"A Study of Investment Behavior amongst IT sector”

A Project Submitted to

University of Mumbai for partial completion of degree of

Bachelor of Management Studies

Under the Faculty of Commerce

By
Sanika Yogesh Mahamunkar

Under the Guidance of

MS. Rachana Chawda

D. G. Ruparel College of Arts, Science and Commerce

Senapati Bapat Marg, Matunga west, Mumbai-16

April 2020

Declaration by learner

1
I the undersigned Ms. Sanika Mahamunkar here by, declare that the work embodied in this
project work titled “A Study of Investment Behavior in IT sector”, forms my own
contribution to the research work carried out under the guidance of Ms. Rachana Chawda is
a result of my own research and has not been previously submitted to any other University for
any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly indicated
as such and included in the bibliography.

I, here by further declare that all the information provided in the project is true and to the best
of my knowledge.

______________________
Sanika Mahamunkar

________________________ __________________________
Rachana Chawda
Internal Examiner External Examiner

________________________ ________________________
Neeta Tatke College Seal
Vice-Principal

Certificate
2
This is to certify that Ms. Sanika Yogesh Mahamunkar" worked and duly completed his
Project Work for the degree of Bachelor of Management Studies under the Faculty of
Commerce in the subject of Finance and his project is entitled, “A Study of Investment
Behavior of IT sector” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that
no part of it has been submitted for any Degree or Diploma of any University.

It is his own work and facts reported by his personal findings and investigations.

_________________
Rachana Chawda

Date of submission:

3
 Acknowledgement

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, Dr. Tushar Desai for providing the necessary facilities
required for completion of this project.

I take this opportunity to thank our Vice-Principal, Dr. Neeta Tatke for her moral support
and guidance.

I would also like to express my sincere gratitude towards my project guide Ms Rachana
Chawda whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially my Parents and Peers who supported me throughout
my project.

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 INDEX

Serial no Particulars Page no

1. Executive Summary 8

2. Chapter.1 Introduction 10

3. Chapter.2 Research Methodology 20

2.1 Objectives of study 20

2.2 Need of study 21

2.3 Value addition 21

2.4 Limitation 22

2.5 Research Methodology 22

2.6 Questionnaire 24

4. Chapter.3 Literature Review 27

5. Chapter.4 Industry Review 29

6. Chapter.5 Investment Avenues 33

5.1 Non marketable securities 35

5.2 Marketable securities 40

5.3 Real estate 43

5.4 Precious objects 43

5.5 Insurance 46

5.6 Pension Funds 50

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 5.7 Mutual funds 52

5.8 Introduction to capital market 57

5.9 Stock market Indices- Sensex, Nifty 61

5.10 Investment Banking 66

5.11 Depository System 68

5.12 NSDL 70

5.13 Online trading 72

5.14 Penny stocks 76

5.15 Risks 78

5.16 Return 80

7 Chapter.6 Data Analysis and Interpretation 86

8 Chapter.7 Findings and suggestions 101

9 Chapter.8 Summary and Conclusion 104

10 Chapter.9 Bibliography 105

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 LIST OF TABLES AND FIGURES

Sr. No. Table Table/Figure Caption Page No.

Name

1 Table 1 Demographics of the sample investors 87

2 Table 2.1 Investors willing to lose principal amount 89

3 Table 2.2 Time period preferred to invest 90

4 Table 2.3 Frequency of monitoring the investment 91

5 Table 2.4 Family budget 92

6 Table 2.5 Investment objectives 93

7 Table 2.6 Saving objectives 94

8 Table 2.7 Purpose behind investment 95

9 Table 2.8 Factors considered before investing 96

10. Table 2.9 Investment growth rate 97

11. Table 2.10 Source of investment advice 98

12 Table 3 Investment preference based on 99

occupation

13 Table 4 Suggested portfolio based on age group 102

and level of risk

EXECUTIVE SUMMARY

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 This report was commissioned to examine why the involvement of common people in
Capital market in India is very low compared to other countries.

The research draws attention to the fact that in 2019-20, there is a huge transformation in
Indian capital market regulation which attract FPI but still for domestic consumers there is
no changes shows in the participation of common people.

Though the participation in Mutual fund is increase significantly.

This research was conduct to analyse the investors need & wants & depending upon the
needs, how could we educate them to not just to relay on traditional investment options
but invest on capital market for investments.

Findings:

• Throughout the research it was observed that most of the rural people fear capital
market;

• People are trapped by local financial pull investments;

• Some people have some myth about capital market;

• People are happy with their traditional investments;

• People are very much conservatives about their investments;

• Risk tolerance level in rural people is very low;

From that research I have learnt that giving proper education to Investors on investment
products either by campaign or mass target advertisement or through social media platform
like YouTube, Facebook etc. is the way to make them participate in Indian Capital Market.

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.

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One needs to invest and earn return on their 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 cost 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:

➢ Invest early

➢ Invest regularly

➢ Invest for long term and not for short term

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 CHAPTER 1: INTRODUCTION

WHAT IS AN INVESTMENT?

An investment is an asset or item acquired with the goal of generating income or

appreciation.

In an economic sense, an investment is the purchase of goods that are not consumed today
but are used in the future to create wealth.

In finance, an investment is a monetary asset purchased with the idea that the asset will
provide income in the future or will later be sold at a higher price for a profit.

Understanding Investment

Investing is putting money to work to start or expand a project - or to purchase an asset or

interest - where those funds are then put to work, with the goal to income and increased
value over time.

The term "investment" can refer to any mechanism used for generating future income. In
the financial sense, this includes the purchase of bonds, stocks or real estate property
among several others. Additionally, a constructed building or other facility used to produce
goods can be seen as an investment.

The production of goods required to produce other goods may also be seen as investing.

Taking an action in the hopes of raising future revenue can also be considered an
investment. For example, when choosing to pursue additional education, the goal is often to
increase knowledge and improve skills in the hopes of ultimately producing more income.

Investing is oriented toward future growth or income, there is risk associated with the
investment in the case that it does not pan out or falls short.

For instance, investing in a company that ends up going bankrupt or a project that fails. This
is what separates investing from saving - saving is accumulating money for future use that is
not at risk, while investment is putting money to work for future gain and entails some risk.

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Investment and Economic Growth

Economic growth can be encouraged through the use of sound investments at the business
level.

When a company constructs or acquires a new piece of production equipment in order to

raise the total output of goods within the facility, the increased production can cause the
nation’s gross domestic product (GDP) to rise.

This allows the economy to grow through increased production based on the previous
equipment investment.

Investment Banking

An investment bank provides a variety of services designed to assist an individual or

business in increasing associated wealth.

This does not include traditional consumer banking. Instead, the institution focuses on
investment vehicles such as trading and asset management. Financing
options may also be provided for the purpose of assisting with these services.

Investment banking is a specific division of banking related to the creation of capital for
other companies, governments and other entities.

Investment banks underwrite new debt and equity securities for all types of corporations,
aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations
and broker trades for both institutions and private investors.

Investment banks also provide guidance to issuers regarding the issue and placement of
stock, such as with an IPO or rights offering.

Investments and Speculation

Speculation is a separate activity from making an investment. Investing involves the

purchase of assets with the intent of holding them for the long term, while speculation
involves attempting to capitalize on market inefficiencies for short-term profit.

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Ownership is generally not a goal of speculators, while investors often look to build the
number of assets in their portfolios over time.

Although speculators are often making informed decisions, speculation cannot usually be
categorized as traditional investing. Speculation is generally considered higher risk than
traditional investing, though this can vary depending on the type of investment involved.
Some consider speculation more akin to gambling than anything else.

ELEMENTS OF INVESTMENTS

The Elements of Investments are as follows:

Return: Investors buy or sell financial instruments in order to earn return on them. The
return on investment is the reward to the investors. The return includes both current
income and capital gain or losses, which arises by the increase or decrease of the security
price.

Risk: Risk is the chance of loss due to variability of returns on an investment. In case of
every investment, there is a chance of loss. It may be loss of interest, dividend or principal
amount of investment.

However, risk and return are inseparable. Return is a precise statistical term and it is
measurable. But the risk is not precise statistical term. However, the risk can be quantified.
The investment process should be considered in terms of both risk and return.

Time: Time is an important factor in investment. It offers several different courses of action.
Time period depends on the attitude of the investor who follows a ‘buy and hold’ policy. As
time moves on, analysis believes that conditions may change and investors may revaluate
expected returns and risk for each investment.

Liquidity: Liquidity is also important factor to be considered while making an investment.

Liquidity refers to the ability of an investment to be converted into cash as and when
required. The investor wants his money back any time. Therefore, the investment should
provide liquidity to the investor.

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Tax Saving: The investors should get the benefit of tax exemption from the investments.
There are certain investments which provide tax exemption to the investor. The tax saving
investments increases the return on investment. Therefore, the investors should also think
of saving income tax and invest money in order to maximize the return on investment.

OBJECTIVES OF INVESTMENT

Investing is a wide spread practice and many have made their fortunes in the process. The
starting point in this process is to determine the characteristics of the various investments
and then matching them with the individuals need and preferences.

All personal investing is designed in order to achieve certain objectives. These objectives
may be tangible such as buying a car, house etc. and intangible objectives such as social
status, security etc. similarly; these objectives may be classified as financial or personal
objectives.

Financial objectives are safety, profitability, and liquidity. Personal or individual objectives
may be related to personal characteristics of individuals such as family commitments,
status, dependents, educational requirements, income, consumption and provision for
retirement etc.

The objectives can be classified on the basis of the investors approach as follows:

1. Short term high priority objectives: Investors have a high priority towards achieving
certain objectives in a short time. For example, a young couple will give high priority
to buy a house. Thus, investors will go for high priority objectives and invest their
money accordingly.
2. Long term high priority objectives: Some investors look forward and invest on the
basis of objectives of long-term needs. They want to achieve financial independence
in long period. For example, investing for post-retirement period or education of a
child etc. investors, usually prefer a diversified approach while selecting different
types of investments.
3. Low priority objectives: These objectives have low priority in investing. These
objectives are not painful. After investing in high priority assets, investors can invest
in these low priority assets. For example, provision for tour, domestic appliances etc.

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 4. Money making objectives: Investors put their surplus money in these kinds of
investment. Their objective is to maximize wealth. Usually, the investors invest in
shares of companies which provide capital appreciation apart from regular income
from dividend. Every investor has common objectives with regard to the investment
of their capital.

The importance of each objective varies from investor to investor and depends
upon the age and the amount of capital they have. These objectives are broadly
defined as follows.

1. Lifestyle – Investors want to ensure that their assets can meet their financial needs
over their lifetimes.
2. Financial security – Investors want to protect their financial needs against financial
risks at all times.
3. Return – Investors want a balance of risk and return that is suitable to their personal
risk preferences.
4. Value for money – Investors want to minimize the costs of managing their assets
and their financial needs.
5. Peace of mind – Investors do not want to worry about the day to day movements of
markets and their present and future financial security. Achieving the sum of these
objectives depends very much on the investor having all their assets and needs
managed centrally, with portfolios planned to meet lifetime needs, with one overall
investment strategy ensuring that the disposition of assets will match individual
needs and risk preferences.

