A Project Report on

INVESTMENT AVENUE

Master of Business Administration

JIET SCHOOL OF MANAGEMENT

JIET Universe, N. H. No.65, Pali Road, Mogra, Jodhpur-342 002 (Raj.)

Tel: 0291-2868152/53, E-mail: info@jietjodhpur.com Web: www.jietjodhpur.com

Submitted to: Submitted by:

MR.R.P.SANGWA VARSHA LOHIA

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 INVESTMENT AVENUE
Introduction

Savings form an important part of the economy of any nation. With the savings invested in
various options available to the people, the money acts as the driver for growth of the country.
Indian financial scene too presents a plethora of avenues to the investors. Though certainly not
the best or deepest of markets in the world, it has reasonable options for an ordinary man to
invest his savings. The money you earn is partly spent and the rest saved for meeting future
expenses. Instead of keeping the savings idle you may like to use savings in order to get return
on it in the future. This is called Investment. One needs to invest to and earn return on your idle
resources and generate a specified sum of money for a specific goal in life and make a provision
for an uncertain future One of the important reasons why one needs to invest wisely is to meet
the cost of Inflation. Inflation is the rate at which the cost of living increases.

The cost of living is simply what it costs to buy the goods and services you need to live. Inflation
causes money to lose value because it will not buy the same amount of a good or service in the
future as it does now or did in the past. The sooner one starts investing the better. By investing
early you allow your investments more time to grow, whereby the concept of compounding
increases your income, by accumulating the principal and the interest or dividend earned on it,
year after year. The three golden rules for all investors are:

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 • Invest early

• Invest regularly

• Invest for long term and not short term

This project will also help to understand the investors facet before investing in any of the
investment tools and thus to scrutinize the important aspects for the investors before investing
that further helped in analyzing the relation between the features of the products and the
investors’ requirements.

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INVESTMENT AVENUES IN INDIA

There are a large number of investment instruments available today.

To make our lives easier we would classify or group them under 4 main types of investment
avenues. We shall name and briefly describe them.

1. Financial securities: These investment instruments are freely tradable and negotiable. These
would include equity shares, preference shares, convertible debentures, non-convertible
debentures, public sector bonds, savings certificates, gilt-edged securities and money market
securities.

2. Non-securitized financial securities: These investment instruments are not tradable,

transferable nor negotiable. And would include bank deposits, post office deposits, company
fixed deposits, provident fund schemes, national savings schemes and life insurance.

3. Mutual fund schemes: If an investor does not directly want to invest in the markets, he/she
could buy units/shares in a mutual fund scheme. These schemes are mainly growth (or equity)
oriented, income (or debt) oriented or balanced (i.e. both growth and debt) schemes.

4.Real assets: Real assets are physical investments, which would include real estate, gold &
silver, precious stones, rare coins & stamps and art objects.

Characteristics of Investment:
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The following are the main characteristics features of investments are:

1. 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 & 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 investment, the maturity period & a host of other factors.

2 .Risk :- Risk is inherent in any investment. The risk may relate to loss of capital, delay in
repayment of capital, nonpayment of interest, or variability of returns. While some investments
like government securities & bank deposits are almost risk less, others are more risky. The risk of
an investment depends on the following factors.
1. The longer the maturity period, the longer 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 share carry higher risk compared to investments in debt instrument like debentures
& bonds.

3. Safety :- The safety of an investment implies the certainty of return of capital without loss of
money or time. Safety is another features which an investors desire for his investments. Every
investor expects to get back his capital on maturity without loss & without delay.

4. Liquidity :- An investment, which is easily saleable, or marketable without loss of money &
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 instrument like
preference shares & debentures are marketable, but there are no buyers in many cases & 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 investment, safety of his funds, a good
return with minimum risk or minimization of risk & maximization of return.

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Objectives of Investment

The purpose of the study was to determine the saving behavior and investment preferences of
customers. Customer perception will provide a way to accurately measure how the customers
think about the products and services provided by the company. Today’s trying economic
conditions have forced difficult decisions for companies. Most are making conservative decisions
that reflect a survival mode in the business operations. During these difficult times, understanding
what customers on an ongoing basis is critical for survival. Executives need a 3rd party
understanding on where customer loyalties stand. More than ever management needs ongoing
feedback from the customers, partners and employees in order to continue to innovate and grow.
The main objective of the project is to find out the needs of current and future customers. For this
report ,customer perception and awareness level will be measured in many important areas like:-

• To understand all about different investment avenues available in India

• To find out how the investors get information about the various financial instrument
• To find out how the investor wants to invest i.e. on his own or through a broker.
• To find out the saving habits of the different customers and the amount they invest in
various financial instruments.
• In which type of financial instrument they like to invest.
• How long they prefer to keep their money invested.
• What is the return that they expect from the investment.
• What are the various factors that they consider before investing.
• To find out the risk profile of the investor.
• To give a recommendation to the investors that where they should invest.
• To give a suggestion to my company where our fund lacks in the market & how it should
be rectified.

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The Emerging Investment Avenues

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.

Needs of wealthy investors

Wealthy investors being aware of the emerging investment opportunities use sophisticated
investment strategies such as:-

• Leveraging on the professional advisors’ capability to analyse market trends and make
appropriate investments
• Searching for innovative products to enhance value
• Diversifying across various types of assets
• Investing across emerging geographies
• Consolidating financial information and assets

Investment products and avenues

• Managed products: Managed product service is the most popular investment strategy
adopted by wealthy investors globally
• Real Estate: Wealthy investors have found this asset class very attractive and have
invested directly in real estate and indirectly through real estate investment trusts.

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 • Art and passion: Wealthy investors also have their investment in art, wine, antiques, and
collectibles
• Precious Metals: Gold and other precious metals are attractive investment options to
balance the asset allocation
• Commodities: Wealthy investors have turned to commodities to offset the lower returns
from fixed income securities.
• Alternative investments: 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 amidst volatile market
conditions.

Characteristics of wealthy investor

The wealthy investor of today is:-

• Young, educated and knowledgeable

• Well informed about global trends
• Willing to take risks
• Demanding and quality conscious
• Performance oriented in taking decisions and less loyal
• Techno savvy and seeks information from various sources
• Smart in looking for the best deal
• Not attracted by traditional status symbols that do not add value
• Hands on in checking investments, making deals and getting personally involved

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Special needs of wealthy investors

The strategies and characteristics of wealthy investors has led to financial institutions innovating
and expanding their product range to meet the growing demands of such investors.

A financial advisor should keep in mind the following special needs and expectations of the
wealthy clients:-

• Demand broader range of services and skills: Wealthy clients not only are on the look out
for multiple investment avenues, unlike other clients, but are also ready to face the risks
associated with newer products.
• Net worth and goals need to be matched and assets need to be planned tax effectively:
Since wealthy investors have surplus funds that can be passed on to the next generations
and also come into the high tax paying category, investors need to advice them on the
best methods to transfer their assets after death as well as on the best tax saving
investments.
• Estate planning and tax planning: In-depth knowledge about tools of estate planning such
as wills, trusts, and power of attorney is necessary. It is also important to know the
succession rules and tax rules to do effective tax planning resulting in minimal/no tax on
transfer of assets.
• Educate the client: Educating the client on various and different types of investment
avenues that will suit him the best will prove very beneficial for the financial advisor.
Wealthy clients, especially those who are self made, may assume that if they can make
wealth in one industry they can manage their own portfolio as well. In such cases it is best
to educate the client about the best investment options rather than trying to push a
product; because if one is trying to push a product, the client is unlikely to get interested
since he/she will be having enough people chasing him/her for investments.

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1).SAVING BANK ACCOUNT

Savings Bank Accounts are meant to promote the habit of saving among the citizens while
allowing them to use their funds when required. The main advantage of Savings Bank Account is
its high liquidity and safety. On top of that Savings Bank Account earn moderate interest too. The
rate of interest is decided and periodically reviewed by the Government of India. Presently, the
rate of interest is 3.5% compounded half yearly.

Savings Bank Account can be opened in the name of an individual or in joint names of the
depositors. Savings Bank Accounts can also be opened and operated by the minors provided
they have completed ten years of age. Accounts by Hindu Undivided Families (HUF) not
engaged in any trading or business activity, can be opened in the name of the Karta of the HUF.

The minimum balance to be maintained in an ordinary savings bank account varies from bank to
bank. It is less in case of public sector banks and comparatively higher in case of private banks.
In most of the public sector banks, minimum balance to be maintained is Rs. 100. In accounts
where cheque books are issued, a minimum balance of Rs. 500/- has to be maintained. For
Pension Savings Accounts, minimum balance to be maintained is Rs. 5/- without cheque facility
and Rs. 250/- with cheque facility.

Things to Consider While Opening a Savings Account

It is advisable to seek the following information from bank before opening the account:
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• Minimum balance requirements.
• Penal provisions in case the balance falls below the minimum stipulated amount
• Penalty in case of return of cheques issued or instruments sent on collection.
• Collection facilities etc. offered and charges applicable.
• Details of charges, if any for issue of cheque books and limits fixed on number of
withdrawals, cash drawings, etc.

Document Required For Opening a Savings Account

• Two passport size photographs

• Proof of residence i.e. Passport/driving license/Gas / Telephone / Electricity Bill/ Ration
card/voters identity card
• An introduction of the person from an existing account holder.
• PAN number / Declaration in form no.60 or 61 as per the Income Tax Act 1961.

Bank savings accounts are a critical part of everybody's financial picture. If you need a safe place
to keep money, a bank savings account is often a good choice. Here’s a quick review of what
savings accounts are and why you might want to have a bank savings account.

Characteristics

The minimum amount to open an account in a nationalized bank is Rs 100. If cheque books are
also issued, the minimum balance of Rs 500 has to be maintained. However in some private or
foreign bank the minimum balance is Rs 500 or more and can be up Rs. 10,000. One cheque
book is issued to a customer at a time.

A Savings account can be opened either individually or jointly with another individual. In a joint
account only the sign of one account holder is needed to write a cheque. But at the time of
closing an account, the sign of the both the account holders are needed.

Advantages

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It's much safer to keep your money at a bank than to keep a large amount of cash in your home.
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India
with regard to several policy and operational parameters. The federal Government insures your
money. Saving Bank account does not have any fixed period for deposit. The depositor can take
money from his account by writing a cheque to somebody else or submitting a cheque directly.
Now most of the banks offer various facilities such as ATM card, credit card etc. Through
debit/ATM card one can take money from any of the ATM centres of the particular bank which will
be open 24 hours a day. Through credit card one can avail shopping facilities from any shop
which accept the credit card. And many of the banks also give internet banking facility through
with one do the transactions like withdrawals, deposits, statement of account etc.

Return

The interest rate of savings bank account in India varies between 2.5% and 4%. In Savings Bank
account, bank follows the simple interest method. The rate of interest may change from time to
time according to the rules of Reserve Bank of India. One can withdraw his/her money by
submitting a cheque in the bank and details of the account, i.e the Money deposited, withdrawn
along with the dates and the balance, is recorded in a passbook.

Tax Benefit

No tax benifit

2).FIXED DEPOSIT

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A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed
period; say for a minimum period of 15 days to five years and above, thereby earning a higher
rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the
deposit.

Bank fixed deposits are one of the most common savings scheme open to an average investor.
Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary
from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the
amount deposited, premature withdrawal before maturity period (which involves a loss of interest)
etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of
India.

CHARACTERISTICS

Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India
(RBI) with regard to several policy and operational parameters. The banks are free to offer
varying interests in fixed deposits of different maturities. Interest is compounded once a quarter,
leading to a somewhat higher effective rate.

• The minimum deposit amount varies with each bank. It can range from as low as Rs. 100
to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-.
• Before opening a FD account, try to check the rates of interest for different banks for
different periods. It is advisable to keep the amount in five or ten small deposits instead of
making one big deposit. In case of any premature withdrawal of partial amount, then only
one or two deposit need be prematurely encashed. The loss sustained in interest will,
thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully
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 to see that all particulars have been properly and accurately filled in. The thing to consider
before investing in an FD is the rate of interest and the inflation rate. A high inflation rate
can simply chip away your real returns.

Advantages and Disadvantages

• Also known as term deposits, a fixed deposit account is an arrangement between a

banking institution and its client to deposit a certain amount of money for an agreed period
of time. The money deposited cannot be withdrawn before the expiry of the period that the
client enters with the bank to accept his deposit. In return, the depositor will earn interest
and the principal amount will be refunded at the end of the agreed period.
• There are many advantages and disadvantages of this type of account. The interest
percentage is high when compared with other deposits such as saving bank account and
current Bank account. This makes it a better investment when compared to other bank
accounts such as savings accounts. Further, like every other asset, current account
deposits increase your net worth and in case of need, you can use it as collateral to
acquire debt financing such as a loan.
• Among the notable disadvantages is that you cannot withdraw the deposited money not
until at the expiry of the agreed period of time. This is the even when a very pressing need
arises which makes it inflexible.
• Money saved in fixed deposit account is mostly affected by inflation savings. If this is the
case then most depositors tend to lose because inflation is a common phenomenon in
everyday life. For instance, if you are entitled to 10% interest rate and inflation rate moves
to 15%, you are losing money which would not be the case when you invest your money is
other investment tools and channels. Even with the involvement of Federal Reserve
authorities to ease the swings in inflation rates, this has failed to trickle down to the
individual banking institutions while others apply the regulations partially.

