INVESTMENT

INVESTMENT

Investment refers to current commitment of funds for a specified time period to derive benefits in future. The future benefits derived from an investment are known as returns Giving loan: with an expectation to get the principal back along with the interest at a future date Buying gold: with an expectation of appreciation in its value in future Buying an insurance plan: for various benefits derivable in future &/or in case of an eventuality Buying shares of companies: for dividend &/ or capital appreciation CURRENT SACRIFICE FUTURE REWARD

As the reward would accrue only in future, it involves risk (of realized return being lower than that expected)

Objective of an investor

Maximization of return Minimization of risk Hedge against inflation (if the investment cannot earn as much as the rise in price level, the real rate of return will be negative)

INVESTMENT ALTERNATIVES

FINANCIAL ASSETS

Non- marketable financial assets Equity shares Bonds Preference shares Money market instruments Mutual funds Life insurance Financial derivatives

REAL ASSETS

Real estate Precious objects

NON-MARKETABLE SECURITIES
Bank deposits

There are various kinds of bank accounts current, savings and fixed deposit While a deposit in a current account does not earn any interest, deposit made in others earn an interest Liquidity, convenience and low investment risks are the common features of the bank deposits Deposits in scheduled banks are safe because of the regulations of RBI and the guarantee provided by the Deposit Insurance Corporation on deposits up to Rs 1,00,000 per depositor of the bank Calculation of Interest Loan can be raised against bank deposits.

NON-MARKETABLE SECURITIES
Post office Time deposit
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Deposits in multiples of Rs 50 without any limit Interest rate is calculated on quarterly basis but paid annually No withdrawal before 6 months If withdrawn prematurely after 6 months but before expiry of one year from the date of deposit, simple interest at the rate applicable. If withdrawn prematurely after the expiry of one year from the date of deposit, interest is payable for the completed years and months at 1% lower rate than specified for the completed period.

NON-MARKETABLE SECURITIES
Post Office Monthly Income Scheme
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Meant for investors who want to invest a lump sum amount initially and earn interest on a monthly basis. Minimum investment is Rs.1000 in multiples of Rs 1,000 The maximum deposits in all the accounts taken together should not exceed Rs.3 lakh in a single account and Rs.6 lakh in a joint account The tenure of the MIS scheme is five years Most suitable scheme for senior citizens. Interest rate of 8% is earned. No Tax rebate

NON-MARKETABLE SECURITIES
National savings certificate
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Certificate in denomination of Rs. 100, Rs.500, Rs. 1000, Rs.5000 & Rs. 10,000 with no limit. Interest is compounded half yearly and paid after the maturity period along with principal NSC VIII Issue- Maturity is 5 years and Rate of interest is 8.60% NSC IX Issue-Maturity is 10 years and Rate of interest is 8.90% p.a. Tax rebate under 80c of Income Tax.

NON-MARKETABLE SECURITIES
Company deposits

Deposits mobilized by companies are governed by the provisions of section 58A of Companies Act, 1956 The interest offered on this fixed income deposits is higher than what investors would normally get from the banks Manufacturing and trading companies are allowed to pay a maximum interest of 12.5%. The rates vary depending on the credit rating of the company offering the deposit These deposits are unsecured. No tax benefits. A manufacturing company can raise an amount of 25% of its net worth from the public and additional 10% from its shareholders.

NON-MARKETABLE SECURITIES
Employee Provident fund scheme
Saving vehicle for salaried employees Every employee has a separate PF account in which both the employer and the employee contribute certain amount on monthly basis. Contribution made by the employer is fully tax exempt and that of made by the employee are deducted under 80c of Income Tax Current Interest rate is 8.60% Withdrawal of money is taxable if withdrawn in less than 5 years. Within a certain limit, employee can take loan against PF balance.

NON-MARKETABLE SECURITIES
Public provident fund scheme

--One of the most attractive schemes in India

--PPF account may be opened with Post offices or selected banks. --Deposits made in PPF accounts up to prescribed limits are eligible for relief under section 80C of Income Tax Act. --Interest earned on deposits in PPF accounts is exempt from Income Tax. --Interest 8.8% p.a. (compounded annually), w.e.f. 01-Apr-2012 --Min Amount :Rs. 500/- and additional investment in multiples of Rs 5/and Max Amount Rs. 1,00,000/--An Account, on the expiry of fifteen years, can be extended for a further period of five years at a time.

EQUITY SHARES

Represents ownership capital

They elect the board of directors and have a right to vote on every resolution placed before the company They enjoy the preemptive right which enables them to maintain their proportional ownership

Risk: residual claim over income Reward: partners in progress Share holders enjoy pre-emptive rights. The amount of capital that a company can issue as per its memorandum represents authorized capital The amount offered by the company to the investors is called issued capital The part of issued capital that is subscribed to by the investors is called subscribed capital / paid up capital

EQUITY SHARES

Par / Face / Nominal value of a share is stated in the memorandum and

written on the share scrip

Issue of shares at a value above its par value is called issue at a premium Issue of shares at a value below its par value is called issue at a discount The price at which the share currently trades in the market is called the

market value

EQUITY SHARES

Blue chip shares

Shares of large, well established and financially strong companies with impressive record of earnings and dividend Shares of companies having fairly strong position in the growing market and having an above average rate of growth and profitability Shares of companies having fairly stable operations, limited growth opportunities and high dividend payouts Shares of companies performing as per the business cycles Shares of companies relatively unaffected by the ups and downs in the general economic conditions shares of companies whose prices fluctuate widely because of a lot of speculative trading being done on them

Growth shares

Income shares

Cyclical shares

Defensive shares Speculative shares

PREFERENCE SHARES

Represents a hybrid security that has attributes of both equity shares and debentures. They carry a fixed rate of dividend. However it is payable only out of distributable profits Dividend on preference shares is generally cumulative. Dividend skipped in one year has to be paid subsequently before equity dividend can be paid Cumulative Vs Non Cumulative PS. Convertible Vs Non Convertible PS. Redeemable Vs Irredeemable PS. Participating Vs Non Participating PS.

BONDS

They are long term debt instruments issued for a fixed time period Bonds are debt securities issued by the government or PSUs Debentures are debt securities issued by private sector companies They comprise of periodic interest payments over the life of the instrument and the principal repayment at the time of redemption Debt securities issued by the central government , state government and quasi government agencies are referred to as gilt-edged securities Callable bonds are the ones that can be called for redemption earlier than their date of maturity. This right to call is available with the company Convertible bonds are the ones that can be converted into equity shares at a later date either fully or partly. This option is available with the bond holder Coupon rate is the nominal rate of interest fixed and printed on the bond certificate. It is calculated on the face value and is payable by the