FACTORS INFLUENCING SELECTION OF INVESTMENT

Investment is expenditure on capital goods – for example, new machines, offices, new
technology. Investment is a component of Aggregate Demand (AD) and also influences the
capital stock and productive capacity of the economy (long-run aggregate supply)

1. Interest rates

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Investment is financed either out of current savings or by borrowing. Therefore, investment
is strongly influenced by interest rates. High interest rates make it more expensive to
borrow. High interest rates also give a better rate of return from keeping money in the bank.
With higher interest rates, investment has a higher opportunity cost because you lose out
the interest payments.

2. Economic growth

Firms invest to meet future demand. If demand is falling, then firms will cut back on
investment. If economic prospects improve, then firms will increase investment as they
expect future demand to rise. There is strong empirical evidence that investment is cyclical.
In a recession, investment falls, and recover with economic growth.

3. Confidence

Investment is riskier than saving. Firms will only invest if they are confident about future
costs, demand and economic prospects. Keynes referred to the ‘animal spirits’ of
businessmen as a key determinant of investment.

Keynes noted that confidence wasn’t always rational. Confidence will be affected by
economic growth and interest rates, but also the general economic and political climate. If
there is uncertainty (e.g. political turmoil) then firms may cut back on investment decisions
as they wait to see how event unfold.

4. Inflation

In the long-term, inflation rates can have an influence on investment. High and variable
inflation tends to create more uncertainty and confusion, with uncertainties over the future
cost of investment. If inflation is high and volatile, firms will be uncertain at the final cost of
the investment, they may also fear high inflation could lead to economic uncertainty and
future downturn.

Countries with a prolonged period of low and stable inflation have often experienced higher
rates of investment.

5. Wage costs

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If wage costs are rising rapidly, it may create an incentive for a firm to try and boost labour
productivity, through investing in capital stock. In a period of low wage growth, firms may
be more inclined to use more labour-intensive production methods.

6. Depreciation

Not all investment is driven by the economic cycle. Some investment is necessary to replace
worn out or outdated equipment. Also, investment may be required for the standard
growth of a firm.

In a recession, investment will fall sharply, but not completely – firms may continue with
projects already started, and after a time, they may have to invest in less ambitious projects.
Also, even in recessions, some firms may wish to invest or start-up.

7. Public sector investment

The majority of investment is driven by the private sector. But investment also includes
public sector investment – government spending on infrastructure, schools, hospitals and
transport.

8. Government policies

Some government regulations can make investment more difficult. For example, strict
planning legislation can discourage investment. On the other hand, government
subsidies/tax breaks can encourage investment

In China and Korea, the government has often implicitly guaranteed – supported the cost of
investment. This has led to greater investment – though it can also affect the quality of
investment as there is less incentive to make sure the investment has a strong rate of
return.

TYPES OF INVESTORS

Investors come in three types: aggressive, moderate and conservative. However, one
commonality is that a mutual fund portfolio will work for all three investors.

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The three investor categories have differences in their risk tolerance and time horizons and
will tend to gravitate towards different types of investment products and returns. The wide
world of mutual fund products has something to offer investors of all types.

Aggressive Mutual Fund Portfolio

An aggressive mutual fund portfolio is appropriate for an investor with a higher-risker

tolerance level and a time horizon—the time before you need invested sums returned—
longer than 10 years. Aggressive investors are willing to accept periods of extreme market
volatility—the ups and downs in account value.

They allow volatility in exchange for the possibility of receiving higher relative returns that
outpace inflation by a wide margin.

Aggressive portfolios are most appropriate for investors in their 20s, 30s or 40s because
they typically have decades to invest and recoup any losses they may experience.

An aggressive portfolio might average 7-10% average rate of return over time. In its best
year, it might gain 30-40%. In its worst year, it could decline by 20-30%.

Moderate Investor Mutual Fund Portfolio

A moderate portfolio of mutual funds is appropriate for an investor with medium risk
tolerance and a time horizon longer than five years. Moderate investors are willing to accept
periods of moderate market volatility in exchange for the possibility of receiving returns that
outpace inflation.

Most investors tend to fall into the moderate category, which means they want to achieve
good returns but are not comfortable taking high levels of market risk.

This moderate portfolio might get an average annualized return of 7-8%. Its best yearly gain
might be 20-30% and its biggest decline in a year may range from 20-25%.

Conservative Investor Mutual Fund Portfolio

A conservative portfolio of mutual funds is appropriate for an investor with low-risk

tolerance and a time horizon from immediate to longer than 3 years.

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Conservative investors are not willing to accept periods of extreme market volatility and are
seeking returns that match or slightly outpace inflation

INVESTMENT PROCESS

Step 1. Investment Policy:

The first stage determines and involves personal financial affairs and objectives before
making investments. It may also be called preparation of the investment policy stage.

The investor has to see that he should be able to create an emergency fund, an element of
liquidity and quick convertibility of securities into cash.

This stage may, therefore; be considered appropriate for identifying investment assets and
considering the various features of investments.

Step 2. Investment Analysis:

When a individual has arranged a logical order of the types of investments that he requires
on his portfolio, the next step is to analyse the securities available for investment. He must
make a comparative analysis of the type of industry, kind of security and fixed vs. variable
securities. The primary concerns at this stage would be to form beliefs regarding future
behaviour or prices and stocks, the expected returns and associated risk.

Step 3. Valuation of Securities:

The third step is perhaps the most important consideration of the valuation of investments.
Investment value, in general, is taken to be the present worth to the owners of future
benefits from investments. The investor has to bear in mind the value of these investments.
An appropriate set of weights have to be applied with the use of forecasted benefits to
estimate the value of the investment assets.

Comparison of the value with the current market price of the asset allows a determination
of the relative attractiveness of the asset. Each asset must be valued on its individual merit.
Finally, the portfolio should be constructed.

Step 4. Portfolio Construction:

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Under features of an investment programme, portfolio construction requires a knowledge
of the different aspects of securities.

These are briefly recapitulated here, consisting of safety and growth of principal, liquidity of
assets after taking into account the stage involving investment timing, selection of
investment, allocation of savings to different investment

DIFFERENCES BETWEEN INVESTMENT AND SPECULATION.

The basic difference between investment and speculation are mentioned in the points given
below:

1. Investment refers to the purchase of an asset with the hope of getting returns. The
term speculation denotes an act of conducting a risky financial transaction, in the
hope of substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e.
performance of the company. On the other hand, in speculation decisions are based
on hearsay, technical charts, and market psychology.
3. Investments are held for at least one year. Hence, it has a longer time horizon than
speculation, where speculators hold assets for short term only.
4. The quantity of risk is moderate in investment and high in case of speculation.
5. The investors, expect profit from the change in the value of the asset. As opposed to
speculators who expect profit from the change in the prices, due to demand and
supply forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a
speculator expects higher profits from the speculation in exchange for the risk borne
by him.
7. The investor uses his own funds for investment purposes. Conversely, speculator
uses borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not
in the case of investment.

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 CHAPTER 2: RESEARCH METHODLOGY

2.1 Objectives of the Study

The purpose of the analysis is to determine the investment behaviour of investors

and investment preferences for the same. Investors perception will provide a way to
accurately measure how the investors 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 investors on an ongoing basis is critical for survival. Executives need a third
party understanding on where investor's loyalties stand. More than ever
management needs ongoing feedback from the investors, partners and employees in
order to continue to innovate and grow.

The main objective of the project is to find out the needs of the current and future
investors.
For this analysis, customer perception and awareness level will be measured in
important areas such as:
1. To understand in depth about different investment avenues available in India.
2. To find out how investors get information about the various financial instruments.
3. The type of financial instruments, they would prefer to invest.
4. The duration for which they would prefer to keep their money invested.
5. What are the factors that they consider before investing?
6. To give some recommendations to the investors that where they should invest.
7. To know the risk tolerance level of the individual investor and suggest a suitable
portfolio.
8. To develop a profile of sample Indian individual investor in terms of their
demographics. And demographics based on occupation of the sample investor.
9. To identify the objective of savings of an investor.
10. To study the dependence/independences of the demographic factors (Age) of
the investor and his/her risk tolerance level.

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 2.2 Need of the Study

Stock market has been subjected to speculations and inefficiencies, which are
beached to the rationality of the investor. Traditional finance theory is based on the
two assumptions. Firstly, investors' make rational decisions; and secondly investors
are unbiased in their predictions about future returns of the stock. However financial
economist has now realized that the long-held assumptions of traditional finance
theory are wrong and found that investors can be irrational and make predictable
errors about the return on investment on their investments.
This analysis on Individual Investors' Behaviour is an attempt to know the profile of
the investor and know the characteristics of the investors to know their preference
with respect to their investments. The study also tries to unravel the influence of
demographic factors like age on risk tolerance level of the investor.

2.3 Value Addition

This analysis will help to strengthen investor involvement to investment products.

This analysis will also throw lighten various investment avenues available in India
that will help in many ways like. The expectations of different types of investors
regarding particular service requirements can be identified.
The common problem areas faced by the investors can be understood. · It also
enhances new services initiatives. · This study will help in gaining a better
understanding of what an investor looks for in an investment option. · It can be used
by the financial sector in designing better financial instrument customized to suit the
needs of the investor. · It will also help the agents and brokers in marketing the
existing financial instruments. · It will provide knowledge to the investors about the
various financial services provided by the company to their investors. · It will also
help the company to understand what is the requirement and expectations of
different categories of investors.

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This analysis will be originated in order to empower the investors with detailed research on
various investments avenues available in India. The awareness lever of the investors about
the various investment options and what is the perception of the investors with regard to
the investments they want to make.

2.4 Limitation of the Study

This analysis is based upon investors' behaviour for investment preferences during normal
time vis-a-vis recessionary period. This analysis would be focusing on the information from
the investors about their knowledge, perception and behaviour on different financial
products.

The various limitations of the study are:

1. The total number of financial instruments in the market is so large that it needs a lot of
resources to analyse them all. There are various companies providing these financial
instruments to the public. Handling and analysing such a varied and diversified data
need a lot of time and resources.
2. As the analysis is based on primary as well as secondary data, possibility of unauthorized
information cannot be avoided.
3. Reluctance of the people to provide complete information about them can affect the
validity of the responses.
4. The lack of knowledge of customers about the financial instruments can be a major
limitation.
5. The information can be biased due to use of questionnaire.

2.5 Research Methodology

Sampling Technique: Initially, a rough draft will be prepared keeping in mind the objective
of the research.

A pilot study will be undertaken in order to know the accuracy of the questionnaire.

The final questionnaire will be arrived at only after certain important changes are
incorporated.

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Convenience sampling technique will be used for collecting the data from different
investors. The investors are selected by the convenience sampling method.

The selection of units from the population based on their easy availability and accessibility
to the researcher is known as convenience sampling.

Convenience sampling is at its best in surveys dealing with an exploratory purpose for
generating ideas and hypothesis.

Sampling unit: The respondents who will be asked to fill out the questionnaires are the
sampling units. These comprise of salaried employees in IT sector.

Sampling size: The sample size will be restricted to only 100, which comprised of mainly
people from different regions of Mumbai, Maharashtra.

due to time constraints.

