chapter 2 investment aveneus available in...
Post on 29-Mar-2018
223 Views
Preview:
TRANSCRIPT
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
14 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
CHAPTER – 2
INVESTMENT AVENEUS AVAILABLE IN INDIA
Sr. No. Content Page No.
2.1 Introduction 16
2.2 Financial System 17
2.2.1 Financial Institutions 18
2.2.2 Financial Markets 18
2.2.3 Financial Services 19
2.2.4 Financial Instruments/Avenues 19
2.3 Investment Avenues 20
2.3.1 Security Form 21
2.3.1.1 Money Market Securities 21
2.3.1.2 Capital Market Securities 27
2.3.2 Non – Security Form 34
2.3.2.1 Bank Deposits 34
2.3.2.2 Post Office Deposits 38
2.3.2.3 Public Provident Fund 39
2.3.2.4 Employee Provident Fund 42
2.3.2.5 Insurance Schemes 43
2.3.2.6 Mutual Funds 48
2.3.2.7 Commodity Investment 50
2.3.2.8 FOREX Market 56
2.3.3 Traditional Form 63
2.3.3.1 Real Estate 63
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
15 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2 Gold & Silver Investment 67
2.3.4 Emerging Investment Avenues 72
2.3.4.1 Hedge Funds 72
2.3.4.2 Venture Capital 76
2.3.4.3 Chit Fund 79
2.3.4.4 Depository Receipts 81
2.4 Rationale for Mutual Funds 85
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
16 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.1 Introduction
Financial system plays vital role in the economic growth of a country. It intermediates
between the flow of funds belonging to those who save a part of their income and
those who invest in productive assets. It mobilizes and usefully allocates scare
resources of a country. It is a complex, well-integrated set of subsystems of financial
institutions, markets, instruments, and services which facilitates the transfer and
allocation of funds, efficiently and effectively. The financial systems of most
developing countries are characterized by coexistence and cooperation between the
formal and informal financial sectors. The coexistence of these two sectors is
commonly referred to as financial dualism. The formal financial sector is
characterized by the presence of an organized, institutional and regulated system
which caters to the financial needs of the modern spheres of economy. The informal
financial sector has emerged as a result of the intrinsic dualism of economic and
social structures in developing countries, and financial repression which inhibits the
certain deprived sections of society from accessing funds. One of the important
functions of a financial system is to link the savers and investors and, thereby, help in
mobilizing and allocating the saving efficiently and effectively. By acting as an
efficient conduit for allocation of resources, it permits continuous up-gradation of
technologies for promoting growth on a sustained basis. A financial system not only
helps in selecting project to be funded but also inspires the operators to monitor the
performance of the investment. Financial markets and institutions help to monitor
corporate performance and exercise corporate control through the threat of hostile
takeovers for underperforming firms. It provides a payment mechanism for the
exchange of goods and services and transfers economic resources through time and
across geographic regions and industries.
One of the most important functions of a financial system is to achieve optimum
allocation of risk bearing. It limits, pools and trades the risk involved in mobilizing
saving and allocating credit. An efficient financial system aims at containing risk
within acceptable limits. It reduces risk by laying down rules governing the operation
of the system. Risk reduction is achieved by holding diversified portfolios and
screening of borrowers. Market participants gain protection from unexpected losses
by buying financial insurance services. Risk is traded in the financial markets through
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
17 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
financial instruments such as derivatives. Derivatives are risk shifting devise, they
shift risk from those who have it but may not want it to those who are willing to take
it.
The Indian financial system can broadly be classified into the formal/organized and
informal/unorganized system. The formal financial system comes under the purview
of the Ministry of Finance (MOF), Reserve Bank of India (RBI), Security and
Exchange Board of India (SEBI), and other regulatory bodies. The informal financial
system consists of:
i. Individual moneylenders such as neighbors, relatives, landlords, traders and
storeowners.
ii. Groups of person operating as funds or associations. These groups function under
a system of their own rules and use names such as fixed fund, association and
saving club.
iii. Partnership firms consisting of local brokers, pawnbrokers and non-bank financial
intermediaries such as finance, investment and chit fund companies.
2.2 Financial System
Figure – 2.1 – Financial System of India
Financial
System
Financial Market
Primary
Secondary
Capital Market Money Market
Organised Unorganised
Financial
Instruments
Long Term
Short Term
Medium Term
Primary Secondary
Financial Institutions
Interdediary NonIntermediary
Others
Regulatory
Banking Non-Banking
Financial Services
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
18 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.2.1 Financial Institutions
Financial institutions are intermediaries that mobilize savings and facilitate the
allocation of funds in an efficient manner. Financial institutions can be classified as
banking and nonbanking financial institutions. Banking institutions are creators and
purveyors of credit while non-banking financial institutions are purveyors of credit.
Financial institutions can also be classified as term finance institutions such as the
Industrial Development Bank of India (IDBI), the Industrial Credit and Investment
Corporation of India (ICICI), the Industrial Financial Corporation of India (IFCI), the
Small Industries Development Bank of India (SIDBI) and the Industrial Investment
Bank of India (IIBI). In the post reforms era, the role and nature of activity of these
financial institutions have undergone a tremendous change. Banks have now
undertaken non-bank activities and financial institutions have taken up banking
functions. Most of the financial institutions now resort to financial markets for raising
funds.
2.2.2 Financial Markets
Financial markets are a mechanism enabling participants to deal in financial claims.
The market also provides a facility in which their demands and requirements interact
to set a price of such claims. The main organized financial markets in India are the
money market and the capital market. The first is a market for short term securities
while the second is a market for long term securities. Financial market can also be
classified as primary and secondary markets. While the primary market deals with
new issues, the secondary market is meant for trading in outstanding or existing
securities. There are two components of the secondary market: over-the-counter
(OTC) market and the exchange traded market. The government security market is an
OTC market. In OTC market, spot trades are negotiated and traded for immediate
delivery and payment, while in the exchange traded market, trading takes place over a
trading cycle in stock exchanges. Recently, the derivatives market (exchange traded)
has come into existence.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
19 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.2.3 Financial Services
Financial services are those that help with borrowing and funding, lending and
investing, buying and selling securities, making and enabling payment and
settlements, and managing risk exposures in financial markets. The major categories
of financial services are funds intermediation, payments mechanism, provision of
liquidity, risk management and financial engineering. The producers of these financial
services are financial intermediaries, such as banks, insurance companies, mutual
funds and stock exchanges. Financial intermediaries provide key financial services
such as merchant banking, leasing, hire purchase and credit rating. Financial services
rendered by the financial intermediaries‟ bridge the gap between lack of knowledge
on the part of investors and the increasing sophistication of financial instrument and
markets. These financial services are vital for creation of firms, industrial expansion
and economic growth.
2.2.4 Financial Instruments / Avenues
A financial instrument is a claim against a person or an institution for payment, at a
future date, of a sum of money or a periodic payment in the form of interest or
dividend. A financial instrument represents paper wealth such as shares, debentures,
bonds, notes etc,. Different types of financial instruments can be designed to suit the
risk and return preferences of different classes of investors. Savings and investments
are linked through a wide variety of complex financial instruments known as
„securities‟. Financial securities are financial instruments that are negotiable and
tradable. Financial securities may be of primary and secondary securities. Primary
securities are also termed as direct securities as they are directly issued by the ultimate
borrowers of funds to the ultimate savers. Secondary securities are also referred to as
indirect securities, as they are issued by the financial intermediaries to the ultimate
savers. Bank deposits, mutual funds units and insurance policies are secondary
securities. Financial instruments differ in terms of marketability, liquidity,
reversibility, type of options, return, risk and transaction costs. Financial instruments
help financial markets and financial intermediaries to perform the important role of
channelizing funds from lender to borrowers. Financial Instruments are also known as
investment avenues.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
20 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3 Investment Avenues
By Investment Avenue we mean a particular organization or system in which an
investor can place his surplus funds with the objectives of having certain gains in the
future. This organization may be well organized like a bank, financial institution,
mutual funds and company or in an unorganized manner like chit fund organization,
Nidhis (a type of non-banking finance company) or curry (a type of non-banking
finance company in southern India). Different investment avenues have different
features; few offer a fixed return and certain others offer stock market based returns
and yet certain others offer a mix of these two. Few of these have an element of safety
and yet others do not have any kind of safety. In certain cases these are in negotiable
form and in other cases these are non-negotiable. Investment avenues of a country are
subject to different rules and regulations of either the government or some apex body
like Reserve Bank of India, NABARD, SEBI or Companies Act. Following are the
features of investment avenues.
A place where one can invest his surplus
Fixed or floating return
Security vs. Non-security form
Investment accepting organization might have an obligation or not
Negotiable vs. Non-negotiable
Risk is the inherent part of every avenue
May be in an organized form or unorganized form
Regulation
Market oriented vs. others
Investment avenues can be broadly divided into following types.
Security form
Non-security form
Traditional form
Other emerging avenues
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
21 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.1 Security Forms
These are the instruments or securities through which a company or issuing authority
like government raises finance. Majority of these are in negotiable form, i.e. these are
sellable in the market by the holder of the securities. Companies/Government issues
these in capital market or money market to raise funds directly from the providers of
the funds. Some of these have maturity for a very long period and others have for
either medium term or short term. Security form can further be divided into money
market securities and capital market securities.
2.3.1.1 Money Market Securities
It is the market in which liquid funds as well highly liquid securities are traded in for
a very shorter duration. The main participants in this market are banks and financial
institutions. The banks deal in this market to fulfill their CRR (Cash Reserve Ratio)
and SLR (Statutory Liquidity Ratio) requirements. However, few corporate houses,
insurance companies, mutual funds, provident funds trusts and non-banking finance
companies also play an active role in this market. This market provides liquidity
support to banking system. At the same time, the central bank of the country –
Reserve bank of India- uses this market to exercise monetary control in the economy
and credit control in the county.
Money market can be divided into two parts, call money market and government
securities/gilt-edged securities market. Call money market in which surplus cash of
banks and corporate houses is traded in for a very short maturity period, generally not
exceeding one fortnight. The main transactions are carried on by banks to fulfill their
liquidity, as well as CRR requirements. The main participants in market are banks,
financial institution, mutual funds, corporate houses and other organizations as
allowed by Reserve bank of India from time to time. Banks are allowed to play the
role of both the seller as well as the buyer of funds. A seller of funds is the one who
provides it to another party and the party receiving it is identified as the buyer of the
funds. For making funds available, the seller charges interest, which is decided
mutually.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
22 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
The charges in a call money market are influenced by the demand and supply of
money available in this market. Call rates fluctuate very frequently due to the volatile
nature of this market. The provider of funds can call back his money at a short notice;
which is why it is called call money market. The market for government securities is
known as gilt-edged securities market. Government securities are either issued by the
central government or state government or any of the agencies of these governments.
The government guarantees payment of interest and repayment of the principal
amount in gilt-edged securities. Developed banks and financial institutions trade in
this market to fulfill their SLR (Statutory Liquidity Ratio) requirement. The feature of
safety and liquidity in these securities is as safe as good as that of gold; hence, these
are called as gilt-edged securities. Following are the main instruments in this market.
2.3.1.1.a - Treasury Bills
Treasury bills are very useful instruments to deploy short term surplus depending
upon the availability and requirement. Even funds which are kept in current accounts
can be deployed in treasury bills to maximize returns. These treasury bills have a
maturity period not exceeding 364 days. These bills do not carry any interest rate;
instead these are issued at a discount to face value, and redeemed at par on the
maturity. Treasury bills have a unique maturity period of 91 days, 182 days, and 364
days. Recently RBI issued treasure bills for a maturity of 14 days and 28 days too.
Banks do not pay any interest on fixed deposits of less than 15 days, or balances
maintained in current accounts, whereas treasury bills can be purchased for any
number of days depending on the requirements. This helps in deployment of idle
funds for very short periods as well.
Further, since every week there is a treasury bills auction, investor can purchase
treasury bills of different maturities as per requirements so as to match with the
respective outflow of funds. Treasury bills are of two types, regular treasure bills
issued to the general public, including banks, financial institutions and corporate
houses through a notification by RBI. Ad-hoc treasure bills are issued in the favour of
RBI, and these bills never issued or sold subsequently to anyone in the secondary
market. Nowadays RBI issues only regular treasure bills; ad-hoc treasure bills are not
issued. At times when the liquidity in the economy is tight, the returns on treasury
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
23 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
bills are much higher as compared to bank deposits even for longer term. Another
important advantages of treasury bills over bank deposit are that the surplus cash can
be invested depending upon the staggered requirements.
Advantage of treasury bills includes; no tax deducted at source, zero default risk being
sovereign paper, highly liquid money market instrument, better return especially in
the short term, transparency, simplified settlement, high degree of tradability and
active secondary market facilitate meeting unplanned fund requirements. Limitations
of treasury bills includes restrictions and penalties associated with redeeming treasure
bonds too early, depending on the type of bond the rate of return may not exceed the
average annual inflation rate of 3 percent thus mitigating the interest gains.
2.3.1.1.b - Certificate of Deposits
Certificate of deposits are offered to investors by banks just like normal deposits. But
the difference is certificate of deposits are short term wholesale deposits and they are
tradable. An investor holding the certificate of deposit can sell it to another investor.
Because of liquidity interest rates on certificate of deposits are normally less than that
on „sight‟ deposits, investor can compare certificate of deposits with treasury bills as
they are short term, tradable, discounted bonds. But the difference is treasure bills are
issued by government and certificates of deposits are issued by banks, financial
institutions etc. The lender of a certificate of deposits could be another bank,
corporate or financial institution. Certificates of deposits are rated by approved rating
agencies (e.g. CARE, ICRA, CRISIL, and FITCH) which considerably enhance their
tradability in the secondary market, depending upon demand.
The term of certificate of deposit is fixed and it is usually 3 months, 6 months, 1 year
or 5 years. In India certificate of deposits are introduced in July 1989. Maturity period
is minimum 7 days and maximum 12 months for certificate of deposits issued by
banks. For certificate of deposits issued by financial institutions, maturity is minimum
1 year and maximum 3 years. Minimum amount to invest in a certificate of deposit is
Rs. 100000 and in the multiples of Rs. 100000 thereafter. Loan against collateral of
certificate of deposit is not permitted but it is possible in „sight fixed deposits.
