiable securities

Deposits –Deposits earn fixed rate of return even tour bank deposits resemble fixed income

securities they are not negotiable instruments. Some of the deposits are dealt

subsequently.

1. Bank deposits – it is the simple investment avenue for the investors.

Traditionally the bank offered current account, saving account & fixed

deposit. Current account does not offer any interest rate. The drawback of

having large amounts in savings accounts is that the return is just 4.5%.

The saving account interest rate is regulated by the reserve bank of India

and kept low because of the high cost of servicing them. The savings

account is more liquid and convenient to handle. The fixed account carries

high interest rate and the money is locked up for a fixed period. With

increasing competition among the banks, the banks have handled the

plain savings accounts with the fixed accounts later to the needs of the

small savers. The deposits in the banks are considered to be safebecause of RBI regulation. The risk arises investors prefer the bank

deposits.

2. NBFC deposits – in recent years, there has been significant increases in

the important of non-banking financial companies in the process of

financial intermediation. The NBFC comes under the purviews of the RBI.

The amendment of RBI act of Kim -1997, made registration compulsory

for the NBFC’s.

• Period – the immaturity period ranges form few months to five years.

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• Maximum limit – the limit for acceptance of deposit has been based on the

credit rating of the company. The NBFC not having net owned funds of

Rs. 25 lakh are not entitled to accept deposits.

• Interest – interest rate higher than the commercial bank on public deposit.The interest rate differs according to maturity period.

• Security – security of the deposits of the NBFC in much lower than the

deposits with banks. To improve the liquidity of NBFCs the percentage of

liquid assets required to be maintained y them has been enhanced form

12.5% to 15% with effect from April 1999 respectively.

3. Post office deposits – like the bank, post office also offers fixed deposit

facility and monthly income scheme. Post office monthly income scheme

is a popular scheme for the retired. An interest rate of 13% is paid

monthly. The term of the scheme is 6 years, at the end of which a bonus

of 10% is paid. The annualized yield to maturity works out to be 15.01%

pa. After three years, premature closure is allowed without any penalty. If

the closure is after one year, a penalty of 5% is charged.

4. Tax sheltered savings scheme – the tax sheltered savings schemes offer tax relief to those who participate in their schemes according to the

income tax laws.

Public provident fund scheme

National savings scheme

a) Public provident fund scheme – ppf earns an interest rate of 12% pa.

Which is exempted form the income tax under sec. 88? The individualsand Hindu undivided families can participate in this scheme. The

maximum limit per annum for the deposit is Rs. 60000. The interest is

accumulated in the deposit. Ppf is also provides the early withdrawal

facility.

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b) National savings schemes – this scheme helps in deferring the tax

payment. Individual and HUF are eligible to open NSS account in the

designated post office. Locking period of 4 years quality for a rebate of

20% under section 55 of the income tax act, subject to a maximum of

rs 12000.

Real / physical assets

The imp. Categories of real assets are –

1. Real estate – real estate has historically been useful in a portfolio for both

income and capital gain. Home ownership is a form of equity investment

because such property appreciates in value. A residential house is very

attractive investment proposal due to following reasons –

A) Capital appreciation of residential property is in general very high.

B) Loans are available from various quarters for buying / constructing a

residential home.

C) For wealth tax purpose, the value of a residential home is reckoned at his

historical cost and not at its present market prices.

D) Interest on loans taken for buying / constructing a residential home is tax-

deductible within certain limits.

E) Ownership of a residential home provides psychological sets. The other

forms of real estate like commercial premises, industrial land, plantation,

farmhouses etc.

ADVANTAGES AND DISADVANTAGES

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There are many advantages and disadvantages of investing in real estate. One

of the advantages of investing in real estate is; real estate is an investment that

can give you income for the rest of your life. If you buy properties and rent the

properties out it can give you lifelong income. Another advantage of investing in

properties is you can use a lot of leverage to acquire them. There are many ways

you can buy properties without using your own money. One way of doing this is

seller financing. Seller financing is when you agree to pay the seller over time the

down payment and the rest you get from the bank.