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 • If you opt for an early withdrawal, you may be penalized which may lead to lose of money.
You will have no alternative other than to forfeit up to your six months deposits which are a
large sum of money. While many depositors would not want to forfeit their earnings, many
will prefer to leave the money earn interest until it reaches its maturity period. You may
then be forced to seek for alternative financing and yet you have your cash in the form of
frozen investments.
• Your locked finances may make you miss an opportunity to invest because your cash
savings are tied up. Take for example a one off investment opportunity that comes your
way which may call for your urgent attention to grab it, your financial ability will be
completely watered down and such situations will necessitate you to borrow using the
deposit as collateral. This will make you incur unnecessary borrowing costs such as
insurance charges, legal costs and insurance which can be avoided could by having more
liquid deposits.

Returns

The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the
maturity period (duration) of the FD and the amount invested. Interest rate also varies between
each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its
maturity. Some banks have facility to pay interest every quarter or every month, but the interest
paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed
Deposit can also be transferred to Savings Bank or Current account of the customer. The deposit
period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 10 years.

TAX BENEFIT

Rates, got a boost when the Indian government announced in 2006 that, bank fixed deposits
booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,00/- will be eligible for
exemption. This exemption would be under section 80C of the income tax act 1961, provided the
investor makes necessary declarations. This is the same section where we take exemption for
life insurance policies, Mutual Funds, etc. The fixed deposits which were giving interest rates up
to 14% or more a decade back have recently slump to around 10%. However, as soon as the

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announcement from income tax department came, fixed deposit again became darling of the
investors.

3).SHARES AND SECURITIES

Shares are the best investment available over a long period of time. The growth of share prices
comfortably out-paces inflation most years because the best share prices represent the growth in
earnings of the best companies. Although the stock market is seen as "high risk" this depends
very much on timing and the sort of shares you invest in. It is possible to invest in shares with
very little risk if you are willing to put in a great deal of effort in learning the art of investment and
doing ample research.

Shares have acquired a high-risk reputation because the majority of people only participate in the
stock market during bull markets, buying at or near historic high prices in the belief that past
returns may by a good indicator of future results. Those that buy just before a crash do not
appreciate share valuations and upside potential v/s downside risk. In fact such considerations
actually bore them and many newcomers choose to trade shares in a highly speculative fashion,
making the stock market into little more than a casino. The rewards are great, but the penalty for
laziness is also great. Those that buy on "hot tips" and rely on the opinions of others, without any
knowledge of what they are doing are often those who suffer the greatest loss.

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A "share" is nothing more, and nothing less than a partial ownership of a business. If you look at
shares investment as the partial purchase of businesses, you are already half way to becoming a
successful investor (the other half is to get some idea of what a business is worth, economically,
and hence to be able to value a share). If you think of shares as part ownership of businesses
you have a substantial advantage over those who think of them only as abstract pieces of paper
with a randomly fluctuating price tag.

Direct share investment is not suitable for everyone, many simply do not have the time or the
inclination to research a portfolio adequately, and will be exposed to the greatest dangers when
they do take the plunge and buy something. Managed funds are available that give returns
roughly in line with market averages (if you take into account tax and trading expenses) and
these are by far a superior investment for those that do not wish to make investment their
profession. Shares, as a whole, are not highly speculative investments with a low probability of
success. The chances of making money in shares over all but the shortest time frames are
excellent, however you need more than just money and a desire to succeed in order to invest
successfully. No one should be afraid of the stock market, it does not crash without reason at any
random time. If you choose to ignore stocks out of fear of a market downturn, you ignore the best
investment that there is.

Characteristics of common shares

• A vote at annual meetings and receive regular financial statements of the company.
• An opportunity to share in the profit of the company, capital gains (losses) and dividends
because buying common stock represents a decision to give up some measure of safety
in favor of prospects for greater return. If the company does poorly, some or all of the
investment of common share holder can be lost.
• common share holders also can claim on the company's assets, in case of dissolution.
• Sometimes common shareholders are offered privileges to buy additional shares directly
from the company, often bellowing market price without paying commission and the rights
of either exercising them to buy more shares or of selling them on the market. This right
usually is expired in 3 weeks.

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 • The company might also issue common share with warrants to attract new buyers.
Warrants allow the owner to buy shares of the issuing company at a set price, usually
below the going price rate within a specified time period and they can be may be
detached and sold separately.
• Common may be split by the company by exchanging each share for several shares.

Characteristics of prefer shares

Preferred shares issued by company also representing limited ownership in a

corporation/company. Some investors choose preferred shares over common shares because
of their lower risk and greater assurance of regular income known as dividends.

• Part ownership in the company with no voting right

• A set dividend rate.
• Most preferred shares are cumulative. If the company does not pay the dividends due
each quarter, the unpaid dividends accumulated in arrears and must be paid before
any common shares dividends are paid. Usually, unpaid dividends usually causes the
market price of the shares to drop.
• Some preferred shares are redeemable giving the issuer the right to redeem them at a
future date.
• Some prefer shares are convertible giving the investor the option to convert the shares
into other stock of the company at a specified price and within a certain period.

Advantages of Common Shares

• Common stock has the potential for delivering very large gains, unlike bonds, Certificates
of Deposit, or some other alternatives. Annual returns-on-investment (ROIs) of over 100%
have occurred on a somewhat regular basis.
• The potential loss from stock purchased with cash is limited to the total amount of the
initial investment. This is considerably better than that of some leveraged transactions,
where the maximum loss can well exceed the total of the funds invested.

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 • Stocks offer limited legal liability. Passive stockholders (those who take no active part in
the running of the company) are protected against any liability stemming from the
company’s actions beyond their financial investment in the company.
• Most stocks are very liquid; in other words, they can be bought and sold quickly at a fair
price.
• Although past performance is not a guarantee of future performance, stocks have
historically offered very high returns in relation to other investments.
• Stocks offer two ways for their owners to benefit, by capital gains and with dividends. As
previously stated, each share of stock represents partial ownership in a company. If the
company becomes more valuable, so will the ownership interest represented by each
share of stock. This appreciation of the stock’s value is known as a capital gain. In
addition, if the company earns more profits than it needs to support its maintenance and
growth, it may elect to distribute the excess to its owners, the shareholders. The periodic
distributions of profits are called dividend payments.

Disadvantages of Common Shares

• Since common stock represents ownership of a business, stockholders are the last to get
paid, like all other owners. A company must first pay its employees, suppliers, creditors,
maintain its facilities and pay its taxes. Any money left can then be distributed among its
owners.
• While shareholders are company owners, they do not enjoy all of the rights and privileges
that the owners of privately held companies do. For example, they cannot normally walk in
and demand to review in detail the company’s books.
• Investors in a company may not know all that there is to know about the company. This
limited information can sometimes cause investment decision-making to be difficult.
• Stock prices tend to be volatile. Prices can be erratic, rising and declining quickly. Such
declines often cause investors to panic and sell, which actually only serves to lock in their
losses.
• Stock values can sometimes change for no apparent reason, which can be quite
frustrating for the investor who is trying to anticipate the stock’s behavior based on the
actual performance of the company.
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Advantages of Preference Shares

• Helpful in raising long term capital for a company

• There is no need to mortgage property on these shares.
• Redeemable preference shares have the added advantages of repayment of capital
whenever there is surplus in the company.
• Rate of return is guaranteed.

Disadvantages of Preference Shares

• Permanent burden on the company to pay a fixed rate of dividend before paying anything
on the other shares.
• Not advantageous to investors from the point of view of control and management as
preferences shares do not carry voting rights.
• Compared to other fixed interest bearing securities such as debentures, usually the cost of
raising the preference share capital is higher.

4).National Savings Certificate

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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
are sure to give good and safe returns.

Characteristics

NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a
maturity period of 6 years. There is no prescribed upper limit on investment.

Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to
the Post Office through a representative or an agent.

One person can be nominated for certificates of denomination of Rs. 100- and more than one
person can be nominated for higher denominations.The certificates are easily transferable from
one person to another through the post office. There is a nominal fee for registering the transfer.
They can also be transferred from one post office to another.

One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co-
operative society, a corporation or a government company, a housing finance company approved
by the National Housing Bank etc with the permission of the concerned post master.

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Though premature encashment is not possible under normal course, under sub-rule (1) of rule
16 it is possible after the expiry of three years from the date of purchase of certificate.

Tax benefits are available on amounts invested in NSC under section 88, and exemption can be
claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be
treated as fresh investment in NSC for that year and tax benefits can be claimed under section
88.

Denominations and Limit

National Savings Certificates are available in the denominations of Rs. 100 Rs 500, Rs. 1000,
Rs. 5000, & Rs. 10,000. There is no maximum limit on the purchase of the certificates. So it is for
you to decide how much you want to put in the NSCs. This is of course a huge benefit for you
can decide as much as your budget allows.

Maturity
Period of maturity of a certificate is six years. Presently interest paid is 8 % per annum half yearly
compounded. Maturity value of a certificate of any other denomination is at proportionate rate.
Premature encashment of the certificate is not permissible except at a discount in the case of
death of the holder(s), forfeiture by a pledge and when ordered by a court of law.

Tax Benefits
Interest accrued on the certificates every year is liable to income tax but deemed to have been
reinvested. Income Tax rebate is available on the amount invested and interest accruing under
Section 88 of Income Tax Act, as amended from time to time. Income tax relief is also available
on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time
to time.

Return
It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid

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for a maximum period of 24 months at the rate applicable to individual savings account. A
Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years.

Interest rates for the NSC Certificate of Rs 1000

Year Rate of Interest

1 year Rs 81.60

2 year Rs 88.30

3 year Rs 95.50

4 years Rs103.30

5 years Rs 111.70

6 years Rs 120.80

Advantages
Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed u
the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax be
NSCs can be transferred from one person to another through the post office on the payment of a prescribed
one post office to another. The scheme has the backing of the Government of India so there are no risks ass

5).POSTAL SAVING DEPOSIT

Post Office Monthly Income Scheme

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 • Interest rate of 8% per annum payable monthly.
• Maturity period is 6 years.
• Minimum investment amount is Rs.1000/- or in multiple thereof.
• Maximum amount is Rs. 3 lacs in single account and Rs. 6 lacs in a joint account.
• Account can be opened by an individual, two/three adults jointly and a minor through a
guardian.
• A minor having attained 10 years of age can open an account in his/her own name directly.
• Non-Resident Indian / HUF cannot open the Account.
Minor has a separate limit of investment of Rs. 3 lacs and the same is not clubbed with the
limit of guardian.
• A separate account is opened for each deposit.
• Any number of accounts can be opened subject to the maximum prescribed limit.
• Facility of automatic credit of monthly interest to saving account if accounts are at the same
post office.
• Facility of premature closure of account after one year @ 3.50% discount.
• No deduction of 3.5% if account is closed on completion of three years.
• Facility of reinvestment on maturity of an account.
• Interest not with-drawan does not carry any interest.
• Maturity proceeds not drawn are eligible to saving account interest rate for a maximum
period of two years.
• Account is transferable from one post office to any Post office in India free of cost.
• Nomination facility available.
• Rebate under section 80 C not admissible.
• Interest income is taxable, but no TDS
• Only scheme in Post office where monthly interest is payable.
• Most suitable scheme for senior citizens and for those who need regular monthly income.
• Deposits are exempt from Wealth Tax.

Why should you invest in Post Office Schemes

• These schemes are offered by the Government of India.

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 • Safe, secure and risk-free investment options.
• No Tax Deduction at Source (TDS).
• Nomination facility is available.
• Nomination can be changed at any time
• The instruments are transferable to any Post Office anywhere in India.
• Attractive rates of interest.

POST OFFICE SAVINGS BANK

• Minimum amount Rs20/- in case of non- cheque account, Rs.500/- in case of cheque
account.
• Minimum balance of Rs.500/- is to be maintained for a cheque account.
• Account is opened with cash only.
• Maximum balance permissible Rs. 1,00,000/- in a single account and 2,00,000/- in Joint
account.
• Two/Three adults, individuals, minor through guardian.
• A Minor having 10 years of age can also open an account directly.
• One individual account and one joint account can only be opened at a post office.