Premature withdrawal is not allowed but can be sold to other investors. Interest rate
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
24 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
can be fixed or floating and they are issued at a discount to face value like zero
coupon bonds.
Advantages of certificate of deposits
Since one can know the returns from inception, the certificates of deposits are
considered much safe.
One can earn more as compared to depositing money in savings account.
The central insurance corporation guarantees the investments in the certificate of
deposit.
Disadvantages of Certificate of deposits
As compared to other investments the return is less.
Money is tied along with the long maturity period of the certificate of deposit.
Huge penalties are paid if one gets out of it before maturity.
2.3.1.1.c - Commercial Paper
Commercial paper is short-term loan that is issued by a corporation for financing
accounts receivable and inventories. Commercial papers have higher denominations
as compared to the treasury bills and the certificate of deposit. The maturity period of
commercial papers is minimum 15 days to maximum of one year. Commercial papers
do not carry any interest rate; instead these are issued at a discount to face value and
redeemed at par on maturity. The difference between issue price and maturity value is
the interest compensation for the buyer of commercial papers. These are negotiable in
nature – these can easily and freely be transferred from one party to another party.
They are very safe since the financial situation of the corporation can be anticipated
over a few months.
Commercial paper is a money market security sold by banks and corporations.
Commercial paper is a low-cost alternative to bank loans. It is a very safe investment
and can be used for inventory purchases or working capital. Use of commercial paper
can efficiently raise large amounts of funds quickly and without expensive
registration by selling paper, either directly or through independent dealers, to a large
and varied pool of institutional buyers. Competitive, market-determined yields in
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
25 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
notes, whose maturity and amounts can be tailored to specific needs, can be earned by
investing in commercial paper. The essential quality of this type of investment is
short-term maturity typically three to six months, an automatic or self-liquidating
nature, and non-speculativeness in origin and purpose of use. The two main methods
of issuing commercial paper are selling them directly to an investor, or selling them to
a dealer who then sells them in the market.
Commercial paper is issued by large creditworthy borrowers, which means it's
typically less risky than some other investments. Also, the rating provided by credit
rating agencies gives an indication to investors about how risky the investment is,
which helps them better gauge the investment. As a tradeoff for the relative safety of
this investment, it yields a lower rate than riskier investments, such as stocks. Another
advantage is that commercial paper issuers usually can't buy back the paper before its
due date without a penalty. This means they can't buy back the paper before its
maturity without compensating the investor for the early purchase. Investors can thus
count on a steady yield from commercial paper, unlike in the case of certain bonds
that investors can retire before their maturity.
These funds also charge management fees and expenses, for giving the convenience
of investing in market-rate, short-term, fixed-income securities. Therefore, investor
could obtain slightly higher yields on their money if they invest in commercial paper
directly. However this is not a very liquid investment and there is no active secondary
market, this makes it difficult for the investor to sell off the commercial paper before
its scheduled maturity date.
2.3.1.1.d - Dated Securities of Government
Government securities are issued by the government for raising a public loan or as
notified in the official gazette. They consist of government promissory notes, bearer
bonds, stocks or bonds held in bond ledger account etc. They may be in the form of
treasury bills or dated government securities. Government securities are mostly
interest bearing dated securities issued by RBI on behalf of the government of India.
Government of India uses these funds to meet its expenditure commitments. These
securities are generally fixed maturity and fixed coupon securities carrying semi-
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
26 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
annual coupon. Since the date of maturity is specified in the securities, these are
known as dated government securities.
The dated government securities market in India has two segments; primary market
consists of the issuers of the securities, viz., central and state government and buyers
include commercial banks, primary dealers, financial institutions, insurance
companies & co-operative banks. RBI also has a scheme of non-competitive bidding
for small investors. Secondary market includes commercial banks, financial
institutions, insurance companies, provident funds, trusts, mutual funds, primary
dealers and reserve bank of India. Even corporate and individuals can invest in
government securities. The eligibility criteria are specified in the relative government
notification. Following are the main features of government securities.
i. Issued at face value.
ii. No default risk as the securities carry sovereign guarantee.
iii. Ample liquidity as the investor can sell the security in the secondary market.
iv. Interest payment on a half yearly basis on face value.
v. No tax deducted at source.
vi. Can be held in dematerialized form.
vii. Rate of interest and tenure of the security is fixed at the time of issuance and is
not subject to change.
viii. Redeemed at face value on maturity
ix. Maturity ranges from of 2-30 years.
Auctions for government securities are normally multiple-price auctions either yield
based or price based. In yield based type of auction, RBI announces the issue size or
notified amount and the tenure of the paper to be auctioned. The bidders submit bids
in term of the yield at which they are ready to buy the security. If the bid is more than
the cut-off yield then its rejected otherwise it is accepted where in price based type of
auction RBI announces the issue size or notified amount and the tenure of the paper to
be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price.
This method of auction is normally used in case of reissue of existing government
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
27 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
securities. Bids at price lower than the cut off price are rejected and bids higher than
the cut off price are accepted. Price based auction leads to a better price discovery
then the yield based auction. Government securities, state development loans &
treasury bills are regularly sold by RBI through periodic public auctions. It gives
investors an opportunity to buy government securities/treasure bills at primary market
auctions of RBI through its invest scheme. Investors may also invest in high yielding
government securities through buy and sell facility for selected liquid scripts in the
secondary markets.
2.3.1.2 - Capital Market Securities
The capital market is a market for financial assets which have a long or indefinite
maturity. Unlike money market instruments the capital market instruments become
mature for the period above one year. It is an institutional arrangement to borrow and
lend money for a longer period of time. It consists of financial institutions like IDBI,
ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market.
Business units and corporate are the borrowers in the capital market. Capital market
involves various instruments which can be used for financial transactions. Capital
market provides long term debt and equity finance for the government and the
corporate sector. Capital market can be classified into primary and secondary markets.
The primary market is a market for new shares, where as in the secondary market the
existing securities are traded. Capital market institutions provide rupee loans, foreign
exchange loans, consultancy services and underwriting. Capital market securities
issued by the companies in the primary market to raise the finance. Issue of the
securities is completely regulated by the provisions of SEBI. A company can issue the
following securities in this market.
Equity shares
Preference shares
Debentures
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
28 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.1.2.a - Equity Shares
Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed
profits after the holders of debentures and preference shares have been paid. Ordinary
shares are issued to the owners of a company. The ordinary shares of Indian
companies typically have a nominal or 'face' value between rupees 10 to 100.
However, it is important to understand that the market value of a company's shares
has little relationship to their nominal or face value. The market value of a company's
shares is determined by the price another investor is prepared to pay for them. In case
of publicly quoted companies, this is reflected in the market value of the ordinary
shares traded on the stock exchange. In case of privately owned companies, where
there is unlikely to be much trading in shares, market value is often determined when
the business is sold or when a minority shareholding is valued for taxation purposes.
"Deferred ordinary shares" are a form of ordinary shares, which are entitled to a
dividend only after a certain date or only if profits rise above a certain amount. Voting
rights might also differ from those attached to other ordinary shares. An equity holder
become the owner of the company and enjoys voting rights also. Besides capital
appreciation, he is entitled to get dividend also. Equity shares are listed on stock
market and can easily converted into cash whenever required. But equity investments
are the most risky form of investment where there are chances of going money into
100 percent loss. Besides, investors will get his money back when all the parties have
been paid their dues to company at the time of liquidation.
2.3.1.2.b - Preference Shares
A preference shares means shares which carries preferential rights in respect of
dividend at fixed amount or at fixed rate before the holders of the equity shares have
been paid. It also carries preferential right in regard to payment of capital on winding
up or otherwise. It means the amount paid on preference share must be paid back to
preference shareholders before anything in paid to the equity shareholders. In other
words, preference share capital has priority both in repayment of dividend as well as
capital. Following are the main types of preference shares.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
29 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.1.2.b-i - Cumulative and Non – Cumulative Preference Shares
A non-cumulative or simple preference shares gives right to fixed percentage
dividend of profit of each year. In case no dividend thereon is declared in any year
because of absence of profit, the holders of preference shares get nothing nor can they
claim unpaid dividend in the subsequent year or years in respect of that year.
Cumulative preference shares however give the right to the preference shareholders to
demand the unpaid dividend in any year during the subsequent year or years when the
profits are available for distribution. In this case dividends which are not paid in any
year are accumulated and are paid out when the profits are available.
2.3.1.2.b-ii - Redeemable and Non- Redeemable Preference Shares
Redeemable Preference shares are preference shares which have to be repaid by the
company after the term for which the preference shares have been issued.
Irredeemable preference shares means preference shares need not to repay by the
company except on winding up of the company. However, under the Indian
companies act, a company cannot issue irredeemable preference shares. In fact, a
company limited by shares cannot issue preference shares which are redeemable after
or more than 10 years from the date of issue. In other words the maximum tenure of
preference shares is 10 years. If a company is unable to redeem any preference shares
within the specified period, it may, with consent of the company law board, issue
further redeemable preference shares equal to redeem the old preference shares
including dividend thereon. A company can issue the preference shares which from
the very beginning are redeemable on a fixed date or after certain period of time not
exceeding 10 years.
2.3.1.2.b-iii - Participating and Non - Participating Preference Shares
Participating preference shares are entitled to a preferential dividend at a fixed rate
with the right to participate further in the profits either along with or after payment of
certain rate of dividend on equity shares. A non-participating share is one which does
not such right to participate in the profits of the company after the dividend and
capital has been paid to the preference shareholders.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
30 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.1.2.b-iv - Convertible and Non - Convertible Preference Shares
Convertible preference shares are the one which have a provision of conversion into
the equity shares of the issuing company; the conversion takes place on pre-specified
date. The terms and conditions of conversion are specified at the time of issue of these
shares. Holders of these have the benefit of preference shares till the date of
conversion, thereafter these have the benefits of equity shares, due to this dual nature
these are called hybrid securities. Non-convertible preference shares are those in
which a provision of conversion into the equity shares of the issuing company is not
provided, these might be redeemable or irredeemable, redemption, if any, take place
according to the terms and conditions of the issue of these preference shares. For the
investor, preference shares are less attractive than loan stock because they cannot be
secured on the company's assets, the dividend yield traditionally offered on preference
dividends has been too low to provide an attractive investment compared with the
interest yields on loan stock in view of the additional risk involved.
2.3.1.2.c - Debentures and Bonds
Debentures and bonds are similar except for one difference that bonds are more
secure than debentures. In case of both, investors are paid a guaranteed interest that
does not change in value irrespective of the fortunes of the company. However, bonds
are more secure than debentures, but carry a lower interest rate. The company
provides collateral for the loan. Moreover, in case of liquidation, bond holders will be
paid off before debenture holders. In India, the terms „corporate bonds‟ and
„debentures‟ are interchangeably used. Though different countries have different
interpretations of both the terms „corporate bonds‟ and „debentures‟, our companies
act (section 2(12)) identifies both as same. Investor may find a corporate bond similar
to a fixed deposit in a bank or a post office scheme or any such fixed‐return
instrument. However, every type of investment is different in its own way and has its
own features, advantages and disadvantages.
In India, both public and private companies can issue corporate bonds. A company
incorporated in India, but part of a multinational group, can also issue corporate
bonds. However, a company incorporated outside India cannot issue corporate bonds
in India. A statutory corporation like LIC can also issue corporate bonds. For
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
31 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
investors those who are looking for an investment that generates fixed income
periodically, corporate bonds may be an ideal investment. It normally offers a higher
rate of interest as compared to fixed deposits or postal savings or similar investments.
Listed bonds can also sell in the secondary market before its maturity. While a bond is
usually not designed for capital appreciation; a listed bond may also earn capital
appreciation i.e. investor can sell bond at a price higher than cost price in the market.
A corporate bond may offer a fixed or floating rate of interest and accordingly
investor may earn a fixed or varying amount of interest periodically. A fixed rate
bond will pay fixed amount periodically as per the interest rate set out when the bonds
were issued. This interest is determined as a percent of the face value of the bond.
Such fixed interest payments are sometimes also called coupon payments. A floating
rate bond has its interest rate pegged to a benchmark rate i.e. (Benchmark rate) +/‐
(some percent). The benchmark rate may be government bond/MIBOR. As the
benchmark rate changes, the interest rate on the bond will vary accordingly. Hence, a
floating rate bond is considered to be relatively risky since return is dependent on the
movement of the benchmark rate. If investor wish to receive fixed amount
periodically, a fixed rate bond is advisable. However, a fixed interest rate bond may
earn less than a floating rate bond due to lesser risk involved. If investor plans to
invest in a floating rate bond, return will depend on the movement of benchmark rate
which may move in either direction substantially.
An investor in corporate bonds receives his interest payments periodically. The
interest may be received yearly or half yearly or quarterly or even monthly depending
upon the period set at the time of issue. The interest payment dates are usually
specified in the prospectus. On the maturity date, the issuer pays back the investor
face value of the bonds held by him along with the interest accrued on the same.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
32 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
Figure – 2.2 – Types of Debentures / Bonds
2.3.1.2.c-i - From the Security Point of View
Secured debentures refer to those debentures where a charge is created on the assets
of the company for the purpose of payment in case of default. The charge may be
fixed or floating. A fixed charge is created on a specific asset whereas a floating
charge is on the general assets of the company. The fixed charge is created against
those assets which are held by a company for use in operations not meant for sale
whereas floating charge involves all assets excluding those assigned to the secured
creditors. Unsecured debentures do not have a specific a charge on the assets of the
company. However, a floating charge may be created on these debentures by default.
Normally, these kinds of debentures are not issued.
Types of Debentures / Bond
Security Secured Unsecured
secured
Tenure
Redeemable
Irredeemable/ Perpetual
Convertibility
Convertible
Fully Convertible
Partly Convertible
Non Convertible
Coupon Rate
Zero Coupon Rate
Specific
Rate
Registration
Registerd
Bearer
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
33 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.1.2.c-ii - From the Tenure Point of View
Redeemable debentures are those which are payable on the expiry of the specific
period either in lump sum or in installments during the life time of the company.
Debentures can be redeemed either at par or at premium. Irredeemable debentures are
also known as perpetual debentures because the company does not given any
undertaking for the repayment of money borrowed by issuing such debentures. These
debentures are repayable on the on winding-up of a company or on the expiry of a
long period.
