risk analysis project report

7/30/2019 risk analysis project report

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SUBMITTED BY:

SOUMITA MUKERJI

MBA (IT)

INDIAN INSTITUTE OF INFORMATION TECHNOLOGY,

ALLAHABAD.

UNDER THE GUIDANCE OF:

Ms.Ankita

Karvy Consultants Limited, Lucknow

&

Dr. Madhvendra Misra.

Faculty, Indian Institute of Information Technology,

Allahabad.


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CONTENTS.

1. PREFACE.

2. INTRODUCTION.

3. AIM .

4. OBJECTIVES.

5. PORTFOLIO MANAGEMENT.

6. RISK ANALYSIS.

7. PORTFOLIO ANALYSIS.

7.1 FIXED DEPOSITS.

7.2 PUBLIC PROVIDENT FUND.

7.3 GOI SECURITIES.

7.4 NATIONAL SAVING CERTFICATES.

7.5 POST OFFICE.

7.6 INSURANCE.

7.7 MUTUAL FUNDS.

7.8 STOCK MARKET.

8. RESEARCH MEHODOLOGY.

9. THE SURVEY.

9.1 FINDINGS.

10. ANALYSIS AND RECOMMNEDATIONS.

11. LIMITATIONS.

12. CONCLUSION.

13. APPENDIX.

14. BIBLIOGRAPHY.


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PREFACE.

Investment is a long-term concept. An investment is a commitment of funds

made in expectation of some positive return. The main motive of investmentis to earn returns. It is the basic motivating factor behind all investments and

the desire is to earn better returns. When investment is done in one single

security it bears the risk and return features of that particular security only.

When it is done in a number of securities it forms a portfolio and thereby it

bears the aggregate risk and return features of the various components of

the portfolio. A general perception is that risk in a portfolio is less as

compared to that in an individual security. Also the returns in a portfolio are

comparatively high and stable. In the present day the investor finds a large

number of avenues where he may invest hence the decisions regarding

portfolio are of great importance. This leads to the need for an intensive

analysis of various opportunities of investment and then find out where to

invest, when to invest, how much to invest and for what duration to invest.

This project mainly aims to study all the available for an investor and

drawing a basic comparison among them and thereby deriving results that

would be useful to plan an ideal portfolio.


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INTRODUCTION.

A portfolio is a collection of investments all owned by the same individual or

organization. These investments often include stocks, which are investments inindividual businesses; bonds, which are investments in debt that are designed to

earn interest; and mutual funds, which are essentially pools of money from many

investors that are invested by professionals or according to indices.

But the basic question is why should an investor maintain an investment portfolio

and that why should the individual not keep himself limited to a single security?

And the answer to this question is that an investor has different types of needs

and one single form of investment shall be unable to meet all his requirements.

Also maintaining the whole amount in a single entity shall be very risky.

So the key to investment success is the proper diversification of assets.

Diversification means more than just having different types of investments. It

means having a mix of investments across sectors, time horizons, markets, and

instruments. When one diversifies, the money is spread among many different

securities, thereby avoiding the risk that the portfolio will be badly affected

because a single security or a particular market sector turns sour. Diversification

is the key to a balanced investment portfolio. By diversifying across assets, the

investor can reduce the risk without necessarily having to reduce the returns. The

golden rule is that if there is a diversified portfolio the overall portfolio risk will be

lower.

A good portfolio will have stocks, bonds, mutual funds, money market funds etc.

of different companies from different sectors. But diversification needs to be done

carefully and with adequate prudence. There are basically three steps to

diversification. And in order to make diversification all these steps need to befollowed properly.


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The first step is that of analysis of Liquidity Considerations. The investor should

establish how much of the portfolio will need to be invested in relatively liquid

assets that can be quickly converted to cash when needed. Generally investment

managers advise that keeping 10% to 15% of the portfolio in these types of

investments is an adequate amount for most people.

The second step is to establish the investment goals and objectives. If one is

looking for long-term results, he will have to concentrate on growth investments-

real estate or growth stocks. However, the aim of investing is to develop a source

of yearly income, concentration on income-generating investments such as high-

dividend stocks or bonds will be needed.

The third and the final step is to select the specific investments. Here the investor

needs to consider the tax consequences of various instruments. To maintain

appropriate diversification, regular evaluation of the investment strategy shall

also be needed and a further analysis how the investments are performing and

whether or not the investment goals of the individual has changed.

So a close and continuous monitoring of the various components of the portfolio

is needed. And thus arises the concept of portfolio management.


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AIM

The aim of the study is to mainly analyze the risk associated with investment in

various securities, and thereby find out that how an ideal portfolio should be

planned such that the investor gets the maximum return out of the investment

made and fulfilling his liquidity requirement simultaneously.


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OBJECTIVES

The aim of the project being an exhaustive analysis of portfolio decisions of an

investor the study would be carried out keeping the following objectives in mind.

To study the concept of risk why does it arise and the various types of

risks that are associated with investment.

An intensive study of the various avenues of investment those are

available to an investor.

To study the different types of risk and return factors that are associated

with each type of investment and thereby find out the role that each type

of security plays in an investors portfolio.

To find out how individuals actually plan their portfolio, their preferencesabout different types of investment opportunities based on the collection

of primary data.

Lastly, to analyze and find out that how an ideal portfolio can be planned

for an individual that would give him adequate return without any

hindrance to his liquidity requirements.


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PORTFOLIO MANAGEMENT.

The way to manage the composition of the investment portfolio is known as

portfolio management. The processes, practices and specific activities to perform

continuous and consistent evaluation, prioritization, budgeting, and finally

selection of investments that provides the greatest value to the investor. Through

portfolio management, the investor can explicitly assess the tradeoffs among

competing investment opportunities in terms of their benefit, costs, and risks.

Investment decisions can then be made based on a better understanding of what

will be gained or lost through the inclusion or exclusion of certain investments.

The aim of Portfolio Management is to achieve the maximum return from a

portfolio that the investor has. The investor has to balance the parameters which

define a good investment i.e. security, liquidity and return. The goal is to

obtain the highest return out of the investment made. It is the way of diversifying

a portfolio of investments that takes into account risk and return considerations.

Each investor has different kinds of needs and should keep in mind all his needs

before any investment decision is taken. The various needs that an investor has

are mainly of four types:

LONG TERM PROFIT: Investment is a long-term concept. When any investor

makes an investment he aims to acquire a good return in the long run. This

means that the investors have a desire for capital appreciation in their

investment. Any investment made should give good yield in the long run. Such

investors do not worry much about the current earnings. They want the

investment to grow in the long-term. Such investors do not take a very high

degree of risk. And their desire for return is also not very high. This category of

investors prefers investing in the securities that have a fixed return and keep the


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capital also safe. These types of investments are like debt based mutual funds,

bank and corporate fixed deposits.

TAX SAVING: Another investment aim that people have is that to save tax. The

income tax gives certain leverages in the payment of tax in case certain amount

of investment is made in certain specific kinds of securities. These securities are

mostly those that relate to the infrastructure developments in the country. We find

a very large category of investors who invest only for the sole purpose to save

tax. Their investments are again very fixed. They are generally made in the

infrastructure bonds. Others include NSCs and treasury bills. But now the

taxation system has changed. All the leverages under Section80 (ccc), Section

88 and Section 80(l) have been clubbed under Section 80 c. and now there is a

common limit of Rs. I00000/- so now the concept of rebate in tax has been

eliminated. But in case the withdrawals begin to be taxed this would dampen the

spirit of investment in these securities.

INSURANCE: Insurance is also a motive of investment. The reason is that each

individual has certain amount of insurance needs. Life insurance is also taken as

a method of investment. It serves both purposes that are of insurance as well as

investment. Also we have a large number of ULIPs that are attracting the

investment from the individuals. These ULIPs serve the dual benefit to the

investor it fulfills the investment needs as well as the insurance needs as well.