6).MUTUAL FUND

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Mutual fund is a pool of money collected from investors and is invested according to stated
investment objectives Mutual fund investors are like shareholders and they own the fund. Mutual
fund investors are not lenders or deposit holders in a mutual fund. Everybody else associated with
a mutual fund is a service provider, who earns a fee. The money in the mutual fund belongs to the
investors and nobody else. Mutual funds invest in marketable securities according to the
investment objective. The value of the investments can go up or down, changing the value of the
investor’s holdings.NAV of a mutual fund fluctuates with market price movements. The market
value of the investors’ funds is also called as net assets. Investors hold a proportionate share of the
fund in the mutual fund. New investors come in and old investors can exit, at prices related to net
asset value per unit.

Mutual Fund Industry in India

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are
generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise
option, as option, as in real terms the value of money decreases over a period of time. One of the
options is to invest the money in stock market. But a common investor is not informed and
competent enough to understand

the intricacies of stock market. This is where mutual funds come to the rescue. A mutual fund is a
group of investors operating through a fund manager to purchase a diverse portfolio of stocks or
bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together
26
in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they
tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the
biggest advantage of mutual funds is diversification. Diversification means spreading out money
across many different types of investments. When one investment is down another might be up.
Diversification of investment holdings reduces the risk tremendously.

In 1963, the government of India took the initiative by passing the UTI act, under which the Unit
Trust of India (UTI) was set-up as a statutory body. The designated role of UTI was to set up a
Mutual Fund. UTI’s first scheme, called. In 1987 the other public sector institutions set up their
Mutual Funds. In 1992, government allowed the private sector players to set-up their funds. In 1994
the foreign Mutual Funds arrives in Indian market. In 2001 there is a crisis in UTI and in 2003 UTI
splits up into UTI1and UTI 2. The history of Indian Mutual Fund industry can be explained easily by
various phases.

Advantages
• Professional Management
Mutual Funds provide the services of experienced and skilled professionals backed by a
dedicated investment research team that analyses the performance and prospects of
companies and selects suitable investments to achieve the objectives of the scheme.

• Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same
time and in the same proportion. You achieve this diversification through a Mutual Fund with far
less money than you can do on your own.

• Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad
deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save
your time and make investing easy and convenient.

27
• Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they
invest in a diversified basket of selected securities.

• Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the
capital markets because the benefits of scale in brokerage, custodial and other fees translate
into lower costs for investors.

• Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related
prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange
at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV
related prices by the Mutual Fund.

• Transparency
You get regular information on the value of your investment in addition to disclosure on the
specific investments made by your scheme, the proportion invested in each class of assets and
the fund manager's investment strategy and outlook.

• Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your needs
and convenience.

• Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
28
 because of its large corpus allows even a small investor to take the benefit of its investment
strategy.

• Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

• Well Regulated
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
regularly monitored by SEBI.

Disadvantages

• Professional Management:
Some funds doesn’t perform in neither the market, as their management is not dynamic
enough to explore the available opportunity in the market, thus many investors debate over
whether or not the so called professionals are any better than mutual fund or investor himself, for
picking up stocks.

• Costs:
The biggest source of AMC income is generally from the entry & exit load which they charge
from investors, at the time of purchase. The mutual fund industries are thus charging extra cost
under layers of jargon.

• Dilution:
Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result of a
successful fund getting too big. When money pours into funds that have had strong success, the
manager often has trouble finding a good investment for all the new money.
29
 • Taxes:
When making decisions about your money, fund managers don't consider your personal
tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered,
which affects how profitable the individual is from the sale. It might have been more advantageous
for the individual to defer the capital gains liability.

Tax Benefit

Evaluating performance of a tax saving mutual fund

The basic criteria for an investor to bear in mind before opting for a tax saving mutual fund is the
current performance of that specific fund. Performance is significant constraint, through which a
fund attracts prospective investors before they consider it for investing. Generally the performance
of all the major equity related investments are considered on the basis of 3-5 year of its investment
period. While analyzing the performance of a fund emphasis should be laid on premium and
consistency of the fund in the market.

Another important aspect to consider is the amount of returns that the fund offers in comparison to
other tax saving funds. Decent returns can be attained by following an aggressive investment
approach. Identify the most rewarding tax saving funds which have rewarded its investors on per
unit of risk taken by them and opt for it. Also look for other hidden expenses such as fund
manager's income, marketing expenses, managing expenses, etc.The expenditure of investing in a
mutual fund is calculated by the expense ratio which signifies the proportion of the fund's assets
that go towards the expenses of maintaining the fund.

Popular Tax saving mutual funds in India

• SBI Mutual Funds

• Prudential ICICI
• Franklin Templeton Mutual Fund India

30
 • Standard Chartered Mutual fund India
• Bajaj Capital.

Risk & Return on Mutual Funds

A mutual fund pools money from a large number of investors and buys stocks from a large number
of companies. Investing in mutual funds does not have the same level of high return as investing in
stocks does, but it carries significantly less risk.Risk and return for a mutual fund depends on the
type of fund. Small-capitalization funds typically own stocks of companies with less than $1 billion
in market capitalization. These funds can generate high returns but at high risk. Mid-cap funds
invest in companies with median capitalization between $1 billion and $8 billion. Large-cap funds
invest in companies with market capitalization of $8 billion or more. These funds tend to focus on
income from dividends, which can mean a stable if not spectacular return. Value funds invest in
stocks that are undervalued, while growth funds invest in stocks that have high potential to grow.
Value and growth funds tend be associated with higher returns and higher risk, compared with
other types of funds, such as balanced funds, which contain both stocks and bonds.
An example of large-cap index funds is the Vanguard 500 Index fund, which invests in companies
in the Standard & Poor's 500 Index. The performance of the fund will mimic its index's performance.
This type of fund is appropriate for long-term investment, with small short-term returns but stable
long-term growth.

Statistics
A mutual fund's fact sheet often contains information on risk versus return as represented by four
statistics: alpha, beta, standard deviation and the Sharpe Ratio. Beta indicates a fund's past price
volatility in relation to a standard stock market index, like the S&P 500. Beta typically ranges
between 0.85 to 1.05 for stock funds. Other, more aggressive funds might have higher values of
beta. Alpha measures the fund's expected return based on its beta. A positive alpha means a fund
returns more than what is expected, given its beta. A negative alpha indicates that the fund returns
less than expected, based on the beta. The Sharpe Ratio measures risk-adjusted performance.
The higher the ratio, the better.

Standard deviation measures the variability of actual returns in comparison with historical data. The

31
higher the standard deviation, the more volatile the fund.

Risk Identification
There are many risks associated with investing in mutual funds, which must be taken into account
when choosing a fund. The stock market tends to move in cycles, and if the market declines, there
is a good chance the value of your fund will drop too. Funds that invest in foreign stock markets,
such as Vanguard Emerging Markets, tend to be riskier than funds based on the U.S. market.
Other types of risks involve the political and economic conditions in countries where the fund
invests, currency risk, income risk, manager risk and inflation risk.

Diversification
A diversified mix of mutual funds reduces risk. In his book "New Guide to Financial Independence,"
Charles Schwab recommends a mixture of growth funds, income funds, international funds and,
most important, index funds. In any given year, only one in five mutual funds outperforms the
market, while index funds aim to match the market.

Considerations
If you do not want to deal with the risks associated with mutual funds, you can choose money
market funds, which have a stable share price, unlike a stock or bond mutual fund. Your return will
be much less than what you can expect from mutual funds, but your risk is minimized.

7).REAL STATE

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Real estate has several unique characteristics that affect its value. There are economic
characteristics and physical characteristics. Real estate is a product to be purchased but it is
different from anything else due to the characteristics that will be discussed here.

The economic characteristics that influence value are scarcity, improvements, permanence and
area preference. Scarcity is simply demonstrated in the saying, "They aren't making any more."
The supply of land has a ceiling and cannot be produced more than what exists today. This value
of this supply however, is influenced by other characteristics.

Improvements, such as buildings on one parcel of land may have an effect on the value of
neighboring parcels or the entire community. If a large company builds in a certain depressed
neighborhood, the value of living their will probably increase because of the introduction of jobs.
This value would impact on neighboring communities, thus increasing value in some ways to the
real estate in these areas.

Permanence has to do with the infrastructure. As buildings, houses or other structures are
demolished, the infrastructure, such as sewers, drainage, electricity, and water remain intact.
Permanence effects real estate, or the type of infrastructure. If you buy a piece of land in an area
with no utilities, drainage or paved streets, it will most likely be worth less than a parcel of land that
has this infrastructure intact and developed.

Area preference refers to the choices of the people in any given area. This is usually referred to by
most people when they talk about real estate as, "location, location, location." The location of a
preferred area, for whatever reasons, is what makes values of homes higher. Conversely, the
location of a nonpreferred area, for whatever reason, is what makes the values of homes less.
33
8000 square foot brand new homes on the coast of Long Island's, East Hampton will be worth
much more due to their area preference, over an area with 1200 square foot starter homes in the
middle of Long Island, located next to a garbage dump.

The physical characteristics of land represent its indestructible nature, immobility and
nonhomogeneity. Working backwards, we'll start with nonhomogeneity. This simply points out that
no two parcels are the same. Two pieces of land may be very similiar, but every single parcel is
different geographically because each parcel is located in a different spot. This includes two lots
right next to each other. It is important to remember that parcels are created by subdividing land, so
as one large parcel of 20 acres is subdivided, each individual lot becomes its own separate piece of
land.

Land cannot be moved, therefore it is immobile. Even when soil is torn from the ground, the part of
the Earth's surface will always remain. It is important here to note how this physical characteristic
affects real estate law and markets. Immobility of land is the reason why real estate laws and
markets are local in nature.

The indestructibility of land simply means that it is durable and cannot be destroyed. It can be
damaged by storms and other disasters, but it remains and weathers the changing times and will
always be there. This is a main reason why land is talked about as being a sound investment.

So the basic characteristics of real estate include scarcity, improvements to the land, permanence,
area preference, nonhomogeneity, indestructibility and immobility. Please note there is a big
difference between land and real estate. Land is the the part of the earths surface, subsurface and
air above it. Real estate is anything that becomes attached to land. So when you're looking for
investments, it is important to note the infrastructure of the area, the surrounding neighborhood and
the preferences of the area or...location, location, location!

ADVANTAGES AND DISADVANTAGES

There are many advantages and disadvantages of investing in real estate. One of the advantages
of investing in real estate is; real estate is an investment that can give you income for the rest of
your life. If you buy properties and rent the properties out it can give you life long income. Another
34
advantage of investing in properties is you can use a lot of leverage to acquire them. There are
many ways you can buy properties without using your own money. One way of doing this is seller
financing. Seller financing is when you agree to pay the seller over time the down payment and the
rest you get from the bank.

One last advantage of investing in real estate is real estate has intrinsic value to it. A stock that you
buy can lose 99% of its value but it is almost impossible to buy a property and it loses 99% of its
value. One disadvantage of investing in properties is if you buy a property and can't make the
mortgage payments you can lose the property and damage your credit. Another disadvantage of
investing in properties is, as an investor you depend on a lot of people to do their part. If the people
you are renting out to do not pay their rent you will have to use their security money and find new
people quickly or it can eat up your profits.

One last disadvantage of investing in properties is the cost it takes to maintain or repair. Many
times when you think you're done with a property something can break or needs to be replaced.
Investing in properties does have its advantages and disadvantages. If you use the information you
read here you will have some idea of what the advantages and disadvantages are.

There are many different types of investment real estate: rental houses, apartments, vacant land,
commercial buildings, industrial, shopping centers or warehouses. They all offer big tax incentives
for investors who understand those benefits. Many people believe that depreciation is the best real
estate tax deduction of all. The IRS REQUIRES real estate investors to depreciate their investment
properties.
Depreciation is a "paper loss" required for estimated wear, tear and obsolescence. However, land
value is not depreciable. This applies to 100% of the money invested in buying vacant land and that
part of the property value apportioned to land on an improved property. (That is, land with a
building on it).
Condominiums do not have a land element and 100% of the purchase price can be depreciated.

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

Commercial property is depreciated over 39 years, also on a straight-line basis.
35
CURRENT TRENDS

With property boom spreading in all directions, real estate in India is touching new heights.
However, the growth also depends on the policies adopted by the government to facilitate
investments mainly in the economic and industrial sector. The new stand adopted by Indian
government regarding foreign direct investment (FDI) policies has encouraged an increasing
number of countries to invest in Indian Properties.

India has displaced US as the second-most favored destination for FDI in the world. As the
investment scenario in India changes, India which has attracted more than three times foreign
investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion
during the corresponding period of 2004-05, making India amongst the "dominant host countries"
for FDI in Asia and the Pacific (APAC).

The positive outlook of Indian government is the key factor behind the sudden rise of the Indian
Real Estate sector - the second largest employer after agriculture in India. This budding sector is
today witnessing development in all area such as - residential, retail and commercial in metros of
India such as Mumbai, Delhi & NCR, Kolkata and Chennai. Easier access to bank loans and higher
earnings are some of the pivotal reasons behind the sudden jump in Indian real estate.