2.3.1.2.c-iii - From the Convertibility Point of View
Debentures which are convertible into equity shares or in any other security either at
the option of the company or the debenture holders are called convertible debentures.
These debentures are either fully convertible or partly convertible. The debentures
which cannot be converted into shares or in any other securities are called
nonconvertible debentures. Most debentures issued by companies fall in this category.
2.3.1.2.c-iv - From Coupon Rate Point of View
These debentures are issued with a specified rate of interest, which is called the
coupon rate. The specified rate may either be fixed or floating. The floating interest
rate is usually tagged with the bank rate. These debentures do not carry a specific rate
of interest. In order to compensate the investors, such debentures are issued at
substantial discount and the difference between the nominal value and the issue price
is treated as the amount of interest related to the duration of the debentures.
2.3.1.2.c-v - From the Registration Point of View
Registered debentures are those debentures in respect of which all details including
names, addresses and particulars of holding of the debenture holders are entered in a
register kept by the company. Such debentures can be transferred only by executing a
regular transfer deed. Bearer debentures are the debentures which can be transferred
by way of delivery and the company does not keep any record of the debenture
holders. Interest on debentures is paid to a person who produces the interest coupon
attached to such debentures.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
34 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2 Non - Security Form
These are the avenues of investment in which document issued as evidence of the
investment cannot be transferred from one party to another party. These are non-
negotiable in form. The payment of these can be claimed by only the original holder
or in the event of death of the original holder his legal successors can claim the
payment. The prominent feature of these avenues that the majority of these are safe
investments. By safe we mean free from default risk. However due to privatization of
banking and insurance sector there has been the incidences that even the bank are in
trouble sometimes and investment in a bank might be subject to default risk like in a
co-operative bank or certain low creditworthy banks. By default risk we mean
chances of early in the payment or repayment it may be even the non-payment of
dues. Following is included in this category:
Bank Deposits
Post Office Deposits
Public Provident Fund Account
Employee Provident Fund Account
Insurance Investment
Mutual Funds Investment
Commodity Investment
FOREX Investment
2.3.2.1 Bank Deposits
An investor who has safety as the first objective can choose bank as an avenue for
investment. Banks are considered to be safe i.e. these assure a fix return in the form of
interest payment and also there is no default risk. Investors can deposit his savings in
a bank as per their convenience by maintaining different accounts. In general
following type of deposits can be held by an investor in a bank.
Savings Bank Account
Current Account
Cash and Credit Account
Self-Liquidating FDR
Recurring Deposit Account / Scheme
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
35 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
Flexi Deposit Account / Scheme
Fixed Deposit Receipt (FDR)
2.3.2.1.a - Savings Bank Account
In a savings bank account, account holder has the option to deposit his small savings
with the aim to have safety and interest income on such deposit. Investor has the
convenience of withdrawal of his money through different mechanisms like by
cheque, by withdrawal slip, through ATM card, etc. Bank offers anywhere banking
which offers operation of the bank account for deposit and withdrawal from anywhere
across the country at the designated branches. In a saving bank account one can have
limited number of transactions in each month and it has the restrictions that frequent
transactions cannot be made in this account. Although banks have a norm for
maintaining minimum balance in the savings bank account, yet there are the banks
which offer zero balance savings bank account. The main reason people use banks to
hold their money isn't because of the lucrative returns from interest rates - it is
because the bricks, sensors and a tempered steel safe convey a sense of security that a
sock drawer can't match.
2.3.2.1.b - Current Account
Current account is mainly opened by the businessman or business houses. In a current
account frequent transaction are allowed and one can have the facility of overdraft.
Overdraft is a facility provided by the bank only on a current account whereby
account holder can withdraw the amount over and above his deposit. On this extra
withdrawal, bank charges interest as per rules and regulation of the bank. Overdraft
facility can be utilized only when it has been sanctioned by the bank in advance. For
the deposited amount in a current account few banks do not give any interest whereas
few offer a nominal interest. Withdrawal from this account can be made by cheque,
debit card or credit card.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
36 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.1.c - Cash & Credit Account
A cash credit account is the account which allows the account holder a credit facility
against the security of certain fixed deposit or some other assets of the business like
stock, building etc. This account is opened after entering into an agreement with the
bank whereby bank sanctions a cash credit limit, the account holder has the
convenience of using the sanctioned amount as per his requirement from time to time
within the overall time limit of the cash credit account. Interest is charged on the
amount which is utilized by the account holder and not on the sanctioned amount.
Few banks charge nominal commitment charge/interest for the amount sanctioned but
not utilized. If this account is opened against the security of stock-in-trade then the
account holder is required to provide the details of the stock-in-trade at a regular
interval. Withdrawal can be made by cheque.
2.3.2.1.d - Self-Liquidating FDR
This is a fixed deposit scheme in which instead of issuing one single FDR bank issues
several FDR of small denominations. These have a provision that in case depositor
wishes to utilize a part of the amount out of the total FDR or in the current account or
savings bank account of the same depositor and if some shortfall of amount is there,
then it can be met by liquidating the FDR of small denomination without affecting the
interest on rest of the FDR amount.
2.3.2.1.e - Recurring Deposit Account/Schemes
This is a bank account in which account holder is required to deposit a fixed amount
every month. This account offers the benefit of higher interest rate as compared to
savings bank account, however there is a restriction of making pre-mature withdrawal
from this account. Account holder can get back his deposited amount along with the
interest earned on it only at the time of maturity. This account offers a facility of
taking a loan against the deposited amount on which bank charges interest.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
37 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.1.f - Flexi Deposit Account/Scheme
This account is like recurring deposit account with a little difference that the depositor
is not bound to deposit a fix amount every month instead he has the option to make
different amount in each month depending upon his savings, if he desires so. In these
accounts account holder can deposit any amount from a minimum amount up to
maximum amount as specified by the bank. Repayment of principal amount along
with the interest on it is done only at the time of maturity. This account offers a
facility of taking loan against the deposited amount on which bank charges interest.
2.3.2.1.g - Fixed Deposit Receipts (FDR)
Banks offer a low interest on the deposited money in savings bank account and
current account, but these accounts offer the convenience of making partial
withdrawal anytime at demand. In contrary to this FDR is a deposit scheme which
offers a higher interest rate with the condition to maintain the deposit for a fixed time
period. It is not like an account wherein any time any amount can be added instead a
fixed amount is deposited by mentioning the time period till which no withdrawal is
allowed. If the deposit continues till the specified maturity period then interest for the
full period along with the principal amount is paid. These also offer the convenience
of premature withdrawal, in such case interest is paid at a low rate and few banks
charge a panel interest also.
FDR can be pledged with the issuing bank to obtain a loan against the FDR or it can
be pledged to open a cash credit account. In case a loan is taken against the FDR then
bank gives the interest on the amount of FDR and charges the interest on the loan
amount. Fixed deposit is a financial instrument for investors to deposit money for a
fixed duration ranging from 15 days to 10 years. Therefore, the depositors are
supposed to continue such FDR for the duration of time for which the depositor
decides to keep the money with the bank. However, in case of need, the depositor can
ask for closing the fixed deposit in advance by paying a penalty. Soon some banks
have even introduced variable interest fixed deposits. The rate of interest in such
deposits will keep on varying with the prevalent market rates i.e. it will go up if
market interest rate goes and it will come down if the market rates fall. Following are
the advantages of bank deposits.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
38 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.1.g-i - Safety
FDs have conventionally been the premier choice for investors with a low risk
appetite; assured returns is the key factor which attracts investors towards deposits.
Stick to FDs of the highest credit rating i.e. those with a “AAA” rating even if their
rates seem modest vis-à-vis those offered by company deposits. The fixed deposits of
reputed banks and financial institutions regulated by reserve bank of India are very
secure and considered as one of the safest investment methods.
2.3.2.1.g-ii - Regular Income
Fixed deposits earn fixed interest rates for their entire tenure, which is usually
compounded quarterly. The investors who want an income on a regular basis can
invest into fixed deposits and use the interest rate as their income. This makes a fixed
deposit very popular way of investing money for retire purpose.
2.3.2.1.g-iii - Saves Tax
With the directives of the income tax department stating that investment in fixed
deposits up to a maximum of Rs.100000 for minimum 5 years are eligible for tax
deductions under section 80C of income tax act; fixed deposits have again become
popular. Fixed deposits save tax and give high returns on invested money.
2.3.2.1.g-iv - Liquidity
FDs can be encashed before maturity date i.e. Investment can easily liquidate. But
liquidity comes with some penalty clauses. So, investor needs to compare how various
fixed deposits rank on this parameter and pick the best deal; thereby try to minimize
the impact of illiquidity which is typically associated with fixed deposits.
2.3.2.2 Post Office Deposits / Post Office Savings Certificate
National savings certificate, popularly known as NSC, is a time-tested tax saving
instrument that combines adequate returns with high safety. NSCs are an instrument
for facilitating long-term savings. A large chunk of middle class families use NSCs
for saving on their tax, getting double benefits. They not only save tax on their hard-
earned income but also make an investment which assures good and safe returns.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
39 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
National savings certificate (NSC) is a fixed interest, long term instrument for
investment. NSCs are issued by the department of post, government of India. Since
they are backed by the government of India, NSCs are a practically risk free avenue of
investment. They can be bought from authorized post offices. They offer a fix rate of
return per annum. This interest is calculated every six months, and is merged with the
principal. That is, the interest is reinvested, and is paid along with the principal at the
time of maturity. NSCs qualify for investment under Section 80C of the income tax
act. Even the interest earned every year qualifies under Sec 80C.
National savings certificates are available in the denominations of Rs. 100, Rs 500,
Rs. 1000, Rs. 5000 & Rs. 10000 throughout the year. There is no maximum limit on
the purchase of the certificates. So it is investor to decide how much amount to invest
in the NSCs. This is of course a huge benefit for investor as he can decide as much as
budget allows. There are various investment schemes available in post offices, like
KVP (KisanVikas Patra), Post Office Monthly Income Scheme (MIS), Post Office
Time Deposits (TD), Post Office Recurring Deposits (RD), National Savings
Certificates (NSC) and National Saving Schemes (NSS) etc. All these schemes are
completely risk-free and do not need to have large sum of money to start investing in
these schemes. Some schemes offer tax-saving benefits and some gives tax-free
returns. So investors need to find out scheme as per requirements.
The certificate can be encashed from the issuing post office on the due date by simply
discharging the certificates at the back. Investor can avail of a loan against the
certificates by pledging it to the bank. The bank will have the NSC assigned in its
favour and advance up to 75 percent of face value plus the amount of accrued interest
till the date of taking the loan.
2.3.2.3 Public Provident Fund
PPF is a 30 year old constitutional plan of the central government happening with the
objective of providing old age profits security to the unorganized division workers
and self-employed persons. Any individual salaried or non-salaried can open a PPF
account. Investor may also pledge on behalf of a minor, HUF, AOP and BOI. Even
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
40 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
NRIs can open PPF account. A person can contain only one PPF account. Also two
adults cannot open a combined PPF account. The collective annual payment by an
individual on account of himself his minor child and HUF/AOP/BOI cannot exceed
Rs.70000 or else the excess amount will be returned without any interest.
The yearly contribution to PPF account ranges minimum Rs.500 to a maximum of
Rs.70000 payable in multiple of Rs.500 either in lump sum or in convenient
installments, not exceeding 12 in a year. The account will happen to obsolete if the
required minimum of Rs.500 is not deposited in any year. The account can be
regularized by depositing for each year of default, arrears of Rs.500 along with
penalty of Rs.100.
A PPF account can be opened at any branch of State Bank of India or its subsidiaries
or in few national banks or in post offices. On opening of account a pass book will be
issued wherein all amounts of deposits, withdrawals, loans and repayment together
with interest due shall be entered. The account can also be transferred to any bank or
post office in India. Deposits in the account earn interest at the rate notify by the
central government from time to time. Interest is designed on the lowest balance
among the fifth day and last day of the calendar month and is attributed to the account
on 31st March every year. So to derive the maximum, the deposits should be made
between 1st and 5th day of the month.
Even though PPF is 15 year scheme but the effectual period works out to 16 years i.e.
the year of opening the account and adding 15 years to it. The sum made in the 16th
financial year will not earn any interest but one can take advantage of the tax rebate.
The investor is allowed to make one removal every year beginning from the seventh
financial year of an amount not more than 50 percent of the balance at the end of the
fourth year or the financial year immediately preceding the withdrawal, whichever is
less. This facility of making partial withdrawals provide liquidity and the withdrawn
amount can be used for any purpose.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
41 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.3.a - Features of PPF Account
It is not necessary to make a deposit in every month of the year. The amount of
deposit can be varied to suit the convenience of the account holders.
Those who are contributing to GPF fund or EPF account can also open a PPF
account.
No age is prescribed for opening a PPF account.
Pre-mature closure of a PPF account is not permissible except in case of death.
Nominee/legal heir of PPF account holder on death of the account holder cannot
continue the account, but account had to be closed.
The account holder has an option to extend the PPF account for any period in a
block of 5 years on each time.
The account holder can retain the account after maturity for any period without
making any further deposits. The balance in the account will continue to earn
interest at normal rate as admissible on PPF account till the account is closed.
Deposits are exempt from wealth tax.
Table – 2.1 - Differences and Similarities between NSC and PPF
National Savings Certificate (NSC) Public Provident Fund (PPF)
Interest Paid: 8 percent, compounded
half-yearly
Interest Paid: 8 percent, compounded
Annually
No monthly/yearly payments No monthly/yearly payments
Minimum investment: Rs 100 Minimum investment: Rs 500
(required annually)
Maximum investment: No Limit Maximum investment: Rs 70000
Duration of investment: 6 years Duration of investment: 15 years
Can be used as a security for
mortgage and other purposes
Cannot be used for such purposes
Tax benefit under Section
80 „C‟ available.
Tax benefit under Section
80 „C‟ available.
Maximum limit: Rs 100000 (80 C) Maximum limit: Rs. 70000 (80 C)
Good medium-term investment option Good long-term investment option
Interest if fully Taxable Interest is fully Exempt
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
42 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.4 Employee Provident Fund (EPF)
EPF has been such a successful idea that many people check where a company offers
EPF before taking up employment. Through EPF, the employer deducts 12 percent of
the employee‟s salary and contributes an equal amount from their side. For example,
if basic salary of any person is Rs. 6000, then employees contribution will be 12
percent of 6000 would be Rs. 720. Employer will also contribute an equal amount.