Also with the tax regime being changed these now stand in direct competition

with the ordinary mutual funds. But now the investor has to select fro himself that

what are his primary needs and what are of a secondary nature.

SHORT TERM EARNINGS: Some of the investors aim for just short t term

earnings. These investors have a desire for high current earnings. Hence they

play in the stock market and trade actively in the securities so that they may


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make short-term profits. These investors study the market very closely as most of

their investments are linked to the market. This kind of investment is very short

term in nature and here the main aim is to gain high by due to the fluctuations in

the market in the short run. Only only those investors who have a high-risk

appetite do this type of investment. Also these types of investors do not prefer

any lock in period of their investments made. They have a high preference for

liquidity.

Now in any investors portfolio there can be large number of combinations of

securities. Each security has certain features regarding the returns that it would

pay and the risk that it has. So for this purpose an analysis of all possible

avenues of investment has been made in the following chapters.


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RISK ANALYSIS.

RISK IS A PART OF GODs GAME, ALIKE FOR MEN AND NATIONS.

-George Woodberry.

Risk is the possibility of losing or of not gaining in value. It is the measure of a

particular investment's volatility and of the possibility that it will cause an investor

some degree of financial loss. It is the difference between what should happen

and what actually happens. This can be in form of either in form of happening of

some unexpected negative event or the non-occurrence of an expected positive

event. In the course of investment an investor faces a large number of risks and

some of them can be controlled and some of them are out of control of an

individual. Before any investment decision is taken it is necessary for an

individual to analyze all the possible risks associated to the investment being

made. An individual faces variety of risks that include risk of loss of capital, risk of

getting inadequate returns, unexpected change in the government policies, any

risk of loss that takes places to fluctuations in the market. These are only some

of the preliminary risks that investors face but when an intensive analysis is

made we find a large number of risks that we generally ignore as an investor.

The two basic types of investment risks are:

BUSINESS RISK:

Business risk is, the most familiar risk that the investor generally considers and

easily understands. It is the potential for loss of value through competition,

mismanagement, and financial insolvency. It is an unsystematic risk that is

specific to the company in which the investment is made. It arises due to the

possibility that a company may not be able to meet ongoing operating

expenditures. There are certain industries that are very vulnerable to this type of

risk. So before an investor invests his money in a company he is supposed to


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carefully analyze the operational aspects of the company. This is a risk that an

investor can avoid by intensive study of the past performance of the company.

This type of a risk is more in investments made in the equity market as well as

mutual funds. The reason is that returns in equity are directly related to the

operations of the company and in case of mutual funds on the efficiency of the

fund manager and his way to manage the portfolio of the fund.

VALUATION RISK

This risk is associated with the risk in the value at which the security is available

in the market. The value should be adequate and should give the true position of

the security. This type of risk mainly arises when a security is directly purchased

from the market. In case of equity shares an investor who applies in an IPO

should consider that at what price the share is available in the open market and

then bid accordingly. It applies in case of mutual funds as well. When the

purchase is NAV based an investor should be careful about the return that the

investor shall get back from the investment in form of capital appreciation and

recurring return in form of dividends.

Now an investor has to understand that risk has got certain features and before

he takes any investment decision he should consider these features of risk.

Risk can be quantified. As it has been defined as a negative event or a positive

event not occurring various methods have been developed that help to quantify

the risk that can be associated with the investment being made. This feature

creates an inbuilt feature of it being mitigated. So now since risk can be

quantified it can be managed and controlled. This would help the investor to

earn returns like that prevailing in the market and maximize the return that he

earns in the course of investment.


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Here a lot depends upon the risk bearing capacity of the investor. It depends

upon the investor that what is the amount of risk that he wishes to take. Different

investors have different risk appetite that depends upon a variety of other factors.

These include liquidity preference of the investor, stage of a persons life, earning

requirements of the person and many other financial as well as psychological

factors.

During the course of study it was found that generally investors ignore certain

basic facts about risks involved in investment. Though risks are pervasive and

inherent to any financial decision but a common investor fails to understand

them.

For any investor the risk is not same in all stages of his life. People in the later

stages of their life have a lower risk bearing capacity the reason is that their

earning capacity is lower and they have limited savings. Hence people in this

stage of their life need to carefully examine all the risks associated with the

investment being made by them. Another factor that works in the later stages of

the life are liquidity is more desired due to causes like emergency medical needs

and the individuals do not have a regular recurring source of income. Also people

in the mid stage of their life cycle also have less risk bearing capacity due to

various responsibilities that they have. Hence these investors need to keep their

money safe such that they do not face any problem in future. They not only have

to generate enough recurring income but also keep in mind the long term capital

aspect in mind while they take any investment decision. So the conclusion is that

age of a person has an inverse relationship with the age of the investor.

Another factor of risk for the investors need to pay a lot of attention to is that of

inflation. It is considered as a tax on everyone. It destroys value and creates

recessions. Although it is believed inflation is under control, the cure of higher

interest rates may at some point be as bad as the problem. Inflation can have

very drastic effects on the investment made. It corrodes the real value of money.


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Investors historically have retreated to hard assets such as real estate and

precious metals, especially gold, in times of inflation.

Inflation hurts investors on fixed incomes the most, since it erodes the

value of their income stream. But in normal course the fails to understand that

his fact. People who invest in fixed income bearing sources of investment feel

that they are able to earn a fixed amount and do not realize the fact their real

income is actually falling. Stocks are the best protection against inflation since

companies have the ability to adjust prices to the rate of inflation.

So as a guard against the factor of inflation even the investors in the later stage

of their life maintain some of their assets in stocks. This would help them to

maintain a pace in their income.

Some investors fear from making investments in the equity market due to the

inherent risk that prevails in this form of investment. But the investor should

always try to get maximum out of the investment that he makes and hence take

advantage of the high returns in the equity market. Equity and equity related

instruments have been the only option of investment that has beaten the effect of

inflation. Nowadays if an investor has a low risk capacity he can enter the equity

market with the help of mutual funds especially for the investors in the later

stages of the life. Here they would enjoy a large number of benefits that have

been stated later under the chapter of mutual funds.

So it is proved that assured returns are not always the best as they are always

lower than what an investment actually should earn. Hence it is recommended

for the investors to not be lured by the assured returns they should try to make

their money work hard for them so that the yields are optimum. Not taking any

risk is one of the biggest risks that an investor might have to face.

Another risk is related to the trends in the market. One should neither have an

over optimistic view nor an over pessimistic view about the market. Both the

conditions may prove harmful for an investor. An investor should not enter the


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market when it is on a rising trend under the impression that it would further rise

in future because the market may behave in just an opposite manner. Rather it

would be a better option to exit the market when it is high that would help the

investor to get good return on the initial investment made. Being too bullish can

prove harmful so the investors should keep a close watch of the changes in the

market. The same thing applies for a pessimistic approach towards the market.

Generally when the market is falling it is the right time to enter the market. But if

the fall is over estimated then the investors would refrain from entering the

market. And any profit from future rise would not be available to the investor. So

by carefully studying the trends in the market an investor should adopt an

effective investment strategy so that the risk due wrong estimation of the

market trends can be reduced.

Only a close study of the market is also not sufficient decisions regarding the

selling and buying in the market also need to be taken promptly. The reason is

that suppose the market is high and an investor plans to sell his security but by

the time he finally decides to sell it the prices may have reduced so the gap

between the time of the idea generation and the final action may be a cause of

loss for the investor. Even the buying decisions need to be taken promptly as

delay in actual purchase may lead to paying of high price by the investor.

All macro factors need to be taken care of while deciding the portfolio of an

investor. The major risk that investors have is that of irrationality. Most of the time

we see that the investors tend to follow the crowd instead of analyzing that what

shall be a better option for them. The information upon which the investment

decision needs to be based should be authentic.