Sampling area: The area of the research is Mumbai, Maharashtra.

Primary Data: Information is collected by conducting a survey by distributing a

questionnaire to 100 investors in Mumbai, Maharashtra.

These 100 investors are of different age group, different income levels, and different
qualifications in IT sector.

Secondary Data:

This data is collected by using the following means.

1. Articles in Financial Newspapers ('Economic times' and 'Business Standard').

2. Investment Magazines, Business Magazines, Financial chronicles.

3. Expert's opinion published in various print media.

4. Books written by various Foreign and Indian authors on Investments.

5. Data available on internet through various websites

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 2.6 Questionnaire

1. Gender
a) Male
b) female
2. Age
a) 25-30
b) 30-35
c) 40 above
3. Salary
a) 20000-40000
b) 40000-50000
c) Above 50000
4. Where do you Invest Your Savings.?

a.) Savings Account.

b.) Fixed Account.

c.) Mutual fund.

d.) Gold/Silver.

e.) Real Estate.

f.) No Investment Yet.
5. What is percentage of your savings.?
a.) 0-15%
b.) 15-30%
c.) 30-45%
6. What are the factors you give priority to when you invest.?

a.) Safety of principle

b.) High Return.

c.) Low Risk.

d.) maturity.

24
7. Do you have a formal budget for your family expenditure?

a.) Yes.

b.) No.

8. From Where do you gather information about mutual fund scheme.?

a.) Financial Institutions.

b.) Brokers.

c.) Internet.

d.) Newspaper

e.) Financial Consultant.

f.) Magazines.

9. At what rate do you want your investment to grow?

a) Fast
b) Steadily
c) Slow
10. What is the purpose behind investment?
a) Tax saving
b) Wealth creation
c) Future expenses
d) Earn returns
11. What are your investment objectives?
a) Asset generation
b) Capital preservation
c) Long term gain
d) Short term gain
12. What is your saving objective?
a) Child’s education
b) Marriage
c) Retirement
d) Healthcare
e) Other
13. How do you monitor your investment?
a) Monthly
b) Daily
c) Occasionally
14. Time period you prefer to invest.
a) 1-5 years

25
b) More than 5 years
c) 0-1 years

26
 CHAPTER 3. LITERATURE REVIEW

A study on public and private sector banks and their study shows that quality gap between
expectations of

consumers and perceptions of service delivered is highest in public sector banks and lowest
in private sector banks. Another study found out that public sector banks are better than
private sector

banks. Other studies and their findings are given below

Dawood Fez et al (2010)-The study uses hypothesis to find out service quality in Iran
railways. It was

found out that perceived service was found to be within zone of tolerance and service was
satisfactory.

The difference between ideal level and current level was significant. There was significant
relationship

between service adequacy variables and perceived value. The study in nutshell gives an
image of service

quality

Sachin Mittal &Rajnish Jain (2010)-This paper is basically a literature review of banking
industry and

effect of IT based services on customer satisfaction. The study highlights customer

satisfaction levels

among young customers in banking industry. A survey indicates the gaps between
customer’s

expectations and perception with respect to IT based banking services. Findings indicated
need to

improve the IT based services for enhancing customer satisfaction

27
H. Emari et al (2011)- The main objective of this research was to determine the dimensions
of service

quality in the banking industry of Iran. For this the study empirically examined the European
perspective

(i.e., Gronow’s model) suggesting that service quality consists of three dimensions,
technical, functional

and image. The results from a banking service sample revealed that the overall service
quality is identified

more by a consumer’s perception of technical quality than functional quality

Kumbhar, Vijay (2011)- It examined the relationship between the demographics and
customers’

satisfaction in internet banking, it also found out relationship between service quality and
customers’

satisfaction as well as satisfaction in internet banking service provided by the public sector
bank and

private sector banks. The study found out that overall satisfaction of employees,
businessmen and

professionals are higher in internet banking service. Also, it was found that there is
significant difference in

the customers’ perception in internet banking services provided by the public and privates
sector banks.

Kailash M (2012)- The paper compares public and private sector banks in Vijayawada city
using

SERVQUAL model. The findings revealed that private sector banks have good services to
customers and

they retained customers by providing better facilities. The study finds out importance of
new products and services for banks for retaining customers.

28
 CHAPTER 4. INDUSTRY REVIEW

Indian financial industry is considered as one of the strongest financial sectors among the
world markets. Many industry experts may give various reasons for such Indian financial
industry reputation, but there is only one answer which no one can deny, is the effective
control and governance of the country's supreme monetary authority the "RESERVE BANK
OF INDIA" (RBI).

Financial sector in India has experienced a better environment to grow with the presence of
higher competition. The financial system in India is regulated by independent regulators in
the field of banking, insurance, mortgage and capital market. Government of India plays a
significant role in controlling the financial market in India.

Ministry of Finance, Government of India controls the financial sector in India. Every year
the finance ministry presents the annual budget on 28th February. The Reserve Bank of
India is an apex institution in controlling banking system in the country. Its monetary policy
acts as a major weapon in India's financial market.

Various governing bodies in financial sector:

1. RBI - Reserve Bank of India is the supreme authority and regulatory body for all the
monetary transactions in India. RBI is the regulatory body for various Banking and Non-
Banking financial institutions in India.

2. SEBI - Securities and Exchange Board of India is one of the regulatory authorities for
India's capital market.

3. IRDA - Insurance regulatory and development authority in India regulates all the
insurance companies in India.

4. AMFI - Association of mutual funds in India regulates all the mutual fund companies in
India.

5. FIPB - Foreign investments promotion board regulates all the foreign direct investments
made in India.

Ministry of housing has introduced he Real Estate (Regulation and Development) Act, 2016
is an Act of the Parliament of India which seeks to protect home-buyers as well as help

29
boost investments in the real estate industry. Investments in gold is governed by the world
gold council, in India we do not have any regulatory authority for investments in gold.
Ministry of Finance, Government of India has a control over all the financial bodies in India.
Government securities, Public Provident Fund (PPF), National Savings Certificate (NSC), Post
Office Savings are all under the control of the central government.

Investment are normally categorized using the risk involved in it, risk is dependent on
various factors like the past performance, its governing body, involvement of the
government etc., in this scenario Indian investments are classified in to 3 categories based
on risk. They are:

➢ Low Risk/ No Risk Investments.

➢ Medium Risk Investments.

➢ High Risk Investments.

Apart from these, there are traditional investment avenues and emerging investment
avenues. Various Investment avenues available in India

Safe/Low Risk Avenues:

• Savings Account • Bank Fixed Deposits. • Public Provident fund. • National savings
certificates. • Post office savings. • Government Securities. Moderate Risk Avenues:

• Mutual Funds. • Life Insurance. • Debentures. • Bonds.

High Risk Avenues:

• Equity Share Market. • Commodity Market. • FOREX Market.

Traditional Avenues:

• Real Estate (property). • Gold/Silver. • Chit Funds.

30
 INDUSTRY REVIEW OF IT SECTOR

Information Technology is playing vital role in economic scenario of the country. IT has
transformed the country’s image and pattern of doing work. This sector mainly comprises
two major components, one is IT Services and other is BPO (Business Process Outsourcing).
According to NASSCOM, the contribution of this sector toward GDP has been increased to
7.5% in 2012.

The cities touching the height of development in India are having IT sector to be one of the
major sectors which accelerate the wheel of growth and development of these cities. These
cities are Bangalore, Chennai, Kolkata, Hyderabad, Trivandrum, Noida, Mumbai and Pune.
Bangalore is leading software exporter. This makes Bangalore to be popularly known as
Silicon Valley of India. About 33% of the IT export is contributed by Bangalore. Where 90%
of the export in IT is made by these cities mentioned above. Major Indian giant who
contributing toward this are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL
Technologies.

IT sector generate enough job opportunities, which led absorb the excess employment and
newly added workforce. Thus, IT sector is providing employment to 20 lakh peoples directly
and 89 lakh people indirectly. Indian IT companies are having focusing on providing the low-
cost solution to global clients.

Scope of IT companies

The IT and ITES (IT Enabled Services) are having the brightest scope in India. These IT and
ITES are growing with increasing rate of growth. According to the recent economic survey,
these IT and ITES are adding 30 lakh job opportunities in this sector. Some of the major
companies that are providing good career in IT-ITES sector are – Infosys technologies, TCS,
Wipro Technologies, Tech Mahindra, Persistent, Cognizant, Amdocs, Cubage, Caltech, HCL
technologies, Satyam Computers, Patni, Mphasis, Convergys, First source solution, L&T
Infotech, Genpact, Internet Global services etc.

Salaries of Professional in Major IT Hub

31
Silicon Valley of India, Bangalore is the highest paying city in the country for IT professionals.
Although, the project managers are paid well and software engineers are also among those,
who were enjoying the highest salaries.

Average annual salaries of IT professionals

Mumbai Bangalore Chennai Delhi

Senior Software Engineer Rs.700000 Rs.600000 Rs.580000 Rs.400000

Software Engineer Rs.430000 Rs.320000 Rs.450000 Rs.440000

IT Project Manager Rs.1200000 Rs.1000000 Rs.1100000 Rs.1200000

SAP Consultant Rs.600000 Rs.520000 Rs.500000 Rs.575000

Software Developer Rs.390000 Rs.260000 Rs.321000 Rs.380000

Lead Software Engineer Rs.1000000 Rs.800000 Rs.750000 Rs.750000

32
 CHAPTER 5: INVESTMENT AVENUES IN BREIF

INVESTMENT AVENUES

What are Non-Marketable Securities?

Non-marketable securities are the ones which cannot be bought or sold as they are not
traded as often in any secondary markets.

These are generally brought and sold privately in private transactions or in OTC markets
(over the counter). It is difficult for the owner of the non-marketable securities to find a
buyer. Also, even some marketable securities cannot be sold at all because of many
government rules and regulations.

Why Some Securities are Non-Marketable?

The primary and most vital reason for securities to be non-marketable is the need for stable
ownership of securities.

These securities are mainly sold at discount to their face value. The gain for the investor is
the discount between the face value and the purchase price of the security

Characteristics of Non-Marketable Securities

1 – Highly illiquid

This is the most important feature that makes a financial instrument classified as non-
marketable security.

These securities are non-liquid and cannot be converted into the cash till the maturity date
has passed.

The maturity period is not defined. However, as per the convention and GAAP rules, the
duration is typically longer and can range from more three years to ten

2 – Transferable

33
Some of the non-marketable securities are not transferable and hence have to be kept till
maturity. On the other hand, there are some securities which are transferable and also used
as gifts.

Illiquid and non-transferable are the characteristics which complement each other.

The above two features are used to classify any security as non-marketable.

3 – High Return

These securities usually have long maturities and are government backed. It is assured that
the investor will get principal back and the rate of interest will be dependent on the market
rate.

However, it is assured that the return will be higher.

The return of non-marketable securities is higher than marketable securities

Difference Between Marketable and Non-Marketable Securities

Marketable securities are those that are freely traded in a secondary market.

The principal difference between marketable and nonmarketable securities revolves around
the concepts of market value and intrinsic, or book, value.