But 8.33 percent of the 12 percent contributed by the employer (6000*8.33 percent =
500) will get deposited in the employees‟ pension scheme (EPS) and the remaining
(6000*3.67 percent = 220) will be added to the employee‟s contribution and deposited
into the employee‟s EPF account. So, in total 940 Rs. will get deposited in the
employee‟s EPF account and Rs. 500 will get deposited in the EPS account. But here
the contribution to EPS is limited to a maximum of Rs. 541 irrespective of salary; the
rest of the amount will get deposited in EPF account. Investor will earn interest on the
amount deposited in PPF account as well as get tax benefits under section 80C for the
contribution from salary.
2.3.2.4.a - Advantages of EPF Account
i. The amount contributed by investor under EPF is eligible for tax deductions under
section 80C up to a limit of Rs. 100000. The employer‟s contribution is not
considered for tax deduction.
ii. Investor need not to open EPF account. It is opened by employer.
iii. At the time of closing an account and withdrawing money, simple procedure is
required to follow and money will get deposited to investors account.
iv. At the time of switching job, investor need to mention EPF account number to
new employer. The amount accumulated in earlier EPF account will get
transferred to new account automatically.
v. If EPF account holds for more than five years or more, the amount investor gets
on closing account is completely tax free.
vi. Investor can deposit more than 12 percent in EPF account.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
43 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.4.b - Disadvantages of EPF Account
i. Investors cannot withdraw amount from EPF account, except in case of
emergencies.
ii. If withdraw money before completion of five years, investors will have to pay tax
on the amount received.
iii. It is not a liquid investment; on closing account or withdrawing amount, investor
will not get amount due to him immediately, it takes around two to three months.
2.3.2.5 Insurance Schemes
Insurance is a contract between the policy owner and the insurer, where the insurer
agrees to pay an amount of money upon the happening of the insured individual's or
individuals' death or other event, like terminal illness, critical illness. In return, the
policy owner agrees to pay a fixed amount called a premium at regular intervals. Like
other insurance policies, life insurance is also a contract between the insurer and the
policy owner whereby a benefit is paid to the nominated beneficiaries if an insured
event occurs which is covered by the policy. The assessment for the policyholder is
derived not from an actual claim event, but to a certain extent it is the value derived
from the 'peace of mind' experienced by the policyholder; because of the negating of
adverse financial consequences caused by the death of the life assured.
By investing in life insurance, almost anyone can transfer the financial risks of dying
early, guaranteeing a payout for family members who might otherwise be left in
economic turmoil. Today's insurance policies, however, often come with features
borrowed from the investment world, blending traditional insurance with attributes of
a mutual funds account. There are many types of insurance policies available in the
market. Insurance plans can be divided into two major parts: 1. Life insurance and 2.
General insurance.
2.3.2.5.a - Life Insurance
Life insurance covers all the potential dangers, which may damage life. A life
insurance can be short term and permanent. A short term life insurance plan protects
the person for a certain amount of time. A permanent life insurance policy covers the
person until he pays off his monthly premiums regularly.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
44 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.5.b - General Insurance
There are several types of general insurance in market. Some of them are mentioned
below:
2.3.2.5.b-i - Health Insurance
Health insurance cover protects the policy holder from any kind of accident and
medical conditions. Be it the medical expenses, the consultant's fees, or the accident
cover, a health insurance policy takes care of any health related issue. Health
insurance can be short term and long term. Group health insurance is offered by
corporate houses.
2.3.2.5.b-ii - Motorcar Insurance
Every car owner must have car insurance. Accidents can take place any time. A
general car insurance includes personal cover and at the same time, personal liabilities
also.
2.3.2.5.b-iii - Travel Insurance
No matter whether it is a small trip or a long tour, a business tour or a pleasure
holiday, a travel insurance is a must for all travelers. Travel insurance can be for
single trip and for multi trips. Travel insurance can cover the policyholder against
accidents, hospitalization charges, loss of luggage and many more.
2.3.2.5.b-iv - Property Insurance
Property insurance protects personal belonging from any danger such as theft, fire,
natural calamities etc. Some special types of property insurance covers are fire
insurance, earthquake insurance, flood insurance, inland marine insurance, home
insurance, boiler insurance etc.
2.3.2.5.b-v - Casualty Insurance
Casualty insurance insures the policy holder from casualties, caused by any kind of
accident. Two casualty insurance plans are crime insurance and political risk
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
45 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
insurance. Crime insurance can cover against criminal activities. Political risk
insurance covers against any unrest situation, caused by political issues.
Some other types of insurance policies are:
All-risk insurance
Expatriate insurance
Media liability insurance
Pet insurance
Legal expenses insurance
Collateral protection insurance
Locked funds insurance
Kidnap and ransom insurance
Today, there is no shortage of investment options for a person to choose from.
Modern day investments includes gold, property, fixed income instruments, mutual
funds and of course, life insurance. Given the plethora of choices, it becomes
imperative to make the right choice when investing hard-earned money. Insurance is a
unique investment that helps to meet dual needs - saving for life's important goals,
and protecting assets. From an investor's point of view, an investment can play two
roles - asset appreciation or asset protection. While most financial instruments have
the underlying benefit of asset appreciation, life insurance is unique in that it gives the
customer the reassurance of asset protection, along with a strong element of asset
appreciation.
The core benefit of life insurance is that the financial interests of one‟s family remain
protected from circumstances such as loss of income due to critical illness or death of
the policyholder. Simultaneously, insurance products also have a strong inbuilt wealth
creation proposition. The investor therefore benefits on two counts and life insurance
occupies a unique space in the landscape of investment options available to an
investor. Every investor has some goals in life for which they need to save. Life
insurance is the only investment option that offers specific products tailor made for
different life stages. It thus ensures that the benefits offered to the customer reflect the
needs of the customer at that particular life stage, and hence ensures that the financial
goals of that life stage are met.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
46 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.5.c - Advantages of a Life Insurance Policy
2.3.2.5.c-i - Early Death Risk Cover
Life today is full of uncertainties; in this scenario life insurance ensures that investor‟s
family members continue to enjoy a good quality of life against any unforeseen event.
The mortality rate is experiencing a declining trend in many parts of the world.
However it is also important to note that the age at which people die is also ever
decreasing. Some reasons for this include unhealthy living style, stress, pollution, and
some natural calamities. This necessitates people to make adequate measures to yield
income for their family and dependents. This could be a serious concern if the insured
happens to be the sole bread winner. Some individuals see this as an option to plan
their retirement.
2.3.2.5.c-ii - Planning for Life Stage Needs
Life Insurance not only provides for financial support in the event of premature death
but also acts as a long term investment. Investors can meet its goals, be it children's
education, their marriage, building dream home or planning a relaxed retired life,
according to life stage and risk appetite. Traditional life insurance policies i.e.
traditional endowment plans, offer in-built guarantees and defined maturity benefits
through variety of product options such as money back, guaranteed cash values,
guaranteed maturity values etc.,
2.3.2.5.c-iii - Protection Against Rising Health Expenses
Life Insurers through riders or standalone health insurance plans offer the benefits of
protection against critical diseases and hospitalization expenses. This benefit has
assumed critical importance given the increasing incidence of lifestyle diseases and
escalating medical costs.
2.3.2.5.c-iv - Builds the Habit of Thrift
Life Insurance is a long-term contract where policy holder, have to pay a fixed
amount at a defined periodicity. This builds the habit of long-term savings. Regular
savings over a long period ensures that a decent corpus is built to meet financial needs
at various life stages.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
47 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.5.c-v - Safe and Profitable Long-Term Investment
Life Insurance is a highly regulated sector. IRDA, the regulatory body, through
various rules and regulations ensures that the safety of the policyholder's money is the
primary responsibility of all stakeholders. Life Insurance being a long-term savings
instrument, also ensures that the life insurers focus on returns over a long-term and do
not take risky investment decisions for short term gains.
2.3.2.5.c-vi - Assured Income Through Annuities
Life Insurance is one of the best instruments for retirement planning. The money
saved during the earning life span is utilized to provide a steady source of income
during the retired phase of life.
2.3.2.5.c-vii - Protection Plus Savings Over a Long Term
Since traditional policies are viewed both by the distributors as well as the customers
as a long term commitment; these policies help the policy holders to meet the dual
need of protection and long term wealth creation efficiently.
2.3.2.5.c-viii - Growth Through Dividends
Traditional policies offer an opportunity to participate in the economic growth
without taking the investment risk. The investment income is distributed among the
policyholders through annual announcement of dividends/bonus.
2.3.2.5.c-ix - Facility of Loans without Affecting the Policy Benefits
Policyholders have the option of taking loan against the policy. This helps to meet
unplanned life stage needs without adversely affecting the benefits of the policy they
have bought.
2.3.2.5.c-x - Mortgage Redemption
Insurance acts as an effective tool to cover mortgages and loans taken by the
policyholders so that, in case of any unforeseen event, the burden of repayment does
not fall on the bereaved family.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
48 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.5.c-xi - Increase in the Cost of Living and Spending Power
The purchasing power of the consumers and the standard of living has experienced a
steep rise over the years. The increase in national income and gross domestic product
are partly responsible for this. Individuals incur many unexpected expenses due to the
growing needs. Insurance comes in handy to meet such an unexpected expense. It also
makes sure that an individual is able to meticulously plan his finances. Insurance
option is more or less an interest free loan. An individual can cancel his insurance
policy and obtain a huge amount if it is imperative in meeting an urgent expenses and
he does not have alternative sources for finance. Life insurance companies therefore
do the needful to consumers.
2.3.2.5.c-xii - Tax Concessions
Income tax concessions are available to individuals and corporate houses who adopt
insurance policies. Many have been making investments in insurance with the sole
aim of enjoying tax benefits. This naturally increases spending power. Since the
investments increases, the economic activities in the country automatically increase.
2.3.2.5.c-xiii - Best Option for Salaried Youth
Insurance is by and large regarded as one of the savings scheme. Investors see
insurance as a profitable scheme to regulate their savings. Apart from tax concessions
life insurance entails individuals to enjoy more benefits as they have special and
attractive schemes for this segment.
2.3.2.6 Mutual Funds
A Mutual fund is an investment tool that allows small investors to access a well-
diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed as
needed. A mutual funds is a professionally managed firm of collective investments
that pools money from many investors and invests it in stocks, bonds, short-term
money market instruments, and/or other securities. In a mutual funds, the fund
manager, who is also known as the portfolio manager, trades the fund's underlying
securities, realizing capital gains or losses, and collects the dividend or interest
income. The investment proceeds are then passed to the individual investors. The
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
49 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
value of a share of the mutual funds, known as the net asset value per share (NAV), is
calculated daily based on the total value of the fund divided by the number of shares
currently issued and outstanding. There are several benefits from investing in Mutual
funds.
2.3.2.6.a - Small Investments
Mutual funds help to reap the benefit of returns by a portfolio spread across a wide
spectrum of companies with small investments. Such a spread would not have been
possible without their assistance.
2.3.2.6.b - Professional Fund Management
Professionals having considerable expertise, experience and resources; manage the
pool of money collected by mutual funds. They thoroughly analyze the markets and
economy to pick good investment opportunities.
2.3.2.6.c - Spreading Risk
An investor with a limited amount of fund might be able to invest in only one or two
stocks or bonds, thus increasing his or her risk. However, mutual funds will spread its
risk by investing a number of sound stocks or bonds. A fund normally invests in
companies across a wide range of industries, so the risk is diversified at the same time
taking advantage of the position it holds. Also in cases of liquidity crisis where stocks
are sold at a distress, mutual funds have the advantage of the redemption option at the
NAVs.
2.3.2.6.d - Transparency and Interactivity
Mutual funds regularly provide investors with information on the value of their
investments. Mutual funds also provide complete portfolio disclosure of the
investments made by various schemes and also the proportion invested in each asset
type. Mutual funds clearly layout their investment strategy to the investor.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
50 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.6.e - Liquidity
Closed ended funds have their units listed at the stock exchange, thus they can be
bought and sold at their market value. Over and above this, the units can be directly
redeemed to the mutual funds as and when they announce the repurchase.
2.3.2.6.f - Choice
The large amount of mutual funds offers the investor a wide variety to choose from.
An investor can pick up a scheme depending upon his risk / return profile.
2.3.2.6.g - Regulations
All the mutual funds are registered with SEBI and they function within the provisions
of strict regulation designed to protect the interests of the investor.
2.3.2.7 Commodity Investment
After Indian economy embarked upon the process of liberalization and globalization
in 1990, the Indian government set up a committee in 1993 to examine the role of
futures trading. The committee headed by Prof. K.N. Kabra recommended allowing
futures trading in 17 commodity groups. It also recommended strengthening of the
forward markets commission, and certain amendments to forward contracts regulation
act 1952, particularly allowing options trading in goods and registration of brokers
with forward markets commission. The government accepted most of these
recommendations and futures trading were permitted in all recommended
commodities.
India is among the top five producers of most of the commodities, in addition to being
a major consumer of bullion and energy products. Agriculture contributes about 22
percent to the GDP of the Indian economy. It employees around 57 percent of the
labor force on a total of 163 million hectares of land. Agriculture sector is an
important factor in achieving a GDP growth of 8-10 percent. All this indicates that
India can be promoted as a major center for trading of commodity derivatives. It is
unfortunate that the policies of FMC (Forward Market Commission) during the most
of 1950s to 1980s suppressed the markets. It was supposed to encourage and nurture
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
51 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
to grow with times. It was a mistake that other emerging economies of the world
would want to avoid.
However, it is not in India alone that derivatives were suspected of creating too much
speculation that would be to the detriment of the healthy growth of the markets and
the farmers. Such suspicions might normally arise due to a misunderstanding of the
characteristics and role of derivative product. It is important to understand why
commodity derivatives are required and the role they can play in risk management. It
is common knowledge that prices of commodities, metals, shares and currencies
fluctuate over time. The possibility of adverse price changes in future creates risk for
businesses. Derivatives are used to reduce or eliminate price risk arising from
unforeseen price changes. A derivative is a financial contract whose price depends on,
or is derived from, the price of another asset. Two important derivatives are futures
and options.