But the final verdict is that risks cannot be eliminated they can however bemanaged effectively if the investors are prepared to walk an extra mile.

Awareness about risk and knowledge regarding the ramifications of the same is

the first step to risk management. Risks need to be treated as by-products of any

investment exercise.


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A PORTFOLIO MAY

INCLUDE:


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FIXED DEPOSITS.

Fixed deposits remain the most popular instrument for financial savings in India.

They are the middle path investments with adequate returns and sufficient

liquidity. There are mainly two avenues for parking savings in the form of fixed

deposits. The most common are bank deposits. For nationalized banks, the yield

is generally low with a maximum interest of 5%-5.5% per annum for a period of

three years or more. As opposed to that, NBFCs and company deposits are more

attractive.

The idea is to select the right company to minimize the risk. Company deposits

as a saving instrument have declined in popularity over the last three years. The

major reason being the slowdown in economy resulting in default by some

companies.

All that is likely to change for the better. Corporate performance is likely to

improve and stricter control by RBI should improve NBFCs record. But still the

investor needs to be selective and careful while he makes a selection of the fixed

deposit.

The term "fixed" in fixed deposits denotes the period of maturity or tenor. Fixed

Deposits, therefore, presupposes a certain length of time for which the depositor

decides to keep the money with the bank and the rate of interest payable to the

depositor is decided by this tenor. The rate of interest differs from bank to bank

and is generally higher for private sector and foreign banks. This, however, does

not mean that the depositor loses all his rights over the money for the duration of

the tenor decided. The deposits can be withdrawn before the period is over.

However, the amount of interest payable to the depositor, in such cases goes

down which is charged as a penalty for premature withdrawal made by the

investor. Moreover, as per RBI regulations no interest is paid for any premature

withdrawals for the period 15 days to 29 or 15 to 45 days as the case may be.


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So the main problem with the fixed deposits is that of liquidity and withdrawal in

case of need by the investor. But again the investor can be quite sure about the

returns that he would get from the investment in the fixed deposits. So fixed

deposit remains the choice of the conservative investors who do not have much

of liquidity requirements.

Presently we see a lot of fall in the interest rates offered by the banks but the

Indian investor is not that enterprising and so a lot of investors still prefer to

invest in bank FDs rather than any other form of investment.

The current rates that are being offered by the banks vary from 3.25% to 6.25%

that is much less than what is paid by the other areas of investment. So the

banks have started offering various schemes related to fixed deposits.

The banks offer regular income scheme under the fixed deposits. Under these

schemes the interest is credited regularly to the investors account and the

investor can thereby withdraw the amount as per his requirement. So the fixed

deposits offer certain amount recurring income to the investor. Certain banks

also offer loans against these deposits as well.

To state a few Punjab National Bank has large number of fixed deposit schemes

and hence the investor is offered a wide choice to select the scheme according

to his need. Like Anupam Account Scheme, Multi Benefit Fixed Deposit Scheme.

Canara Bank offers loan against deposits and also allows part withdrawal from

the deposit as and when needed. Union Bank of India also a large number of

deposit schemes under fixed as well as recurring deposits. Hence the banks are

making efforts to attract the investors money and have been successful to large

extent.

There is only slight variation in the interest rates offered by the banks on these

deposits. Some of them, which were a part of study during its course, have been

stated below.


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Rates offered by Union Bank of India are differentiated on the amount of

deposits. The rates are as follows:

FIXED DEPOSIT RATES OFFERED BY UNION BANK OF INDIA

Amount of Deposit (% p.a.)

PERIODLess than Rs. 15

LacsRs. 15 Lacs &

aboveRs. 1 crore &above

07 - 14 days 3.50 4.00 4.00

15 - 45 days 4.25 4.25 4.25

46 - 90 days 4.50 4.50 4.50

91 - 179 days 4.75 4.75 4.75

180 days < 1year

5.00 5.00 5.00

1 year < 2 years 5.25 5.25 5.25

2 years < 3 years 5.50 5.50 5.50

3 years < 5 years 5.75 5.75 5.75

5 years andabove

6.25 6.25 6.25

Canara Bank has an absolutely same rates list. But there a clear distinction has

not been made in the amount of deposit. Rates are same for all amounts of

deposit.


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State Bank of India has a bit different rates being offered and some additional

benefits as well.

FIXED DEPOSIT RATES OFFERED BY STATE BANK OF INDIA

PERIOD %p.a.

7 days to 14 days 3.00

15 days to 45 days 4.00

46 days up to 179 days 4.50

180 days to less than one year 5.00

1 year to less than 3 years 5.50

3 years to less than 5 years 5.75

5 years and above 6.25

The rate of interest on deposits of Senior Citizen under Senior Citizen Deposit

Scheme under Domestic pay additional Interest of 0.50% p.a. for maturity

periods of 1 year and above upto 5 years and 0.25%for maturity period of 5 years

and above.

RISK ANALYSIS OF FIXED DEPOSITS.

As far as the risk involved in investing in fixed deposits is concerned there is

hardly any risk involved. Neither there is risk of loss of capital nor there is risk

regarding the current earnings. But this safety is limited to bank fixed deposits

only. Corporate fixed deposits carry a certain degree of risk. A lot depends upon

the performance of the company. If an investors desires to have a corporate fixed

deposit then it is necessary to work on the principle of adequate diversification

over a number of companies as well as industries. Also in case of corporate fixed

deposits the investor should not keep his money locked in for a longer duration

this ensures the safety of the principal money.

An investor needs to analyze the cash flows in the company. The companies that

offer higher rates of interest should be avoided as most of the times they fail to


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pay so. Even companies with poor cash flows are an alarm for the investors. So

the risk level automatically rises. But in India not many companies issue public

deposits.

The return on these deposits is also certain to large extent. The interest shall be

paid at the end of the period if the withdrawal is not made in midst of the duration

for which the deposit has been made.

FIXED DEPOSIT TRENDS

Banks investments have grown faster than their loans. As a result, banks

investment-deposit ratio has moved up sharply from 38.0 percent to 42.4 per

cent. Over the same period, banks credit-deposit ratio has moved up from 53.6

per cent to 55.9 per cent, largely due to the pick up in credit growth during the

last year.

The preference of banks for government securities has been influenced by

several factors, of which the following are important:

High level of Statutory Liquidity Ratio (SLR): Banks are statutorily

required to invest 25 per cent of their net demand and time liabilities in

government and other approved securities. This reflects the governments

need to have access to bank funds to finance its deficit. However, in a

market driven regime, such restrictions should be done away with and the

SLR should be brought down gradually.

Uniform risk-weights on all commercial lending: RBI guidelines for

capital adequacy require banks to assign 100% risk weight to its loanportfolio while its investments in government securities attract a risk

weight of only 2.5% to cover market risk. This skewness in risk-weights is

unrealistic, as all commercial loans do not bear the same level of risk. The

new Basel Capital Accord or Basel 2 recommends a continuum of risk

weights that reflects the borrowers credit rating. If such a risk weight


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structure were implemented in India, it would discourage banks tendency

to misallocate resources in favor of government securities.

Inadequate laws to tackle NPA recovery: Till recently, foreclosure laws

in India favored borrowers, so that banks and financial institutions found itextremely difficult to recover non-performing assets. This further

reinforced bankers aversion towards medium to high-risk commercial

debt. The Securitisation Act, 2002 aims to rectify this problem by allowing

lenders to dispose of a defaulting borrowers asset within 60 days of

having sent a notice.

.

Banks investments have delivered good returns, but a large proportion of banks

investment portfolio is illiquid

Over the last few years, the sharp decline in interest rates has helped banks

make substantial gains from the sale of investments in securities.


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PUBLIC PROVIDENT FUND.