Why Invest In Indian Real Estate?

Flying high on the wings of booming real estate, property in India has become a dream for every
potential investor looking forward to dig profits. All are eyeing Indian property market for a wide
variety of reasons:

• It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed
36
 in the last financial year. The boom in economy increases purchasing power of its people
and creates demand for real estate sector.

• India is going to produce an estimated 2 million new graduates from various Indian
universities during this year, creating demand for 100 million square feet of office and
industrial space.

• Presence of a large number of Fortune 500 and other reputed companies will attract more
companies to initiate their operational bases in India thus creating more demand for
corporate space.

• Real estate investments in India yield huge dividends. 70 percent of foreign investors in
India are making profits and another 12 percent are breaking even.

• Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise
in sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where
it can match the best in the world. These positive attributes of India is definitely going to
attract more foreign investors in the near future.

The relaxed FDI rules implemented by India last year has invited more foreign investors and real
estate in India is seemingly the most lucrative ground at present. The revised investor friendly
policies allowed foreigners to own property, and dropped the minimum size for housing estates built
with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). With this sudden
change in investment policies, the overseas firms can now put up commercial buildings as long as
the projects surpass 50,000 square meters (538,200 square feet) of floor space.

Indian real estate sector is on boom and this is the right time to invest in property in India to reap
the highest rewards.

Tax benefits

37
If you are a "real estate professional" who meets certain time requirements and who "materially
participates" in managing your investment property, you are allowed almost unlimited income tax-
deductions from your investment property.

Time requirement

If you spend at least 750 hours per year, or more than half of your working hours, involved in real
estate activities, you probably qualify as a "real estate professional."

There does not appear to be any clear IRS ruling on a semi-retired person with no occupation but
real estate to which they devote say, 200 hours a year.

Full-time real estate brokers, realty sales agents, property managers, builders, contractors and
leasing agents are examples of qualified real estate professionals.
However, the tax law excludes real estate attorneys and mortgage brokers from qualifying. Unless,
one must assume, they spend more than 50% of their working hours investing in real estate. This
would include managing, buying and selling real estate.

If you invest in real estate but do not qualify as a "real estate professional" , you are limited to a
maximum annual $25,000 realty investment property loss deduction against their ordinary taxable
income. This is called the passive loss restriction. This "loss" includes the paper loss created by
depreciation.

Another catch. If your annual adjusted income exceeds $100,000, the $25,000 loss deduction
gradually phases out. At the $150,000 adjusted income level, the allowable tax loss deduction goes
to zero.

Any undeducted real estate investment tax loss is "suspended" for future use, such as at the time
the property is sold at a profit. Then you may subtract the unused suspended tax loss from your
capital gain to lower the taxable profit. See below.

Material participation requirement

Participation is critical. You can hire a professional property manager and still meet the material
38
participation requirement, and claim the unlimited tax deductions as a professional.
Day-to-day operating details, such as collecting rents, evicting tenants and unclogging toilets, can
be delegated to this manager.
But, you must make the major decisions, such as setting rents, approving major expenses and
qualifying new tenants. Remember of course the time requirement.

Depreciation of personal property such as appliances

Personal property used in operating the property, such as appliances, is depreciated over shorter
periods, typically five to 10 years. Even automobiles and trucks used in the investment operation
can be depreciated over their useful lives.

First-year 100% deduction

There is also the new first-year 100 percent tax deduction for up to $100,000 of business
equipment purchased. This would include appliances. Sorry but you can't buy a brand new
Mercedes and deduct 100% of the cost from your taxes in the first year. But there are special rules
for work vehicles, such as trucks. Ask your CPA for more details.

Depreciation is a non-cash deduction

It reduces taxable income from the investment property. But, in contrast to property taxes,
mortgage interest, utilities, insurance and repairs, it doesn't require any cash outlay. The
depreciation expense deduction can result in a positive cash flow property becoming a loss maker
for tax purposes.

Most investment properties go up in value every year, but on paper their value is going down.

Unfortunately, unused tax losses from investment properties cannot be carried back to prior tax
years to claim a tax refund.

IRS Notice 88-94 allows use of suspended passive activity tax losses (assuming you do NOT
qualify as a professional with material participation) from realty investment assets to offset profits
from the sale of the property. The tax result is that you can use suspended property losses on an
39
total basis, rather than property-by-property.

Recapture of depreciation benefits

The maximum capital gains tax rate was reduced to 15 percent in 2003 for assets owned more
than 12 months. (If held for less than 12 months gains are taxed as ordinary income.)
However, the IRS requires that you "recapture" the tax saving from your income tax at a special 25
percent depreciation "recapture" tax rate when the property is sold. This apply whether or not you
qualify as a "real estate professional."

Example of recapture

Suppose you bought an investment property for $500,000 and deducted $150,000 of
depreciation during your ownership years.
That means your book value (also called "adjusted cost basis") declined to $350,000. Then you
sold for $650,000.
Your capital gain is therefore $300,000 ($650,000 minus $350,000).
Of that $300,000 capital gain, the $150,000 depreciation deducted will be "recaptured" and taxed
at the 25 percent special federal tax rate.
The $150,000 remainder of your capital gain will be taxed at the new 15 percent maximum tax
rate.

8).CURRENCY

40
Definition
An exchange of currencies, where an investor will exchange a specific amount of one currency
for another currency which can be invested at a higher interest rate.

Any form of money that is in public circulation. Currency includes both hard money (coins)
and soft money (paper money). Typically currency refers to money that is legally
designated as such by the governing body, but in some cultures currency can refer to any
object that has a perceived value and can be exchanged for other objects.

Characteristics

The money market is a market for financial assets that are close substitutes for money. It is a
market for overnight short-term funds and instruments having a maturity period of one or less
than one year. It is not a place (like the Stock market), but an activity conducted by telephone.
The money market constitutes a very important segment of the Indian financial system.

The characteristics of the money market are:

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

2. It is wholesale market of short term debt instruments
3. Its principal feature is honor where the creditworthiness of the participants is important.
4. The main players are: Reserve bank of India (RBI), Discount and Finance House of India
(DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state
governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI),
public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.
5. It is a need based market wherein the demand and supply of money shape the market.

Functions of the CurrencyMarket:

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

1. Provide a balancing mechanism to even out the demand for and supply of short term funds
2. Provide a focal point for central bank intervention for influencing liquidity and general level of

41
interest rates in the economy.
3. Provide reasonable access to suppliers and users of short term funds to fulfill their borrowings
and investment requirements at an efficient market clearing price.

Besides the above functions, a well functioning money market facilitates the development of a
market for longer term securities. The interest rates for extremely short term use of money serve
as a benchmark for longer term financial instruments.

Advantages

An efficient money market benefits a number of players. It provides a stable source of funds to
banks in addition to deposits allowing alternative financing structures and competition. It allows
banks to manage risks arising from interest rate fluctuations and to manage the maturity
structure of their assets and liabilities.

A developed inter-bank market provides the basis for growth and liquidity in the money including
the secondary market for commercial paper and treasury bills.

An efficient money market encourages the development of non-bank intermediaries thus

increasing the competition for funds. Savers get a wide array of savings instruments to choose
from and invest their savings.

A liquid money market provides an effective source of long term finance to borrowers. Large
borrowers can lower the cost of raising funds and manage short term funding or surplus
efficiently.

A liquid and vibrant money market is necessary for the development of a capital market, foreign
exchange market, and market in derivative instruments. The money market supports the long
term debt market by increasing the liquidity of securities. The existence of an efficient money
market is a precondition for the development of a government securities market and a forward
foreign exchange market.

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

42
certainty of prompt cash settlement is essential for such transactions. The government can
achieve better pricing on its debt as it provides access to a wide range of buyers. It facilitates the
government market borrowing.

Monetary control through indirect methods (repos and open market operations) is more effective
if the money market is liquid. In such a market response to the central bank’s policy actions are
both faster and less subject to distortion.

The average turnover of the money market in India is over Rs 40,000 crore daily. This is more
than 3 per cent of the total money supply in the Indian economy and 6 percent of the total funds
that commercial banks have let out to the system. This implies that 2 per cent of the annual GDP
of India gets traded in the money market in just one day. Even though the money market is many
times larger than the capital market, it is not even a fraction of the daily trading in developed
markets.

9).Antiques

An antique is a work of art, including a piece of furniture, a decorative object which, according to
43
some experts must be at least 100 years old. The value of an antique depends upon certain
parameters including its authenticity, beauty, age, rarity and condition. Traditionally speaking, an
antique also means objects preceding the the mass production of objects in the 1830's; It can
also include anything very old, a relic or an object of ancient times or the bygone era.

Time Vs Authenticity
Though age is an important factor in determining whether an object is an antique or not, but
authenticity is the most important element. An antique is an authentic piece, made in olden times
and place in which those pieces were in vogue and constructed with authentic tools and
methods.

Authenticity is a more important aspect in deciding if something is an antique because it, not
age, determines the actual value of a piece. Any object that is in original condition is far more
valuable than a piece that has been altered. Refinishing, relining, repairing, resilvering, regilding
or replacing an antique diminishes its value.

Few Examples of Antiques

• Antique furniture
• Antique jewellery
• Antique Collectibles
• Antique Automobiles
• Antique Metals
• Antique kitchenware
• An antique (Latin: antiquus; old) is an old collectible item. It is collected or desirable
because of its age (see definition), beauty, rarity, condition, utility, personal emotional
connection, and/or other unique features. It is an object that represents a previous era or
time period in human society. It is common practise to define "antique", as applying to
objects at least 100 years old. Collectables are, generally speaking, the possible antiques
of the future and generally less than 100 years old.
• Antiques are usually objects which show some degree of craftsmanship, or a certain
attention to design such as a desk or an early automobile. They are most often bought at
antique shops, or passed down as an estate. Some valuable antiques can be bought from
44
 antique dealers and auction services or purchased online through websites and online
auctions. Antique dealers are often members of national trade associations, many of
which belong to CINOA, a confederation of art and antique associations across 21
countries, representing 5000 dealers.

Definition

The definition of antique varies from source to source, product to product, and year to year.
However, some time-tested definitions of antique deserve consideration, such as the following:

1. "An item which is at least 100 years old and is collected or desirable due to rarity,
condition, utility, or some other unique feature. Motor vehicles, power tools and other
items subject to vigorous use in contrast, may be considered antiques in the US if older
than 50 years, and some electronic gadgets of more recent vintage may be considered
antiques. Another general rule of thumb is 75 years for most objects to become
antiques."[citation needed]
2. "Any piece of furniture or decorative object or the like produced in a former period and
valuable because of its beauty or rarity."[citation needed]

In the United States, the 1930 Smoot-Hawley Tariff Act defined an antique as "works of art
(except rugs and carpets made after the year 1700), collections in illustration of the progress of
the arts, works in bronze, marble, terra cotta, parian, pottery or porcelain, artistic antiquities and
objects of ornamental character or educational value which shall have been produced prior to the
year 1830."[citation needed]
1830 was roughly the beginning of mass production in the US and 100
years older than 1930 Smoot-Hawley Tariff Act.

These definitions allow people to make a distinction between genuine antique pieces, vintage

45
items, and collectible objects.

The alternative term antiquities commonly refers to the remains of ancient art and everyday
items from antiquity, which themselves are often archaeological artifacts.

The term antiquarian refers to a person interested in antiquities, or things of the past.

Antiquing

Antiquing" is the act of shopping, identifying, negotiating, or bargaining for antiques. Items can
be bought for personal use, gifts, and in the case of brokers and dealers, profit. Antiquing is
performed at garage sales, estate sales, resort towns, antiques districts, collectives, and
international auction houses.

10).ART AND PAINTING

Today, we find that an increasing number of individuals are looking at alternative investments,
which provide them with a diversification away from a particular asset class. People are willing to
invest and looking for areas other than the stock market for investing. Investing in the vintage
46
wine, coins, stamps and Art, is now an indulgence which gives them an opportunity to cash in on
their hobbies, without having the level of expertise that is required for other direct investments.

Art is being incorporated into the investor's overall asset allocation decision. The art scene
around the world is growing significantly. With more and more investors looking at art as an
alternative asset class and a store of a long term value, average annual art valuations have
outpaced average annual stock market valuations by more than three times since 2000.

Now this market is much stronger. In terms of returns one can see the market price has gone up
four to five times, in some cases ten times in the past four years. With a sharp rise in the value of
art and a comparatively disappointing performance in the stock markets and the real estate,
individuals with money are now tapping Art as an alternate investment avenue.

This is the reason why Citigroup and others are buying paintings as an investment for their very
important private-banking clients. Wealthy clients who switch to art collection, as a way of
diversifying investments, can find it an unexpectedly pleasurable experience. Unlike incase of
stocks and shares, investors can literally admire their expensive investment.