2.3.2.7.a - Commodity Futures Contracts
A futures contract is an agreement for buying or selling a commodity for a
predetermined delivery price at a specific future time. Futures are standardized
contracts that are traded on organized futures exchanges that ensure performance of
the contracts and thus remove the default risk. The commodity futures have existed
since the Chicago board of trade was established in 1848 to bring farmers and
merchants together. The major function of futures market is to transfer price risk from
hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat
to be ready in two months‟ time, but is worried that the price of wheat may decline in
this period. In order to minimize his risk, he can enter into a futures contract to sell his
crop in two months‟ time at a price determined now. This way he is able to hedge his
risk arising from a possible adverse change in the price of his commodity.
2.3.2.7.b - Commodity Options Contracts
Like futures, options are also financial instruments used for hedging and speculation.
The commodity option holder has the right, but not the obligation, to buy or sell a
specific quantity of a commodity at a specified price on or before a specified date.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
52 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
Option contracts involve two parties – the seller of the option, who writes the option
in favour of the buyer, who pays a certain premium to the seller as a price for the
option. There are two types of commodity options: a „call‟ option gives the holder a
right to buy a commodity at an agreed price, while a „put‟ option gives the holder a
right to sell a commodity at an agreed price on or before a specified date called expiry
date.
Futures and options trading therefore helps in hedging the price risk and also provide
investment opportunity to investors who are willing to assume risk for a possible
return. Further, futures trading and the ensuing discovery of price can help farmers in
deciding which crops to grow. They can also help in building a competitive edge and
enable businesses to smoothen their earnings because non-hedging of the risk would
increase the volatility of their quarterly earnings. Thus futures and options markets
perform important functions that cannot be ignored in modern business environment.
Commodity markets are markets where raw or primary products are exchanged. These
raw commodities are traded on regulated commodities exchanges, in which they are
bought and sold in standardized contracts. The terms commodities and futures are
often used to depict commodity trading or futures trading. It is similar to the way
stocks and equities are used when investors talk about the stock market. Commodities
are the actual physical goods like gold, crude oil, corn, soy beans, etc. Futures are
contracts of commodities that are traded at a commodity exchange like MCX. Apart
from numerous regional exchanges, India has three national commodity exchanges
namely, Multi Commodity Exchange (MCX), National Commodity and Derivatives
Exchange (NCDEX) and National Multi-Commodity Exchange (NMCE). Forward
Markets Commission (FMC) is the regulatory body of commodity market. It is one of
a few investment areas where an individual with limited capital can make
extraordinary profits in a relatively short period of time. Selected information about
the most important commodity exchanges in India is given here.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
53 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.7.c - Multi-Commodity Exchange of India Limited (MCX)
MCX an independent and de-mutualized multi commodity exchange has permanent
recognition from government of India for facilitating online trading, clearing and
settlement operations for commodity futures markets across the country. Key
shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State
Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India,
Bank of Baroda, Canara Bank and Corporation Bank. Its headquartered is in Mumbai.
MCX is led by an expert management team with deep domain knowledge of the
commodity futures markets.
Through the integration of dedicated resources, robust technology and scalable
infrastructure, since inception MCX has recorded many first to its credit. Inaugurated
in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director,
Reliance Industries Ltd, MCX offers futures trading in the following commodity
categories: Agriculture Commodities, Bullion, Metals- Ferrous & Non-ferrous,
Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities.
MCX has built strategic alliances with some of the largest players in commodities
namely Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors'
Association of India, Pulses Importers Association, Shetkari Sanghatana, United
Planters Association of India and India Pepper and Spice Trade Association. Today
MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including producers, processors, traders, corporate, regional
trading centers, importers, exporters, cooperatives and industry associations.
2.3.2.7.d - National Commodity & Derivatives Exchange Limited
National Commodity & Derivatives Exchange Limited is a professionally managed
online multi commodity exchange promoted by ICICI Bank Limited, Life Insurance
Corporation of India, National Bank for Agriculture and Rural Development and
National Stock Exchange of India Limited. Punjab National Bank, Credit Rating
Information Services of India Limited, Indian Farmers Fertilizer Cooperative Limited
and Canara Bank by subscribing to the equity shares have joined the initial promoters
as shareholders of the Exchange. NCDEX is the only commodity exchange in the
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
54 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
country promoted by national level institutions. This unique parentage enables it to
offer a bouquet of benefits, which are currently in short supply in the commodity
markets.
The institutional promoters of NCDEX are prominent players in their respective fields
and bring with them institutional building experience, trust, nationwide reach,
technology and risk management skills. NCDEX is a public limited company
incorporated on April 23, 2003 under the companies act, 1956. It obtained its
certificate for commencement of business on May 9, 2003. It has commenced its
operations on December 15, 2003. NCDEX is a nation-level, technology driven
de-mutualized online commodity exchange with an independent board of directors
and professionals not having any vested interest in commodity markets. It is
committed to provide a world-class commodity exchange platform for market
participants to trade in a wide spectrum of commodity derivatives driven by best
global practices, professionalism and transparency.
NCDEX is regulated by forward market commission in respect of futures trading in
commodities. Besides, NCDEX is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission (regulation) Act and
various other legislations, which impinge on its working. NCDEX is located in
Mumbai and offers facilities to its members in more than 390 centers throughout
India. The reach will gradually be expanded to more centers. NCDEX currently
facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli,
Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold,
Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry
Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein,
Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,
Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize and Yellow
Soybean Meal.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
55 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.7.e - Advantages of Commodity Investment
2.3.2.7.e-i - Investing in Commodities
Commodity investing was initially received well only by a few sectors. Commodities
investing were first restricted to the trade and exchange of commodities meant for
regular and day to day use. However the awareness in the subsequent stages has
brought all sectors into the manifold of commodity investing and has enabled speedy
movements, transfer and transaction of goods and services. The following are the
benefits of investing in commodities market.
2.3.2.7.e-ii - Reduced Risks
As an investor chances of risks are very less if choose to invest in commodity.
Therefore the gains from commodity investing will be helpful for investor to balance
other losses due to other financial instruments in portfolio. The chances of risks are
lower because commodity investing primarily deals with diverse items. Moreover
when the contracts are entered for a future date at the current time investor can
exercise reasonable care and see to it that the chances of risks are reduced or nil.
2.3.2.7.e-iii - Helps to Fix Price Easily
The performance of commodity market can be monitored by analyzing the
performance of bond and share market because in most cases a commodity market
will perform well when the others don't perform and vice versa. It is therefore
possible to easily predict the prices and make the contracts by considering the ups and
downs in other markets. A prerequisite for this is that the assets in the commodity
market should not be correlated with the stock and bond market.
2.3.2.7.f - Disadvantages of Commodity Investment
The futures markets can be very volatile and direct investment in these markets
can be very risky, especially for inexperienced investors.
Leverage can greatly increase profit, but likewise can greatly increase losses.
Investor can lose initial deposit and more before investors are not able to close
position if trade turns and begins to lose money.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
56 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.8 FOREX Market
The foreign exchange market also known as FOREX. FOREX or currency market is a
global, worldwide decentralized over the counter financial market for trading
currencies. Financial centers around the world function as anchors of trading between
a wide range of different types of buyers and sellers round the clock, with the
exception of weekends. The foreign exchange market determines the relative values
of different currencies.
The primary purpose of the foreign exchange is to assist international trade and
investment, by allowing businesses to convert one currency to another currency. For
example, it permits a US business to import British goods and pay Pound, even
though the business's income is in US dollars. It also supports speculation, and
facilitates the carry trade, in which investors borrow low-yielding currencies and lend
or invest in high-yielding currencies, and which may lead to loss of competitiveness
in some countries.
In a typical foreign exchange transaction, an investor purchases a quantity of one
currency by paying a quantity of another currency. The modern foreign exchange
market began forming during the 1970s when countries gradually switched to floating
exchange rates from the previous exchange rate regime, which remained fixed as per
the Bretton Woods system.
The foreign exchange market is unique because of
Its huge trading volume, leading to high liquidity;
Its geographical dispersion;
Its continuous operation: 24 hours a day except weekends;
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed income;
and
The use of leverage to enhance profit margins with respect to account size.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
57 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.8.a - Market Size Liquidity
The foreign exchange market is the largest and most liquid financial market in the
world. Traders include large banks, central banks, institutional investors, currency
speculators, corporations, governments, other financial institutions and retail
investors. The average daily turnover in the global foreign exchange and related
market is continuously growing. According to the 2010 Triennial central bank survey,
coordinated by the bank for international settlements, average daily turnover was Rs.
398000 crores in April 2010 vs. Rs. 170000 crores in 1998. From this Rs. 398000
crores, Rs. 150000 crores was spot foreign exchange transactions and Rs. 250000
crores was traded in outright forwards, FOREX swaps and other currency derivatives.
Trading in London accounted for 36.7 percent of the total, making London by far the
most important global center for foreign exchange trading. In second and third places,
respectively, trading in New York accounted for 17.9 percent, and Tokyo accounted
for 6.2 percent.
Turnover of exchange-traded foreign exchange futures and options have grown
rapidly in recent years, reaching Rs. 16600 crores in April 2010 double the turnover
recorded in April 2007. Exchange-traded currency derivatives represent 4 percent of
OTC foreign exchange turnover. FOREX futures contracts were introduced in 1972 at
the Chicago mercantile exchange and are actively traded relative to most other futures
contracts.
Most developed countries permit the trading of FOREX derivative products like
currency futures and options on their exchanges. All these developed countries
already have fully convertible capital accounts. A number of emerging countries do
not permit FOREX derivative products on their exchanges in view of controls on the
capital accounts. The use of foreign exchange derivatives is growing in many
emerging economies. Countries such as Korea, South Africa, and India have
established currency futures exchanges, despite having some controls on the capital
account.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
58 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
FOREX trading is the immediate trade of one currency and the selling of another.
Currencies are traded through an agent or dealer. Investors are not buying anything
physical but think of buying a currency as buying a share of a particular country.
When investor purchase say Japanese Yen, they are in fact buying a share in the
Japanese financial system, as the price of the currency is a direct reflection of what
the market thinks about the current and future health of the Japanese economy. In
common, the exchange rate of a currency versus other currencies is a reflection of the
condition of that country's financial system compared to the other countries financial
system. Unlike other financial markets like the New York stock exchange, the
FOREX spot market has neither a physical location nor a central exchange.
The FOREX market is measured an over the counter (OTC) or interbank market, due
to the fact that the entire market is run electronically within a network of banks
continuously over a 24 hour period. Until the late 1990's only the big investors could
play this game. The first requirement was that investor could trade only if he had
about ten to fifty million bucks to start with FOREX. FOREX was initially intended
to be used by bankers and large institutions and not by small investors. However
because of the rise of the internet, online FOREX trading firms are now able to offer
trading accounts to 'retail' traders also.
2.3.2.8.b - Financial Instruments in Foreign Exchange:
2.3.2.8.b-i - Spot Market and Forwards & Futures Markets
There are actually three ways that institutions, corporations and individuals trade
FOREX: the spot market, the forward market and the future market. The FOREX
trading in the spot market always has been the largest market because it is the
"underlying" real asset that the forwards and futures markets are based on. In the past,
the futures market was the most popular venue for traders because it was available to
individual investors for a longer period of time. However, with the advent of
electronic trading, the spot market has witnessed a huge surge in activity and now
surpasses the futures market as the preferred trading market for individual investors
and speculators. When people refer to the FOREX market, they usually are referring
to the spot market. The forwards and futures markets tend to be more popular with
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
59 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
companies that need to hedge their foreign exchange risks out to a specific date in the
future.
2.3.2.8.b-ii - Spot Market
More specifically, the spot market is where currencies are bought and sold according
to the current price. That price, determined by supply and demand, is a reflection of
many things, including current interest rates, economic performance, and sentiment
towards ongoing political situations both locally and internationally, as well as the
perception of the future performance of one currency against another. When a deal is
finalized, this is known as a "spot deal". It is a bilateral transaction by which one party
delivers an agreed-upon currency amount to the counter party and receives a specified
amount of another currency at the agreed-upon exchange rate value. After a position
is closed, the settlement is in cash. Although the spot market is commonly known as
one that deals with transactions in the present rather than the future, these trades
actually take two days for settlement.
2.3.2.8.b-iii - Forwards and Futures Markets
Unlike the spot market, the forwards and futures markets do not trade actual
currencies. Instead they deal in contracts that represent claims to a certain currency
type, a specific price per unit and a future date for settlement. In the forwards market,
contracts are bought and sold over the counter between two parties, who determine
the terms of the agreement between themselves. In the futures market, futures
contracts are bought and sold based upon a standard size and settlement date on public
commodities markets. Futures contracts have specific details, including the number of
units being traded, delivery and settlement dates, and minimum price increments that
cannot be customized. The exchange acts as a counterpart to the trader, providing
clearance and settlement.
Both types of contracts are binding and are typically settled for cash. The forwards
and futures markets can offer protection against risk when trading currencies. Usually,
big international corporations use these markets in order to hedge against future
exchange rate fluctuations, but speculators take part in these markets as well.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
60 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.8.b-iv - Swap
The most common type of forward transaction is the FOREX swap. In FOREX swap,
two parties exchange currencies for a certain length of time and agree to reverse the
transaction at a later date. These are not standardized contracts and are not traded
through an exchange.
2.3.2.8.b-v - Option
A foreign exchange option commonly shortened to just FOREX option is a derivative
where the owner has the right but not the obligation to exchange money denominated
in one currency into another currency at a pre-agreed exchange rate on a specified
date. The FOREX options market is the deepest, largest and most liquid market for
options of any kind in the world.
2.3.2.8.b-vi - Risk Aversion in FOREX
Risk aversion in FOREX is a kind of trading behavior exhibited by the foreign
exchange market when a potentially adverse event happens which may affect market
conditions. This behavior is caused when risk adverse traders liquidate their positions
in risky assets and shift the funds to less risky assets due to uncertainty. In the context
of the FOREX market, traders liquidate their positions in various currencies to take up
positions in safe-haven currencies, such as the US Dollar. Sometimes, the choice of a
safe haven currency is more of a choice based on prevailing sentiments rather than
one of economic statistics. An example would be the financial crisis of 2008. The
value of equities across world fell while the US Dollar strengthened. This happened
despite the strong focus of the crisis in the USA.
