Investment and Its Avenues

 

Unit 1 - Investment

 

 

 

Introduction

 

Investment is the employment of funds on assets with the aim of earning income or capital appreciation Investment has two attributes namely time and risk. Present consumption is sacrificed to get a return in the future. The sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute of investment indicates the risk factor. The risk is undertaken with a view to reap some return from the investment. For a layman, investment means some monetary commitment. A person’s commitment to buy a flat or a house for his personal use may be an investment from his point of view. This cannot be considered as an actual investment as it involves sacrifice but does not yield any financial return.

To the economist, investment is the net addition made to the nation’s capital stock that consists of goods and services that are used in the production process. A net addition to the capital stock means an increase in the buildings, equipments or inventories. These capital stocks are used to produce other goods and services.

 

Financial investment is the allocation of money of assets that are expected to yield some gain over a period of time. It is an exchange of financial claims such as stocks and bonds for money. They are expected to yield returns and experience capital growth over the years.

 

The financial and economic meanings are related to each other because the savings of the individual flow into the capital market as financial investments, to be used in economic investment. Even though they are related to each other, we are concerned only about the financial investment made on securities.

 

Thus, investment may be defined as “a commitment of funds made in the expectation of some positive rate of return”. Expectation of return is an essential element of investment.

 

Since the return is expected to be realized in future, there is a possibility that the return actually realized is lower than the return expected to be realized. This possibility of variation in the actual return is known as investment risk. Thus, every investment involves return and risk.

 

 

Characteristics of Investment

 

All investments are characterized by certain features. Let us analyse these characteristic features of investment.

 

Return

 

All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation.

 

The difference between the sale price and the purchase price is capital appreciation. The dividend or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of the investment, the maturity period and a host of other factors.

 

Risk

 

Risk is inherent in any investment. This risk may relate to loss of capital, delay in repayment of capital, non-payment of interest, or variability of returns. While some investments like government securities and bank deposits are almost riskless, others are more risky.

 

The risk of an investment depends on the following factors.

 

1.      The longer the maturity period, the larger is the risk.

2.      The lower the credit worthiness of the borrower, the higher is the risk.

3.      The risk varies with the nature of investment. Investments in ownership securities like equity shares carry higher risk compared to investments in debt instruments like debentures and bonds.

 

Risk and return of an investment are related. Normally, the higher the risk, the higher is the return.

 

Safety

 

The safety of on investment implies the certainty of return of capital without loss of money or time. Safety is another feature which an investor desires for his investments. Every investor expects to get back his capital on maturity without loss and without delay.

 

Liquidity

 

An investment which is easily saleable or marketable without loss of money and without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O. Deposits, NSC, NSS, etc. are not marketable.

 

Some investment instruments like preference shares and debentures are marketable, but there are no buyers in many cases and hence their liquidity is negligible. Equity shares of companies listed on stock exchanges are easily marketable through the stock exchanges.

 

An investor generally prefers liquidity for his investments, safety of his funds, a good return with minimum risk or minimization of risk and maximization of return.

 

Objectives of Investment

 

An investor has various alternative avenues of investment for his savings to flow to. Savings kept as cash are barren and do not earn anything. Hence, savings are invested in assets depending on their risk and return characteristics. The objectives of the investor are minimizing the risk involved in investment and maximize the return from the investment.

 

Our savings kept as cash are not only barren because they do not earn anything, but also loses its value to the extent of rise in prices. Thus, rise in prices or inflation erodes the value of money. Savings are invested to provide a hedge or protection against inflation. If the investment cannot earn as much as the rise in prices, the real rate of return would be negative. Thus, if inflation is at an average annual rate of ten percent, then the return from an investment should be above ten percent to induce savings to flow into investment.

 

Thus, the objectives of an investor can be stated as:

 

➢            Maximisation of return.

➢            Minimization of risk

➢            Hedge against inflation.

 

Investors, in general, desire to earn as large returns as possible with the minimum of risk. Risk here may be understood as the probability that actual returns realized from an investment may be different from the expected return. If we consider the financial assets available for investment, we can classify them into different risk categories. Government securities would constitute the low risk category as they are practically risk free. Debentures and preference shares of companies may be classified as medium risk assets. Equity shares of companies would form the high risk category of financial assets. An investor would be prepared to assume higher risk only if he expects to get proportionately higher returns. There is a trade-off between risk and return. The expected return of an investment is directly proportional to its risk. Thus, in the financial market, there are different financial assets with varying risk-return combinations.