Risk

"Art" is not everyone's cup of tea. It varies to great extent depending on public tastes and other
factors. Hence, they are considered to be high risk, speculative investments. Also art cannot be
resold quickly for a profit. In other words, it is not a very liquid investment to earn reasonable
amount of profit; one might have to stay invested very long period of time. One should be careful
while making investment in this asset class. Art is illiquid; it needs maintenance, storage,
security, and it doesn't give dividends, bonuses or income.

Guidelines for investing in Art

• Educate yourself by reading all relevant data you find on your specific area of interest.
Read up from books, websites and trade journals. Take the advice of other investors or
experts in that field. Make an informed investment decision.
• To avoid possession of a "fake" piece of Art, attest the authenticity of the item by
47
 obtaining a written certificate or appraisal.
• Avoid investing in cheaper second, third grade art works. The top quality products may be
more expensive but are sure to appreciate in value and fetch a good price even in difficult
markets.
• Find a dealer who has enough knowledge about the market trends, quality and prevalent
pricing in this field.
• Limit the field of your investment collection because holding too many works of art adds
very little in terms of incremental diversification.
• The piece of art that you invest in has market value and hence must be insured. The item
must be covered in the event of fire or theft.
• Art items are fragile and they require maintenance. They require proper environmental
conditions and are pretty costly to maintain. It is very important to preserve them in their
original state because the value of a poorly maintained artwork diminishes rapidly.
• To avoid high level of risk do not exceed a percentage (between 1 to 15 per cent) of such
investments in your entire investment portfolio.
• Purchase from recognized dealers and auction houses only.

11).GOVERNMENT SECURITIES

Government securities(G-secs) are sovereign securities which are issued by the Reserve Bank
of India on behalf of Government of India,in lieu of the Central Government's market borrowing
programe.

The term Government Securities includes:

48
 • Central Government Securities.

• Central Government Securities.

• State Government Securities

• Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit'.The market borrowing of the
Central Government is raised through the issue of dated securities and 364 days treasury bills
either by auction or by floatation of loans.

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

CHARACTERISTICS

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

Example: 12.25% GOI 2008 indicates the following:

12.25% is the coupon rate, GOI denotes Government of India, which is the borrower, 2008 is the
year of maturity.

Eligibility
All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies,
corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors,
State Governments, Provident Funds, trusts, research organizations, Nepal Rashtra bank and
even individuals are eligible to purchase Government Securities.

49
Availability
Government securities are highly liquid instruments available both in the primary and secondary
market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary
Dealer in the government securities market, and is actively involved in the trading of government
securities.

Forms of Issuance of Government Securities

• Banks, Primary Dealers and Financial Institutions have been allowed to hold these
securities with the Public Debt Office of Reserve Bank of India in dematerialized form in
accounts known as Subsidiary General Ledger (SGL) Accounts.

• Entities having a Gilt Account with Banks or Primary Dealers can hold these securities

with them in dematerialized form.

• In addition government securities can also be held in dematerialized form in demat

accounts maintained with the Depository Participants of NSDL.

Minimum Amount
In terms of RBI regulations, government dated securities can be purchased for a minimum
amount of Rs. 10,000/-only.Treasury bills can be purchased for a minimum amount of Rs
25000/- only and in multiples there of. State Government Securities can be purchased for a
minimum amount of Rs 1,000/- only.

Repayment
Government securities are repaid at par on the expiry of their tenor. The different repayment
methods are as follows :

• For SGL account holders, the maturity proceeds would be credited to their current
50
 accounts with the Reserve Bank of India.

• For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity proceeds
and they would pay the Gilt Account Holders.

• For entities having a demat account with NSDL,the maturity proceeds would be collected
by their DP's and they in turn would pay the demat Account Holders.

Day Count
For government dated securities and state government securities the day count is taken as 360
days for a year and 30 days for every completed month. However for Treasury bills it is 365 days
for a year.

Advantages

• No tax deducted at source.

• Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals.

• Qualifies for SLR purpose

• Zero default risk being sovereign paper

• Highly liquid.

• Transparency in transactions and simplified settlement procedures through CSGL/NSDL.

Methods of Issuance of Government Securities

Auctions:

Auctions for government securities are either yield based or price based.

51
 • In an yield based auction, the Reserve Bank of India announces the issue size(or notified
amount) and the tenor of the paper to be auctioned. The bidders submit bids in terms of
the yield at which they are ready to buy the security.

• In a price based auction, the Reserve Bank of India announces the issue size(or notified
amount), the tenor 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 securities.

The basic features of the auctions are given below:

• Method of auction: There are two methods of auction which are followed-

• Uniform price Based or Dutch Auction: procedure is used in auctions of dated

government securities. The bids are accepted at the same prices as decided in the cut off.

Multiple/variable Price Based or French Auction: procedure is used in auctions of

Government dated securities and treasury bills. Bids are accepted at different prices / yields
quoted in the individual bids.

• Bids: Bids are to be submitted in terms of yields to maturity/prices as announced at the

time of auction.

• Cut off yield: is the rate at which bids are accepted. Bids at yields higher than the cut-off
yield is rejected and those lower than the cut-off are accepted. The cut-off yield is set as
the coupon rate for the security. Bidders who have bid at lower than the cut-off yield pay a
premium on the security, since the auction is a multiple price auction.

52
 • Cut off price: It is the minimum price accepted for the security. Bids at prices lower than
the cut-off are rejected and at higher than the cut-off are accepted. Coupon rate for the
security remains unchanged. Bidders who have bid at higher than the cut-off price pay a
premium on the security, thereby getting a lower yield. Price based auctions lead to finer
price discovery than yield based auctions.

• Notified amount: The amount of security to be issued is ‘notified’ prior to the auction
date, for information of the public. The Reserve Bank of India (RBI) may participate as a
non-competitor in the auctions. The unsubscribed portion devolves on RBI or on the
Primary Dealers if the auction has been underwritten by PDs. The devolvement is at the
cut-off price/yield.

Underwriting in Auctions

• For the purpose of auctions, bids are invited from the Primary Dealers one day before the
auction wherein they indicate the amount to be underwritten by them and the underwriting
fee expected by them.

• The auction committee of Reserve Bank of India examines the bids and based on the
market conditions, takes a decision in respect of the amount to be underwritten and the
fee to be paid to the underwriters.

• Underwriting fee is paid at the rates bid by PDs , for the underwriting which has been
accepted.

• In case of the auction being fully subscribed, the underwriters do not have to subscribe to
the issue necessarily unless they have bid for it.

If there is a devolvement, the successful bids put in by the Primary Dealers are set-off against
the amount amount underwritten by them while deciding the amount of devolvement.

53
On-tap issue
This is a reissue of existing Government securities having pre-determined yields/prices by
Reserve Bank of India. After the initial primary auction of a security, the issue remains open to
further subscription by the investors as and when considered appropriate by RBI. The period for
which the issue is kept open may be time specific or volume specific. The coupon rate, the
interest dates and the date of maturity remain the same as determined in the initial primary
auction. Reserve Bank of India may sell government securities through on tap issue at lower or
higher prices than the prevailing market prices. Such an action on the part of the Reserve Bank
of India leads to a realignment of the market prices of government securities. Tap stock provides
an opportunity to unsuccessful bidders in auctions to acquire the security at the market
determined rate.

Fixed coupon issue

Government Securities may also be issued for a notified amount at a fixed coupon. Most State
Development Loans or State Government Securities are issued on this basis.

Private Placement
The Central Government may also privately place government securities with Reserve Bank of
India. This is usually done when the Ways and Means Advance (WMA) is near the sanctioned
limit and the market conditions are not conducive to an issue. The issue is priced at market
related yields. Reserve Bank of India may later offload these securities to the market through
Open Market Operations (OMO). After having auctioned a loan whereby the coupon rate has
been arrived at and if still the government feels the need for funds for similar tenure, it may
privately place an amount with the Reserve Bank of India. RBI in turn may decide upon further
selling of the security so purchased under the Open Market Operations window albeit at a

54
different yield.

Open Market Operations (OMO)

Government securities that are privately placed with the Reserve Bank of India are sold in the
market through open market operations of the Reserve Bank of India. The yield at which these
securities are sold may differ from the yield at which they were privately placed with Reserve
Bank of India. Open market operations are used by the Reserve Bank of India to infuse or suck
liquidity from the system. Whenever the Reserve Bank of India wishes to infuse the liquidity in
the system, it purchases government securities from the market, and whenever it wishes to suck
out the liquidity from the system, it sells government securities in the market.

12).COMMODITIES

A commodity is a normal physical product used by everyday people during the course of their
lives, or metals that are used in production or as a traditional store of wealth and a hedge against
inflation. For example, these commodities include grains such as wheat, corn and rice or metals
such as copper, gold and silver. The full list of commodity markets is numerous and too detailed.
The best way to trade the commodity markets is by buying and selling futures contracts on local
and international exchanges.

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

55
brokerage service. Traditionally, there is an expectation when trading commodity futures of
achieving higher returns compared to shares or real estate, so successful investors can expect
much higher returns compared to more conventional investment products.

The process of trading commodities, as mentioned above, must be facilitated by the use of
trading liquid, exchangeable, and standardized futures contracts, as it is not practical to trade the
physical commodities.

Futures contracts give the investor ease of use and the ability to buy or sell without delay. A
futures contract is used to buy or sell a fixed quantity and quality of an underlying commodity, at
a fixed date and price in the future. Futures contracts can be broken by simply offsetting the
transaction. For example, if you buy one futures contract to open then you sell one futures
contract to close that market position. The execution method of trading futures contracts is
similar to trading physical shares, but futures

contracts have an expiry date and are deliverable.Futures contracts have an expiry date and
need to be occasionally rolled over from the current contract month to the following contract
month. The reason is because the biggest advantage to trading commodity futures, for the
private investor is the opportunity to legally short-sell these markets. Short-selling is the ability to
sell commodity futures creating an open position in the expectation to buy-back at a later time to
profit from a fall in the market. If you wish to trade the up-side of commodity futures, then it will
simply be a buy-to-open and sell-to close set of transactions similar to share trading.

The commodity markets will always produce rising of falling trends, and with the abundance of
information and trading opportunities available there is no reason for any investor to exclusively
trade the share market when there is potential profits from trading commodity futures.

The increased use of commodity trading vehicles in investment management has led
practitioners to create investable commodity indices and products that offer unique performance
opportunities for investors in physical commodities. As is true for stock and bond performance,
as well as investment in managed futures and hedge fund products, commodity-based products
have a variety of uses. Besides being a source of information on cash commodity and futures
commodity market trends, they are used as performance benchmarks for evaluation of
commodity trading advisors and provide a historical track record useful in developing asset

56
allocation strategies. However, the investor benefits of commodity or commodity-based products
lie primarily in their ability to offer risk and return trade-offs that cannot be easily replicated
through other investment alternatives. Previous research that direct stock and bond investment
offers little evidence of providing returns consistent with direct commodity investment.
commodity-based firms may not be exposed to the risk of commodity price movement. Thus for
investors, direct commodity investment may be the principal means by which one can obtain
exposure to commodity price movements.

The commodities that are traded in the market.

• Gold

• Copper

• Silver

• Sugar

• Wheat

• Zeera

• Guar

The commodity trading system functions on a real time basis through online means. Farmers,
exporters, importers, and traders are the main participants in this market. This article will help the
reader to gain overall knowledge on the topic. The commodity trading system operates through
online channels. Trading takes place on a real time basis and is either routed through satellite
communication system or the internet.

Commodity Trading System - Order Matching Mechanism

• Traders place their order through a registered

commodity broker of a commodity exchange.
• The trader's order is entered by the authorized dealer

57
 into the online terminal.

• The order finds its match automatically through the online channel.
• If it doesn't find a match at that very moment then it gets stored in the online order book
until and unless a similar and opposite order matches it.
• When two similar and opposite orders (that is, one buy and one sell order) match, then a
trade is said to be complete.

Commodity Trading System - Trade Clearing Mechanism

In a commodity market, trade clearing takes place through a registered clearing house of an
exchange. Clearing house helps the system to function smoothly and properly by guaranteeing:

• timely settlement
• registration of a trade and its consequent follow up
• delivery of the commodity to the concerned buyer and simultaneous payment to the seller
• settlement of funds in non-delivery cases

Commodity Trading System - Clearing and Settlement

Clearing and settlement of commodities in the commodity trading system commences only after
the end of trading hours on the expiration date of the contract. Processing of delivery matching
considers the following:

• Location of the order

• Available warehouse capacity
• Total quantity of commodities that have already been deposited and given to
dematerialize.

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

• Information on the final outcome of the matching process (amount of commodities to be

delivered or received and amount of unmatched position) is given to the clearing
members of the exchange.
• Unmatched positions (gains or losses) are cash settled.

58
 • Commodity delivery takes place through the following steps:
• The concerned buyer asks its depository participant to deliver the commodity.
• The depository participant, in turn, forwards this request to the designated depository.
• Depository forwards this message to the registrar and then to the transfer agent.
• Transfer agent, in turn, verifies authenticity of the request.
• In case of genuine request, transfer agent passes on the details of delivery to the
warehouse.
• Warehouse then arranges delivery of the concerned commodity to the designated buyer
(only after thorough identification check).