The foreign exchange market is exclusive because of the following reasons:
Its trading volumes
The tremendous liquidity of the market
Its geographical dispersion
Its long trading hours
The variety of factors that affect exchange rates
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
61 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
The low limits of profit compared with other markets of fixed income but profits
can be high due to very great trading volumes
The use of leverage
2.3.2.8.c - Benefits of FOREX Trading
2.3.2.8.c-i - Superior Liquidity
Liquidity is what really makes the FOREX market different from other markets. The
FOREX market is by far the most liquid financial market in the world with more than
Rs. 300000 crores traded every day. This ensures price stability and better trade
execution. Allowing traders to open and close transactions with ease. Also such a
tremendous volume makes it hard to manipulate the market in an extended manner.
2.3.2.8.c-ii - 24 hour Market
This one is also one of the greatest advantages of trading FOREX. It is an around the
clock market, the market opens on Sunday at 3:00 pm EST when New Zealand begins
operations, and closes on Friday at 5:00 pm EST when San Francisco terminates
operations. There are transactions in practically every time zone, allowing active
traders to choose at what time to trade.
2.3.2.8.c-iii - Leverage Trading
Trading the FOREX market offers a greater buying power than many other markets.
Some FOREX brokers offer leverage up to 400:1, allowing traders to have only 0.25
percent in margin of the total investment. For instance, a trader using 100:1 means
that to have a Rs. 100000 position, only Rs. 1000 are needed on margin to be able to
open that position. Remember leverage is like a double sword, it could work in your
favor as well as against you.
2.3.2.8.c-iv - Low Transaction Costs
Almost all brokers offer commission free trading. The only cost traders incur in any
transaction is the spread; difference between the buy and sell price of each currency
pair. This spread could be as low as 1 percentage in profit in some pairs.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
62 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.2.8.c-v - Low Investment
The FOREX market requires less capital to start trading than any other markets. The
initial investment could go as low as Rs. 10000, depending on leverage offered by the
broker. This is a great advantage since FOREX traders are able to keep their risk
investment to the lowest level.
All these benefits make the FOREX market very attractive to investors and traders.
Investor needs to make something clear though, even when all these benefits of the
FOREX market are notorious; it is still difficult to make a profit in FOREX market. It
requires a lot of education, discipline, commitment and patience.
The foreign exchange market, or FOREX, has unique disadvantages not found in
other trading environments. Without understanding the pitfalls investors are almost
guaranteed to lose money.
2.3.2.8.d - Disadvantages of FOREX Market
2.3.2.8.d-i - Central Bank Intervention
Many government central banks intervene in the markets in order to preserve the
value of their currency, not known to the average investor. This intervention is usually
camouflaged to keep the market from knowing. For example, the central bank may
use a network of smaller banks to buy or sell on their behalf. Regardless of the
camouflage used, the result is the same: the currency value is artificially strengthened
or weakened, making it difficult to make trades based on market fundamentals.
2.3.2.8.d-ii - Timing Difficulties
The foreign exchange market is a bartering based system. This means that one item a
given currency is exchanged directly for another item a second currency. These trades
are usually made through a third "vehicle" currency. So, for example, if an investor
wants to trade from the Brazilian Real into the British Pound, holdings of Real are
usually converted into the U.S. Dollar and then reconverted into the Pound. In such a
complex arrangement, it can be difficult when the vehicle currency will remain stable
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
63 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
and the currency to be bought will appreciate against the base currency all within the
same time frame.
2.3.2.8.d-iii - Differences between Retail and Wholesale Pricing
Roughly two-thirds of all trades on the foreign exchange are made between dealers
and large organizations such as hedge funds and banks. Organizations that make
trades of this size operate at wholesale prices known as interbank trading. The
investor, on the other hand, is forced to buy and sell at the retail price known as client
trading. The difference is known as the spread, and shows itself in the form of
commissions and fees paid to the investor's broker. When dealing with spreads, it
becomes a challenge to compete against the larger organizations that start with a
lower entry point and can sell profitably with far less market fluctuation.
2.3.2.8.d-iv - 24 hour Trading
Unlike organized trading exchanges with a central location, the foreign exchange
market is open for trading 24 hours a day. With currency fluctuations being triggered
from traders across the globe, it's a never-ending challenge to stay profitable. This
makes FOREX trading time intensive and constantly hectic.
2.3.2.8.d-v - Platform Freezes
Certain FOREX brokers build price freezes into their platforms that are triggered by
major news events or large fluctuations in the market. This keeps investors far from
trading during the most profitable moments.
2.3.3 Traditional Form of Investments
2.3.3.1 Real Estate Investment
The growth curve of Indian economy is at an all-time high and contributing to the
upswing is the real estate sector in particular. Investments in Indian real estate have
been strongly taking up over other options for domestic as well as foreign investors.
The boom in the sector has been so appealing that real estate has turned out to be a
convincing investment as compared to other investment vehicles such as capital and
debt markets and bullion market. It is attracting investors by offering a possibility of
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
64 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
stable income yields, moderate capital appreciations, tax structuring benefits and
higher security in comparison to other investment options.
A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI)
and Ernst & Young has predicted that Indian real estate industry is poised to emerge
as one of the most preferred investment destinations for global realty and investment
firms in the next few years. The potential of India's property market has a
revolutionizing effect on the overall economy of India as it transforms the skyline of
the Indian cities mobilizing investments segments ranging from commercial,
residential, retail, industrial, hospitality, healthcare etc. But maximum growth is
attributed to its growth from the booming IT sector, since an estimated 70 percent of
the new construction is for the IT sector. Real estate industry research has also thrown
light on investment opportunities in the commercial office segment in India. The
demand for office space is expected to increase significantly in the next few years,
primarily driven by the IT and ITES industry that requires an projected office space of
more than 367 million square feet till 2012-13.
2.3.3.1.a - Advantages of Investment in Properties
In general, property is considered a fairly low-risk investment, and can be less volatile
than shares. Some of the advantages of investing in property includes following.
2.3.3.1.a-i - Tax Benefits
A number of deductions can be claimed on tax return, such as interest paid on the
loan, repairs and maintenance, rates and taxes, insurance, agent's fees, travel to and
from the property to facilitate repairs, and buildings depreciation.
2.3.3.1.a-ii - Negative Gearing
Tax deductions can also be claimed as a result of negative gearing, where the costs of
keeping the investment property exceed the income gained from it.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
65 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.1.a-iii - Long - Term Investment
Many people like the idea of an investment that can fund them in their retirement.
Rental housing is one sector that rarely decreases in price, making it a good potential
option for long-term investments.
2.3.3.1.a-iv - Positive Asset Base
There are many benefits from having an investment property when deciding to take
out another loan or invest in something else. Showing potential lender that have the
ability to maintain a loan without defaulting will be highly regarded. The property can
also be useful as security when taking out another home, car or personal loan.
2.3.3.1.a-v - Safety Aspect
Low-risk investments are always popular with untrained "mum and dad" investors.
Property fits these criteria with returns in some country areas reaching 10 percent per
year. Housing in metropolitan areas is constantly in demand with the high purchase
price being offset by substantial rental income and a yearly return of between 6 to 9
percent.
2.3.3.1.a-vi - High Leverage Possibilities
Investment properties can be purchased at 80 percent LVR (loan to valuation ratio), or
up to 90 percent LVR with mortgage insurance. The LVR is calculated by taking the
amount of the loan and dividing it by the value of the property, as determined by the
lender. This high leverage capacity results in a higher return for the investor at a lower
risk due to less personal finance ties up in the property. By choosing a property
intelligently, investors can make this form of investment work for them. However, as
with all investments there are some disadvantages to be aware of. Disadvantages of
investment properties includes the following.
2.3.3.1.a-vii - Liquidity
Investor can sell the property if things go bad, but however this can take many months
unless willing to accept a price less than the property is worth. Unlike the stock
market, investor will have to wait for any financial rewards.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
66 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.1.a-viii - Vacancies
There will be times when mortgage payments will need to be covered out of own
pocket due to property being untenanted. This could just be a result of a gap between
tenants or because of maintenance issues.
2.3.3.1.a-ix - Bad Tenants
It‟s every investment property owner's worst frightening problem of bad tenant. They
can significantly damage property, refuse to pay rent and refuse to leave. Disputes can
sometimes take months to resolve.
2.3.3.1.a-x - Property Oversupply
In recent years, inner-city builders have created a glut of high-rise apartment blocks,
resulting in fierce competition and many units being increasingly difficult to rent out.
2.3.3.1.a-xi - Ongoing Costs
In addition to the standard costs associated with a property, ongoing maintenance
costs, especially with an older building, can be substantial.
2.3.3.1.a-xii - Putting all your Eggs in one Basket
If investor has tied up all money in property, overexposure to one particular type of
investment can be a dangerous thing. If the property market crashes investor can stand
to lose significantly.
2.3.3.1.a-xiii - Capital Gain Tax
Capital gain tax is imposed by the federal government on the appreciation of
investments and payable on disposal. Increase in tax rates reduces the amount of
appreciation benefit.
2.3.3.1.a-xiv - Other Costs
Negative gearing may offer tax deductions each financial year, however ongoing
payments to cover the shortfall need to be budgeted for every month. Also, costs
involved in purchasing and disposing of the property can be substantial.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
67 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2 Gold & Silver Investment
Gold has got lot of emotional value than monetary value in India. India is the largest
consumer of gold in the world. In western countries, majority of stock of gold is kept
in central banks. But in India, people use gold mainly as jewels. When look at gold in
a business sense, anybody can understand that gold is one of the all-time best
investment tool in India. Following data shows Indian gold market current scenario.
Size of the gold economy in India is more than Rs. 30000 crores.
Number of gold jewelry manufacturing units is almost 100000.
Number of people employed more than 500000.
Gems & Jewellery constitute 25 percent of India‟s exports and about 10 percent of
our import bill constitutes gold import.
Official estimates of the stock of gold in India are 9000 tons; unofficial estimates
of the stock of gold in India are 12000 to 14000 tons.
Gold held by the reserve bank of India as on 31st March, 2010 was 358 tons.
Gold production in India is 2 tons per annum.
India has the highest demand for gold in the world and more than 90 percent of this
gold is acquired in the form of jewellery. The movement of gold prices is one of the
important variables determining demand for gold. The increase in the irrigation,
technological change in agriculture have generated large marketable surplus; and a
highly skewed rural income distribution is another factors contributing to additional
demand for gold.
2.3.3.2.a - Types of Gold
Some of the popular modes of investing in gold are gold coin investing, gold stock
investing, gold bullion investing etc,. Before investors decide to invest in the gold he
or she must decide which form suits in terms of convenience, convertibility and
preference. Some of the popular forms of investment are as follows
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
68 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2.a-i - Raw Gold
This is the most common form of gold. However it is not regarded to be safe and
maintenance becomes difficult. If planning to invest in large quantities this method is
extremely unsuitable. One should think of adopting this method carefully because
adequate safety measures like keeping them in a bank locker is required.
2.3.3.2.a-ii - Jewellery
This form of investment is also equally famous. This form of investment can be
especially beneficial if investors are planning to trade them to the consumers and
households. The advantage of raw gold and jewellery are that they facilitate liquidity
in no time. However investor have to take lot of care to maintain jewellery and it is
not advisable to opt this method unless or otherwise gold investments are full time
trade.
2.3.3.2.a-iii - Gold Coin
This form of investment is advantageous when compared with the earlier two forms
because it is easily portable. However there are lots of gold coins specific to national
boundaries and must have a clear idea of their values before trading with them. It is
also very easy to convert gold coins to other forms and as well as selling them for
cash.
2.3.3.2.a-iv - Exchange Traded Funds (ETF)
ETFs are beneficial gold investment plan if investors do not want to indulge for
paying premiums and commissions. As it is similar to shares in the stock market, it is
accessible for the investors effortlessly. ETF is treated like a normal stock therefore
only need to make payment for the stockbroker‟s commission. The management
procedure is comparable to the mutual funds but do not need to deal with paper works
and unnecessary expenses. But do remember that ETFs have a stipulated cost along
with a management fee on them that depreciates the worth of the share.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
69 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2.a-v - Gold Mining Companies
The gold mining companies have distributed public shares therefore investor can opt
for these shares. This is considered a brilliant option for investing in gold. The gold
mining share prices will shoot up with the steady increase in the price of gold bullion.
2.3.3.2.a-vi - Gold Certificates
In this type of investment plan these certificates will be a proof of the amount of gold
purchased. Investors have three options here to invest as he or she can buy physical
gold or trade through certificates or opt for a gold accumulation plan. In case of gold
accumulation, investor can buy gold each month for a fixed sum at a standard market
price. There is a stable rise in the graph of gold investment so it is a preferred option
for many people to invest in gold according to the existing financial situation.
2.3.3.2.b - Advantages of Investing in Gold
Gold has been a useful commodity throughout the economic history of mankind. In
the earlier civilizations gold used to be a currency itself. There used be to coins made
of gold and silver. The gold remained in the market as a standard for trading purposes
till the beginning of the 20th
century. In the second half of the previous century gold
was replaced by paper currencies the world over. Here are the few benefits of
investing in gold.
2.3.3.2.b-i - Stability in Trading Value
Although there have been some down turns but over the last few decades gold has
overall seen a surge in its value. It has been used as a way of preserving wealth. Take
the example of its equivalence to US dollar. In the early 70s, one ounce of gold
equaled 35 $ which has now risen to 1000$. The value of dollar might have decreased
due to various reasons chief of them being an increase in the amount of money
available in the market.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
70 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2.b-ii - Economic Weapon
From the various statistics of the central banks and IMF it is evident that almost one
fifth of the reserves are in the form of gold. Had the gold not been a symbol of
security the economists would have never preserved the wealth of the country in the
form of the gold. It is also used against the inflation. The buying power of the gold
owner is preserved or increases with the increase of inflation. Inflation can harm in
the long run when buying goods at an increased price or when currency is devalued.
2.3.3.2.b-iii - Lesser Production of Gold
Like any other mineral gold reserves have also started to deplete. This has resulted in
lesser production of gold from the gold producing countries. On the other hand the
human population is increasing all the time. This has automatically resulted in a
supply demand gap which in turn increases the price of gold further.
2.3.3.2.b-iv - Immune
Gold has immune from the geo political situations. Throughout the history of
mankind there have been a variety of changes in political landscapes of the different
countries, resulting in a collapse of their monetary system. But gold is not a property
of only one nation. Its value has the same effect on all the currencies.