 

Investment Vs Speculation

 

Investment and speculation are two terms which are closely related. Both involve purchase of assets like shares and securities. Traditionally, investment is distinguished from speculation with respect to three factors, viz. (1) risk, (2) capital gain and (3) time period.

Risk

 

It refers to the possibility of incurring a loss in a financial transaction. It arises from the possibility of variation in returns from an investment. Risk is invariably related to return. Higher return is associated with higher risk.

 

No investment is completely risk free. An investor generally commits his funds to low risk investment, whereas a speculator commits his funds to higher risk investments. A speculator is prepared to take higher risks in order to achieve higher returns.

 

Capital Gain

 

The speculator’s motive is to achieve profits through price charges, i.e. he is interested in capital gains rather than the income from the investment. If purchase of securities is preceded by proper investigation and analysis to receive a stable return and capital appreciation over a period of time, it is investment.

 

Thus, speculation is associated with buying low and selling high with the hope of making large capital gains. A speculator consequently engages in frequent buying and selling transactions.

 

Time Period

 

Investment is long-term in nature, whereas speculation is short-term. An investor commits his funds for a longer period and waits for his return. But a speculator is interested in short-term trade gains through buying and selling of investment instruments.

 

Analysis of these distinctions helps us to identify the role of an investor and a speculator. An investor is interested in a good rate of return earned on a rather consistent basis for a relatively longer period of time. He evaluates the worth of a security before investing in it. A speculator seeks opportunities promising very large returns earned rather quickly. He is interested in market action and price movements. Consequently, speculation is more risky than investment.

 

Basically, both investment and speculation aim at good returns. The difference is in motives and methods. As a result, the distinction between investment and speculation is not very wide. Investment is sometimes described as a well grounded and carefully planned speculation.

 

Investment Vs Gambling

 

Investment has also to be distinguished from gambling. Typical examples of gambling are horse races, card games, lotteries, etc. Gambling consists in taking high risks not only for high returns, but also for thrill and excitement. Gambling is unplanned and non scientific, without knowledge of the nature of the risk involved. It is surrounded by uncertainty and is based on tips and rumors. In gambling artificial and unnecessary risks are created for increasing the returns.

 

Investment is an attempt to carefully plan, evaluate and allocate funds to various investment outlets which offer safety of principal and moderate and continuous return over a long period of time. Gambling is quite the opposite of investment.

 

Types of Investors

 

Investors may be individuals and institutions. Individual investors operate alongside institutional investors in the investment arena. However, their characteristics are different.

 

Individual investors are large in number but their investable resources are comparatively smaller. They generally lack the skill to carry out extensive evaluation and analysis before investing. Moreover, they do not have the time and resources to engage in such an analysis.

 

Institutional investors, on the other hand, are the organizations with surplus funds who engage in investment activities. Mutual funds, investment companies, banking and non-banking companies, insurance corporations, etc. are the organizations with large amounts of surplus funds to be invested in various profitable avenues.

 

These institutional investors are fewer in number compared to individual investors, but their investable resources are much larger. The institutional investors engage professional fund managers to carry out extensive analysis and evaluation of different investment opportunities.

 

As a result their investment activity tends to be more rational and scientific. They have a better chance of maximizing returns and minimizing risk.

 

The professional investors and the unskilled individual investors combine to make the investment arena dynamic.

 

Investment Avenues

 

There are a large number of investment avenues for savers in India. Some of them are marketable and liquid while others are non marketable. Some of them are highly risky while some others are almost riskless. The investor has to choose proper avenues from among them depending on his preferences, needs and ability to assume risk.

 

The investment avenues can be broadly categorized under the following heads:

 

1.      Corporate securities

2.      Deposits in banks and non-banking companies

3.      UTI and other mutual fund schemes

4.      Post office deposits and certificates

5.      Life insurance polices

6.      Provident fund schemes

7.      Government and semi-government securities.

 

Corporate Securities

 

Corporate securities are the securities issued by joint stock companies in the private sector. These include equity shares, preference shares and debentures. Equity shares have variable divided and hence belong to the high risk-high return category, while preference shares and debentures have fixed returns with lower risk.