A provident fund is a fund that pays benefits to the company employees who are

fund members upon the termination of their employment. Contributions paid intothe fund by both the employees and the employers are invested in accordance

with the pre-determined condition of amount and risks. Now a public provident

fund is one that is taken to be a savings cum a tax saving instrument. It is like a

account in which a certain amount has to deposited on an yearly basis and a

certain amount of interest is paid on the amount deposited.

FEATURES OF PPF

A PPF account can be opened by an individual in his own name or on

behalf of a minor of whom he is the guardian or by the Karta of Hindu

undivided family of which he is a member or behalf of an association of

persons or a body of individuals consisting only husband and wife

governed by the system of community of property in force .

An individual on his own behalf can open only one PPF account. However,

an additional account can be opened on behalf of a minor of whom he is

the guardian or a Hindu undivided family by the Karta of which he is a

member or on behalf of an association of persons or a body of individuals.

A person having a GPF account can open a PPF account

The account can be opened in the Head Post Office or in the branches ofSBI or its subsidiaries or in the Nationalized Banks. The account can be

transferred at the request of the subscriber from one Post office to

another, including Bank to Post Office and vice-versa.


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Minimum Amount Rs.500/- in a year (financial year i.e. from 1st

April to 31st

March) Maximum Amount in a year in Rs.70, 000/-. If contributions in

excess of Rs.70, 000/- are made during a year Excess amount will be

treated as Irregular subscription and will neither carry any interest nor this

excess amount will be eligible for rebate under section 88 of I.T. Act. This

excess amount will be refunded without any interest.

PPF account can be revived paying a fee of Rs.50 along with arrear of

minimum subscription for each year of default before maturity .The default

Fee must be credited to Govt. Account under the Sub Head 0049.

Where a deposit is made by means of an outstation cheque or instrument,

collection charges at the prescribed rate shall be payable along with the

deposit and the date of realization of the amount shall be the date of

deposit.

The subscriber can extend the account beyond 15 years for one or more

block(s) of 5 years without any loss of benefits. Subscriber can continue to

make deposit during this period

Withdrawal can be made any time after expiry of 5 years from the end of

the year in which the initial subscription was made. The amount of

withdrawal should not exceed 50% of the balance at the end of 4 th year

immediately preceding the year in which the amount is withdrawn or at the

end of the preceding year whichever is lower. Only one withdrawal is

permissible in a year.

The first loan can be taken in the third financial year from the financial

year in which the account was opened up to 25% of the amount at credit

at the end of the first financial year. Subsequent loan can be taken when

the earlier loan with interest has been fully repaid.


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The loan is repayment either in lump sum or in convenient installments

numbering not more then 36. Interest at the rate of 1% above would be

charged if loan is repaid in 36 month. Such interest should be paid in not

more than 2 monthly installments .If the amount of loan is not repaid within

3 month, interest on outstanding amount of loan would be charged at 6%.

Calculation of interest from 1st day of the month following the month in

which the loan is drawn up to the last day of the month in which the last

installment of the loan is repaid

A subscriber may nominate one or more person to receive the amount

standing to his credit in the event of his death. No nomination can,

however, be made in respect of an account opened on behalf of a minor.

Nomination may also be made in respect of an account on behalf of a

Hindu undivided family. Nomination may be cancelled or varied by a fresh

nomination.

In the event of the death of the subscriber, the amount standing to his

credit can be repaid to his nominee or legal heir, as the case may be,

even before the expiry of fifteen years. Legal heirs can claim the amount

up to Rs. One lac without production of the succession certificate after

observing certain formalities

Subscription to the PPF qualify for deduction from the taxable income of

the subscriber for income tax purpose within the limits laid down under

section 80-C of the income tax act.

The interest credited to the funds is not counted as income for the purposeof income tax. The amount including the interest standing in the credit of

the subscriber in the fund is also totally exempt from the wealth tax.


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PPF account is not transferable from one person to another. In case of

death of the subscriber, the nominee cannot continue the account of the

deceased subscriber

A female subscriber can change her name in the PPF account in the event

of her marriage.

So all these make PPF a very popular investment option among the investors.

We find a lot of investors who select PPF as major component of their portfolio.

There are various reasons that lure the investors money towards this form of

investment.

Generally the risk perception towards PPF is very liberal. There is hardly any

type of risk in investing in PPF. Both the recurring return as well as the capital of

the investor is safe. Other than the factor of safety other factors that attract

investors are:

Fixed Return: This type of investment pays a fixed amount of return @8%

per annum. This leads to sense of security to the investor as he is assured

the return. Generally the investors who have a conservative attitude prefer

this type of investment. The reason is that they do not want to take nay

risk and desire some amount of income of investment.

Small Investors Choice: The minimum amount of investment needed in

case of PPF is very small. Hence even the small investors have the

chance to take the opportunity to invest. The minimum annual amount is

only Rs.500/- which is an affordable amount for even the small investors.

So PPF is one of the most attractive options of investment for the smallinvestors.


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Loan Facility: One has an added facility in case he holds a PPF account

that is the loan facility. One can take a loan in case of need of money.

The investor can take a loan after one year of opening of the PPF

account. But here there are some restrictions regarding the re-payment of

the loan. The principal has to be paid within 3 years. But still in case of

need an investor can use this option. So this ensures some amount of

liquidity in the fund.

Tax Benefits: The main advantage of PPF is of tax benefits. All interest

received under the fund are tax-free. And even investment up to

Rs. 70000/- helps to get a rebate in income tax. So the main motive of

most of PPF account holders is to enjoy the tax benefit.

So all the factors make PPF a competitive area for investment. It is advisable

for the people in the later stage of the life cycle to maintain a PPF account, as

this would keep their principal safe and give them small & regular returns. The

only problem with PPF is that of liquidity. Withdrawals are allowed only after

the fifth year of opening of the account and that too only 50% of the amount at

the credit of the account at the fourth year of the drawl.


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GOI SECURITIES.

These securities are a part of the money market and have a high degree of

liquidity. The two basic features that these bonds have is that they are totally riskfree and that have a very high degree of liquidity. They include the bonds that are

issued by the Government of India from time to time and the treasury bills.

GOI Bonds are sovereign i.e. credit risk-free coupon bearing instruments which

are issued by the Government of India. The investors who have a conservative

attitude generally go in for this form of investment. The reason is that the investor

is completely assured of the returns as well as the liquidity of the investment

being made. The basic features of these bonds are:

These securities have a fixed coupon that is paid on specific dates on

half-yearly basis.

Securities are available in wide range of maturity dates, from short dated

(less than one year) to long dated (upto twenty years).

Securities are available in primary and secondary market.

High liquidity-securities can be sold in the secondary market at prevailing

rates

Available in physical form or in demat -maintained in Constituents

Subsidiary General Ledger (CSGL) a/c with any bank

Securities held in CSGL a/c will have the convenience of automatic credit

of half yearly interest and the redemption proceeds on due date

Reasonably good returns


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Treasury Bills are discounted instruments issued by the Central Government.

These are also one of the most preferred forms of investment that the

conservative investors select as a part of their portfolio.

The basic features of these bills are as follows:

Sovereign zero risk instruments. Hence there is no risk at all of any

kind involved in this form of investment.

They are generally short term, discounted Instruments with a maximum

tenor of 364 days.

Available in primary and secondary market. This makes them more

popular among the different forms of investment. They are available by

way of auction every week and also in the secondary markets as per

availability. The Reserve Bank of India auctions 91 day T-Bills every

week and 364 day T-Bill every alternate week.

Issued at a discount to face value i.e., investors will buy the T-bill at

discount to face value of Rs.100 and on maturity the investor receives

the face value of Rs.100.

No Tax Deduction at Source (TDS). This ensures some amount of tax

benefit as well.

Convenience of CSGL a/c as in case of Central Govt securities such

as automatic credit of redemption money.