Marketable securities have both a marketable value, one which is subject to potentially
volatile fluctuation in accordance with the changing levels of demand for the security in the
trading marketplace.

Thus, marketable securities generally carry a higher level of risk than nonmarketable
securities.

Non-marketable securities, however, are not subject to the demand changes in a secondary
trading market and, therefore, have only their intrinsic value, but no market value.

The intrinsic value of a non-marketable security, depending on the structure of the security,
can be considered as either its face value, the amount payable upon maturity or its
purchase price plus interest.

34
 5.1 NON-MARKETABLE FINANCIAL ASSETS

A significant portion of the investment in financial assets by an individual or a household is

parked in non-marketable financial assets such as, bank deposits, post-office deposits, PPF,
NSC, etc.

The unique feature of these assets is that there is a prevalence of personal relationship
between the investor and the issuer.

This personal transaction touch makes the investor comfortable and moreover these
investments are quite safe.

Though these investments cannot be traded, it ensures high degree of safety and
reasonable liquidity.

The purpose of these assets is to provide a good savings plan to individuals for future
purposes or a regular stream of income.

The risks in these investments result from two major economic factors, namely, inflation
and interest rates.

A relatively high inflation shall reduce the real returns and a higher interest rates shall
increase the opportunity cost thereby reduce the flair for these investments

Bank deposits

Bank deposits are most popular and the simplest investment avenue for an individual

investors, where he opens an account with a bank and parks his money. There are basically

four types of bank deposits, namely,

1. Savings deposits
2. Fixed deposits
3. Current deposits
4. Recurring deposits

35
The current a/c deposits do not earn any interest, while the other three deposits earn
interest

on the deposited amount that is payable by the bank to the depositor.

Fixed deposits are the popular scheme for investment purpose available for households and

individual investors, where safety is assured. The deposit of a certain amount is made for a

fixed period at the pre-determined market rate of interest. The interest is payable on a

periodic basis and also reinvestment of interest type of fixed deposits are available. At the

end of fixed period, the amount with accrued interest is paid back to the depositor.

Recurring deposits are also quite popular means of investment by the households,
where the

depositor makes periodical investment for a fixed duration. This enables the individual

investor to build a corpus amount with small deposits on a regular basis. Recurring deposits

are very popular among salaried class, especially for those who can save few hundreds to
few

thousands per month. This scheme is quite useful to people who cannot afford to have a
large

amount of savings and thus cannot use fixed deposit scheme of the bank. The depositor

deposits the amount periodically, generally every month, and the banks promise to pay the

interest at the pre-determined rates on these deposits. Upon maturity, the investor is paid
the

maturity value, which denotes principal coupled with interest accrued.

Flexi Deposits

Flexi deposits are unique type of savings deposit account, which is a blend the
characteristics

36
of both savings account and the fixed deposit account. In this deposit scheme, the balance
in

excess of a stipulated amount is automatically converted to fixed deposit for a default term
of

one year. This is a savings-cum-fixed deposit account, where the cash limit of the savings

deposit is fixed and the balance of the idle cash in the savings account is converted into

earning mode of fixed deposits.

These flexi deposits provide the liquidity associated with the savings deposit as well as the

higher returns by investing the surplus cash into fixed deposits.

Post office term deposits (POTD)

Post office deposits are very popular means of investment by individuals and households in

India, since it is one of the safest and easiest modes of investments. The investment in post

office term deposit is quite similar to that of fixed deposits offered by the bank, but with

additional features. POTD has the maturity periods ranging from 1 year, 2 years, 3 years and

5 years. The POTD can be opened with a very small amount of 200 and in its multiples;

however, there is no upper limit. The rates offered by POTD are slightly higher than the bank

deposits and very safe mode of investment, since government backing is available.

Monthly income scheme of the post office (MISPO)

POMIS is one of the most popular investment avenues among rural investors and not that

well-known amongst urban population. It is the scheme where there is a defined return on
the

37
investment. The interest is calculated on a yearly basis, but payable every month. The
interest

is payable from the date of making the investment and not from the start of the month. The

maturity period is five years.

The unique feature of this scheme is that the investor is also eligible for a 5% bonus if he

retains the scheme for entire tenure, in addition to the regular interest. However, w.e.f. 1st

January 2011, this bonus is not applicable.

The minimum amount eligible for investment is 1,500 and the maximum amount is

4,50,000 in case of individuals and 9,00,000 in case of joint account holders.

The drawback of this scheme is that this investment is not eligible for deduction u/s 80C,

which explain the fact that it is not popular amongst urban investors.

National Savings Certificate (NSC)

National Savings Certificate is another opportunity for investors, wherein, they can keep
them

money invested for a slightly long period and want this amount to compound. The
investment

in NSC is eligible for deduction u/s 80C. However, the interest earned thereon is taxable.

This is an excellent avenue for those who want to stay invested and allow the investment to

grow over a period of time.

NSCs are available in the denominations of 100, 500, 1000, 5,000 and 10,000.

NSCs can be also purchased in demat form. The NSC VIII issue have a maturity period of 5

years and NSC IX issue have a maturity of 10 years. This scheme is best suitable to

government employees, businessmen and other salaried class, who are income tax assesses.

38
Company Deposits

Company deposits are very similar to bank fixed deposits that are made by the investors
with

Financial Institutions and NBFCs for a fixed period at a pre-determined fixed rate of interest.

The interest paid on these deposits is relatively higher than the bank deposits, since there is
a higher degree of risk associated.

The risks associated with these company deposits are credit risk and interest rate risk.

Although, there is a higher risk involved, the investors are motivated to invest in these

instruments due to higher returns earned thereof.

Employees Provident Fund Scheme (EPF)

Employee Provident Fund is a prominent platform of savings in India amongst the organized

workforce. Employee Provident Fund Scheme is an investment avenue, wherein, the

employees from both the private sectors and public sectors can invest a portion of their
salary

every month and build a corpus for future.

Generally, the contribution is made by both the employee and the employer. The
contribution

made by the employee is eligible for deduction u/s 80C of Indian Income Tax Act of 1961.

Interest is paid on amount deposited and it is accumulated with the fund. The fund gets
built

and the investor can use it for his retirement of future plans.

Employee Provident Fund Organization, a statutory body of the Government of India,

established under the Ministry of Labour and Employment oversees the functioning of EPF.

Public Provident Fund (PPF)

39
Public Provident Fund is a long-term debt scheme of Government of India, wherein, any

individual in India can invest in this scheme and can earn a decent tax-free return on the

same. The interest rate on PPF is generally slightly higher than that of interest rates offered

by Bank Fixed Deposits.

PPF account can be opened in any post office or designated bank branches. The PPF

investors prefer to maintain their PPF account with banks rather than Post office, since
banks

facilitate online transfer of funds and online deposits.

The minimum amount to be deposited in a PPF account is 500 and the maximum is

1,00,000 per annum. PPF account can be closed after a period of fifteen years from the date

of opening the account. However, the investor can extend for a further period of five years.

There is also a lock-in-period of initial five years.

Another unique feature of PPF account is that the account holder can avail loan from the
third

year onwards. He can get a loan up to 25% of the amount outstanding at the end of

immediately preceding the year in which the loan is applied for.

Investment in PPF is eligible for deduction u/s 80C of Income Tax Act of 1961 and also, the
tax earned thereon is tax-free.

Kisan Vikas Patra

India Post introduced the Kisan Vikas Patra as a small saving certificate scheme in 1988. Its
primary objective is to encourage long-term financial discipline in people.

As per the 2014 amendment of the scheme, the tenure for the scheme is now 118 months
(9 years & 10 months). The minimum investment is Rs. 1000 and there is no upper limit.

40
And if you invest a lumpsum today, you can get double the amount at the end of the 118th
month. Initially, it was meant for farmers to enable them to save for long-term, and hence
the name.

Now it is available for all. To prevent the possibilities of money laundering, the 2014
government made PAN Card proof compulsory for investments above Rs. 50,000. To deposit
Rs. 10 lakhs and above, you must submit income proofs (salary slips, bank statement, ITR
document etc.).

It is a low-risk savings platform, where you can safely park your money for a certain period.
Further, it is also mandatory to submit AADHAR number as proof of identity of account
holder.

5.2 MONEY MARKET INSTRUMENTS

Money market instruments are the investment avenues which have high liquidity and short-
term maturity, generally less than a year.

These instruments provide an opportunity for the investor to park his/her money for a
short-term varying from few days to few weeks to few months.

Treasury Bills

Treasury bills are another investment vehicle available for the investors who can invest for a
period of less than a year.

These are issued by Government of India and currently three variants of treasury bills are
issued, namely, 91-day treasury bills, 182-day treasury bills and 364-day treasury bills.

The subscriptions can be made for a minimum of 10,000 and in multiples of 10,000.

Treasury bills are issued based on auction and these auctions are held on Negotiated
Dealing System (NDS). The bidders can submit their bids electronically.

41
The successful bidders need to pay the bid amount on the next working day of the auction
date.

Certificate of Deposits

Commercial deposits are short-term instruments issued by schedule banks, having a

maturity ranging from 7 days to a year.

These are similar to promissory notes and are issued in demat form. CDs are issued in
denomination of 1,00,000 and in multiples of 1,00,000, thereon. The interest rate on these
are market driven.

Commercial deposits are like bank term deposits, except for the fact that they are freely
negotiable and transferable.

Commercial deposits normally earn relatively higher return as compared to bank term
deposits. There can be traded in secondary market and there is no lock-in-period.

These instruments can be purchased by individuals, corporate, trusts and even NRIs. They
have to be compulsorily credit rated by credit rating agencies.

SBI DFHI is the most active player in secondary market of CDs.

Commercial Papers

Commercial papers are another investment vehicle in money-market asset class. Indian
money market reforms were responsible for introduction of commercial papers.

These are short-term monetary funds, issued in the form of promissory notes by large
corporations. They are not backed by any form of collaterals and hence are unsecured.

The corporations issuing these papers must be compulsorily credit rated.

The issuers of commercial paper create supply while the subscribers or investors create
demand for these papers.

42
The main issuers of commercial papers are large corporations and subscribers are majorly
the banking companies. The other subscribers are individuals, NRIs and FIIs. Commercial
papers are generally issued at a discount to face value and redeemed at par value. The face
value of these papers is in denominations of 5,00,000 and in multiples thereof. The maturity
period of these papers, range between 7 days and a year.

Liquid Bees

Liquid Bees is a peculiar investment vehicle which are listed and traded on a recognized
stock exchange, wherein the investment is made in a basket of money-market instruments
like call-money,

short-term government securities or treasury bills, commercial paper, certificate of deposits

and other money-market instruments of short maturities.

Safety and liquidity are the two most important factors considered in Liquid Bees.

The unique feature of Liquid Bees is that the price risk would be minimized.

These need to be credit rated and can be traded only in electronic mode (demat).

Liquid Bees is the alternate mode for managing cash-in-hand for the short-term, instead of it
lying idle in the bank. The income received from these investments is exempt from tax.

5.3 REAL ESTATE

Real estate is one of the most sought-after investments, which the investors are excited
about.