 

Deposits

 

Among the non-corporate investments, the most popular are deposits with banks such as savings accounts and fixed deposits. Savings deposits have low interest rates whereas fixed deposits have higher interest rates varying with the period of maturity.

 

Interest is payable quarterly or half-yearly. Fixed deposits may also be recurring deposits wherein savings are deposited at regular intervals. Some banks have reinvestment plans wherein the interest is reinvested as it gets accrued. The principal and accumulated interests are paid on maturity.

 

Joint stock companies also accept fixed deposits from the public. The maturity period varies from three to five years. Fixed deposits in companies have high risk since they are unsecured, but they promise higher returns than bank deposits.

Fixed deposit in non-banking financial companies (NBFCs) is another investment avenue open to savers. NBFCs include leasing companies, investment companies, chit funds, etc. Deposits in NSFCs carry higher returns with higher risk compared to bank deposits.

 

UTI and Other Mutual Fund Schemes

 

Mutual funds offer various investment schemes to investors. UTI is the oldest and the largest mutual fund in the country. Unit Scheme 1964, Unit Linked Insurance Plan 1971, Master Share, Master Equity Plans, Master gain, etc. are some of the popular schemes of UTI. A number of commercial banks and financial institutions have set up mutual funds. Recently mutual funds have been set up in the private sector also.

 

Post Office Deposits and Certificates

 

The investment avenues provided by post offices are generally non-marketable. Moreover, the major investments in post office enjoy tax concessions also. Post office accepts savings deposits as well as fixed deposits from the public. There is also recurring deposit scheme which is an instrument of regular monthly savings.

 

Six-year National Savings Certificates (NSC) are issued by post office to investors. The interest on the amount invested is compounded half-yearly and to payable along with the principal at the time of maturity which is six years from the date of issue.

 

Indira Vikas Patra and Kissan Vikas Patra are savings certificates issued by post officers.

 

Life Insurance Policies

 

The Life Insurance Corporation (LIC) offers many investment schemes to investors. These schemes have the additional facility of life insurance cover. Some of the schemes of LIC are whole Life Polices, Convertible Whole Life Assurance Polices, Endowment Assurance Polices, Jeevan Saathi, Money Back Plan, Jeevan Dhara, Marriage Endownment Plan etc.

 

Provident Fund Schemes

 

Provident fund schemes are compulsory deposit schemes applicable to employees in the public and private sectors. There are three kinds of provident funds applicable to different sectors of employment, namely Statutory Provident Fund, Recognised Provident Fund and Unrecognised Provident Fund.

In addition to these, there is a voluntary provident fund scheme which is open to any investor whether employed or not. This is known as the Public Provident Fund (PPF). Any member of the public can join the scheme which is operated by the post offices and the State Bank of India.

 

Government and Semi-Government Securities

 

The government and semi-Government bodies like the public sector undertakings borrow money from the public through the issue of government securities and public sector bonds. These are less risky avenues of investment because of the credibility of the government and government undertakings. 

 

 

 

 

 

 

 

 

 

Investment Alternatives

 

 

 

Negotiable Securities

Variable Income Securities

Equity Shares

 

The equity shares attract the interest of many. In the early nineties, the stock market was the best and safety place for the common individual to invest. Since 1996 the share market prices have been low. This made the retail investors to turn away from the stock market. The characteristic features of the equity are given in the previous chapter.

 

The stock market classifies shares into Growth shares, Income shares, Defensive shares, Cyclical shares and Speculative shares.

 

1)      Growth Shares The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. For example, the list of major gainers for 1996 is dominated by software sector stocks. The HCL and Info systems share prices increased sharply.

2)      Income Shares These stocks belong to companies that have comparatively stable operations and limited growth opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares.

3)      Defensive Shares Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy.

4)      Cyclical Shares The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles.

5)      Speculative Shares Shares that have lot of speculative trading in them are reffered to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the trades.

 

The stocks, which fall under one category in one period, may switch over to another category in another period. The classification should not be considered rigid. For example, growth shares may be speculative shares.