One last advantage of investing in real estate is real estate has intrinsic value to

it. A stock that you buy can lose 99% of its value but it is almost impossible to

buy a property and it loses 99% of its value. One disadvantage of investing inproperties is if you buy a property and can't make the mortgage payments you

can lose the property and damage your credit. Another disadvantage of investing

in properties is, as an investor you depend on a lot of people to do their part. If

the people you are renting out to do not pay their rent you will have to use their

security money and find new people quickly or it can eat up your profits.

One last disadvantage of investing in properties is the cost it takes to maintain or

repair. Many times when you think you're done with a property something canbreak or needs to be replaced. Investing in properties does have its advantages

and disadvantages. If you use the information you read here you will have some

idea of what the advantages and disadvantages are.

There are many different types of investment real estate: rental houses,

apartments, vacant land, commercial buildings, industrial, shopping centers or

warehouses. They all offer big tax incentives for investors who understand those

benefits. Many people believe that depreciation is the best real estate tax

deduction of all. The IRS REQUIRES real estate investors to depreciate their

investment properties.

Depreciation is a "paper loss" required for estimated wear, tear and

obsolescence. However, land value is not depreciable. This applies to 100% of

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the money invested in buying vacant land and that part of the property value

apportioned to land on an improved property. (That is, land with a building on it).

Condominiums do not have a land element and 100% of the purchase price can

be depreciated.

Residential income property is depreciated over 27.5 years on a straight-line

basis.Commercial property is depreciated over 39 years, also on a straight-line basis.

Tax benefits

If you are a "real estate professional" who meets certain time requirements and

who "materially participates" in managing your investment property, you are

allowed almost unlimited income tax-deductions from your investment property.

CURRENCY

DefinitionAn exchange of currencies, where an investor will exchange a specific amount of

one currency for another currency which can be invested at a higher interest rate.

Any form of money that is in public circulation currency includes both hard money(coins) and soft money (paper money). Typically currency refers to money that is

legally designated as such by the governing body, but in some cultures currency

can refer to any object that has a perceived value and can be exchanged for

other objects.

Characteristics

The money market is a market for financial assets that are close substitutes for money. It is a market for overnight short-term funds and instruments having a

maturity period of one or less than one year. It is not a place (like the Stock

market), but an activity conducted by telephone. The money market constitutes a

very important segment of the Indian financial system.

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The characteristics of the money market are:

1. It is not a single market but a collection of markets for several instruments

2. It is wholesale market of short term debt instruments

3. Its principal feature is honor where the creditworthiness of the participants isimportant.

4. The main players are: Reserve bank of India (RBI), Discount and Finance

House of India (DFHI), mutual funds, banks, corporate investor, non-banking

finance companies (NBFCs), state governments, provident funds, Primary

dealers. Securities Trading Corporation of India (STCI), public sector undertaking

(PSUs), non-resident Indians and overseas corporate bodies.

5. It is a need based market wherein the demand and supply of money shape themarket.

Functions of the Currency Market:

A currency market is generally expected to perform three broad functions:

1. Provide a balancing mechanism to even out the demand for and supply of

short term funds

2. Provide a focal point for central bank intervention for influencing liquidity and

general level of interest rates in the economy.

3. Provide reasonable access to suppliers and users of short term funds to fulfill

their borrowings and investment requirements at an efficient market clearing

price.

Besides the above functions, a well functioning money market facilitates the

development of a market for longer term securities. The interest rates for extremely short term use of money serve as a benchmark for longer term

financial instruments.

Advantages

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An efficient money market benefits a number of players. It provides a stable

source of funds to banks in addition to deposits allowing alternative financing

structures and competition. It allows banks to manage risks arising from interest

rate fluctuations and to manage the maturity structure of their assets and

liabilities.

A developed inter-bank market provides the basis for growth and liquidity in the

money including the secondary market for commercial paper and treasury bills.