The rapid rise in real estate prices is very attractive and the investor looks forward this as
both an investment avenue and a basic shelter to live in.

The real estate investors think it is wise decision to invest in a real estate, since there are
numerous advantages of investing in real estate.

43
There is an ever-growing capital appreciation, rental income, real and tangible asset, safety,
etc. The real estate has emerged as an asset class and increasingly becoming a global asset
class.

India’s large market, favourable demographics, higher disposable income and rising
domestic demand are key ingredients for the growth in real estate sector in India.

The investment in real estate may take any of the following form, namely,

1. Residential House
2. Commercial Property
3. Agricultural Land
4. Suburban Land
5. Time Share in Holiday Resort

5.4 PRECIOUS OBJECTS

Precious objects are those items that are generally small in size, but highly valuable in
monetary terms. These are normal physical product or metals that are used as traditional
store of wealth.

The most important precious objects are gold, silver, precious stones and art objects. There
is an increased use of precious objects as an investment vehicle, since the returns from
these are quite outstanding, whereas the risks are comparatively lower.

Investment in these precious objects can be made directly in the product or through
derivative instruments like futures or through mutual funds with a directive of investing in
the specified commodities.

Gold & Silver

Gold has been an important part of diversified investment portfolio. It is being respected
throughout the word for its value and rich history.

44
It is also considered as a way to pass on and preserve wealth from one generation to the
next.

There has been a paradigm shift in the gold’s preference, as consumers are turning into
investors.

Gold, as an investment option is gaining momentum and popularity as compared to

ornamental value. Around 40% of the gold buying in India is for investment purpose.

Gold, despite the surge in price has led to spurt in demand.

Gold has been used as a hedge against other investment options.

Gold ensures that there is the most enduring benefit and has the ability to stabilize a
portfolio and protect it against market fluctuations.

Silver, in the recent times, has gained sheen as an investment avenue. It has been viewed as
safe haven and regarded as a form of money and store of value.

Besides investing in physical silver, investors have shown keen interest in exchange traded
funds. Analysts have predicted silver to rise faster than gold in the next decade.

Silver is relatively volatile than gold and silver is positively correlated to industrial demand.

Gold ETFs

Gold exchange traded funds refer to buying gold in electronic form. Gold ETFs are units
representing physical gold in demat form. Gold ETF is much easier form of investing in gold.

The Gold ETF shall ensure to provide the returns that closely correspond with the real price
of gold. The investor can buy a gram at a time and hence has the avenue to build a good
gold portfolio, by accumulating gold over a period of time.

45
 The Gold ETFs are open-ended funds that can be traded on the stock exchange, thereby
providing high liquidity.

The Gold ETFs aims to provide the investors to participate in the gold market and to offer
the investors a simple and cost-efficient way to access the gold market by providing a return
equivalent to movement in the gold spot prices.

Gold ETFs have quite a lot of benefits than actual gold, like there are not premium charges,
making charges, wastage charges, delivery charges, no worries of theft and quite easy to
sell.

The best part of Gold ETF is that there is no need to pay sales tax, securities transaction tax,
VAT or wealth tax.

Following are few of the Gold ETFs currently available in India,

List of Gold ETFs in India

Name of the Gold ETF Asset Management Company

1. AXIS GOLD Axis Mutual Fund

2. BSL GOLD ETF Birla Sunlife Mutual Fund

3. CANARA ROBECO Canara Robeco Mutual Fund

4. GOLDBEES Goldman Sachs Asset Management

5. GOLD SHARE UTI MUTUAL FUND UTI Mutual Fund

6. HDFC MFGETF HDFC Mutual Fund

7. IDBI GOLD IDBI Mutual Fund

8. IPGETF ICICI Prudential Mutual Fund

9. KOTAK GOLD Kotak Mutual Fund

10. MGOLD Motilal Oswald Mutual Fund

11. QGOLDHALF – Quantum Mutual Fund

46
12. RELGOLD Reliance Mutual Fund

13. RELIGAREGO Religare Mutual Fund

14. SBIGETF SBI Mutual Fund

The investor can choose any of the above Gold ETFs, depending on his preference and the
choice of the Asset Management Company (AMC).

5.5 INSURANCE POLICIES

Insurance is a contract, wherein the individual or an entity gets the protection against the
losses resulting from some unexpected or uncertain event.

The concept of insurance is that a group of people exposed to similar risk come together
and make contributions towards formation of a pool of funds.

A person, suffering an actual loss on account of such risk, is compensated out of the same
pool of funds.

The interesting aspect of insurance is that it serves the twin-objective of protection as well
as investment.

The investor has to primarily separate the insurance portion from the investment portion of
the premium that he pays, so that he knows, the quantum of each portion.

The total premium paid minus the amount evaluated as the cost of insurance must be
considered as the amount invested. The yield must be calculated based on this amount to
evaluate the investment.

Though insurance is not the best available investment avenue, there are sufficient reasons
for the investor to believe that it can be highly lucrative avenue to facilitate savings.

The very essence of insurance is to enable protection to the family coupled with returns on
the investment.

Endowment Assurance

47
Endowment assurance is a policy which not only provides protection to the family of the life
assured in case of early death, but also assures a lumpsum at a desired age.

The premiums are generally paid for a fixed term or until death whichever is earlier.

The lumpsum received at the end of the term can be reinvested to provide an annuity
during the remainder of the life.

The salient features of endowment assurance are,

 Moderate premium
 High bonus
 High liquidity
 Savings oriented

LIC’s Jeevan Saral and Jeevan Anand are the two popular endowment policies in India.

Money Back Plans

In case of money back policy, the insured gets periodic receipt of partial survival benefits
during the term of the policy.

Money back policy protects the family’s financial interests from unforeseen situation like
death or critical illness of the policy holder.

In this case, the periodic pay-outs ensure wealth creation for meeting financial
commitments at important phases in life. A good money back policy has lower risk, assured
returns and also gives tax benefits. At the time of maturity, the policyholder gets the
remaining amount of the survival benefits plus the accrued bonus.

In case of death of the life assured within the term, the total sum insured is paid to the
nominee, irrespective of earlier survival benefits.

Money back policy can be availed for either 20 years or 25 years. Generally, periodic
payments are made every 5 years. At the end of the period, the remaining amount plus
bonus is paid to the insured.

48
The amount invested in the money back policy is eligible for deduction u/s 80C of Income
Tax Act of 1961.

Whole Life Assurance

A whole life assurance is a policy where premium is for a term and this premium has two
components. The first component is the insurance component and the second component is
the investment component.

The insurance component pays an assured amount upon death of the insured and the
investment component the wealth that the policyholder can withdraw or borrow against.

The whole life insurance is different form term assurance. In case of term assurance, the
amount is paid only in case of death during the term of the policy,

but the whole life assurance always pays out eventually. Hence, whole life assurance is
comparatively expensive than term assurance.

This policy is mainly devised to create a wealth for legal heirs of the policyholders. The
premium under this policy are payable up to the age of 80 years of the policyholder or for a
term of 35 years whichever is later.

ULIP

ULIP is a unique investment avenue which blends the benefits of both insurance and
investment under a single integrated plan. ULIP is an avenue that focuses on safety on
insurance as well as wealth creation opportunities. In case of ULIPs, a portion of investment
is apportioned towards providing life cover and the residual portion is invested in a fund to
be invested in equity or bonds. The investment value is market driven.

ULIPs are gaining popularity since they offer dual role of protection for life and investment
plan simultaneously.

The amount invested in ULIP is eligible for deduction u/s 80 C of Income Tax Act of 1961.
There is however a lock-in-period of 5 years for these ULIPs.

ULIP returns are directly linked to market performance and investment risk in investment
portfolio is entirely borne by the policyholders.

49
The invested portions of the premium after deducting for all the charges and premium for
risk cover under all policies in a particular fund. The value of the fund units with accrued
bonus is payable on maturity of the policy.

Term Assurance

Term assurance is the purest and the simplest form of the life insurance providing coverage
for a defined period of time, at a fixed rate of payment.

In case of death of the insured during the relevant term, the benefit is payable to the
nominee. There is no survival benefit payable to the insured.

Further, if the coverage has to be extended beyond the term, he has to pay generally a
higher premium for the continual.

Term assurance is the least expensive mode of substantial life cover over a particular period
of time.

The term assurance just provides a specific amount of coverage for a specified period of
time, but does not involve any investment component.

However, the premium paid for term assurance is eligible for deduction u/s 80C of Income
Tax Act of 1961.

Immediate Annuity

Immediate annuity is an investment avenue, wherein a single lumpsum premium is paid

and in return a guaranteed income starts flowing almost immediately to the insured. In this
case, the insured receives a guaranteed gross income throughout his life time or over a fixed
period. In addition to the regular income upon the death of the insured, the family shall
receive the death benefits.

However, there is also an option, wherein the nominee shall receive regular income upon
death of the insured.

The immediate annuity plan is best suited for retired personnel, who anticipate a regular
and a guaranteed amount in place of pension.

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The regular stream of income can be chosen at the option of the insured either monthly,
quarterly, half-yearly or annually.

Deferred Annuity

Deferred annuity is an investment vehicle, wherein the investor starts savings his money by
paying regular premium and builds a corpus.

Later, the insured can elect to receive income from the corpus that has been built over a
period of time.

Typically, this plan has two phases, namely, savings phase and income phase. In the savings
phase, the investor invests money into the account on a periodical basis.

The income phase is a period, where the investor converts the amount invested into an
annuity and receives periodical income.

The deferred annuity also consists of death benefit to the nominee upon death of the
insured. Deferred annuities are designed primarily as retirement savings accounts.

The amount invested into this account is eligible for deduction u/s 80C of the Income Tax
Act of 1961.

5.6 PENSION FUNDS

Pension fund is a qualified retirement plan set up by an entity – a corporation, labour union,
government or other organization. Pension fund is a retirement plan, in which an investor
makes a contribution into an account periodically.

In other words, pension funds are type of retirement plan, wherein an investor pays part of
his current income towards retirement income.

These contributions are invested on behalf of the investor, who may withdraw after
retirement.

There are two types of pension plans, namely, defined-benefit plan and defined-
contribution plan.

In case of defined-benefit plan, the investor is guaranteed to receive a fixed amount upon
retirement, irrespective of the performance of the underlying investment. On the contrary,

51
in case of defined-contribution plan, the investor makes pre-defined contribution, but the
benefit is market-driven or underlying investment’s performance driven.

NPS

Government of India has constantly been searching for a solution to the problem of
providing adequate retirement income and in the effort of doing so, NPS has been designed.

Government had a huge responsibility of single-handedly contributing towards the pension

fund for its employees till 2003. The huge pension obligations for the government prompted
a rethink of this scheme.

Thus, the shift was being made from defined benefit system to defined contribution system
by introducing NPS.

Government of India, Ministry of Finance, Department of Economic Affairs Notification, and

dated 22nd December 2003 has notified NPS.

The NPS came into operation with effect from 1st January 2004 and was made applicable to
all new employees to Central Government service, except to Armed Forces, joining
Government service on or after 1st January 2004. The State Governments and Union
Territories have also notified the NPS for their new employees.