 

Fixed Income Securities

 

I)  Preference Shares

 

A detailed description of the preference shares is given in chapter 1. Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed ` 150 Cr. Worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also make it attractive. The biggest advantage is the tax-exempt status of the preference share’s dividend.

 

II)  Debentures

 

Corporate debentures are an option available to the investors who are sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. If the instruments were actively traded in the secondary market, it would have perhaps changed hands at a considerable premium, thereby lowering the yield on par with the present interest rate. These reasons contribute towards high coupon rates on debentures.

 

III)  Bonds

 

Bonds are similar to the debentures but they are issued by the public sector un- dertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and conditions of the issuance of the debt security. Being contractual it cannot be changed during the tenure of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would appreci-

ate. IDBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are deep discount bond, education benefit bond, retirement benefit bond and index bond.

 

IV)   IVPs AND KVPs

 

These are saving certificates issued by the post office with the name Indira VikasPatra (IVP) and KisanVikasPatra (KVP). The IVPs are in the face value of` 500, 1000 and 5000. The KVPs are in the denomination of` 1000, 5000 and 10000. The capital is doubled in 5.5 years with the return of 13.47%. IVPs are like bearer bounds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment.

 

6)      Government Securities The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim on the Government, it is a secured financial instrument, which guarantees the income and the capital. The rate of interest on these securities is relatively lower because of their high liquidity and safety.

7)      Money Market Securities Money market securities have very short term maturity say less than a year. Common money market instruments are:

 

➢            Treasury bills

➢            Commercial paper

➢            Certificate of deposit

 

Treasury Bills

 

A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the Treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day Treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, Treasury bill of 28-day was introduced on auction basis. Further, it was decided to reintroduced 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the offered on the treasury bills are very low, individuals very rarely invest in them.

Commercial Papers

 

Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicated the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30 days.

 

Certificate of Deposit

 

The certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. The denominations of the CD and the interest rate on them are high. It is mainly preferred by institutional investors and companies rather than the individuals. The minimum size of the certificate is ` 10 lakh. The additional amount is issued in multiples of ` 5 lakh.

 

Non-Negotiable Securities

 

Deposits

 

Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently.

 

a)     Bank Deposits

 

It is the simple investment avenue open for the investors. He has to open an account and deposit the money. Traditionally the banks offered current account, savings account and fixed deposit account. Current account does not offer any interest rate. The drawback of having large amounts in savings accounts is that the return is just 4.5 per cent. The savings account interest rate is regulated by the Reserve Bank of India and kept low because of the high cost of servicing them. The savings account is more liquid and convenient to handle. The fixed account carries high interest rate and the money is locked up for a fixed period. With increasing competition among the banks, the banks have bundled the plain savings account with the fixed account to cater to the needs of the small savers. Some of the hybrid accounts are given below in the Table.

Hybrid Accounts Offered by Some Banks

 

Bank	Product	Nature	Min. Dep. (` )	Other Benefits
ICICI Bank	Maxi Cash	Svings account savings with Auto sweep facility through which standing instructions can be issued to transfer surplus funds of FD.	5,000	ATM Card, Internet banking and assistance in investing funds in money market instruments, anywhere banking and cheque book.
	Quantum Optima	FD linked to savings account with Auto-sweep Reverse- sweep, Auto Renewal facilities	25,000	ATM Card, Anywhere banking, Internet Banking, & overdraft facility
IndusInd Bank	2-in-1 Account	Savings account with link to FD.	25,000	Cheque book and overdraft facility
	Cluster Deposits	Savings linked FD with Auto- sweep and Reverse-sweep.	25,000	Cheque book.
HDFC Bank	Super saver account	Savings linked to FD.	25,000	Overdraft, cheque book, ATM and phone banking.
	Sweep-in- account	Savings linked to FD with Reverse Sweep and add-on- deposit.	25,000	ATM, Cheque book and phone banking.

 

The deposits in the banks are considered to be safe because of the RBI regulation.

The risk averse investors prefer the bank deposits.

 

b)     Post Office Deposits

 

Like the banks, post office also offers fixed deposit facility and monthly income scheme. Post office Monthly Income Scheme is a popular scheme for the retired. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.