An efficient money market encourages the development of non-bank

intermediaries thus increasing the competition for funds. Savers get a wide array

of savings instruments to choose from and invest their savings.

A liquid money market provides an effective source of long term finance to

borrowers. Large borrowers can lower the cost of raising funds and manage

short term funding or surplus efficiently.

A liquid and vibrant money market is necessary for the development of a capital

market, foreign exchange market, and market in derivative instruments. The

money market supports the long term debt market by increasing the liquidity of

securities. The existence of an efficient money market is a precondition for the

development of a government securities market and a forward foreign exchange

market.

Trading in forwards, swaps, and futures is also supported by a liquid money

market as the certainty of prompt cash settlement is essential for such

transactions. The government can achieve better pricing on its debt as it provides

access to a wide range of buyers. It facilitates the government market borrowing.

Monetary control through indirect methods (repos and open market operations) is

more effective if the money market is liquid. In such a market response to the

central bank’s policy actions are both faster and less subject to distortion.

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The average turnover of the money market in India is over Rs 40,000 crore daily.

This is more than 3 per cent of the total money supply in the Indian economy and

6 percent of the total funds that commercial banks have let out to the system.

This implies that 2 per cent of the annual GDP of India gets traded in the money

market in just one day. Even though the money market is many times larger than

the capital market, it is not even a fraction of the daily trading in developed

markets.

Postal Services in India

India possesses the largest postal network in the world with 155,000 post offices

spread all over the country as on March 31, 2001, of which 89 per cent are in therural sector. Post offices in India play a vital role in the rural areas. They connect

these rural areas with the rest of the country and also provide banking facilities in

the absence of banks in the rural areas. Post Offices offer various types of

accounts. These are:

• Savings Account• Recurring Deposit Account• Monthly Income Account• Time Deposit Account

Post Offices also offer various saving and tax saving instruments such as:

• National Savings Certificate• Public Provident Fund• Kisan Vikas Patra

National Savings Certificate

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National Saving Certificate of NSC is another popular and safe investment

option. Maturity period of NSC is 6 years compared to 16 in PPF.

National Savings Certificate, popularly known as NSC, is a time-tested tax saving

instrument that combines adequate returns with high safety.

National Savings Certificate can be purchased by the following:

• An adult in his own name or on behalf of a minor,• A minor,• A trust• Two adults jointly,• Hindu Undivided Family

National Savings Certificates are available in the denominations of Rs. 100, Rs

500, Rs. 1000, Rs. 5000, & Rs. 10,000. There is no maximum limit on the

purchase of the certificates.

Period of maturity of a certificate is six years. Presently, maturity value of a

certificate of Rs. 100 denomination is Rs. 160.10. Maturity value of a certificate of any other denomination is at proportionate rate. Premature encashment of the

certificate is not permissible except at a discount in the case of death of the

holder(s), forfeiture by a pledge and when ordered by a court of law.

Interest accrued on the certificates every year is liable to income tax but deemed

to have been reinvested. Income Tax rebate is available on the amount invested

and interest accruing under Section 88 of Income Tax Act, as amended from time

to time. Income tax relief is also available on the interest earned as per limits

fixed vide section 80L of Income Tax, as amended from time to time.

Denominations and Limit

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National Savings Certificates are available in the denominations of Rs. 100 Rs

500, Rs. 1000, Rs. 5000, & Rs. 10,000. There is no maximum limit on the

purchase of the certificates. So it is for you to decide how much you want to put

in the NSCs. This is of course a huge benefit for you can decide as much as your

budget allows.

MaturityPeriod of maturity of a certificate is six years. Presently interest paid is 8 % per

annum half yearly compounded. Maturity value of a certificate of any other

denomination is at proportionate rate. Premature encashment of the certificate is

not permissible except at a discount in the case of death of the holder(s),

forfeiture by a pledge and when ordered by a court of law.