The degree of liquidity is very high and returns are very attractive. This

leads to its increasing popularity among the investors.


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These days transactions in these forms of securities have been made quite

simple as well as paperless. The most convenient mode of transacting in GOI

Securities or Treasury Bills is by opening Constituent SGL account with a Bank

or NSDL. A Constituent SGL account is very much like a depository account by

means of which a person can engage in paperless transaction in GOI Securities

and Treasury Bills.

The investor can easily know the present value of the investment. Rates on debt

instruments can be obtained from banks that are active in trading these

instruments. Brokers who deal in debt instruments can also provide these rates.

But the rates are not very accurate as the trading is not very regular.

The security bought can be held to maturity giving interest inflows on the

respective interest payment dates and redemption proceeds on maturity. The

interest accruals and Redemption proceeds for Gsecs and T-Bills will be credited

directly to the savings / current account of the SGL account holder.


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NATIONAL SAVING CETIFICATES.

National Saving Certificates, or NSCs, as they are more popularly known, are atime-tested tax-saving instrument that combines adequate returns with high

safety. To main motive that the investors have behind investing in NSCs is to

save tax. The reason is that the degree of liquidity is very less in case of NSC.

A lump sum payment has to be made at the time of investment. The certificates

are issued in the denomination of Rs.100, Rs.500, Rs.1,000, Rs.5,000,

Rs.10,000 and other denominations as may be notified by the Central

Government. The minimum amount of investment to be made is of Rs. 100 and

for the maximum there is no limit.

The interest is compounded half yearly @ 8%. And the maturity period is six

years. So the interest paid on a Rs. 1000/- certificate for the various periods of

time would be:

PERIOD INTERESTFirst Year 81.60

Second Year 88.30

Third Year 95.50

Fourth Year 103.30

Fifth Year 111.70

Sixth Year 120.80


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BENEFITS TO THE INVESTOR

Tax Rebate: Deduction in income upto an amount of Rs.100000/- is

allowed on the investment made in national saving certificates. So the

investor can enjoy a deduction in the gross income on which he is

suppose to pay tax. This is the real motive that attracts the investors

towards making investment in NSCs. There is no TDS applicable on the

interest paid on NSC.

Loan Facility: The banks provide loans to the investors against the

certificates. But during that duration the certificates cannot be encashed.

This helps the investors to enjoy certain amount of liquidity. So here it

becomes quite similar to the public provident fund.

Easy to Invest: The eligibility criterion for investing in an NSC is quite

simple. An individual can purchase it singly or jointly, by a minor, a

registered charitable trust and also a Hindu undivided family. Also these

certificates are available at post offices and they can be paid for either incash or by local cheque. So not much of legal formalities are needed to

purchase an NSC.

Easy Transferability: A NSC held in the name of one person can be

easily transferred in the name of another person and also from one post

office to another on payment of the prescribed fees. But this facility can be

availed only after the completion of one year from the date of purchase of

the NSC.

Negligible Risk: The degree of risk involved in investing in NSC is

absolutely nil. The return is completely risk free and so is the principal


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amount. Only loss may take place in case of premature encashment of the

certificate.

TRENDS IN NSC INVESTMENTS

There has been a lot of change in the tax act as result NSC investments have

been affected to a large extent. As per the act earlier the NSC investments were

eligible for a rebate in income tax upto an amount of Rs.70000/- u/s 88 of the

Income Tax Act. But now all the items that came under this section and section

80 (ccc) have been consolidated under a single section 80 c. the difference here

is that now there is no tax rebate rather a deduction in the gross income allowed

upto an extent of Rs. 100000/-. Also the rate of interest has been sustained at

8%. So all this has helped to boom up the investment in these types of securities.

The only dampener in this regard is the declared intention of the Government to

migrate to an EET regime, that is, exempt the contributions from tax; and exempt

accumulations from tax and tax the withdrawals. This will mean that investors

may be taxed when they withdraw the amounts from these schemes, in case this

regime comes into effect.


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POST OFFICE.

Post offices have been one of the major areas where we find a large number of

investors in India. Post offices offer a variety of schemes and hence an investorhas a large number of choices to invest. As a part of the study only two schemes

have been considered.

Monthly Income Scheme.

Kisan Vikas Patra.

The rest of the schemes have been left, as they are quite similar to the schemes

in the banks. The time deposit schemes as well as the recurring deposit schemes

are quite similar to what are available with the banks.

MONTHLY INCOME SCHEME(MIS).

A monthly income scheme (MIS) provides for monthly payment of interest

income to investors. Here a lump sum amount has to invest initially and then the

interest is paid on a monthly basis. A single individual can open the account or it

can be a joint account. The account can also be on the behalf of a minor.

Interest is paid at the rate of 8% p.a. plus a bonus of 10% bonus on the maturity

after 6 years. But the interest can be withdrawn every month. This gives the

advantage of current earnings to the investors.

The minimum amount of deposit is of Rs. 1000/- while the maximum amount is

Rs.300000/- in case of single deposit and it is Rs.600000/- in case of a jointdeposit. The interest that is paid can either be withdrawn on monthly basis or it

can be directly credited to ones savings account directly.


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Premature encashment is allowed after one year after deduction of 3.5% of the

principal. No such deduction is made if account if the account is closed after 3

years but no bonus is paid in case of premature closure if the account.

This scheme is taken to be a boon for the retired persons because it gives the

benefits of a regular income; as well the principal amount is totally safe. Also in

the post maturity period the interest paid is that according to the savings bank

interest rate upto a period of two years for the completed month.

RISK ANALYSIS OF MIS

The degree of risk involved in a MIS is nil. There is hardly any specific risk that is

there in form of investment. The only risk that is there includes the market risk.

Generally this type of investment is considered to be risk free by the investors.

KISAN VIKAS PATRA.

These are also certificates that are purchased by the investors that are available

in different denominations. The Kisan Vikas Patra provides interest income

similar to bonds and provides better liquidity by virtue of the exit option after two

and half years from the date of allotment. The instrument suits those looking for a

safe investment without the need for a regular income. Unlike many of the other

PO scheme, the Kisan Vikas Patra does not provide any tax relief to the investor.

This is a good option of investment for the retired people since they do not have

a taxable income and neither have very high liquidity needs.

Under this scheme the principal doubles in 8yrs and 7 months. And the interestrate is 8.5% that is compounded annually.


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INSURANCE.

Insurance is protection against loss or damage in which a number of individuals

agree to transfer risk by paying specified amounts of money, called premiums.

These premiums create a pool of money that guarantees the individuals will be

compensated for losses caused by occurrences such as fire, accident, illness, or

death. In case of life insurance the subject matter of insurance is life.

Life insurance is also considered as one of the avenues of investment. The

reason is that in case of life insurance the claim is paid on death or maturity

whichever is earlier. Also certain tax leverages are also given on the premium

paid for such policies that are taken by the investors. But now what is more

popular amongst the investors is ULIP (Unit Linked insurance Plan). In case of

ULIP the premium that is paid by the investor is used to purchase the unit of a

mutual fund. So the investor has the benefit of a mutual fund as well as

insurance. Here for the first few years the investor is suppose to pay an amount

as premium. This premium is used to purchase the units of a mutual fund. It also

gives an assurance of life during the period that has been decided. And the life

cover is given for the period. If during the period of the contract there is no death

then the entire amount is paid based upon the NAV of the fund.

So these policies are not as risky as mutual funds rather they cover some

amount of the investors risk.

But due to the recent changes in the tax regime now these mutual funds are in

direct combat with these unit linked insurance plans.


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MUTUAL FUNDS Vs. UNIT LINKED INSURANCE PLANS.

Mutual funds are better as the money withdrawal is allowed at any point of time.