2.3.3.2.b-v - Diversification
Gold also provides a choice with a diversification in assets. Gold is not dependent on
the values of stocks, securities or bonds. Statistics show that over a period an increase
in value of one commodity has shown a decrease in the value of other commodity.
2.3.3.2.c - Disadvantages of Investing in Gold
Gold investment is no doubt a thrilling option. However they are not free from
limitations. Many investors blindly take decisions on the basis of the ups and downs
in the stock markets and this creates havoc especially when the gold market is
demonstrating a different behavior. Gold investment is very important as it
contributes to the national and international economy. Here are few disadvantages to
invest in gold.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
71 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.3.2.c-i - Massive Growth Potential is Curtailed Right Now
Gold has seen a near meteoric rise in value over the last decade, but that has mostly
been exhausted. What that means to potential investors is that gold has much strength,
but massive growth potential is not one of them. The problem for gold in growth
terms is that the market itself is highly evaluated. Everyone knows the value of
investing in gold and that takes away a lot of the opportunity. In other markets, there
are opportunities and sectors where people still have not discovered the potential that
exists. The value of gold is likely to rise slowly in the coming years, but other options
are also available that enjoys rapid growth potential.
2.3.3.2.c-ii - Lack of Constant Revenue from Dividends
With many investment types, like real estate or stocks, investors can reap the rewards
of their investment without having to sell their asset. This happens with dividends,
which comes from stocks and come in the form of rent payments when own a real
estate property. The good thing about dividend earnings is that investor can take the
money from those items and reinvest right back in the investment. Real estate owners
take their money and put it back into the property, adding value. Stock investors
typically just reinvest their dividends automatically in order to purchase more stock.
Gold does not offer any dividends. When investor purchase coins, bars or bullion, he
or she own those items and the value is derived when sell them. This is a downside
that investors have to consider, because many of them depend upon the residuals to
power further investments. Though gold provides a nice, steady, stable investment
type, it does not offer extra “perk” that is often seen a staple of the financial world.
2.3.3.2.c-iii - Must Provide Physical Storage Space for Gold
One of the important things that many gold investors cite as a positive can be
considered a negative by others. Investors who buy gold typically like to have it on
hand. They do this because the entire point of gold is to have something tangible in
case the system itself fails miserably. Though investors can have certificates to
account for their gold ownership, this defeats the purpose of investing in gold in the
first place. With that in mind, if investor own actual physical gold, they need to have
safe place to store it. Because gold coins are small and can be easily stolen, investor
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
72 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
cannot leave them laying around. If it is not properly stored then it can be dangerous
to keep gold in home.
Gold investment has its own advantages and disadvantages and investors are very
well aware about opportunities and threats for investing in gold. But in a current
scenario it is desirable to have solid gold investment in investor‟s portfolio.
2.3.4 Emerging Investment Avenues
According to a study undertaken jointly by Merrill Lynch, Cap Gemini, and Ernst &
Young, high net worth individuals (HNIs) or wealthy investors are proactive in
portfolio management, risk management, consolidation financial assets and use of
diversification strategies as actively as large institutions. HNIs are proactive in
identifying new investment options and take inputs from professional advisors in
volatile market conditions.
HNIs are dynamic in modifying their asset allocation and were among the first
investors to move from equities to fixed income during 2001-2002 period of downturn
in equity markets. They shifted back to equities when they identified favorable market
trends.
Hedge funds and private equity investments such as venture funds are becoming
increasingly popular with wealthy investors to reduce the investment risks related to
stock market fluctuations. This is because these instruments have low correlation with
equity asset class performance. Investment in non-correlated assets, such as
commodities helps to improve diversification of the portfolio during volatile market
conditions.
2.3.4.1 Hedge Funds
Over the last 15 years, hedge funds have become increasingly popular with high net
worth individuals, as well as institutional investors. The number of hedge funds has
risen by about 20 percent per year and the rate of growth in hedge fund assets has
been even more rapid. A hedge fund is a private investment fund, charging a
performance fee and is open to only a limited number of investors. These funds are
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
73 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
like mutual funds, which collect money from investors and use the proceeds to buy
stocks and bonds. They can invest on almost any type of opportunity; in any market
where in good returns are expected with low risk levels.
Hedge funds are investment vehicles that explicitly pursue absolute returns on their
underlying investments. The appellation "Absolute Return Fund" would be more
accurate, not least as not all hedge funds maintain an explicit hedge on their portfolio
of investments. However the "Hedge Fund" definition has come to incorporate any
absolute return fund investing within the financial markets such as stocks, bonds,
commodities, currencies, derivatives, etc, and applying non-traditional portfolio
management techniques including, but not restricted to, shorting, leveraging,
arbitrage, swaps, etc.
Hedge funds can invest in any number of strategies and they are perhaps most readily
identifiable by their structure, which is typically a limited partnership; the manager
acting as the general partner and investors acting as the limited partners, with
performance related fees, high minimum investment requirements and restrictions on
types of investor, entry and exit periods. Usually defined as "Accredited Investors",
various institutions, corporate treasuries, endowments, fund of funds, family offices,
private banks and pensions invest in hedge funds. This can vary from jurisdiction to
jurisdiction, depending on the investing process in question and is something that
each individual should verify within their own jurisdiction prior to investing with a
hedge fund. Put simply, if investor cannot afford to lose money invested then should
not be looking at hedge funds as a viable investment route.
The minimum investment varies from fund to fund. Although some funds are
charging as low as Rs. 500000, these are very much the exception and a common
starting range would be between Rs. 50 lacs to Rs. 1 crores. Established funds can
have much higher minimums depending on the fund and manager. The fund manager
can waive the minimum at his sole discretion but this is usually only undertaken to
accommodate serious investors who stipulate intent to allocated substantially more
than the stated minimum, depending on how this initial allocation performs. Hedge
funds fee structures vary, depending on jurisdiction, domicile and, most importantly,
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
74 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
investor base. The most common fee structure is the standard "1 and 20"; a 1 percent
of assets as management fee and 20 percent of profits as performance fee annually.
2.3.4.1.a Advantages of Hedge Fund
2.3.4.1.a-i - Value - Addition
Where markets are price-efficient, more and more investors adopt a passive approach
since the potential for an active manager to add value is limited. The greatest potential
for adding value is where information is not freely available, i.e. in inefficient
markets, there the potential for active management is larger. Note that there is a
difference between adding value in an informationally inefficient market through
achieving an informational advantage and adding value by picking up a premium for
liquidity in an informationally efficient market. Hedge funds are involved in both.
Hedge fund industry is opaque, i.e. inefficient, the more experienced and skilled
managers should have an edge over the less experienced and skilled. Hedge fund
selection is most likely a value-added proposition.
2.3.4.1.a-ii - Diversification
Portfolio diversification is probably the main reason why institutional investors invest
in hedge funds. The main reason for investing in a portfolio of hedge funds instead of
a single hedge fund is diversification. Investing in a portfolio of hedge funds
significantly reduces individual fund and manager risk.
2.3.4.1.a-iii - Efficient Exposure
A fund allows easier administration of widely diversified investments across a large
variety of hedge funds. Private and small institutional investors are not able to
diversify properly by investing in single hedge funds. The fund of funds approach
allows access to a broader spectrum of hedge funds than may otherwise be available
due to high minimum investment requirements.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
75 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.1.a-v - Providers of Capacity
Many hedge fund managers are only soft-closed, i.e. they officially announce they are
closed but are still open for high-quality investors. The term high-quality investor is
obviously subjective. However, hedge fund managers prefer sophisticated long-term
investors who understand the merits and risks of the strategy. This reduces the risk
that the investor will pull out of the fund at the worst possible moment. In other
words, a hedge fund manager might prefer a professionally managed pension fund.
2.3.4.1.b - Disadvantages of Hedge Fund
2.3.4.1.b-i - Lack of Transparency
Some investors find it frightening not to know what they are investing in, when
investing in a hedge fund since transparency is lower compared with traditional
managers. In some cases, transparency is diminished still further when investing in
hedge funds because not all fund managers disclose the names of the funds they invest
in. Hedge fund managers might be more willing to disclose information to market
participants who do not trade in the same markets and securities as they do.
2.3.4.1.b-ii - Unfamiliarity
In the most general sense, everything else being equal, something unfamiliar has more
subjective risk than something familiar, i.e. uncertainty is perceived as higher. Many
hedge fund managers are not well known to the decision-maker in an institutional
setup. However, today there is a core of asset management firms that have a track
record of five years or more. Given that the hedge fund industry is newer than the
traditional long-only industry, investors are familiar with the large asset management
institutions but unfamiliar with the newer alternative asset management firms.
2.3.4.1.b-iii - High Cost
The cost of information in the hedge fund industry is high. The main reason is the
persistent opaqueness of the industry. An institutional investor will have to go through
a lengthy due diligence process before the fiduciaries and plan sponsors are prepared
to invest the other people‟s money they were entrusted to manage. The decision
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
76 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
making process for non-institutional investors is faster and less rigid, i.e. cheaper,
than it is for fiduciaries.
2.3.4.1.b-iv - Limited Liquidity
Some investors might find comfort in the fact that most hedge fund managers have a
large portion of their net wealth tied to the fund, i.e. the same long redemption periods
as the investor. A more pragmatic argument for low liquidity is the fact that hedge
funds exploit inefficiencies and therefore are by definition operating in markets that
are less liquid than the bluest of blue chips. In other words, exploiting inefficiencies
by its nature involves some degree of illiquidity. The main reason for a hedge fund to
have a lock-up period however is the benefit of stable capital structure. There are
many opportunities to exploit in periods of market distress.
2.3.4.2 Private Equity Investments / Venture Capital
Starting and growing a business always require capital. There are a number of
alternative methods to fund growth. These include the owner or proprietor‟s own
capital, arranging debt finance, or seeking an equity partner, as is the case with private
equity and venture capital.
Private equity is a broad term that refers to any type of non-public ownership equity
securities that are not listed on a public exchange. Private equity encompasses both
early stage “venture capital” and later stage “buy-out, expansion” investing. In the
broadest sense, it can also include mezzanine, fund of funds and secondary investing.
Venture capital is a means of equity financing for rapidly growing private companies.
Finance may be required for the start-up, development, expansion or purchase of a
company. Venture Capital firms invest funds on a professional basis, often focusing
on a limited sector of specialization etc. The goal of venture capital is to build
companies so that the shares become liquid and provide a rate of return to the
investors in the form of cash or shares that is consistent with the level of risk taken.
With venture capital financing, the venture capitalist acquires an agreed proportion of
the equity of the company in return for the funding. Equity finance offers the
significant advantage of having no interest charges. It is "patient" capital that seeks a
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
77 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
return through long-term capital gain rather than immediate and regular interest
payments, as in the case of debt financing. Given the nature of equity financing,
venture capital investors are therefore exposed to the risk of the company failing. As a
result the venture capitalist must look to invest in companies which have the ability to
grow very successfully and provide higher than average returns to compensate for the
risk.
When venture capitalists invest in a business they typically require a seat on the
company's board of directors. They tend to take a minority share in the company and
usually do not take day-to-day control. Rather, professional venture capitalists act as
mentors and aim to provide support and advice on a range of management, sales and
technical issues to assist the company to develop its full potential. A venture capital
firm typically looks for new and small businesses with a perceived long term growth
potential that will result in a large payout for investors.
A venture capitalist is not necessarily just one wealthy financier. Most venture
capitals are limited partnerships that have a fund of pooled investment capital with
which to invest in a number of companies. They vary in size from firms that manage
just a few lacs rupees worth of investments to much larger venture capitals that may
have crores of rupees invested in companies all over the world. venture capitals may
be a small group of investors or an affiliate or subsidiary of a large commercial bank,
investment bank, or insurance company that makes investments on behalf clients of
the parent company or outside investors. In any case, the venture capital aims to use
its business knowledge, experience and expertise to fund and nurture companies that
will yield a substantial return on the venture capital‟s investment, generally within
three to seven years. Not all venture capital investments pay off. The failure rate can
be quite high, and in fact, anywhere from 20 percent to 90 percent of portfolio
companies may fail to return on the venture capital‟s investment. On the other hand, if
a venture capital does well, a fund can offer returns of 300 to 1000 percent.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
78 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.2.a - Advantages of Venture Capital
It injects long term equity finance which provides a solid capital base for future
growth.
The venture capitalist is a business partner, sharing both the risks and rewards.
Venture capitalists are rewarded by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the
company based on past experience with other companies which were in similar
situations.
The venture capitalist also has a network of contacts in many areas that can add
value to the company, such as in recruiting key personnel, providing contacts in
international markets, introductions to strategic partners, and if needed co-
investments with other venture capital firms when additional rounds of financing
are required.
The venture capitalist may be capable of providing additional rounds of funding if
requires.
2.3.4.2.b - Disadvantages of Venture Capital
2.3.4.2.b-i - Superior Businesses
Venture capitalists investor look for companies with superior products or services
targeted at large, fast growing or untapped markets with a defensible strategic position
such as intellectual property or patents.
2.3.4.2.b-ii - Quality and Depth of Management
Venture capitalists must be confident that the firm has the quality and depth in the
management team to achieve its aspirations. Venture capitalists seldom seek
managerial control, rather they want to add value to the investment where they have
particular skills including fund raising, mergers and acquisitions, international
marketing, product development, and networks.
2.3.4.2.b-iii - Appropriate Investment Structure
As well as the requirement of being an attractive business opportunity, the venture
capitalist will also seek to structure a deal to produce the anticipated financial returns
to investors. This includes making an investment at a reasonable price per share.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
79 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.2.b-iv - Exit Opportunity
Lastly, venture capitalists look for the clear exit opportunity for their investment such
as public listing or a third party acquisition of the investee company.
Once a short list of appropriate venture capitalists has been selected, the entrepreneur
can proceed to identify which investors match their funding requirements. At this
point, the entrepreneur should contact the venture capital firm and identify an
investment manager as an initial contact point. The venture capital firm will ask
prospective investee companies for information concerning the product or service, the
market analysis, how the company operates, the investment required and how it is to
be used, financial projections, and importantly questions about the management team.