During 2004 to 2009, NPS was open only to Government employees and from 1st April,
2009 it was made available to every citizen of India between the age group of 18 and 55 on
a voluntary basis. The New Pension System has been designed to enable the subscribers to
make optimum decisions regarding their future and provide for their old-age through
systemic savings from the day they start their employment.

Under the scheme of NPS, the government employees are required to make a contribution
at par with the employer i.e. 10 per cent of basic pay plus DA to the pension fund. Another
major change that took place in 2008 was to allow the private pension fund managers to
manage the NPS.

Private Pension Funds

Apart from NPS, there are several private pension funds offering pension income to the
retired personnel.

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The private pension schemes provided by insurance companies are gaining importance with
an improvement in cost and quality of the living of the people. These private pension
schemes offer competitive benefits, returns and better services. People consider this option
to be a part of this investment needs wherein it allows them to participate and purchase
units.

The investors are mostly benefitted through tax exemptions that are possible through these
plans. It is an avenue to plan the retirement and lead a secured life.

5.7 MUTUAL FUNDS

Mutual Fund refers to the trust that pools the savings of investors and forms a common
fund.

The fund thus created is then invested in financial market instruments like shares,
debentures and other securities which also include government securities. The income
earned through

these investments and the capital appreciation realized are shared among the unit holders
in proportion of the units held by them.

Investments in securities are spread over a wide cross-section of industries and sectors, thus
allowing risk reduction to take place.

Diversification reduces the risk because all stocks and instruments may not move in the
same direction and in the same proportion and at the same time.

Open ended scheme

When a fund is accepted and liquidated on a continuous basis by a mutual fund manager, it
is called ‘open ended scheme’.

These schemes do not have a fixed maturity and entry to fund is always open to investors
who can subscribe it at any time.

Similarly, the investors have an option to get their holdings redeemed at any time. Under
this scheme the capitalization of the fund will constantly change, since it is always open for

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the investors to sell or buy the units. The scheme provides an excellent liquidity facility to
investors. The value of the unit is based upon the net asset value of the unit.

Close ended scheme

A close ended scheme means any scheme of mutual fund in which the period of maturity of
the scheme is specified.

Unlike open ended funds, the corpus of the close ended scheme is fixed and an investor can
subscribe directly to the scheme only at the time of initial issue.

After the initial issue is closed, a person can buy or sell the units of the scheme in the
secondary market i.e. the stock exchanges where they are listed.

The price in the secondary market is determined on the basis of demand and supply and
hence could be different from the net asset value.

Interval schemes

It is a kind of close ended scheme with a peculiar feature that it remains open during a
particular part of a year for the benefit of the investors, either to offload their holdings or to
undertake purchase of units at their NAV.

An interval scheme is a scheme of mutual fund which is kept open for a specific interval and
after that it operates as a closed scheme.

Thus, it combines the features of both open ended as well as close ended schemes. Interval
schemes

have been permitted by the SEBI in recent years only. The scheme is open for sale or
repurchase at a fixed pre-determined interval which are disclosed in the offer document.

The units of this scheme are also traded in the stock exchanges.

Income Fund Scheme

The scheme that is tailored to suit the needs of investors who are particular about regular
returns is known as income fund scheme.

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The scheme offers maximum current income, whereby the income earned by the units is
distributed periodically. Such funds are offered in two forms.

The first scheme earns a target constant income at a relatively low risk. While the second
scheme offers the maximum possible income.

This obviously implies that the higher expected returns come with the higher potential risks
of the investment.

Growth Fund Scheme

It is a mutual fund scheme that offers the advantage of capital appreciation of the
underlying investment.

For such fund’s investment is made in growth-oriented securities that are capable of
appreciating in the long run.

In proportion to such capital appreciation the amount of risk to be assumed would be far
greater.

Conservative Fund Scheme

A scheme that aims at providing a reasonable rate of return, protecting the value of the
investment and achieving capital appreciation may be designated as conservative fund
scheme.

These are also known as middle of the road funds, since such funds offer a blend of all these
features. Further such funds divide their portfolio in common stocks and bonds in such a
way as to achieve the desired objectives.

Equity Fund Scheme

A kind of mutual whose strength is derived from equity-based investment is called ‘equity
fund scheme’. They carry a very high degree of risk.

Such funds do well in periods of favourable capital market trends. A variation of the equity
fund scheme is the ‘index fund scheme’,

which is involved in transacting only on those scrips which are included in any specific index.

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Bond Scheme Fund

It is a type of mutual fund whose strength is derived from bond-based investments. The
portfolio of such funds comprises bonds, debentures, etc.

This type of fund carries advantage of secure and steady income. However, such shares
have very little or no capital appreciation, but carry low risk.

A variant of this scheme is ‘Liquid funds’, which specializes in investing in short term money
market instruments. The focus is mainly on low risk and low, but steady income.

Balanced Fund Scheme

A scheme of mutual fund that has a mix of debt and equity in the portfolio of investments
of may be referred to as a ‘balanced fund scheme’.

The portfolio of such scheme will be often shifted between debt and equity, depending
upon the prevailing market trends.

Sectoral Fund Schemes

When the managers of the mutual funds invest the amount collected from a wide variety of
small investors directly in various specific sectors of the economy, such funds are called as
Sectoral Mutual Funds.

The specialized sectors may include gold and silver, real estate, specific industry, etc.

Fund of Fund Schemes

There can be Fund of Funds, where funds of one mutual fund are invested in the units of
the other mutual funds.

There are a number of other mutual funds that direct investment into a specified sector of
the economy. This makes diversified and yet intensive investment of funds possible.

Leverage Funds Schemes

The funds that are created out of investments, with not only the amount mobilized from
small savers but also the fund managers who borrow money from the capital market, are
known as ‘leveraged-fund scheme’.

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This way, fund managers pass on the benefit of leverage to the mutual fund investors. In
order to operate such schemes, there must be provisions available.

Gilt Funds

These funds seek to generate returns through investment in gilts. Under this scheme, funds
are invested only in Central and State Government securities and repos/reverse repos.

A portion of the corpus may be invested in the call money market or RBI to meet liquidity
requirements. Government securities carry zero credit risk or default risks.

Their prices are influenced only by movement of interest rates in the financial system.

Index Funds

These funds are also known as growth funds, but they are linked to a specific index of share
prices.

It means that the funds mobilized under such scheme are invested principally in the
securities of companies whose securities are included in the index concerned and in the
same weightage.

Thus, the funds progress is linked to the growth in the concerned index.

Tax Savings Scheme

Certain mutual fund schemes offer tax benefits on investment made in mutual funds. This
helps the Assessee to save tax. He can plan his investment in such a way that the tax
payment is minimized,

but within the legal framework.

Money Market Mutual Funds

Money Market Mutual Fund refers to a scheme of mutual fund which has been set up with
the objective of investing exclusively in money market instruments.

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These instruments include treasury bills, call and notice money, commercial papers,
commercial bills, certificate of deposits etc.

5.8 INTRODUCTION TO CAPITAL MARKETS

The capital market provides the support to the system of capitalism of the country.

The Securities and Exchange Board of India (SEBI), along with the Reserve Bank of India are
the two regulatory authority for Indian securities market,

to protect investors and improve the microstructure of capital markets in India. With the
increased application of information technology, the trading platforms of stock exchanges
are accessible from anywhere in the country through their trading terminals.

Capital Markets in India

India has a fair share of the world economy and hence the capital markets or the share
markets of India form a considerable portion of the world economy. The capital market is
vital to the financial system.

The capital Markets are of two main types. The Primary markets and the secondary markets.

In a primary market, companies, governments or public sector institution can raise funds
through bond issues.

Also, Corporations can sell new stock through an initial public offering (IPO) and raise money
through that. Thus, in the primary market, the party directly buys shares of a company.

The process of selling new shares to investors is called underwriting.

In the Secondary Markets, the stocks, shares, and bonds etc. are bought and sold by the
customers. Examples of the secondary capital markets include the stock exchanges like NSE,
BSE etc. n these markets, using the technology of the current time, the shares, and bonds
etc. are sold and purchased by parties or people.

Broad Constituents in the Indian Capital Markets

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Fund Raisers

Fund Raisers are companies that raise funds from domestic and foreign sources, both public
and private. The following sources help companies raise funds.

Fund Providers

Fund Providers are the entities that invest in the capital markets. These can be categorized
as domestic and foreign investors, institutional and retail investors.

The list includes subscribers to primary market issues, investors who buy in the secondary
market, traders, speculators, FIIs/ sub-accounts, mutual funds, venture capital funds, NRIs,
ADR/GDR investors, etc.

Intermediaries

Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and transfer
agents, FIIs/ sub-accounts, mutual Funds, venture capital funds, portfolio managers,
custodians, etc.

Organizations

Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock
exchanges, and the two depositories National Securities Depository Limited (NSDL) and
Central Securities Depository Limited (CSDL).

Market Regulators

Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve
Bank of India (RBI), and the Department of Company Affairs (DCA).

Role and Importance of Capital Market in India

1. The capital market has a crucial significance to capital formation. For a speedy economic
development, the adequate capital formation is necessary. The significance of capital
market in economic development is explained below:
2. Mobilization of Savings and Acceleration of Capital Formation:

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In developing countries like India, the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of the
population. The twin features of reasonable return and liquidity in stock exchange are
definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.

3. Raising Long-Term Capital

The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity
to investors to buy or sell their securities, while permanent capital with the company
remains unaffected.

4. Promotion of Industrial Growth

The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus, it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate securities.

5. Ready and Continuous Market

The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes an investment in securities more
liquid as compared to other assets.

6. Technical Assistance

An important shortage faced by entrepreneurs in developing countries is technical

assistance. By offering advisory services relating to the preparation of feasibility reports,
identifying growth potential and training entrepreneurs in project management, the
financial intermediaries in capital market play an important role.

7. Reliable Guide to Performance

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

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8. Proper Channelization of Funds

The prevailing market price of a security and relative yield are the guiding factors for the
people to channelize their funds in a particular company.

This ensures effective utilization of funds in the public interest.

9. Provision of Variety Of Services:

The financial institutions functioning in the capital market provide a variety of services such
as a grant of long-term and medium-term loans to entrepreneurs, provision of underwriting
facilities, assistance in the promotion of companies, participation in equity capital, giving
expert advice etc.

10. Development of Backward Areas

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long-term funds are also provided for development
projects in backward and rural areas.

11. Foreign Capital

Capital markets make possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities.

The government has liberalized Foreign Direct Investment (FDI) in the country.

This not only brings in the foreign capital but also foreign technology which is important for
economic development of the country.

5.9 STOCK MARKET INDICES.

A stock market index is a statistical measure which shows changes taking place in the stock
market. To create an index, a few similar kinds of stocks are chosen from amongst the
securities already listed on the exchange and grouped together.

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The criteria of stock selection could be the type of industry, market capitalisation or the size
of the company. The value of the stock market index is computed using values of the
underlying stocks. Any change taking place in the underlying stock prices impact the overall
value of the index. If the prices of most of the underlying securities rise, then the index will
rise and vice-versa.

In this way, a stock index reflects overall market sentiment and direction of price
movements of products in the financial, commodities or any other markets.