 

c)     NBFC Deposits

 

In recent years, there has been a significant increase in the importance of non- banking financial companies in the process of financial intermediation. The NBFC comes under the purview of the RBJ. The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.

a.        Period The maturity period ranges from few months to five years. It varies from company to company. For example, the Birla Global Finance, the company belonging to Aditya Birla group accepts deposits with maturity from 3-5 years.

b.        Maximum Limit The limit for acceptance of deposit has been based on the credit rating of the company. The NBFCs not having net owned funds of ` 25 lakh are not entitled to accept deposits.

c.         Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The interest rate differs according to maturity period. There is a disparity in the interest rate among the companies in accordance with the credit ratings and policies of the companies. Even the companies with similar credit ratings provide different interest rates for their deposits. Generally, companies with lower credit ratings offer higher interest rates to cover the risk. The following Table shows the interest rates offered by some of the finance companies as on July 2004.

 

Interest Rates on Deposits Offered by Finance Companies

 

Company	1 year	2years	3 years	Amount
Bajaj Auto Finance	-	-	6.5	25,000
Birla Home Finance	6.00	6.25	6.50	20,000
Canbanic Factors	6.79	7.04	25,000
Can Fin Homes	5.25	5.50	5.75	5,000
Chola Finance	6.50	7.00	7.50	10,000
Dewan Housing Finance	6.10	6.35	6.60	10,000
HUDCO	6.25	6.50	6.75	50,000
HDFC	5.55	5.80	6.05	10,000
IDBI	5.50	5.75	6.25	25,000
Lakshjni General Finance	6.00	6.50	7.00	10,000
M&M Financial Services	6.50	7.00	7.50	10,000
PNB Housing Finance	5.75	6.00	6.00	20,000
SRF	7.00	7.00	7.00	10,000
Sundaram Finance	6.00	6.50	7.00	10,000
Sundaram Home	6.00	6.25	6.50	10,000
TN Power Finance	-	6.54	7.23	10,000

d.        Security Security of the deposits of the NBFCs is much lower than the deposits with banks. To improve the liquidity of NBFCs the percentage of liquid assets required to be maintained by them has been enhanced from 12.5 percent to 15 percent with effect from April 1999 respectively. Company Law Board is authorised to direct the defaulting NBFCs to repay the deposits. In spite of the strict rules and regulations laid down by RBI the default rate is high in the case of NBFCs.

 

Tax Sheltered Savings Scheme

 

Tax sheltered savings schemes are of great importance to the investors in the tax- paying category. The tax sheltered savings schemes offer tax relief to those who participate in their schemes according to the income tax laws. The important tax sheltered savings schemes are

 

➢            Public Provident Fund Scheme

➢            National Savings Scheme

➢            National Savings Certificate VIII series

 

a)     Public Provident Fund Scheme (PPF)

 

PPF earns an interest rate of 12 percent per year, which is exempted from the income tax under sec 88. The individuals and Hindu undivided families can participate in this scheme. The maximum limit per annum for the deposit is ` 60,000. The interest is accumulated in the deposit. It provides early withdrawal facilities from 7(1 year and every year thereafter, the account holder has an option to withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever is lower. The facility makes PPF a self- sustaining account from 71h year onwards.

 

b)     National Savings Scheme (NSS)

 

This scheme helps in deferring the tax payment. Individuals and 1-IUF are eligible to open NSS account in the designated post office. The NSS-87 gives 100 per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of ` 12,000. The investment also earns an interest rate of 11 per cent pr year covered by Sec 80L. Compared to other tax savings’ instruments the return offered by this scheme is lower.

On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the financial year in which the account is opened. The entire amount can be withdrawn. The account can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the account alive and earn interest at 11 percent per annum.

 

As a tax saving instrument “anytime” withdrawal after 4 years is the only interesting feature to the prospective investor. The tax deduction at source at the rate of 20 percent on the entire amount withdrawn has proved too costly to the investors.

 

c)      National Savings Certificate (NSC)

 

This scheme is offered by the post office. These certificates come in the denominations of ` 500, 1,000, 5,000 and 10,000. The contribution and the interest for the first 5 years are covered by Sec 88. The interest is cumulative at the rate of 12% per annum and payable biannually is covered by Sec 80L. No withdrawals are permitted. There is no deduction at maturity.