2.3.4.3 - Chit Fund
Chit funds have been a popular savings scheme in several parts of India. It has paved
it‟s way as a convenient finance option amongst businessmen, small scale
industrialists and other small time investors. Though very often shrouded by news of
fraudulence, they have still managed to retain their popularity. Chit funds evolved
years ago, when the present system of banking did not exist. Few families in a village
would get together to form a chit or a group, to save money and to avail of loans
amongst the group formed. A sensible person is chosen to manage the group. This
informal system of saving prevailed only on trust. Gradually, as groups became larger
and the money involved became huge, many companies started chit fund schemes
with attractive offers. Thus to provide regulation for chit funds and for matters
connected therewith, the government introduced the Chit Funds Act in 1982.
A chit fund is a savings and borrowing scheme, in which a group of people enter into
an agreement to contribute fixed amounts periodically for a specified period of time.
The amount so collected or the chit value is distributed among each of the persons in
turns, which is determined by way of lots or an auction. Chit funds provide an
opportunity to save excess cash on a daily, weekly or monthly basis, and give an easy
access to it in case of emergency. Chit fund schemes possess a predetermined chit
value and duration. The amount collected from members is auctioned out every
month. Bidders can bid up to a maximum of this total collected value. The difference
between the gross sum collected and the actual auction amount, known as the
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
80 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
discount, is then equally distributed among subscribers, or, is deducted from the next
month‟s premium.
2.3.4.3.a - Benefits of Investing in Chit Fund
It inculcates the habit of compulsory regular saving.
It earns dividends every month. So the net effective rate of return proves to be
pretty attractive.
For any unexpected financial requirement, bidding for the lump sum amount,
could prove to be a better option than going through the hassles of a loan.
Chit fund investments are not affected by any market fluctuations.
Finance option through chit funds are easier to repay through the remaining
monthly installments.
2.3.4.3.b - Drawbacks of Investing in Chit Fund
Chit-funds do not offer any predetermined or fixed returns. Higher returns are earned
when there are more number of members in the group or if the duration of the scheme
is longer. One would earn more, when more members need emergency funds. Thus
returns cannot be calculated and decided when one joins the scheme. With the
plethora of chit fund companies around, the safety of a chit fund lies in choosing the
right one. In a registered chit fund company, under legal binding, the activities are
regulated and institutionalized by the chit fund act, and hence could be considered
safe. However, other unregistered companies operating informally do exist. One
needs to exercise caution while choosing where he desires to invest.
Chit funds definitely are an attractive option for regular saving. It inculcates a
disciplined approach to financial planning. It has the added advantage of bringing a
combination of savings as well as hassle free borrowing. This dual purpose
investment tool could be a friend in need at times of unexpected financial
emergencies.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
81 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.4 Depository Receipts
Depository receipts are a type of negotiable financial security, representing a security,
usually in the form of equity, issued by a foreign publicly listed company. However,
DRs are traded on a local stock exchange though the foreign public listed company is
not traded on the local exchange. Thus, the DRs are physical certificates, which allow
investors to hold shares in equity of other countries. This types of instruments first
started in USA in late 1920s and are commonly known as American depository
receipt (ADR). Later on these have become popular in other parts of the world also
in the form of Global Depository Receipts (GDRs). Some other common types of DRs
are European DRs and International DRs.
In nut shell ADRs are typically traded on a US national stock exchange, such as the
New York stock exchange (NYSE) or the American stock exchange, while GDRs are
commonly listed on European stock exchanges such as the London stock exchange.
Both ADRs and GDRs are usually denominated in US dollars, but these can also be
denominated in Euros.
When a foreign company wants to list its securities on another country‟s stock
exchange, it can do so through depository receipts (DR) mode. To allow creation of
depository receipts, the shares of the foreign company, which the depository receipts
represent, are first of all delivered and deposited with the custodian bank of the
depository through which they intend to create the depository receipts. On receipt of
the delivery of shares, the custodial bank creates depository receipts and issues
the same to investors in the country where the depository receipts are intended to be
listed. These depository receipts are then listed and traded in the local stock
exchanges of that country.
ADRs were introduced with a view to simplify the physical handling and legal
technicalities governing foreign securities as a result of the complexities involved in
buying shares in foreign countries. Trading in foreign securities is prone to number of
difficulties like different prices and in different currency values, which keep in
changing almost on daily basis. In view of such problems, U.S. banks found a simple
methodology wherein they purchase a bulk lot of shares from foreign company and
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
82 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
then bundle these shares into groups, and reissue them and get these quoted on
American stock markets. For the American public ADRs is simplify investing. So
when Americans purchase Infy (the Infosys Technologies ADR) stocks listed on
NASDAQ, they do so directly in dollars, without converting them from rupees. Such
companies are required to declare financial results according to a standard accounting
principle, thus, making their earnings more transparent. An American investor
holding an ADR does not have voting rights in the company. The above indicates that
ADRs are issued to offer investment routes that avoid the expensive and cumbersome
laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs
are listed on the NYSE, AMEX, or NASDAQ.
2.3.4.4.a - Indian Depository Receipts (IDR)
SEBI has issued guidelines for foreign companies who wish to raise capital in India
by issuing Indian depository receipts. Thus, IDRs will be transferable securities to be
listed on Indian stock exchanges in the form of depository receipts. Such IDRs will be
created by domestic depositories in India against the underlying equity shares of the
issuing company which is incorporated outside India. Though IDRs will be freely
priced, yet in the prospectus the issue price has to be justified. Each IDR will
represent a certain number of shares of the foreign company. The shares will not be
listed in India, but have to be listed in the home country. The IDRs will allow the
Indian investors to tap the opportunities in stocks of foreign companies and that too
without the risk of investing directly which may not be too friendly. Thus, now Indian
investors will have easy access to international capital market.
Depository receipts are allowed to be exchanged for the underlying shares held by the
custodian and sold in the home country and vice-versa. SEBI has issued guidelines for
issuance of IDRs in April, 2006. Some of the major norms for issuance of IDRs are as
follows.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
83 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.4.b - Eligibility Conditions for Overseas Companies to Issue
IDRs:
The overseas company intending to issue IDRs should have paid up capital and
free reserve of at least Rs. 10 Crores.
It should have an average turnover of Rs. 50 Crores during the last three years.
Such company should also have earned profits in the last 5 years and should have
declared dividend of at least 10 percent each year during this period.
The pre-issue debt equity ratio of such company should not be more than 2:1.
The issue during a particular year should not exceed 15 percent of the paid up
capital plus free reserves.
IDRs would not be redeemable into underlying equity shares before one year from
date of issue.
IDRs would be denominated in Indian rupees, irrespective of the denomination of
underlying shares.
In addition to other avenues, IDR is an additional investment opportunity for
Indian investors for overseas investment.
Minimum issue size is of Rs. 50 Crores.
The minimum investment required in the IDR issue by the investors has been
fixed at Rs. 20 lacs.
Non-resident Indians and foreign institutional investors (FIIs) have not been
allowed to purchase or possess IDRs without special permission from the Reserve
bank of India (RBI).
The IDR issuing company should have good track record with respect to securities
market regulations and companies not meeting the criteria will not be allowed to
raise funds from the domestic market.
If the IDR issuer fails to receive minimum 90 percent subscription on the date of
closure of the issue, or the subscription level later falls below 90 percent due to
cheques not being honored or withdrawal of applications, the company has to
refund the entire subscription amount received.
In case of delay beyond eight days after the company becomes liable to pay the
amount, the company shall pay interest at the rate of 15 percent per annum for the
period of delay.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
84 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.3.4.4.c - Advantages of IDRs
For individuals, IDRs is an easy and cost effective way to buy shares of a foreign
company.
The individuals are able to save considerable money and energy by trading in
IDRs, as it reduces administrative costs and avoids foreign taxes on each
transaction.
Investors prefer IDRs, because they get more international exposure and it allows
them to tap the international equity markets.
2.3.4.4.d - Challenges for IDRs
Indian investors need to consider the tax implications of investment in the IDRs.
While section 605A of the companies‟ act 1956 discusses IDRs, there are no
specific provisions regarding capital gains taxation of IDRs in the companies act
or in the income tax act, 1961. Therefore, the general rules relating to capital
gains taxation apply and no benefits for long term holders of IDRs are available,
but if the securities transaction tax is paid, there is no capital gains tax on long
term holders of listed securities.
There is the possibility of IDR issues being undersubscribed if they are not well
marketed or fail to catch the imagination of investors.
The stringent eligibility criteria, disclosure and corporate governance norms could
result in higher compliance costs for companies seeking to tap the Indian capital
markets.
Current regulations do not provide for the exchange of equity shares into IDRs
after the initial issuance i.e. reverse fungibility is not allowed.
Risks are involved given that the same shares would be simultaneously trading in
other market say; London, Hong Kong etc,
It is not entirely clear whether IDR holders will have voting rights or not; the
SEBI guidelines do not specifically mention voting rights, it leaves that to the
discretion of the issuer.
Indian financial markets are still considered volatile and contain emerging market
risk.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
85 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
2.4 Rationale for Mutual Funds
Mutual funds offer several advantages over investing in other investment products. A
comparative look at the various investment products which are available in the
market for the purpose of tax saving would help investor to make an informed
decisions for investment and may find mutual funds option more attractive in terms of
comparatively shorter lock in period and superior returns. Following table shows the
comparative analysis between different investment avenues.
Table – 2.2 - Comparative Analysis between Investment Avenues
Type of Investment Return Safety Risk Liquidity
Treasury Bills Moderate or Low High Low High
Certificate of Deposits Moderate or Low High Low High
Commercial Paper Moderate or Low High Low High
Dated Govt. Securities Moderate or Low High Low High
Equity Shares High / Moderate Low High High/Low
Preference Shares Moderate Moderate Moderate Low
Debentures / Bonds Moderate Moderate Moderate Low
Bank Deposits Moderate or Low High Low High
Post Office Deposits Moderate or Low High Low Moderate
Provident Fund Moderate or Low High Low Moderate
Employee Provident Fund Moderate or Low High Low Moderate
Insurance Schemes Moderate or Low High Low Low
Mutual Funds High High or Moderate High High
Real Estate High or Moderate High or Moderate High Low
Gold/Silver Moderate or Low High Moderate Moderate
Although the table provides a qualitative evaluation of various financial products, the
comparison serves as a useful guide towards determining the best option. It is clear
from the above that equity investing in general has good potential in terms of return,
liquidity and convenience. However, as discussed in the previous section, individual
stocks can give varied performance, one stock being more liquid than another or one
stock giving lower return than another. For this reason, equity investing is fraught
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
86 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
with risk and is not ideal for every individual investor. It is recommended only for
investors who are willing to invest the time required for research in stock selection or
have access to sound financial advices and possess the capacity to bear the inherent
risk.
Bonds/Debentures issued by institutions are an attractive option. Bonds are a stable
option in terms of fixed returns, and are recommended for the risk averse investors.
However, bonds can lose value when general interest rates go up. Bonds are also
subject to credit risk or risk of default by the borrower. In case of corporate bonds, the
risk must be assessed in terms of the strength of the borrower as indicated by the
credit rating assigned to the bonds. In the absence of credit rating, it is extremely
difficult for the investor to decide on the quality of the bonds or debentures. The
secondary market in corporate bonds in India is also very thin, leading to lack of
liquidity for the investors who wish to sell.
Treasury bills, commercial paper and government securities fall short on several
counts like return capital appreciation. Certificate of deposits also fall short on several
counts and are recommended only if the issuing company and the deposits on offer
are rated highly by credit rating agencies.
The major advantage of bank deposits relative to other products is the liquidity they
offer. Banks are usually willing to give loans against fixed deposits at a nominal
charge over the interest rate applicable to the deposits. Deposits rates offered by banks
vary as per RBI directives and the interest rate scenario in the economy. Bank
deposits score high on safety, as the return of capital is guaranteed to the depositor by
the bank. However, the financial soundness of the bank is important to look at.
PPF/EPF and post office deposits combine stability with a respectable return. Its tax
exempt status makes it an attractive mechanism for the small investor to build his
savings portfolio. However the lock in period involved in PPF/EPF and post deposits
means that the investor loses out in terms of liquidity, particularly during the early
years of the scheme. Being a government supported investment, PPF scores very high
on safety, compared to bank deposits.
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
87 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
Insurance could become a serious investment vehicle once the insurance market in
India is opened to private players. In today‟s scenario the opportunity cost in terms of
return is too high for insurance to be compared on even terms with the other options.
Its liquidity is also extremely low, though safety is considered high at present for the
government owned LIC as the only insurer.
Some of the reasons that go strongly in favor of mutual funds are their lowest risk
factors owing to diversification of assets in to various sectors and scripts or
instruments within. As with the risk, the costs of unit share too are spread across
making them affordable by almost any one. Fund managers allocate available funds
in a specified proportion among various instruments of investments. Consider a fund
being well diversified across the spectrum of exchange listed stocks and bonds which
yield a guaranteed return in addition to being invested in money markets and real
estates.
From the comparative analysis provided above, it emerges that each investment has
its strengths and weakness. Some options seek to achieve superior returns, but with
correspondingly higher risk. Other provide safety, but at the expense of liquidity and
growth. Options such as bank deposits offer safety and liquidity, but at the cost of
return. Mutual funds seek to combine the advantages of investing in each of these
alternatives while dispensing with the shortcomings. Clearly, it is in the investor‟s
interest to focus his investment on mutual funds.
As has been discussed, mutual funds offer several benefits that are unmatched by
other investment options. Post liberalization, the industry has been growing at a rapid
pace and has crossed Rs. 700000 crores size in terms of its assets under management.
However, the inflow under the industry is yet to overtake the inflows in banks. Rising
inflation, falling interest rates and a volatile equity market make a deadly cocktail for
the investor for whom mutual funds offer a route out of the impasse. The investments
in mutual funds are not without risks because the same forces such as regulatory
frameworks, government policies, interest rate structures, performance of companies
“A study of Awareness, Opportuni t ies & Problems for Retai l
Investors with Reference to Mutual Funds In Gujara t Sta te” G a n p a t U n i v e r s i t y
88 I n v e s t m e n t A v e n u e s A v a i l a b l e i n I n d i a
etc, that rattle the equity and debt markets, act on mutual funds too. But it is the skill
of the managing risks that investment managers seek to implement in order to strive
and generate superior returns than otherwise possible that makes them a better option
than many others.
The above description proves the superiority of mutual funds among all other
investment avenues. So, the researcher has opted this investment avenue for further
thorough research purpose.
top related