Commodity Trading Strategy

Commodity Trading Strategies are determined by the traders according to their personal
objectives and requirements. There can be many types of Commodity Trading Strategy, but the
most popular of them are the Trend Following Strategy and the Range Trading Strategy.
Commodity Trading Strategy can be of various types. It totally depends on the traders that which
Commodity Trading Strategy that want to undertake in order to reap the benefit of the Call
Option or Put Option.

But, for determining the optimal Commodity Trading Strategy, every trader is required to
consider the following issues:

• the level of risk tolerance

• the level of comfort with the chosen Option

• the market trends

• important parameters of commodity trading system

• After considering the above mentioned things, traders can develop their own trading plan
and can construct a personal Commodity Trading Strategy, according to his
requirements. But, here, we will discuss the two most popular Commodity Trading
Strategies-

• Trend Following
59
 • Range Trading

Trend Following

Most of the professional traders use this Commodity Trading Strategy of Trend Following. In this
case, traders determine the strategy following the trend, prevailing in the market. This kind of
strategy is based on the speculation, that the future price movement will take place in that
direction, in which the present market price trend is following. Here, it can be mentioned that, by
Trend, we mean, that the prices are consistently moving upward or downward over a
considerable period of time. Most of the professional managers trade with this Trend Following
Commodity Trading Strategy, as it is believed that the prices are likely to move in the same
direction than reverse.

Range Trading

This kind of Commodity Trading Strategy are undertaken by the traders when market price
movements reveal no clear trend. Traders , who adopt this Range Trading Strategy, sell the
underlying commodity, when they get a price of top of its' range. Similarly, the traders following
Range Trading Strategy, buy the underlying commodity when they get a price of bottom of its'
range. Other than the two above discussed strategies, a trader can construct a strategy of his
own. He can even go for a combination of Trend following Strategy and Range Trading Strategy.

Advantages

Leverage

Commodity futures operate on margin, meaning that to take a position only a fraction of the total
value needs to be available in cash in the trading account.

Commission Costs

It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument. For
example, one full size S&P500 contract is currently worth in excess off $250,000 and could be

60
bought/sold for as little as $20. The expense of buying/selling $250,000 could be $2,500+.

Liquidity

The involvement of speculators means that futures contracts are reasonably liquid. However,
how liquid depends on the actual contract being traded. Electronically traded contracts, such as
the e-minis tend to be the most liquid whereas the pit traded commodities like corn, orange juice
etc are not so readily available to the retail trader and are more expensive to trade in terms of
commission and spread.

Ability to go short

Futures contracts can be sold as easily as they are bought enabling a speculator to profit from
falling markets as well as rising ones. There is no uptick rule for example like there is with
stocks.

No Time Decay

Options suffer from time decay because the closer they come to expiry the less time there is for
the option to come into the money. Commodity futures do not suffer from this as they are not
anticipating a particular strike price at expiry.

Disadvantages

Leverage

Can be a double edged sword. Low margin requirements can encourage poor money
management, leading to excessive risk taking. Not only are profits enhanced but so are losses!

Speed of trading

61
Traditionally commodities are pit traded and in order to trade a speculator would need to contact
a broker by telephone to place the order who then transmits that order to the pit to be executed.
Once the trade is filled the pit trader informs the broker who then then informs his client. This can
take some take and the risk of slippage occurring can be high. Online futures trading can help to
reduce this time by providing the client with a direct link to an electronic exchange.

13).Public Provident Fund

Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also
serves as a retirement planning tool for many of those who do not have any structured pension
plan covering them. The balances in PPF account cannot be attached by any authority normally.

Tabs on Investment
Minimum deposit required in a PPF account is Rs. 500 in a financial year. Maximum deposit limit
is Rs. 70,000 in a financial year. Maximum number of deposits is twelve in a financial year.

Lapse in Deposits
If deposits are not made in a PPF account in any financial year, the account will be treated as
discontinued. The discontinued account can be activated by payment of the minimum deposit of
Rs.500/- with default fee of Rs.50/- for each defaulted year.

62
Premature Closure or Withdrawal
Premature closure of a PPF Account is not permissible except in case of death. Nominee/legal
heir of PPF Account holder cannot continue the account after the death.

Premature withdrawal is permissible in the 7th year of the account subject, to a limit of 50% of
the amount at credit preceding three year balance. Thereafter one withdrawal in every year is
permissible.

Account Transfer
The Account is transferable from one post Office / bank to another and from post Office to bank
or from a bank to a post office.

Maturity
The maturity period of the account is 15 years. Rate of interest is 8% compounded annually. One
deposit with a minimum amount of Rs.500/- is mandatory in each financial year. The amount of
deposit can be varied to suit the convenience of the account holders. The account holder can
retain the account after maturity for any period without making any further deposits. In this case
the account will continue to earn interest at normal rate as admissible till the account is closed.
The account holder also has an option to extend the PPF account for any period in a block of 5
years at each time, after the maturity period of 15 years.

THE PUBLIC PROVIDENT FUND SCHEME, 1968

[Issued vide Government of India, MOF (DEA) Notification No. GSR 1136 dated

15.6.1968 and further amended from time to time]

GSR 1136;- In exercise of the power conferred by Section 3 of the Public

Provident Fund Act, 1968 (23 of 1968), the Central Government hereby makes

the following scheme, namely:-

1. Short title and commencement:- (1) This scheme may be called the Public Provident Fund

63
Scheme, 1968.

(2) It shall come into force on Ist July, 1968.

2. Definitions:- In this scheme, unless the context otherwise requires:-

(a) ‘Account’ means a Public Provident Fund Account under this scheme.

(b) ‘Accounts Office’ means an office or branch of the State Bank of India, may subsidiary bank
of the State Bank of India (excluding a pay office, a sub pay office or any other office managed
by single officer or clerk) and any other office authorized by the Central Government to receive
subscriptions under the scheme.

( c) ‘Accounts Officer’ means the person who for the time being is in charge of an Accounts
Office.

(d) ‘Act’ means the Public Provident Fund Act, 1968 (23 of 1968)

(e) ‘Form’ means a form appended to this scheme;

(ee) ‘Guardian’ in relation to a minor, means:-‘

(i) Father or mother

(ii) Where neither parent is alive, or where the only living parent is incapable of acting, a person
entitled under the law for the time being in force to have care of the property of minor;

(f) ‘Year’ means the financial year (Ist April to 31st March)

3. Limit of subscription:- (1) Any individual may, on his own behalf or on behalf of a minor of
whom he is the guardian, subscribe to the Public Provident Fund (thereafter referred to as the
fund) any amount not less than Rs. 500 and not more than Rs. 70,000 in a year.

(2) Notwithstanding anything contained in sub-paragraph (1), an individual may also subscribe to
the fund on behalf of:-

(a) a Hindu Undivided Family, or

(b) an association of persons or a body of individuals consisting in either

64
case, only of husband and wife governed by the system of community of property in force in the
State of Goa and the Union territories of Dadra and Nagar Haveli and daman and Diu, by whom
or on whose behalf money is deposited in an account and the deposit means money is
deposited. Out of the income of the Hindu Undivided Family or an association of persons or body
of individuals, as the case may be , any amount not less than Rs. 500 and not more than Rs.
70,000 in a year. Non Resident Indians are not eligible to open an account under the Public
Provident Fund Scheme:-

Provided that if a resident who subsequently becomes Non Resident Indian

during the currency of the maturity period prescribed under Public Provident

Fund Scheme, may continue to subscribe to the Fund till its maturity on a Non

Repatriation Basis.

[MOF (DEA) Notification No GSR 585 (E) dated 25.7.2003]

4. Manner of making the subscription:- (1) Every individual desirous of subscribing to Fund
under the Scheme for the first time either on his own behalf or on behalf of a minor of whom he
is the guardian or on behalf of a Hindu Undivided Family of which he is a member or on behalf of
an Association of persons or a Body of individuals as referred to in sub rule 2(b) of Rule 3 above
shall apply to the Accounts Office in Form A, or as near thereto as possible together with the
amount of initial subscription which shall be integral multiples of Rs.5

(2) On receipt of an application under sub-paragraph(1), the Accounts Office shall open an
account in the name of the subscriber and issue a pass book to him, wherein all amount of
deposits, withdrawals, loans and repayment there of together with interest due shall be entered
over the signature of the Accounts Officer with the date stamp.

(3) The subscriber shall deposit his subscription with the Account Office with challan in Form B,
or as near thereto s possible. The counterfoil of the challan shall be returned to the depositor by
the Account Office, duly evidence by receipt. In the case of deposits made by cheques or draft or
pay order, the Accounts Office, may issue a paper token to the depositor pending realization of
the proceeds.

(4) Every subscription shall be made in cash or by crossed cheques or draft or pay order din

65
favour of the Accounts Officer at the place at which that office is situated.

5. Number of subscription: The subscription, which shall be in multiples of Rs. 5 may, for any
year, be paid into the account in one lump sum or installments not exceeding twelve in a year.

6. Transfer of Account:- A subscriber may apply for transfer of his account from one “Account
Office” to another “Account Office”.

7. Issue of duplicate pass book, etc.:- (1) In the event of loss or destruction of a pass book
issued by an Accounts Office, the Accounts Office may, on an application made to it in this
behalf, and on payment of rupee one by the subscriber, issue a duplicate thereof to him.

(2) Condonation of default:- A subscriber who fails to subscribe in any year according to the
limits specified in paragraph 3, may approach the Accounts Office for condonation of the default,
on payment , for each year of default , a fee of Rs. 50 alongwith arrear subscription of Rs. 500
for each year.

8. Interest - Interest at the rate , notified by the Central Government in official gazette from time
to time, shall be allowed for calendar month on the lowest balance at credit of an account
between the close of the fifth day and the end of the month and shall be credited to the account
at the end of each

year. Provided that where the interest to be credited contains a part of a rupee. Then, if such
part is fifty paise or more, it shall be increased to one complete rupee, and if such part is less
than fifty paise, it shall be ignored.

9. Withdrawals from the Fund:- (1) Any time after the expiry of five years from the end of the
year in which the initial subscription was made , a subscriber may, if he so desires, apply in
Form C or as near thereto as possible, together with his pass book to the Accounts Office
withdrawing from the balance to his credit, an amount not exceeding fifty per cent of the amount
that stood to his credit at the end of the forth year immediately preceding the year of withdrawal
or at the end of preceding year, whichever is lower, less the amount of loan, if any, drawn by him
under paragraph 10 and which remains to be repaid Provided that not more than one withdrawal
shall be permissible during any one year.

(2) On receipt of an application under sub paragraph (1) the Accounts Office may, after satisfying
66
itself that the amount of withdrawal applied for is not in excess of the limit prescribed in sub-
paragraph (1) and that the applicant has, till the date of application, been subscribing according
to the limit specified in

paragraph 3, subject to the provisions of sub-paragraph (4) permit the withdrawal and enter the
amount withdrawn in the pass book.

(3) Closure of account or continuation of account without deposits

after maturity:- Notwithstanding the provisions of sub-paragraph (1), any time after the expiry of
15 years from the end of the year in which the initial subscription was made by him, a subscriber
may, if he so desires, apply in Form C or as ‘near thereto as possible together with his pass
book to the Accounts Office for the withdrawal of the entire balance standing to his credit and the
Accounts Office, on receipt of such an application from the subscriber, shall subject to the
provisions of sub-paragraph (4) allow the withdrawal of the entire balance (together with interest
up to the last day of the month preceding the month in which the application for withdrawals
made) after making adjustments, if any, in respect of any interest due from the subscriber on
loans taken by him and close his account. Provided that a subscriber may, if he so desires, make
withdrawal of the amount standing to his credit, from time to time, in installments not exceeding
one in a year.

(3A) Continuation of account with deposits after maturity :- Subject to the provisions of sub-
paragraph (3) a subscriber may, on the expiry of 15 years from the end of the year in which the
initial subscription was made but before then expiry of one year thereafter, may exercise an
option with the Accounts Office in Form H, or as near thereto as possible, that he would continue
to subscribe for a further block period of 5 years according to the limits of subscription specified
in paragraph 3. (3B) In the event of a subscriber opting to subscribe for the aforesaid block
period he shall be eligible to make partial withdrawals not exceeding one every year by applying
to the Accounts Office in Form C, or as near thereto as possible, subject to the condition that the
total of the withdrawals, during the 5 year blcok period , shall not exceed 60 percent of the
balance at his credit at the commencement of the said period.

10. Loans:- (1) Notwithstanding the provisions of paragraph 9, any time after the expiry of one
67
year from the end of the year in which the initial subscription was made but before expiry of five
years from the end of the year in which the initial subscription was made, a subscriber may, he
so desires, apply in Form D or as near thereto as possible, together with his pass book to the
Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five
percent of amount that stood to his credit to at the ends of the second year immediately
preceding the year in which the loan is applied for.