 

Life Insurance

 

Life insurance is a contract for payment of a sum of money to the person assured (or to the person entitled to receive the same) on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other things, the contracts also provide for the payment of premium periodically to the corporation by the policy holders. Life insurance eliminates risk.

 

The major advantages of life insurance are given below:

 

i)        Protection Saving through life insurance guarantees full protection against risk of death of the saver. The full assured sum is paid, whereas in other schemes only the amount saved is paid.

ii)      Easy Payments For the salaried people the salary savings’ schemes are introduced. Further, there is an easy instalment facility method of payment through monthly, quarterly, half yearly or yearly mode.

iii)    Liquidity Loans can be raised on the security of the policy.

iv)     Tax Relief Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of premium for life insurance subject to the tax rates in force.

Schemes of LIC

 

LIC offers a wide range of schemes to suit the needs of the individual investor.

 

Basic Life Insurance Plans

 

Whole Life Assurance Plan it is a low cost insurance plan where the sum assured is payable on the death of the life assured and premiums are payable throughout life.

 

Endowment Assurance Plan Under this plan, the sum assured is payable on the date of maturity or on the death of the life assured, if earlier.

 

Both these plans are available with the facility of paying the premiums for a limited period.

 

Term Assurance Plans

 

Two-Year Temporary Assurance PLAN Under this plan, term assurance for two years is available. The sum assured is payable only on the death of the life assured during the term.

 

Convertible Term Assurance Plan It provides term assurance for 5 to 7 years with an option to purchase a new, Limited Payment whole life Policy or an Endowment Assurance Policy at the end of the selected term; provided the policy is in full force.

 

Bimasandesh This is basically a Term Assurance Plan with the provision for return of premium paid, on the life assured surviving the term.

 

Bimakiran This plan is an improved version of BimaSandesh with an added attraction of loyalty addition, in-built accident cover and Free Term Cover after maturity, provided the policy is then in full force.

 

Plans For Children Various children’s Deferred Assurance Plans are available viz, Jeevan Balya, and Jeevan Kishore. JeevanSubanya is a plan specially designed for girls. The Children’s Money Back Assurance Plan is specially designed to provide for children’s higher educational expenses with added attractions of guaranteed additions, loyalty additions and optional family benefit.

 

Pension Plans These plans provide for either immediate or deferred pension for life. The pension payment are made till the death of the annuitant (unless the policy has

provision of guaranteed period). Both the Deferred Annuity and Immediate Annuity plans are available with the return of the GIVE amount on death after vesting under the JeevanDhara Plan and return of Purchase Price on death under the JeevanAkshay Plan.

 

Jeevansarita This is a Joint-life-last survivor-annuity-cum-assurance plan (for husband and wife) where the claim amount is payable partly in lumpsum and partly in the form of an annuity. Balance sum is assured on the death of the survivor.

 

Mutual Funds

 

Investment companies or investment trusts obtain funds from large number of investors through sale of units. The funds collected from the investors are placed under professional management for the benefit of the investors. The mutual funds are broadly classified into open-ended scheme and close-ended scheme.

 

Open-Ended Schemes

 

The open-ended scheme offers its units on a continuous basis and accepts funds from investors continuously. Repurchase is carried out on a continuing basis thus, helping the investors to withdraw their money at any time. In other words, there is an uninterrupted entry and exit into the funds. The open-end scheme has no maturity period and they are not listed into stock exchanges. Investor can deal directly with the mutual fund for investment as well as redemption. The open-ended fund provides liquidity to the investors since the repurchase facility is available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998 the open-ended schemes have crossed 80 in number.

 

Closed – Ended Funds

 

The close-ended funds have a fixed maturity period. The first time investments are made when the close end scheme is kept open for a limited period. Once closed, the units are listed on a stock exchange. Investors can buy and sell their units only through stock exchanges. The demand and supply factors influence the prices of the units. The investor’s expectation also affects the unit prices. The market price may not be the same as the net asset value.

 

Sometimes mutual funds with the features of close-ended and open-ended schemes are launched, known as interval funds. They can be listed in the stock exchange or may be available for repurchase during specific periods at net asset value or related prices.