Some of the notable indices in India are as follows:

1. Benchmark indices like NSE Nifty and BSE Sensex

2. Broad-based indices like Nifty 50 and BSE 100
3. Indices based on market capitalization like the BSE Small cap and BSE Midcap
4. Sectoral indices like Nifty FMCG Index and CNX IT

Why are stock indices required?

The stock market index acts like a barometer which shows the overall conditions of the
market.

They facilitate the investors in identifying the general pattern of the market. Investors take
the stock market as a reference to decide about which stocks to go for investing.

The following lists the importance of stock market index:

a. Aids in Stock-Picking

In a share market, you would thousands of companies listed on the exchange. Broadly,
picking the appropriate stock for investment may seem like a nightmare.

Without a benchmark, you may not be able to differentiate between the stocks.
Simultaneously sorting the stocks becomes a challenge. In this situation, a stock market acts
like an instant differentiator. It classifies the companies and their shares based on key
characteristics like the size of company, sector, industry type and so on.

b. Acts as a Representative

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Investing in equities involves risk and you need to take an informed decision. Studying about
stocks individually may seem very impractical.

Indices help to fill the knowledge gaps that exist among the investors. They represent the
trend of the whole market or a certain sector of the market.

In India, the NSE Nifty the BSE Sensex act as the benchmark indices. They are believed to
indicate the performance of the entire stock market. In the same manner, an index which is
made up of pharma stocks is assumed to portray the average price of stocks of companies
operating in the pharmaceutical industry.

c. The Parameter for Peer Comparison

Before including a stock in your portfolio, you have to assess whether it’s worth the money.
By comparing with the underlying index, you can easily judge the performance of a stock.

If the stock gives higher returns than the index, it’s said to have outperformed the index. If it
gives lower returns than the index, it’s said to have underperformed the index.

You would definitely want to invest in a multibagger so as to justify the risk assumed. Else
you can be better off investing in low-cost professionally managed index funds.

You may also compare the index with a set of stocks like the Information technology sector.
As an investor, you can know market trends easily.

d. Reflects Investor Sentiment

When you are participating in equity markets, amongst other things, knowing investor
sentiment becomes an important aspect.

It is because the sentiment affects the demand for a stock which in turn impacts the overall
price.

In order to invest in the right stock, you should know the reason behind the rise/fall in its
prices. At this juncture, indices help to gauge the mood of investors. You may even
recognize investor sentiment for a particular sector and across market capitalizations.

e. Helps in Passive Investment

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Passive investment refers to investing in a portfolio of securities which replicates the stocks
of an index.

Investors who want to cut down on the cost of research and stock selection prefer to invest
in index portfolio.

Consequently, the returns of the portfolio will resemble that of the index.

If an investor’s portfolio resembles the Sensex, then his portfolio is going to deliver returns
of around 8% when the Sensex earns 8% returns.

Sensex

What is Sensex?

Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the
Bombay Stock Exchange (BSE) in India.

Sensex comprises 30 of the largest and most actively-traded stocks on the BSE, providing an
accurate gauge of India's economy.

The index's composition is reviewed in June and December each year. Initially compiled in
1986, the Sensex is the oldest stock index in India.

Analysts and investors use the Sensex to observe the overall growth, development of
particular industries, and booms and busts of the Indian economy.

Understanding Sensex

The term Sensex was coined by stock market analyst Deepak Mohini and is a portmanteau
of the words Sensitive and Index.

The constituents of the index are selected by the S&P BSE index Committee based on five
criteria: it should be listed in India on BSE, it should be a large-to mega-cap stocks, it should
be relatively liquid, it should generate revenue from core activities, it should keep the sector
balanced broadly in line with the Indian equity market.

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The BSE Sensex's crashed by 12.7% - its worst fall - on April 18,1992 after revelations of a
scam in which a prominent broker siphoned money from the public banking sector to pump
money into stock.

The BSE Sensex experienced enormous growth since India opened up its economy in 1991.

The growth has mainly occurred in the 21st century, rising from a close of 3,377.28 in 2002
to one of 20,286.99 in 2007 to a high of 38896.63 in August 2018.

The growth has mainly occurred on the back of an increase in India's gross domestic product
(GDP) growth since the turn of the century, which ranks as one of the fastest in the world.

According to International Monetary Fund (IMF) estimates, India's GDP grew rapidly
between 2002 and 2007, and then stunted a bit in 2008, in stride with the global financial
crisis of that year, but has been back on a strong growth rate since 2010.

India’s growing GDP owes much credit to the rise of the Indian middle class, which stood at
less than 1 percent of the global middle class in 2000 but is expected to account for 10
percent by 2020. The middle class is an important driver of consumption demand.

Free-Float Capitalization Method

When it was launched in 1986, the Sensex was calculated based on a market capitalization
weighted methodology.

Since September 2003, the Sensex is calculated based on a free-float capitalization method,
which provides a weighting for the effect of a company on the index.

\This is a variation of the market cap method, but instead of using a company's outstanding
shares, it uses its float, which is the number of shares that are readily available for trading.

The free-float method, therefore, does not include restricted stocks, such as those held by
company insiders, which can't be readily sold.

To find the free-float capitalization of a company, first find its market cap, which is the
number of outstanding shares multiplied by share price, then multiply its free-float factor.

The free-float factor is determined by the percentage of floated shares to outstanding.

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For example, if a company has a float of 10 million shares and outstanding shares of 12
million, the percent of float to outstanding is 83 percent.

A company with an 83-percent free float falls in the 80 to 85 percent free-float factor, or
0.85, which is then multiplied by its market cap.

Twelve million shares multiplied by $10 a share, then multiplied by 0.85 equals $102 million
in free-float capitalization.

NIFTY

he NIFTY 50 index National Stock Exchange of India's benchmark broad based stock market
index for the Indian equity market. Full form of NIFTY is National Index Fifty.

It represents the weighted average of 50 Indian company stocks in 13 sectors and is one of
the two main stock indices used in India, the other being the BSE Sensex.

Nifty is owned and managed by India Index Services and Products (IISL), which is a wholly
owned subsidiary of the NSE Strategic Investment Corporation Limited.

IISL had a marketing and licensing agreement with Standard & Poor's for co-branding equity
indices until 2013. The Nifty 50 was launched 1 April 1996, and is one of the many stock
indices of Nifty.

NIFTY 50 Index has shaped up as a largest single financial product in India, with an
ecosystem comprising: exchange-traded funds (onshore and offshore), exchange-traded
options at the NSE in India, and futures and options abroad at the SGX.

NIFTY 50 is the world's most actively traded contract. WFE, IOMA and FIA surveys endorse
NSE's leadership position.

The NIFTY 50 covers 13 sectors (as of 31 October 2019) of the Indian economy and offers
investment managers exposure to the Indian market in one portfolio.

During 2008-12, NIFTY 50 Index share of NSE market capitalisation fell from 65% to 29%[6]
due to the rise of sectoral indices like NIFTY Bank, NIFTY IT, NIFTY Pharma, NIFTY SERV
SECTOR, NIFTY Next 50, etc.

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The NIFTY 50 Index gives weightage of 39.47% to financial services, 15.31% to Energy,
13.01% to IT, 12.38% to Consumer Goods, 6.11 to Automobile and nil to agricultural sector.

The NIFTY 50 index is a free float market capitalisation weighted index. The index was
initially calculated on full market capitalisation methodology.

From 26 June 2009, the computation was changed to a free-float methodology. The base
period for the CNX Nifty index is 3 November 1995,

which marked the completion of one year of operations of National Stock Exchange Equity
Market Segment. The base value of the index has been set at 1000 and a base capital of Rs
2.06 trillion.

In February 2019, Britannia Industries entered into Nifty 50 by replacing Hindustan

Petroleum Corporation Ltd. HPCL will move into Nifty Next 50 From 27 September, Nestle
India will be included in NSE Nifty 50 Index and Nifty 50 Equal Weight Index.

It will be replacing India bulls Housing Finance Ltd.

5.10 Investment Banking

What Is Investment Banking?

Investment banking is a specific division of banking related to the creation of capital for
other companies, governments and other entities.

Investment banks underwrite new debt and equity securities for all types of corporations,
aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations
and broker trades for both institutions and private investors.

Investment banks also provide guidance to issuers regarding the issue and placement of
stock.

The Role of Investment Bankers

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Investment banks employ investment bankers who help corporations, governments and
other groups plan and manage large projects, saving their client time and money by
identifying risks associated with the project before the client moves forward.

In theory, investment bankers are experts in their field who have their finger on the pulse of
the current investing climate, so businesses and institutions turn to investment banks for
advice on how best to plan their development, as investment bankers can tailor their
recommendations to the present state of economic affairs.

Essentially, investment banks serve as middlemen between a company and investors when
the company wants to issue stock or bonds.

The investment bank assists with pricing financial instruments to maximize revenue and
with navigating regulatory requirements.

Often, when a company holds its initial public offering (IPO), an investment bank will buy all
or much of that company’s shares directly from the company.

Subsequently, as a proxy for the company holding the IPO, the investment bank will sell the
shares on the market.

This makes things much easier for the company itself, as they effectively contract out the
IPO to the investment bank.

Moreover, the investment bank stands to make a profit, as it will generally price its shares at
a mark-up from the price it initially paid.

In doing so, it also takes on a substantial amount of risk. Though experienced analysts use
their expertise to accurately price the stock as best they can,

the investment bank can lose money on the deal if it turns out it has overvalued the stock,
as in this case it will often have to sell the stock for less than it initially paid for it.

5.11 the Benefits of Depository System

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It is a system whereby the transfer and settlement of scrips take place not through the
traditional method of transfer deeds and physical delivery of scrips but through the modern
system of effecting transfer of ownership of securities by means of book entry on the
ledgers or the depository without the physical movement of scrips.

The new system, thus, eliminates paper work, facilitates automatic and transparent trading
in scrips, shortens the settlement period and ultimately contributes to the liquidity of
investment in securities. This system is also known as ‘scripless trading system’.

Benefits of Depository System to investors

1. A depository ensures that only pre-verified assets with good title are traded. Therefore,
an investor is always assured of assets with good title.

Moreover, the problems of bad deliveries and all the risks associated with physical
certificates, such as loss, theft, mutilation etc. are avoided.

2. Electronic transaction of securities saves time. Time spent on preparation of share

certificates and transfer deed are avoided.

3. Electronic transactions reduces the settlement time.

4. Instant transfer of securities enables the investor to get dividend, right and bonus without
delay.

5. Transaction costs are reduced as transfers in electronic form are exempt from stamp
duty.

6. There is no problem of odd lots as the marketable lot in depository is fixed as one share.

7. The interest rate on loan against pledge of dematerialised shares is comparatively lower.

8. As a security measure, the account holder can totally freeze his account for any desired
period.

9. Depositories enable the investors to deliver shares in any part of the country without
exposing themselves to the risk and cost of transportation.

10. The investor is able to revise his portfolio more frequently due to low transaction costs
and quick transfer of securities.

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 Benefits of Depository System to Company

1. The depository system enables the company management to maintain and update
information about shareholding pattern of the company.