Tax Benefits

Interest accrued on the certificates every year is liable to income tax but deemed

to have been reinvested. Income Tax rebate is available on the amount invested

and interest accruing under Section 88 of Income Tax Act, as amended from time

to time. Income tax relief is also available on the interest earned as per limits

fixed vide section 80L of Income Tax, as amended from time to time

Public Provident FundPublic Provident Fund or PPF is a safe investment method in India. Minimum

deposit in a year is Rs500 and maximum is Rs70, 000. Tenure of the deposit is

for 16 years relative long compared to other type of investments. PPF deposits

are eligible for income tax rebate. Loan is available on PPF from the third year onwards.

Public Provident Fund, popularly known as PPF, is a savings cum tax saving

instrument. It also serves as a retirement planning tool for many of those who do

not have any structured pension plan covering them.

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Public Provident Fund account can be opened at designated post offices

throughout the country and at designated branches of Public Sector Banks

throughout the country. The account can be opened by an individual in his own

name, on behalf of a minor of whom he is a guardian, or by a Hindu Undivided

Family.

Minimum deposit required in a PPF account is Rs. 500 in a financial year.

Maximum deposit limit is Rs. 70,000 in a financial year. Maximum number of

deposits is twelve in a financial year.

The account matures for closure after 15 years. Account can be continued withor without subscriptions after maturity for block periods of five years. Premature

withdrawal is permissible every year after completion of 5 years from the end of

the year of opening the account.

Loans from the amount at credit in PPF amount can be taken after completion of

one year from the end of the financial year of opening the account and before

completion of the 5th year.

Interest at the rate notified by the Central Government from time to time, is

calculated and credited to the accounts at the end of each financial year.

Presently, the rate of interest is 8% per annum.

Income Tax rebate is available "on the deposits made", under Section 88 of

Income Tax Act, as amended from time to time. Interest credited every year is

tax-free.

Kisan Vikas Patra

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Kisan Vikas Patra (KVP) is a saving instrument that provides interest income

similar to bonds. Amount invested in Kisan Vikas Patra doubles on maturity after

8 years & 7 months. Kisan Vikas Patra can be purchased by the following:

• An adult in his own name, or on behalf of a minor,• A minor,• A Trust,• Two adults jointly.

Kisan Vikas Patra are available in the denominations of Rs 100, Rs 500, Rs

1000, Rs 5000, Rs. 10,000 & Rs. 50,000. There is no maximum limit on

purchase of KVPs. Premature encashment of the certificate is not

permissible except at a discount in the case of death of the holder(s),

forfeiture by a pledge and when ordered by a court of law.

No income tax benefit is available under the Kisan Vikas Patra

scheme. However, the deposits are exempt from Tax Deduction at

Source (TDS) at the time of withdrawal.

India has a very organized and well maintained postal network with post offices

in even small villages. Postal Department offers many basic services like

delivering letters, parcels, registers, money orders and advanced services like

instant money order, speed post, express delivery and other services like bill

collection. Recently they revamped the speed post with uniform rate called one

India one rate scheme. Apart from these services they offer many financial

services called Postal Saving Schemes

COMMODITIESA commodity is a normal physical product used by everyday people during the

course of their lives, or metals that are used in production or as a traditional store

of wealth and a hedge against inflation. For example, these commodities include

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grains such as wheat, corn and rice or metals such as copper, gold and silver.

The full list of commodity markets is numerous and too detailed. The best way to

trade the commodity markets is by buying and selling futures contracts on local

and international exchanges.

Trading futures is easy, and can be accessed by using the services of any full or

on-line futures brokerage service. Traditionally, there is an expectation when

trading commodity futures of achieving higher returns compared to shares or real

estate, so successful investors can expect much higher returns compared to

more conventional investment products.