Other Classification

 

The open-ended and close-ended schemes are classified on the basis of their objectives. Some of them are given below

 

i)        Growth Scheme Aims to provide capital appreciation over medium to long term. Generally these funds invest their money in equities.

ii)      Income Scheme This scheme aims to provide a regular return to its unit holders. Mostly these funds deploy their funds in fixed income securities.

iii)    Balanced Scheme A combination of steady return as well as reasonable growth. The funds of these schemes are invested in equities and debt instruments.

iv)     Money Market Scheme This type of fund invests its money on money market instruments like treasury bills, commercial paper, etc.

v)      Tax Saving Schemes This type of scheme offers tax rebates to investors. Equity linked savings schemes and pension schemes provide exemption from capital gains on specific investment.

vi)     Index Scheme Here investment is made on the equities of the index. Benchmark index is BSE sensex or NSE-50. The return are approximately equal to the return on the index.

 

Real Assets

Gold and Silver

 

For ages, gold and silver have been considered as a form of investment. They are considered as best hedge against inflation. This is a favourite form of investment amongst the rural and semi-urban population. Besides, investors tend to invest in jewellery instead of pure gold. As a result, when they buy jewellery, the price realization is usually less than total purchase price (this is due to higher making charge of jewellery). The price of gold has declined in the later part of the nineties. Gold prices are suppressed because of large supplies overtaking the demand. The government has allowed imports of gold to certain banks and agencies and they have huge stocks of gold. The gold prices remained depressed in the international markets too in the late nineties. The following reasons are cited for the low price of gold in the international market.

 

i)        Weak demand from Asian countries which are the largest consumers of gold.

ii)      Continuing pressure on central banks to dishoard gold

iii)    Legislative measure like the Sweedish Government move to delink gold from Swiss Franc and lower gold reserves by the European Union.

 

According to World Gold Council (WGC), as against an increase of 9.0 percent in world demand, the demand for gold in India increased by 45.0 percent to a record level of 737 tones during 1997 from 507 tones in 1996, reflecting the increased response to the decline in prices. The substantial increase in domestic demand for gold was met by ease of supply facilities by (i) allowing non-resident Indians to import 10kg. of gold (as against 5kg. earlier) once in every six months with effect from January 1, 1997, (ii) allowing 12 authorised agencies to import gold under Open General Licence (OGL) without any limit on quantity and sell it in the local market against rupees after payment of approximately 5 percent duty and (iii) lower prices in the international market. The following table gives prices of gold and silver.

 

Gold and silver Price

 

Silver (Rupees per kilogram)

Year/month	Gold (rupees per 10 grams) Mumbai-Londonz			Mumbai-London
	Mumbai	London	Spread	Mumbai	New York	Spread
1990-91	3451.52	2164.26	1287.26	6760.79	2579.21	4181.58
1995-96	4957.60	4188.58	769.02	7220.50	5811.03	1409.47
1996-97	5070.71	4283.97	786.74	7165.07	5762.27	1402.42
1997-98	4347.07	3775.93	571.14	7352.27	6153.96	1198.31
April 1998	4210.22	3941.42	268.79	8810.00	8024.88	785.12
May 1998	4141.92	3887.10	255.82	7988.96	7161.03	827.93
June1998	4215.38	3968.86	246.53	7765.00	7144.01	620.99

Source: RBI Annual Number Sept. 1998

 

The monthly average price of silver in Mumbai market fell from ` 6969 pr kg. in April 1997 to ` 6332 per kg. in July 1997. Thereafter, it exhibited a near – steady increase to ` 8557per Kg. in March 1998. The price of silver in the Mumbai and New York markets reached a high of ` 9350 per kg. and 731 cents per ounce, respectively, on February 5, 1998. The average spread between the domestic and international prices of silver declined to 19.5 percent in 1997-98 from 24.3 percent in 1996-97 with the prices in the domestic market moving in tandem with the international market prices.

The investment analysts feel that there will not be major rise in gold prices until 2000 unless there is a currency depreciation. They are optimistic about the rise in silver price.