(2) On receipt of an application under sub-paragraph (1) the Accounts Office may, after
satisfying itself that the amount of loan applied for is not in excess of the limit prescribed in sub-
paragraph (1) and that the

applicant has, till the date of application, been subscribing according to the limit specified in
paragraph 3, subject to the provisions of sub paragraph (3), sanction the loan and enter the
amount in the pass book.

(3) Where the application is made by a person who has made subscriptions to the Fund on
behalf of a minor of whom he is the guardian, he shall furnish a certificate in the following form,
namely:-

‘certified that the amount for which loan is applied for is required for the use of ……. Who is alive
and is still a minor.”

11. Repayment of loan and interest :- (1) The principal amount of a loan under this Scheme
shall be repaid by the subscriber before the expiry of thirty six months from the first day of the
month following the month in which then loan is sanctioned. The repayment a may be made
either in one lump sum or in two or more monthly installments within the prescribed period of
thirty six months. The repayment will be credited to the subscriber’s account.

(2) After the principal of the loan is fully repaid, the subscriber shall pay interest thereon in not
more than two monthly installments at the rate of one percent perannum of the principal for the
period of commencing from the first day of the month following the month in which the loan is
drawn up to the last day of the month in which the last installment of the loan Provided that
where the loan is repaid, only in part within the prescribed period of thirty six months, interest on
the amount of loan outstanding shall be charged at six per cent per annum instead of at one
per cent per annum from the first day of the month following the month in which the loan was
68
obtained to the last day of the month in which the loan is finally repaid.

(3) The interest on the amount of loan outstanding under the proviso to sub-paragraph (2) and
any portion on interest payable, but not paid, on any loan , the principal amount of which has
already been repaid within the prescribed period of thirty six months, may, on becoming due, be
debited to the subscriber’s account.

(4) The interest recoverable shall accrue to the Central Government .

12. Nomination and repayment after death of subscriber :-

(1) subscriber to the fund may nominate in Form E or, as near thereto as possible, one or more
persons to receive the amount stading to his credit in the event of his death before the amount
has become payable or, having become payable , has not been paid.

Note:- Nomination may also be made in respect of an account opened on behalf of a Hindu
Undivided Family (HUF).

(2) No Nomination shall be made in respect of an account opened on behalf of minor.

[MOF (DEA) Notification No. GSR 477 (E) dated 25.5.1994]

(3) A nomination made by a subscriber may be cancelled or varied by a fresh nomination in

Form F or , as near thereto as possible by giving notice in writing to the Accounts Office in which
the account stands.

(4) Every nomination and every cancellation or variation thereof shall be registered in the
Accounts Office and shall be effective from the date of such registration, the particulars of which
shall be entered in the pass book.

(5) If any nominee is a minor, the subscriber may appoint any person to receive the amount due
under the account in the event of the death of the subscriber during the minority of the nominee.

(6) Notwithstanding the provisions contained in paragraph 9-

a. If a subscriber to an account in espect of which a nomination is in force dies, the nominee or

nominees may make an application in Form G or, as near thereto as possible, to the Accounts
Office together with proof of death of the subscriber and on receipt of such application all
69
amounts standing to the credit of the subscriber after making adjustment, if any, in respect of
interest on loans taken by the subscriber shall be repaid by the Accounts Office itself to the
nominee or nominees. Provided that if any nominee is dead, the surviving nominee or nominees
shall, in addition to the proof of death of the subscriber, also furnish proof of the death of the
deceased nominee.

b. Where there is no nomination in force at the time of death of the subscriber, the amount
standing to the credit of the deceased after making adjustment, if any, in respect of interest on
loans taken by the subscriber, shall be repaid by the Accounts Office to the legal heirs of the
deceased on receipt of application in Form G in this behalf from them. Provided that the balance
up to Rs. 1 lakh may be paid to the legal heirs on production of (i) a letter of indemnity, (ii) an
affidavit, (iii) a letter of disclaimer on affidavit, and (iv) a certificate of death of subscriber, on
stamped paper, in the forms as in Annexure to Form G.

(7) A subscriber to the Fund cannot nominee a trust as his nominee.

13. Power to relax:- Where the Central Govt is satisfied that the operation of the any of the
provisions of this scheme causes undue hardship to a subscriber, it may, by order for reasons to
be recorded in writing , relax the requirements of that provision in a manner not inconsistent with
the provisions of the Act.

14).Bullion

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Bullion refers to any precious metal in a form in which its primary value comes from the worth of
the metal, not from an artificial currency value. Bullion is most often traded in the form of coins
minted by national governments, or in bulk ingots.

While government issued coins have a nominal value assigned to them upon minting, this value
is virtually always overshadowed by the commodity value of the metal itself. As an example,
most government issued gold coins have a currency value of between US$10 and US$100, but
usually contain at least one troy ounce of gold. Given that the exchange rate of gold consistently
rises, and from the beginning of the twenty-first century on was worth at least US$350 a troy
ounce, one can see that the government-assigned currency value of a bullion coin is essentially
meaningless.

The value of bullion is affected by three factors: metal, weight and purity. The metal the bullion
consists of is obviously important in determining its overall value: gold is worth more than silver,
while platinum is worth more than gold. The weight of bullion is usually measured in troy ounces,
where one troy ounce is equal to approximately 31g. Purity also varies widely in bullion, though
many countries release coins with 99.99% purity, which is as close as one can practically get to
pure.

The average minting of a bullion coin is less than 10,000, one of the reasons they are so popular
with collectors. Extremely limited presses are also relatively frequent, with countries sometimes
releasing as few as 20 to 50 of a certain bullion coin. Silver coins, particularly, are popular with
collectors; because of the relatively low worth of their metal, they are cheaper in general. For this
reason, silver bullion coins, more than gold or platinum, are often valued substantially above the
market value of silver.

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At this point, most major countries offer at least one type of bullion coin. Usually these coins will
have one main symbol they use each year, though some nations choose to keep the same
theme but alter the image yearly.

Examples of bullion coins include:

• U.S. Eagles: Minted in platinum (since 1997), gold and silver, these coins are embossed
with the image of a bald eagle. Gold Eagles are 91.67% pure.
• Canadian Maple Leafs: These coins are minted in platinum, gold and silver, with the
Canadian maple leaf embossed. Gold Maple Leafs were the first 99.99% pure gold coins
to be released. A very limited platinum coin is also released by Canada, depicting wildlife.
• Chinese Pandas: These come in platinum, gold, silver, palladium, copper and brass. The
depict a panda bear, the image of which changes each year. China also had a short-lived
series of unicorn gold and silver coins, and a limited run of twenty bullion coins in excess
of 260 troy ounces (8kg).
• South African Krugerrands: These were the first bullion coins ever released by a nation,
and are made of gold.

A bullion coin is a coin struck from precious metal and kept as a store of value or an
investment, rather than used in day-to-day commerce. Investment coins are generally coins that
have been minted after 1800, have a purity of not less than 900 thousandths and is or has been
a legal tender in its country of origin.[1] Bullion coins are usually available in gold and silver, with
the exception of the Krugerrand and the Swiss Vreneli which are only available in gold. The
American Eagle series is available in gold, silver and platinum, and the Canadian Maple Leaf
series is available in gold, silver, platinum and also palladium.

Bullion coins are also typically available in various weights. These are usually multiples or
fractions of 1 troy ounce, but some bullion coins are produced in very limited quantities in
kilograms and even heavier.

Bullion coins sell for a premium over the market price of the metal on the commodities
exchanges. This is due to their comparative small size and the costs associated with

72
manufacture, storage and distribution. The margin that is paid varies depending on what type of
coin it is, the weight of the coin, and the precious metal. The premium also is affected by
prevailing demand. The ISO currency code of gold bullion is XAU. ISO 4217 includes codes not
only for currencies, but also for precious metals (gold, silver, palladium and platinum; by
definition expressed per one troy ounce, as compared to "1 USD") and certain other entities
used in international finance, e.g. Special Drawing Rights.

ADVANTAGES

Bullion is the basic commodity traded in the precious metals market. By adding precious metals
in general to a portfolio of stocks, bonds and mutual funds, an investor is introducing a tangible
asset to the mix. This increases the degree of diversification and protects the portfolio against
fluctuations in value of any one asset type.

ECONOMIC FORCES
The economic forces that affect the price of precious metals are different from, and often are
opposed to the forces which determine the price of most common financial assets. This
independent movement of precious metals to the other financial assets can reduce overall
portfolio volatility and contributes balance.

PRESERVATION OF PURCHASING POWER

Precious metals have traditionally performed well as a long-term store of wealth and purchasing
power. Over long periods of time precious metals have purchased a constant basket of basic
goods and services.

THE DECLINING DOLLAR

The purchasing power of the U.S. dollar has steadily declined over time and is expected to
continue to do so; precious metals can often provide a "hedge against inflation." For example,
between 1971 and 1981 the U.S. dollar lost more than half its value while Gold prices rose
nearly five times. Economies fluctuate between inflation, recession and expansion, precious

73
metal investments help diversify and lower overall risk.

ASSET ALLOCATION
Whether you are conservative or aggressive in your investment approach, precious metals can
represent an important part of your asset allocation. Some experts suggest that 10 to 15-percent
of portfolio assets should be precious metals. No matter what level of risk an investor wishes to
take, every portfolio needs a secure foundation.

EASE OF OWNERSHIP
For investors who wish to take possession or direct control of their assets, buying physical
bullion has appeal. Owning bullion is easy and convenient. Thousands of dealers nationwide buy
and sell bullion daily over the counter, by phone, by fax and at auctions. It is internationally
recognized for its value based on its current market price. Bullion is one of the most liquid
investments available anywhere.

FINANCIAL PRIVACY
Bullion is one of the best forms of legally private wealth. No one needs to know how much bullion
you own, or where it is stored. Some forms of bullion, such as coins, can easily and quietly be
passed on to your heirs as a gift. Most of our clients feel that they would like to keep a certain
portion of their wealth from the prying eyes of those who have access to all assets listed under
their social security number. Legally, we are not required to report the purchase or sale of
bullion. In fact, it is classified like fine art and crystal. Bullion has been regarded as hard currency
for over 5,000 years, and is not subject to reportability and confiscation.

Disadvantages

• A gold standard leads to deflation whenever an economy using the gold standard grows
74
 faster than the gold supply. When an economy grows faster than its money supply, the
same money must be used to execute a larger volume of transactions. The only ways of
achieving this are for the money to circulate faster or to lower the cost of the transactions.
If deflation drives costs down, the real value of each unit of money goes up. This
increases the value of cash, and decreases the monetary value of real assets, since the
same asset can be purchased with less money. This in turn tends to increase the ratio of
debts to assets . For example, assuming interest rates remain unchanged, the monthly
cost of a fixed-rate home mortgage stays the same, but the value of the house goes
down, and the value of the money required to pay the mortgage goes up. Thus deflation
rewards cash savings.
• Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing
borrowers to cut spending to service their debts or to default. Lenders become wealthier,
but may choose to save some of their additional wealth rather than spending it all. The
overall amount of expenditure is therefore likely to fall. Deflation also robs a central bank
of its ability to stimulate spending. Deflation is considered to be difficult to control, and to
be a serious economic risk. However in practice it has always been possible for
governments to control deflation by leaving the gold standard or by artificial expenditure.
• The total amount of gold that has ever been mined has been estimated at around 142,000
metric tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the
total value of all the gold ever mined would be around $4.5 trillion. This is less than the
value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation
or in deposit (M2). Therefore, a return to the gold standard, if also combined with a
mandated end to fractional reserve banking, would result in a significant increase in the
current value of gold, which may limit its use in current applications. For example, instead
of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce
effectively raising the value of gold to $9 trillion. However, this is specifically a
disadvantage of return to the gold standard and not the efficacy of the gold standard itself.
Some gold standard advocates consider this to be both acceptable and necessary whilst
others who are not opposed to fractional reserve banking argue that only base currency
and not deposits would need to be replaced. The amount of such base currency (M0) is
only about one tenth as much as the figure (M2) listed above.
75
• Many economists believe that economic recessions can be largely mitigated by increasing
money supply during economic downturns. Following a gold standard would mean that
the amount of money would be determined by the supply of gold, and hence monetary
policy could no longer be used to stabilize the economy in times of economic recession.
Such reason is often employed to partially blame the gold standard for the Great
Depression, citing that the Federal Reserve couldn't expand credit enough to offset the
deflationary forces at work in the market. Opponents of this viewpoint have argued that
gold stocks were available to the Federal Reserve for credit expansion in the early 1930s,
but Fed operatives failed to utilize them.
• Monetary policy would essentially be determined by the rate of gold production.
Fluctuations in the amount of gold that is mined could cause inflation if there is an
increase, or deflation if there is a decrease. Some hold the view that this contributed to
the severity and length of the Great Depression as the gold standard forced the central
banks to keep monetary policy too tight, creating deflation. Milton Friedman however
argued that the main cause of the severity of the Great Depression in the United States
was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy
tighter than was required by the gold standard. Additionally three increases by the Federal
Reserve in bank reserve requirements in 1936 and 1937, which doubled bank reserve
requirements lead to yet another contraction of the money supply.
• Although the gold standard gives long term price stability, it does in the short term bring
high price volatility. In the United States from 1879 to 1913 the coefficient of variation of
the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88. It
has been argued by among others Anna Schwartz that this kind of instability in short term
price levels can lead to financial instability as lenders and borrowers become uncertain
about the value of debt.
• Some have contended that the gold standard may be susceptible to speculative attacks
when a government's financial position appears weak, although others contend that this
very threat discourages governments' engaging in risky policy (see Moral Hazard). For
example, some believe the United States was forced to raise its interest rates in the
middle of the Great Depression to defend the credibility of its currency after unusually
easy credit policies in the 1920s. This disadvantage however is shared by all fixed

76
 exchange rate regimes and not just limited to gold money. All fixed currencies that appear
weak are subject to speculative attack.
• If a country wanted to devalue its currency it would generally produce sharper changes
than the smooth declines seen in fiat currencies, depending on the method of devaluation.