Mutual funds look good in the short run even the money withdrawal quick. Only

the tax saving mutual funds has a lock in period of three years. But in case of

ULIPs the lock in can be of more than three years also. So the mutual funds are

more effective in the short run while the ULIPs have an upper hand in the long

term. In case of ULIPs part of the premium goes into risk cover for insurance

and the rest into investments. But the problem lies that in the initial stages the

cost insurance companies incur to get business is as high as 20% - 30% of the

premium paid in the first year. But once these charges are recovered the

management expense amounts to only 1%. While mutual funds have a regulation

that their charges cannot be cannot exceed 2.5% for the equity plans and 2.25%

for the debt plans. And this cost structure is maintained throughout the period of

investment. So all this makes ULIPs a better option in the long run. These linked

insurance plans also have a certain degree of flexibility they offer the alteration in

the distribution of premium between risk cover and investment.

The price of life cover in ULIP is higher as compared to that in conventional

insurance. And in order to get a good benefit out of the ULIP one has to maintain

the investment in the same for a longer duration. But still we find that most of the

investors do not prefer investing through ULIP


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MUTUAL FUNDS

When any investment is made the investor desires returns to be adequate. But in

order to earn high returns he needs to take a lot of risk and also adequately

diversify his portfolio. In reality an individual is not capable of analyzing all the

risk factors and make wise investment decision. So now we have a lot of mutual

fund companies that are entering the market and they are channelising the small

investments into the stock market and hence help even the small investors to

enjoy the returns of the stock market.

A mutual fund is an investment that pools the money from an unlimited number of

other investors. In return, the investors each own shares of the fund. The fund's

assets are invested according to an investment objective into the fund's portfolio

of investments. And then the returns of the fund are accordingly shared among

the investors.

So the mutual funds work in the following way:

INVESTORS POOL IN MONEY

IN FORM OF PURCHASE OF

ITS OF THE MUTUAL FUND

THE FUND MANAGER DECIDES

UPON THE PORTFOLIO OF THE

FUND.

INVETSMENT IS MADE IN

THE PORTFOLIO AND

RETURNS ARE GENERATED

RETURNS ARE DISTRIBUTED

AMONG THE INVESTORS.


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A Mutual Fund is a trust that pools the savings of a number of investors who

share a common financial goal. The money thus collected is then invested in

capital market instruments such as shares, debentures and other securities. The

income earned through these investments and the capital appreciation realized

are shared by its unit holders in proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment for the common man as it

offers an opportunity to invest in a diversified, professionally managed basket of

securities at a relatively low cost.

If we analyze the advantages that a mutual fund offers the investors it can be

stated as follows:

Diversification: By owning shares in a mutual fund instead of owning

individual stocks or bonds, the risk is spread out. The idea behind

diversification is to invest in a large number of assets so that a loss in any

particular investment is minimized by gains in others. Higher the number

of securities in which the investment is made lower is the amount of risk.

Large mutual funds typically own hundreds of different stocks in many

different industries. It wouldn't be possible for an investor to build this kind

of a portfolio with a small amount of money. The best mutual funds design

their portfolios so individual investments will react differently to the same

economic conditions. For example, economic conditions like a rise in

interest rates may cause certain securities in a diversified portfolio to

decrease in value. Other securities in the portfolio will respond to the

same economic conditions by increasing in value. When a portfolio is

balanced in this way, the value of the overall portfolio should graduallyincrease over time, even if some securities lose value. One rule of

investing that both large and small investors should follow is asset

diversification. Used to manage risk, diversification involves the mixing of

investments within a portfolio. For example, by choosing to buy stocks in

the retail sector and offsetting them with stocks in the industrial sector, the


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impact of the performance of any one security in the portfolio can be

reduced. To achieve a truly diversified portfolio, an individual may have to

buy stocks with different capitalizations from different industries and

bonds having varying maturities from different issuers. And for an

individual investor this can be quite costly and difficult.

By purchasing mutual funds, investors are provided with the immediate

benefit of instant diversification and asset allocation without the large

amounts of cash needed to create individual portfolios. But simply

purchasing one mutual fund might not give adequate diversification it

should be seen that whether the fund is sector or industry specific. For

example, an oil and energy mutual fund has a portfolio that includes

investments made in the oil and energy sector, but if energy prices fall, the

portfolio shall suffer. Here we have the example of Reliance Mutual Fund

that has a number of funds like the Banking Sector Fund, Power Sector

Fund.

Professional Management: When investment is made in a mutual fund,

investors get the benefit of a professional money manager looking after

their money. This manager will use the money to buy and sell stocks that

he or she has carefully researched. So now the investor does not have to

bother about what to sell and what to buy this shall be done by a mutual

fund's money manager. Most mutual funds pay topflight professionals to

manage their investments. These managers decide what securities the

fund will buy and sell.

Divisibility: Many investors don't have the exact sums of money to buy

round lots of securities. They have small amounts available with them that

are not enough to buy shares in the open market. So, instead of waiting

until one has enough money to buy higher-cost investments, one can

enter the market with the aid of mutual funds. Investments in mutual funds


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are made generally in small amounts that range from Rs.500/- to

Rs.5000/-. So it is not necessary to have huge sums of money to invest.

Low Costs: The cost of investment in mutual funds is comparatively low

as compared to what is incurred in investments made directly into the

market. Here the investor enjoys economies of sale purchase and sale of

securities. If only one security is bought at a time, the transaction fees will

be relatively large. Mutual fund expenses are often no more than 1.5

percent of the investment. Expenses for Index Funds are less than that,

because index funds are not actively managed. Instead, they

automatically buy stock in companies that are listed on a specific index.

Other than this entry load and exit load is also nominal. In most of the

cases either of them is nil. At the time of mutual fund IPOs and in case of

SIPs the entry load is always nil.

Mutual funds are able to take advantage of their buying and selling size

and thereby reduce transaction costs for investors. In reality when a

mutual fund is bought, the diversification takes place without the

numerous commission charges. This prevents the commission charges

from eating up a good chunk of the savings. Also the investor does not

have to pay if he changes his portfolio composition. Mutual funds are able

to make transactions on a much larger scale that makes them cheaper.

Liquidity:Another advantage of mutual funds is the ability to get in and

out with relative ease. The investor can sell mutual funds at any time, as

they are as liquid as regular stocks. Both the liquidity and smaller

denominations of mutual funds provide mutual fund investors the ability to

make periodic investments through monthly purchase plans while taking

advantage of money-cost averaging. It is very easy to exit from a mutual

fund one has to simply apply for redemption.


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Return Potential: The return potential is very high in case of mutual funds

due to the diversification of the investment that is made. The company

shall pay at least some dividend to the investor because the fund shall

earn some amount of profit and even if dividend is not paid the asset value

appreciation shall add to the capital of the investor. So the investor has

dual benefit of both recurring returns and capital earnings as well.

Transparency: Mutual fund companies maintain a lot of transparency.

They give a complete list of the portfolio in which they shall invest. The

dividend history and the returns that are earned are also clearly stated in

the fact sheets of the mutual funds. So an investor is made well aware

about where his money is being invested and the real value of his

investment.

Other Benefits: Mutual funds offer a large amount of flexibility to the

investors. An investor can easily switch from one option to the other

depending upon the changing requirements of the investor. Also generally

mutual fund companies have a number of schemes running an investor

can easily choose out of the schemes of his choice. These schemes vary

from sector specific schemes to simply diversified portfolio. And these

have varying return prospects and an investor can select the scheme

according to his requirement and risk appetite. Also these mutual funds

are well regulated by a lot of government regulations and efforts are being

made to formulate more regulations to protect the interest of the investors.


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TAX CONSIDERATIONS IN MUTUAL FUNDS.

Tax treatment is different in case of equity funds and debt funds. As far as the

income from mutual funds is considered they are in two parts:

First includes the income from dividends and the second is income in form of

capital appreciation of the investment made.