The process of trading commodities, as mentioned above, must be facilitated by

the use of trading liquid, exchangeable, and standardized futures contracts, as it

is not practical to trade the physical commodities.Futures contracts give the investor ease of use and the ability to buy or sell

without delay. A futures contract is used to buy or sell a fixed quantity and quality

of an underlying commodity, at a fixed date and price in the future. Futures

contracts can be broken by simply offsetting the transaction. For example, if you

buy one futures contract to open then you sell one futures contract to close that

market position. The execution method of trading futures contracts is similar to

trading physical shares, but futures contracts have an expiry date and are

deliverable. Futures contracts have an expiry date and need to be occasionally

rolled over from the current contract month to the following contract month. The

reason is because the biggest advantage to trading commodity futures, for the

private investor is the opportunity to legally short-sell these markets. Short-selling

is the ability to sell commodity futures creating an open position in the

expectation to buy-back at a later time to profit from a fall in the market. If you

wish to trade the up-side of commodity futures, then it will simply be a buy-to-

open and sell-to close set of transactions similar to share trading.

The commodity markets will always produce rising of falling trends, and with the

abundance of information and trading opportunities available there is no reason

for any investor to exclusively trade the share market when there is potential

profits from trading commodity futures.

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The increased use of commodity trading vehicles in investment management has

led practitioners to create investable commodity indices and products that offer

unique performance opportunities for investors in physical commodities. As is

true for stock and bond performance, as well as investment in managed futures

and hedge fund products, commodity-based products have a variety of uses.

Besides being a source of information on cash commodity and futures

commodity market trends, they are used as performance benchmarks for

evaluation of commodity trading advisors and provide a historical track record

useful in developing asset allocation strategies. However, the investor benefits of

commodity or commodity-based products lie primarily in their ability to offer risk

and return trade-offs that cannot be easily replicated through other investment

alternatives. Previous research that direct stock and bond investment offers littleevidence of providing returns consistent with direct commodity investment.

Commodity-based firms may not be exposed to the risk of commodity price

movement. Thus for investors, direct commodity investment may be the principal

means by which one can obtain exposure to commodity price movements.

The commodities that are traded in the market.• Gold

• Copper

• Silver

• Sugar

• Wheat

• Zeera

• Guar

The commodity trading system functions on a real time basis through online

means. Farmers, exporters, importers, and traders are the main participants in

this market. This article will help the reader to gain overall knowledge on the

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topic. The commodity trading system operates through online channels. Trading

takes place on a real time basis and is either routed through satellite

communication system or the internet.

Commodity Trading System - Trade Clearing Mechanism

In a commodity market, trade clearing takes place through a registered clearing

house of an exchange. Clearing house helps the system to function smoothly

and properly by guaranteeing:

• timely settlement• registration of a trade and its consequent follow up• delivery of the commodity to the concerned buyer and simultaneous

payment to the seller • settlement of funds in non-delivery cases

Commodity Trading System - Clearing and Settlement

Clearing and settlement of commodities in the commodity trading system

commences only after the end of trading hours on the expiration date of the

contract. Processing of delivery matching considers the following:

• Location of the order • Available warehouse capacity• Total quantity of commodities that have already been deposited and given

to dematerialize.

After the completion of the delivery matching process, the following steps are

followed:

• Information on the final outcome of the matching process (amount of

commodities to be delivered or received and amount of unmatched

position) is given to the clearing members of the exchange.

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• important parameters of commodity trading system

• After considering the above mentioned things, traders can develop their

own trading plan and can construct a personal Commodity Trading

Strategy, according to his requirements. But, here, we will discuss the two

most popular Commodity Trading Strategies-

• Trend Following

• Range Trading

Advantages

Leverage

Commodity futures operate on margin, meaning that to take a position only a

fraction of the total value needs to be available in cash in the trading account.

Commission Costs

It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying

instrument. For example, one full size S&P500 contract is currently worth in

excess off $250,000 and could be bought/sold for as little as $20. The expense of

buying/selling $250,000 could be $2,500+.

Liquidity

The involvement of speculators means that futures contracts are reasonablyliquid. However, how liquid depends on the actual contract being traded.

Electronically traded contracts, such as the e-minis tend to be the most liquid

whereas the pit traded commodities like corn, orange juice etc are not so readily

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