15).Insurance

People need insurance in the first place.An insurance policy is primarily meant to protect the
income of the family’s bread earners. The idea is if any one or both die their dependents
continue to live comfortably.The circle of life begins at birth follower by education , marraige and
eventually after a lifetime of work we look forward to life of retirement . Our finances too tend to
change as we go through the various phases of life. In the first twenty of our life, we are
financially and emotionally dependents on our parents and their are no financial committments to
be met.In the next twenty years we gain financial independence and provide financial
independence to our families. This is also the stage when our income may be unable to meet the
growing expenses of a young household. In the next twenty as we see our investments grow
after our children grow and become financially independent. Insurance is a provision for the
distribution of risks that is to say it is a financial provision against loss from unavoidable
disasters.

The protection which it affords takes form of a guarantee to indemnify the insured if certain
specified losses occur. The principle of insurance so far as the undertaking of the obligation is
concerned is that for the payment of a certain sum the guarantee will be given to reimburse the
insured. The insurer in accepting the risks so distributes them that the total of all the amounts is

77
paid for this insurance protection will be sufficient to meet the losses that occur. Insurance then
provide divided responsibility. This principle is
introduced in most stores where a division is made between the sales clerk and the cashiers
department the arrangement dividing the risks of loss. The insurance principle is similarly applied
in any other cases of divided responsibility. As a business however insurance is usually
recognized as some form of securing a promise of indemnity by the payment of premium and the
fulfillment of certain other stipulations.

Types of insurance

Term insurance plans

Term insurance is the cheapest form of life insurance available. Since a term insurance contract
only pays in the event of eventuality the life cover comes at low premium rates . Term
insurance is a useful tool to purchase against risk of early death and protection of an
asset.

Endowment plans
Endowment plans are savings and protection plans that provide a dual benefit of protection as
well as savings. Endowment plans pay a death benefit in the event of an eventuality should the
customer survive the benefit period a maturity benefit is paid to the life insured.

Whole of life plans

A whole of life plan provides life insurance cover to an individual upto a specified age . A whole
of life plan is suitable for an individual who is looking for an extended life insurance cover and /or
wants to pay premium over as long as tenure as possible to reduce the amount of upfront
premium payment.

Pension plans
Pension plans allow an individual to save in a tax deferred manner. An individual can either
contribute through regular premiums or make a single premium investments. Savings
accumulate over the deferment period. Once the contract reaches the vesting age , the individual
has the option of choosing an annuity plan from a life insurance company. An annuity is paid till

78
the life the lifetime of the insured or a predetermined period depending upon the annuity option
chosen by the life insured.

Unit Linked Insurance Plans

Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk
protection and flexibility in investment. The investment is denoted as units and is represented by
the value that it has attained called as Net Asset Value (NAV). The policy value at any time
varies according to the value of the underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium
for risk cover under all policies in a particular fund as chosen by the policy holders are pooled
together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance
Policy. The returns in a ULIP depend upon the performance of the fund in the capital market.
ULIP investors have the option of investing across various schemes, i.e., diversified equity funds,
balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making
premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the
flexibility to alter the premium amounts during the policy's tenure. For example, if an individual
has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with
a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced.

16).DERIVATIVES

Financial derivatives are instruments that derive their value from financial assets. These assets

79
can be stocks, bonds, currency etc. These derivatives can be forward rate agreements, futures,
options swaps etc. As stated earlier, the most traded instruments are futures and options.
Derivatives are nothing but a kind of security whose price or value is determined by the value of
the underlying variables. It is more like a contract of future date in which two or more parties are
involved to alleviate future risk. Usually, derivatives enjoy high leverage. Its value is affected by
the volatility in the rates of the underlying asset. Some of the widely known underlying assets
are:

Futures-When two entities decide to purchase or sell an asset at a given time in the future at a
given price, it is called futures contract. Futures contracts can be said to be a special kind of
forward contracts, as they are customized exchange-traded agreements.

Options- It is of two different kinds such as calls and puts. Those who take calls option, they are
not obligated to purchase given quantity of the underlying variable, at a mentioned price on or
prior to a scheduled future date. On the other hand, buyers in case of puts option may not
necessarily sell a mentioned quantity of the underlying variable at a mentioned price on or prior
to a given date.

Swaps- These are private contracts between two entities to deal in cash flows in the future
following a pre-decided formula. They are somewhat like forward contracts' portfolios. Swaps are
also of two types such as interest rate swaps and currency swaps.

Interest rate swaps- In this case, only interest related cash flows can be exchanged between
the
entities in one currency.

Currency swaps- In this case of swapping, principal and interest can be exchanged in one
currency for the same in other form of currency.

CHARACTERISTICS

Financial transactions are fraught with several risk factors. Derivatives are instrumental in
alienating those risk factors from traditional instruments and shifting risks to those entities that

80
are ready to take them. Some of the basic risk components in derivatives business are:

• Credit Risk: When one of the two parties fails to perform its role as per the agreement,
this is called the credit risk. It can also be referred to as default or counterparty risk. It
varies with different sources.
• Market Risk: This is a kind of financial loss that takes place due to the adverse price
movements of the underlying variable or instrument.
• Liquidity Risk: When a firm is unable to devise a transaction at current market rates, it
can be referred to as liquidity risk. There are two kinds of liquidity risks involved in the
scenario. First is concerned with the liquidity of separate items and second is related to
supporting the activities of the organization with funds comprising derivatives.
• Legal Risk: Legal issues related with the agreement need to be scrutinized well, as one
can deal in derivatives across the different judicial boundaries.

Example

 When one buys a cash instrument, for example 100 shares of ABC Inc., the payoff is
linear (disregarding the impact of dividends). If we buy the shares at $50 and the price
appreciates to $75, we have made $2500 on a mark-to-market basis. If we buy the
shares at $50 and the price depreciates to $25, we have lost $2500 on a mark-to-
market basis.

 Instead of buying the shares in the cash market, we could have bought a 1 month call
option on ABC stock with a strike price of $50, giving us the right but not the
obligation to purchase ABC stock at $50 in 1 month's time. Instead of immediately
paying $5000 and receiving the stock, we might pay $700 today for this right. If ABC
goes to $75 in 1 month's time, we can exercise the option, buy the stock at the strike
price and sell the stock in the open market, locking in a net profit of $1800.
 If the ABC stock price goes to $25, we have only lost the premium of $700. If ABC
trades as high as $100 after we have bought the option but before it expires, we can
sell the option in the market for a price of $5300. The option in this case gives us a
great deal of positional flexibility with a different risk/reward profile.
81
  Mark-to-market is a way of accounting for financial products in which an inventory of
financial products is revalued a pre-set interval (usually at the end-of-business on a
daily basis) at current market rates. The combination of realized and unrealized profit
and loss is booked to the profit-and-loss account. Mark-to-market accounting is a
good practice for the management of any financial portfolio.

Advantages

One of the great advantages that derivatives provide is leverage. You can control a large holding
in an asset for a small amount of money. Since you participate in the gain from the price
movement of the underlying asset for a fraction of the cost of the asset, you can significantly
increase your rate of return. When a security is based on the price of an underlying asset, it is
called a derivative. Derivatives include futures, options, swaps, convertibles, and warrants. Using
derivatives, you can make money when the market goes up or when it goes down, by predicting
the direction of movement of the underlying asset. Derivatives can also be used to hedge or
reduce the risk of your investment in the underlying instrument. When you work with derivatives
such as options, it is important to do appropriate analyses on your option position before you
open it. Determine fair value for the option to make sure you don't pay too much for it. Don't let
your profits erode; make sure you get the right start. It is also good to assess the actual
probabilities of reaching your goal. Don't rely on just a feeling. A good derivative calculator like
Option-Aid can do all of these calculations for you and make it easy.

Derivative contracts are effective tool for hedging and thereby reducing the potential of future
risk. They also allow investors to take a leveraged position in the market and thereby increase
the possibilities of earning higher returns.

1) Flexibility: Derivatives can be used with respect to commodity price, interest and exchange
rates and equity price. They can be used in many ways.

2) Risk Reduction: Derivatives can protect your business from huge losses. In fact, derivatives
allow you to cut down on non-essential risks.

3) Stable Economy: Derivatives have a stabilizing effect on the economy by reducing the

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number of businesses that go under due to volatile market forces.

Disadvantages

If derivatives are misused, they can boomerang on the company. Because of their ability to
provide leveraging, derivative disasters are pretty common in international markets. Just as there
is huge potential of earning higher returns, it also exposes individuals and corporations alike to
lose money in case the market moves against the positions held by them.

1) Credit Risk: While derivatives cut down on the risks caused by a fluctuating market, they
increase credit risk. Even after minimizing the credit risk through collateral, you still face some
risk from credit protection agencies.

2) Crimes: Derivatives have a high potential for misuse. They have been the caused the
downfall of many companies that used trade malpractices and fraud.

3) Interest Rates: Wrong forecasts can result in losses amounting to millions of dollars for large
companies; it can wipe out small businesses. You need to accurately forecast the long term and
short term interest rates, something that many businesses cannot do.

Minimizing Risks with Derivatives:

Stock exchanges follow robust risk management measures for derivative trading. These include,
initial base minimum capital requirements, margins and daily mark to market margin system and
initial Value at risk (VAR) based margin system. Apart from that there are various position limits,
broker wise limits and scrip wise limits also to avoid build up of huge positions. So here are some
suggestions to minimize the above risk:

1) Future Exchanges: Arrange the derivatives through future exchanges. You may need to put
in a lot of work here; you must keep track of all adjustments in the market worth of the underlying

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asset.

2) Asset and Liability driven Transactions: The transactions should be driven by asset and
liability management. You should not speculate based on future forecasts.

3) Derivative Policy: A good derivative policy focuses more on cost management and less on
forecasting. It should aim for cutting down expenses and costs.

While dabbling in derivatives is risky if you choose to speculate, derivatives can be an important
tool for financial structuring and cost management if you use them correctly. If you do not know
how to start investing in derivatives, you can consult a small business advisor or financial
consultant. Remember, if you do go for derivatives, always play by the book and never try
anything illegal.

Types of Derivative Market

The Derivative Market can be classified as Exchange Traded Derivatives Market and Over the
Counter Derivative Market.

Exchange Traded Derivatives are those derivatives which are traded through specialized
derivative exchanges whereas Over the Counter Derivatives are those which are privately traded
between two parties and involves no exchange or intermediary. Swaps, Options and Forward
Contracts are traded in Over the Counter Derivatives Market or OTC market.

The main participants of OTC market are the Investment Banks, Commercial Banks, Govt.
Sponsored Enterprises and Hedge Funds. The investment banks markets the derivatives
through traders to the clients like hedge funds and the rest.

In the Exchange Traded Derivatives Market or Future Market, exchange acts as the main party
and by trading of derivatives actually risk is traded between two parties. One party who
purchases future contract is said to go “long” and the person who sells the future contract is said
to go “short”. The holder of the “long” position owns the future contract and earns profit from it if
the price of the underlying security goes up in the future. On the contrary, holder of the “short”
position is in a profitable position if the price of the underlying security goes down, as he has
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already sold the future contract. So, when a new future contract is introduced, the total position
in the contract is zero as no one is holding that for short or long.

The trading of foreign exchange traded derivatives or the future contracts has emerged as very
important financial activity all over the world just like trading of equity-linked contracts or
commodity contracts. The derivatives whose underlying assets are credit, energy or metal, have
shown a steady growth rate over the years around the world. Interest rate is the parameter which
influences the global trading of derivatives, the most.

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odities are

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