An equity-based mutual fund is that mutual fund in which more than 50%of

the investment is made in the equity market. In case of equity based mutual

fund dividend in the hands of the investor is tax free and even the company is

not liable to pay any dividend distribution tax. The capital gains part is further

taxed in two parts long-term capital gains and short-term capital gains. Long-

term capital gains are those that are for more than one year. These types of

capital gains are now totally tax-free earlier it was 20%. While short term

capital gains are taxed to the extent of 10% of the gain. This type of capital

gain was earlier taxable to the extent of 30%of the gain.

An example of the tax treatment is as follows:

Suppose an investment of Rs.10000/- in January 2005 and by August 2005

the value of the investment rises to Rs.15000/-. The amount of short-term

gain would be Rs.5000/-.

Tax= 10%of 5000 and hence the net gain would be 5000-500=Rs.4500.

A debt-based fund is one that invests the amount in debt and government

securities. These types of funds generally give an assured to the investors. In

case of debt based fund dividend distribution tax has to be paid. This is a tax

paid by the debt-oriented funds before they distribute dividends to the unit

holders. Presently dividend distribution tax is 13.06%. Also in case of taxation

of capital gains in case of debt funds both long term and short-term capital

gains are taxable. Long-term capital gains tax is that of 10% of the gain or


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20% of the gain after taking benefit of indexation. Short-term capital gains are

taxable in the similar way as they are in case of equity funds.

Systematic Investment Plan (SIP)

A systematic investment plan is just like a recurring deposit account with amutual fund. A monthly contribution is made in the mutual fund. Units are

purchased on a given date every month. This helps to avoid risk of timing the

market wrongly since investments are spread over time at various NAV levels.

This helps as it buys less units when the market moves up and more units when

the market moves down. Hence it averages the cost of investment. SIP is a

valuable tool of financial planning. Another advantage is that there is no entry

load in case of SIP so the entire money invested is used for purchasing the units

of the funds.

MONTH NAV ON THE DATE INVESTMENT UNITS ALLOTED AVERAGE COST AVERAGE PRICE

1 13.33 1000 75.02 13.33 13.33

2 13.41 1000 74.57 13.37 13.37

3 12.72 1000 78.62 13.15 13.15

4 13.56 1000 73.75 13.25 13.26

5 13.98 1000 71.53 13.39 13.4

6 15.17 1000 65.92 13.65 13.7

7 17.74 1000 56.37 14.12 14.27

8 18.98 1000 52.69 14.59 14.869 21.57 1000 46.36 15.13 15.61

10 24.11 1000 41.48 16.72 16.46

11 25.46 1000 39.28 16.28 17.28

12 27.23 1000 36.72 16.85 18.11

The above table shows how the averaging factor works in case of SIP. The

calculations are made in the following way:

Average Cost= Total Money Invested/No. Of Units.

Average Price(NAV)= Sum of all the NAVs / No. Of Months.


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So we see that the average cost is low in case an investor opts for SIP. This

type of an investment keeps an investor from any botherations of the

fluctuations in the market.

AVERAGING OF COST AND PRICE IN SIP

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12

MONTHS

VALUE NAV ON THE

DATEAVERAGE

COSTAVERAGE

Another option that is quite similar to SIP is that Systematic Withdrawal Plan.

Under this option an investor is allowed to withdraw a fixed amount each month

and the units are adjusted according to the prevailing NAV on the date of the

withdrawal. In case of SWP there is no exit load, hence it is one of the good

options for the people who have a fixed income need. But the mutual fund

companies do not generally offer this type of a scheme.

TRENDS IN MUTUAL FUNDS

Last six years have been the most turbulent as well as exiting ones for the

industry. New players have come in, while others have decided to close shop by

either selling off or merging with others. Product innovation is now pass with the

game shifting to performance delivery in fund management as well as service.

Those directly associated with the fund management industry like distributors,


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registrars and transfer agents, and even the regulators have become more

mature and responsible.

The industry is also having a profound impact on financial markets. While UTI

has always been a dominant player on the bourses as well as the debt markets,

the new generation of private funds which have gained substantial mass are now

seen flexing their muscles. Fund managers, by their selection criteria for stocks

have forced corporate governance on the industry. By rewarding honest and

transparent management with higher valuations, a system of risk-reward has

been created where the corporate sector is more transparent then before.

Presently the mutual fund companies are in the boom phase. Lot of companies

are entering the mutual fund market. A large number of schemes are being

launched to lure the investors. But the investors need to very careful about their

selection of the mutual funds. The portfolio should be true to its label; investor

should look for consistent long-term results. A very high portfolio-churning ratio

may also prove harmful for the investor. An investor should understand his life

cycle and wealth management stage. Hence he should have a clear picture of

financial goals current wealth level future income and savings risk appetite time

horizon and tax situation.

It has been predicted that investors can expect 15% returns from diversified

equity mutual funds over next 10 years.

Mutual fund companies have been playing a major role in the stock market in

providing capital to the corporate. Nowadays most of the mutual funds are equity

based as returns are quite high in this area.


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Trends in Transactions on Stock Exchanges by Mutual Funds

Equity (Rs in Crores) Debt (Rs in Crores)

GrossPurchase

GrossSales

Net

Purchase/Sales

GrossPurchase

GrossSales

Net

Purchase/Sales

Jan 2000-March2000. 11070.54 11492.19 -421.65 2764.72 1864.29 900.43

April 2000 -March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 5023.49

April 2001-March2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 10959.22

April 2002-March2003 14520.89 16587.59 -2066.70 46663.83 34059.41 12604.42

April 2003-March2004 36663.58 35355.67 1307.91 63169.93 40469.18 22700.75

April 2004-March2005 45045.25 44597.23 448.02 62186.46 45199.17 16987.29

April 2005. 4347.95 2883.04 1464.91 9568.20 4533.42 5034.78May 2005. 7000.72 3660.61 3340.11 10687.90 5982.47 4705.43June 2005. 4567.84 6384.63 -1816.79 10686.86 7089.49 3597.37July 2005 (as on13th) 1788.80 2648.88 -860.08 4417.38 2670.84 1746.54Total (April '05 -July '05) 17705.31 15577.16 2128.15 35360.34 20276.22 15084.12

The table above shows that how active the mutual funds have been in

transacting in the stock exchange. Hence it is advisable for the investors to use

this opportunity and earn better returns out of the investment they make.

ROLE OF MUTUAL FUNDS IN AN INVESTORS PORTFOLIO.

Mutual funds are in individual investors way to enter the equity market. These

help the investor to give an equity flavor to their portfolio without actually

investing directly in the equity market. Mutual funds provide market-linked returns

that help the investor to build a large corpus that would be ideal for a retired life.

If investment is made carefully in funds that have given a good result then the

investor is sure to benefit in the long run. It would be a better option for the

person to opt for SIP so that he can take the benefit of small savings as well as


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enjoying the market returns. This option actually averages the cost of investment.

Even if the market is falling the mutual fund holders have an advantage as at that

point of time they can purchase more units of the fund. Balancer funds are those

funds that invest partly in equity and partly in the debt so their return is also

moderate and quite beneficial.

With the inflation hovering around 5% - 6% poised for great heights investing in

avenues, which offer breakeven returns, exposes the portfolio to inflation risk.

Investment in equity either directly or through the mutual fund route provides an

effective hedge mechanism against such a potent threat.

Investing in the mutual fund IPOs is though an option that attracts the investors

but here the investor needs to careful in studying the stocks in which the fund

shall be invested.

The dividend paid by the mutual funds is also not very regular but at times it is

quite high.

A recent example is that of SBI Contra Fund that paid a dividend of 102% when it

had an NAV of near about Rs.19.