 

Real Estate

 

The real estate market offers a high return to the investors. The word real estate means land and buildings. There is a normal notion that the price of the real estate has increased by more than 12 percent over the past ten years. The population growth and the exodus of people towards the urban cities have made the prices to increase manifold. The price of the residential area land generally in South Mumbai ranges from a high of ` 19,400 per sq.ft. at Kemps Corner to a low of ` 8,400 per sq.ft. at Cuffe Parke in 1998. Recently, the recession in the economy has affected the price of the real estate. Prices, marked a substantial fall in 1998 from the 1997 prices. Reasons for investing in real estate are give below:

 

1.     High capital appreciation compared to gold or silver particularly in the urban area.

2.     Availability of loans for the construction of houses. The 1999-2000 budget provides huge incentives to the middle class to avail of housing loans. Scheduled banks now have to disburse 3 percent of their incremental deposits in housing finance.

3.     Tax rebate is given to the interest paid on the housing loan. Further ` 75,000 tax rebate on a loan upto ` 5 lakhs which is availed of after April 1999. If an invests in a house for about ` 6-7 lakh, he provides a seed capital of about ` 1-2 lakh. The ` 5 lakh loan, which draws an interest rate of 15 percent, will work out to be less than 9.6 percent because of the ` 75,000 exempted from tax annually. In assessing the wealth tax, the value of the residential home is estimated at its historical cost and not on its present market value.

4.     The possession of a house gives an investor a psychologically secure feeling and a standing among his friends and relatives.

 

Apart from making investment in the residential houses, the people in the higher income bracket invest their money in time share plans of the holiday resorts and land situated near the city limit with the anticipation of a capital appreciation. Farm houses and plantations also fall in the line. In spite of the fast capital appreciation investors generally do not invest in the real estate apart from owning one or two houses. The reasons are:

 

Requirement of Huge Capital: To purchase a land or house in the urban area, the investor needs money in lakhs whereas he can buy equity, gold or other form of investment by investing thousands of rupees.

Malpractices: Often-gullible investors become cheated in the purchase of land. The properties already sold are resold to the investors. The investor has lose the hard- earned money.

 

Restriction of the Purchase: The land ceiling Act restricts the purchase of agricultural land beyond a limit.

 

Lack of Liquidity: If the investor wants to sell the property, he cannot immediately realize the money. The waiting period may be months or years.

 

The points to be taken care of while purchasing the real estate are:

 

1.     The plots should be approved by the local authority because on the unapproved layout construction of a house is not permitted.

2.     Possibility of capital appreciation- It depends upon the locality and other facilities of the site.

3.     Originality of title deeds- The site should be free from encumbrance. Encumbrance certificate for a minimum period of latest 15 years should be got from the Registrars Office.

4.     Plinth area should be verified.

5.     Credibility of the broker

 

The role of broker cannot be undermined because it is he who introduces to the parties and location of site. He should be faithful and loyal otherswise the investor finds himself in trouble.

 

Art

 

Paintings are most sought after form of art. The price in the art market are rising and this rise is expected to continue. The trend in the market today is to invest in young upcoming painters whose prices will soar over the years. People who have bought paintings from young painters in the last few years are happy with the kind of financial as well aesthetic appreciation they have received over the years.

 

For example Manask Kamal Bishwash who used to sell A 22” x 30” mixed media on paper for ` 30,000 in 1997, commands a price of ` 45,000 in 1999. If an investor likes to buy paintings as a form of investments he has to consider the following points:

1.     Paintings of the young painters- The works of established painters are costly and scope for appreciation in their values are limited. But prices of the good quality paintings of the young painters may increase quickly.

2.     Should possess the basic idea of the painting- This is needed to decide the quality of the paintings. He should be able to judge the primary attributes of the paintings such as spontaneity, nature of strokes, colour combination and originality.

3.     The investor should have aestheticsense-because he may or may not be able to resell the paintings. Therefore when he possesses the art piece the investor should have a sense of fulfillment.

 

Antiques

 

In western countries’ investment in antiques is more common than in India. The antique is an object of historical interest. It may be a coin, sculpture, manuscript or any other object of olden days. The owner of the antique has to register himself with Archeological Society of India. The society after examining the authenticity of the antique issues a “Certificate of registration”. Any dealings I.e. purchase and sale of antique should be informed to the society. The government has the right to buy the antique from the owner, if it wants to keep it in the museum. In the case of investment, the investor has to be careful about the fake antique and the risk in the price of the antique is uncertain.

 

 

 

 

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