In context of mutual funds it is very important to understand that past

performance is not the only indicator for the future performance. The

performance of a fund is highly unpredictable rather random. Funds that have

occupied top slots in the past need not remain to be so in the future as well. So it

is necessary to understand the basics of the fund before investment is made;

these include the portfolio of the fund the investment manager and the strategy of

the fund. And the most important thing is ones own financial requirements, risk

return profile and the financial goals that need to be achieved in the long run.

Thus introspection of oneself and a close analysis of the fund are necessary tobuild a winning portfolio and not exclusive reliance on the past.


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STOCK MARKET.

Today the stock market is the most happening place in the Indian economy. A

sudden rise in the index has attracted a lot of investors in to try their destiny in

the stock market. This avenue of investment is one of the most risky of all the

options available. In this market an investor may have to face extreme situations

that is he may earn a large amount in one go and may loose the same in another

moment. This depends a lot on the type of stocks that are held by the individual.

Some stocks are very aggressive; their response to the market fluctuations is

always greater than the change in the market.

Equities have the potential to increase in value over time and can provide the

portfolio with the growth necessary to reach long-term investment goals. Equities

are known to have outperformed all other forms of investments in the long-term.

The rationale for investing in equity markets has never been clearer. Investors

must look to maximize their returns over the long term and equity markets have

traditionally been the best place to maximize wealth over the long term. If the

corporate governance practices improve, then the interest of the entrepreneur

and investor are aligned which leads to long-term wealth creation.

SELECTING A STOCK.

There are many theories and techniques about how to choose a winner, how to

separate the wheat from the chaff. There are three basic factors to look for while

picking a stock:

The company itself

Its external environment

The behaviour of its stock


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What happens to the company affects the price of its shares on the stock market

and, hence, the investment. An investor should never invest in the stock of the

company whose business he does not understand.

So, knowing about companies is the first essential step in investment. One needs

to know the business a company is in, and how is it doing both in absolute terms

and in comparison to other companies in the same business. To do that, it is

required to look at the financial performance of companies and pick up the star

performers. As investors there always is a need to have hope of growth in future.

We also need to look at the performance of the entire sector. The reason being

that the entire sector performance also affects the performance of an individual

stock. Were putting our money in companies and we can get to know them by

looking at their performance. And this monitoring of the performance of the stock

has to be done on a regular basis.

INITIALPUBLIC OFFER.

There is a category of investors who invest only in the initial public offers made

by the companies. A corporate may raise capital in the primary market by way of

an initial public offer, rights issue or private placement. An Initial Public Offer

(IPO) is the selling of securities to the public in the primary market. It is the

largest source of funds with long or indefinite maturity for the company. This

category of investors forms a very small portion of the players in the stock

market. As there has been a large number of IPOs in the past few months under

the book building process of many companies. And most of these issues were

highly over subscribed. Some of the issues were that of Jindal Ploy Films

Limited, Provogue (India) Limited, Yes Bank Limited, SPL Industries Limited,

Syndicate Bank, Nectar Life Sciences Limited and many more. Since the stock

market is doing well these days a lot of enthusiasm is seen amongst the

investors to invest in shares and stocks.


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Under the book building process the demand for the securities proposed to be

issued by a corporate body is elicited and built up and the price for such

securities is assessed for the determination of the quantum of such securities to

be issued by means of a notice, circular, advertisement, document or information

memoranda or offer document. Price at which securities will be allotted is not

known in case of offer of shares through book building while in case of offer of

shares through normal public issue, price is known in advance to investor. In

case of Book Building, the demand can be known everyday as the book is built.

But in case of the public issue the demand is known at the close of the issue.

DERIVATIVES MARKET.

Derivative is a product whose value is derived from the value of one or more

basic variables. The underlying product can be equity, forex, commodity, or any

other asset. A security derived from a debt instrument, share, and loan whether

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

of security is called a derivative. The most common types of derivatives are

forwards, futures and options. Forwards are customized contracts between two

entities, where settlement takes place on a specific date in the future at todays

price. A futures contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Futures contract are special

types of forward contracts in the sense that the former are standardized

exchange-traded contracts.

Options are of two types calls and puts. Calls give the buyer a right but not the

obligation to but a given quantity of the underlying asset at a given price on or

before a given future date. Puts give the buyer a right but not the obligation to

sell a given quantity of the underlying asset at a given price on or before a givendate. So there a large number of investors who trade in the market on the daily

basis. Such type of trading yields short-term earnings. Generally the investor

aims at high return in the short term. But even the regular traders need to have

an adequately diversified portfolio in the market. All the sectors need to be

properly analyzed.


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The various sectors need to be studied and then adequate diversification needs

to be made in the various sectors. The IT sector has been leading the rally in the

stock market. These stocks have been the best performing stocks in the market

but investing completely in these stocks can be a threat. Other than these the

banks also have been performing well. So now the investor has to decide that

how does he wish to have his portfolio diversified. Now this year a boom in the

banking stocks was expected and so we see the banking index rising to a large

extent. So an equity portfolio needs to be designed with adequate prudence. An

investor should maintain certain moderate stocks in his portfolio so as to control

the effect of fluctuations in the market.

If all the stocks in the portfolio are aggressive then any negative change in the

market can cause huge losses to the investor. One of the best examples to quote

here is the case of Reliance Industries Limited. As soon as the there was a

change in the structure of Reliance the prices of its stocks boomed up.

TAX IMPLICATIONS OF INVESTING IN THE STOCK MARKET

There have been no changes on the dividend and capital gains front.

The Securities Transaction Tax for day traders in the stock market has

been increased to 0.020 per cent against the existing 0.015 per cent. The

impact of this increment is going to be minimal.

Trading in derivatives will no longer be treated as speculative transactions

for the purposes of income-tax. This will enable more tax effective hedging

of open positions.

Amendment to the Securities Contract Regulation Act to include trading in

securitised debt (including mortgage-backed debt). Considering the

exponential growth of mortgages in the country during the past two years,this move will lead to a lot of funds being made available to housing

finance institutions and enable faster rollover of funds.

SEBI has been accorded the approval to set up the National Institute of

Securities Markets. It is hoped that this will lead to a new breed of

advisors which will ultimately be beneficial to the investors. However, a


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holistic approach in advising incorporating all types of financial products

viz., insurance, mutual funds, and so on, needs to be encouraged.

Withdrawal of tax benefit under Section 80 L. This will hasten the

migration of investors from bank accounts and fixed deposits to liquid

funds and short-term funds as bank interest will be taxable but not

dividends from liquid funds.

A pragmatic approach on the fringe benefit tax is the need of the hour. The

imposition of the above tax will certainly be passed back to the individuals as

most of the establishments work on a cost-to-company (CTC) concept.

Hence, all the tax benefits stated earlier stand collapsed on account of this one

provision.


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RESEARCH METHODOLOGY.

The aim of the study is to find out how an investor actually plans his portfolio the

various risks that are associated with investment and an analysis of the risk

perceptions of an investor. Hence in order to derive certain substantial results

from the study it is necessary to have direct contact with the investor to that the

actual position of and investors mind can be derived.

The study in the initial part of the study was quite exploratory in nature; the

reason is that there was a need to find out on the parameters upon which the

investment attitude of the investors had to be evaluated. This part of the study

was conducted mainly aiming to find out that what investment avenues to be

selected and the target group of investors whose attitude shall be analyzed

during the course of the study. After the parameters were finalized and the target

segments decided the research became more descriptive. In order to actually

meet the objectives of the study an analysis had to be made to draw results

about the investment attitude of the various categories of the investors taken in

the sample. The study was inductive in nature whereby the results were drawnfrom sample and generalized to the universe. So the requirement of the study

was to use primary data gathered from the investors and then derive the results

that would give a very clear picture about the investment attitude and the various

preferences that the an investor has for the various avenues of investment.

The study has been based on both primary as well as secondary data.

The primary data source has been in form of questionnaires and interviews with

the investors who maintain a portfolio. A sample of 50 has been taken and

thereby th

risk analysis project report

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