The company is able to know the particulars of beneficial owners and their holdings
periodically.

2. The issue cost gets drastically reduced because of dematerialisation of securities.

3. Paperless trading is a boon for the company management.

4. Distribution of cash corporate benefits (dividends) and non-cash corporate benefits

(rights and bonus) will be quicker as the ownership can be easily identified.

5. The transfer process under depository system is prompt and free from defects. So,
complaints against the company by an investor is avoided in this regard.

This helps the company build a good corporate image.

Benefits of Depository System to Intermediaries

Intermediaries will be benefited from enhanced liquidity, safety and turnover on stock
market, improved cash flow elimination of forgery and counterfeit with elimination of risk
from settlement due to bad deliveries.

Benefits of Depository System to capital market

1. As the trading, clearing and settlement mechanism are automated and inter-linked with
the depository, the capital market is more transparent.

2. Use of computers and improved communication technology in the depository system has
made capital market activities efficient.

3. Investors repose a high degree of confidence in the capital market.

4. Use of depository system attracts foreign investors.

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5. Volume of trade in capital market substantially increases. More and more middle-income
group become involved either directly or through mutual funds.

5.12 What is NSDL?

NSDL stands for National Securities Depository Limited. It is India’s oldest and largest
depository.

The term “depository” refers to the organization meant for holding and safeguarding the
securities that are traded in the securities market.

it contains the securities in electronic form as opposed to the previous method of recording
paper transactions of shares, bonds, and other financial instruments.

The NSDL can be compared to a bank. A bank holds the investor’s money, while the NSDL
keeps stocks, shares, bonds, and other classes of securities.

When investors purchase securities, they are automatically credited to the depository
account, and when those securities are sold,

they are automatically debited from the depository account. Similarly, if a company wants
to know about the investor’s information for awarding dividends, rights or any other
notification, it will ask the depository about the investor’s details.

Benefits from National Securities Depository Limited (NSDL)

NSDL was created to address issues arising because of ownership of securities held in
physical form and its transfer. Some of the benefits of the subscription from the
organisation are as follows:

No bad deliveries: In case of paper-based transaction, the buyer did not have the facility of
examining quality of asset before buying it, hence there was a risk involved. The risk has
been eliminated by NSDL as securities are held in dematerialized form and hence there are
no chances of bad deliveries.

Elimination of risks related to physical certificates: – There is a lot of risk involved with
physical certificates such as risk of theft, damage due to wear and tear, mutilation,

71
destruction, etc. In depository system, since these certificates are now held in demat form,
there is no such risk involved. It also saves the cost incurred for issuing duplicate certificates.

Stamp duty: Stamp duty was essential in the traditional method, now there is no need of
paying stamp duty in case securities are transferred through depositories. T

his rule is also applicable in case of transfer of equity shares, debt instruments and mutual
funds.

Immediate transfer and registration of securities: In depository system, once the security
has been credited to the investor account, he becomes the owner of that security legally.

This is unlike physical system, where he/she was required to send them to company
registrar for changing the ownership which used to take a lot of time.

It also exposed the investor to the risk of them being lost in transit and opportunity cost in
case there is a delay in transfer.

Faster settlement and more liquidity: In case of NSDL, settlement is done on 2nd working
day from the trade day, i.e. T+2 rolling settlement.

This enables faster turnover of transaction and the liquidity with investor improves.

Faster disbursal of non-cash corporate benefits: NSDL facilitates direct credit of corporate
benefits in non-monetary forms such as bonus shares, right shares, etc. to the account of
the investor.

It offers the facility of quick and safe transfer of securities; thus, the risk of certificates being
lost in transit is eliminated.

Reduction in brokerage: Transfer of securities through depositories helps in reducing the

back office paper work, efforts required at the end of brokers and risk faced by them being
an introducer.

As a result, the brokerage charged by brokers is also reduced. It is beneficial to both

investors as well as brokers, thus this is a win–win situation for both.

Reduction in handling huge paper work: Online transaction of securities leads to reduction
in paper work as everything is available online and at a click of few buttons.

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This doesn’t require maintaining a number of trail documents for the transaction.

Status Reports: Periodic statement of accounts containing the details of transactions

executed and status of holding are provided to the investors; thus, facilitating better
controls.

Ease in change of investor details: In traditional system, if there was any change in the
details of the investor such as communication address, the investor had to go through the
cumbersome process of getting it changed in every company in which he has invested.

This process has been simplified as now the investor needs to inform his Depository
Participants (DPs) about the change and submit relevant documents.

The data is updated everywhere immediately and there is no need to inform every company
separately.

Simplified process of transmission: The transmission of shares held in demat form can be
done by simply providing required documents to DPs and transmission is reflected in the
database of all the companies wherein the investor is listed as a registered owner of
securities. Thus, eliminating the traditional practice in which the nominee or joint holder
had to individually communicate to all the companies in which he holds shares.

Simplified process for sale of securities held on behalf of minor: The guardian who has been
designated as being responsible for minor is not required to take prior approval of court for
selling the securities held in demat form purchased on behalf of the minor.

5.13 Online Trading

You can place trade orders or cancel orders at your will from the comforts of your home.

It allows you to make your own decision with regards to trading without any interference of
the broker. You can buy shares or invest in IPO or buy mutual funds as well.

Online trading can be done by simply opening a demat and trading account with any SEBI
registered broker.

Account opening can be done in a matter of 15 minutes.

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The documents required to open an account are PAN card, address proof, AADHAAR card,
mobile number linked to AADHAAR, bank statement, cancelled cheque leaf and passport
photograph.

Five benefits of online trading

1.One of the clearest advantages of online trading is the reduction in transaction costs and
high fees associated with traditional brick-and-mortar brokerage firms.

Typically, you’ll pay between $5 and $10 to buy and sell stocks and exchange-traded funds
at online discount brokerages, according to a Bloomberg report.

2. More control and flexibility

Time is often of the essence when you trade stocks, so the speed of using online trading
portals is a benefit to many investors. With online trading, you can execute a trade almost
immediately.

Traditional brick-and-mortar brokers might require appointments, either online, over the
phone or in person, just to initiate a trade.

3. Ability to avoid brokerage bias

By taking trading into your own hands, you can eliminate brokerage bias. Bias sometimes
occurs when a broker gives financial advice that benefits the broker — such as in the form of
a commission for selling specific mutual funds and other products.

4. Access to online tools

In the world of online trading, a lower cost does not necessarily mean a shoddy product.

Many of today’s online trading companies offer customers an impressive suite of tools
providing valuable information and helping optimize trades.

5.Option to monitor investments in real time Many online trading sites offer stock quotes
and trade information that make it easy for people to see how their investments are doing
in real time.

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 Five disadvantages of online trading

1. Easier to invest too much too fast

Because online trading is so easy — you basically push a button — there is the risk of making
poor investment choices or overinvesting.

Online investors can protect themselves by understanding the stocks they are buying and
setting up safeguards in fast-paced markets.

Placing a limit order on your account is one way to control what you buy and how much of
it.

2. No personal relationships with brokers

From getting help on how to create an investment strategy to understanding how the
results of feedback mechanisms affect the market, online traders are left to their own
devices. For some, this kind of autonomy can be unsettling.

Experts often stress the importance of research, particularly for new traders. You need to
learn as much as you can about the companies in which you invest.

3. Addictive nature

Online traders can experience a certain high when trading that is similar to what people
experience when gambling, according to a recent study on excessive trading published in
the journal Addictive Behaviours.

The study noted that some investors choose short-term trading strategies that involve
investing in risky stocks offering the potential for large gains but also significant losses. “The
structure itself of the two activities (gambling and trading) is very close,” the study
concluded.

4. Internet-dependent

The nature of online trading means that, ultimately, you’re at the mercy of your internet
connection. If the internet connection is too slow or is interrupted, you can lose out on a
potentially important or lucrative trade.

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5. Buying errors due to computer missteps

With online trading, to simply assume a trade was not completed can cost you money.
Investors who believe their trade was not completed might make the trade again and end
up investing twice as much as they intended.

Assuming a trade was completed without seeing confirmation of the fact also is a mistake.
Make sure you understand how to verify trades and review statements before you begin
using an online investing system.

Definition of 'Market Capitalization'

Market capitalization is the aggregate valuation of the company based on its current share
price and the total number of outstanding stocks.

It is calculated by multiplying the current market price of the company's share with the total
outstanding shares of the company.

Description: Market capitalization is one of the most important characteristics that helps the
investor determine the returns and the risk in the share.

It also helps the investors choose the stock that can meet their risk and diversification
criterion.

For instance, a company has 20 million outstanding shares and the current market price of
each share is Rs100.

Market capitalization of this company will be 200,00,000 x 100=Rs 200 crore.

Stocks of companies are of three types. The stocks with a market cap of Rs 10,000 crore or
more are large cap stocks.

Company stocks with a market cap between Rs 2 crore and 10 crores are mid cap stocks and
those less than Rs 2 crore market cap are small cap stocks.

Small cap is a term used to classify companies with a relatively small market capitalization. A
company’s market capitalization is the market value of its outstanding shares.

76
In US, the company is classified as small cap if its market capitalization is less than $2 billion
and in India, normally a company below market capitalization of Rs.5000 crores is classified
as small cap company.

A mid-cap company is a company with a market capitalization between $2 billion and $10
billion in US.

In India, normally a company with market capitalization above Rs.5000 crores and less than
Rs.20000 crores is considered as midcap company.

As the name implies, a mid-cap company falls in the middle of the pack between large-cap
and small-cap companies.

Large cap (sometimes “big cap”) refers to a company with a market capitalization value of
more than $10 billion.

Large cap is a shortened version of the term “large market capitalization.” In India, normally
companies with the market capitalization higher than Rs.20,000 crores is considered as
Large cap companies.

The amount used for the classifications “large cap,” mid cap” or “small cap” are only
approximations that change over time.

5.14 Penny Stock

What Is a Penny Stock?

A penny stock refers to a small company's stock that typically trades for less than $5 per
share.

Although some penny stocks trade on large exchanges such as the New York Stock Exchange
(NYSE), most penny stocks trade via over the counter (OTC) transactions. Transactions take
place through the electronic OTC Bulletin Board (OTCBB) or through the privately-owned
Pink Sheets. There is no trading floor for OTC transactions, and the quotations are also all
done electronically.

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Penny Stocks Explained

In the past, penny stocks were considered any stocks that traded for less than one dollar per
share.

The U.S. Securities and Exchange Commission (SEC) has modified the definition to include all
shares trading below five dollars.

The SEC is an independent federal government agency responsible for protecting investors
as they maintain fair and orderly functioning of the securities markets.

Penny stocks are usually associated with small companies and trade infrequently meaning
they have a lack of liquidity or ready buyers in the marketplace.

As a result, investors may find it difficult to sell stock since there may not be any buyers at
that time. Because of the low liquidity, investors might have difficulty finding a price that
accurately reflects the market.

Due to their lack of liquidity, wide bid-ask spreads or price quotes, and small company sizes,
penny stocks are generally considered highly speculative.

In other words, investors could lose a sizable amount or all of their investment.

Price Fluctuations of Penny Stocks

Penny stocks offered on the marketplace are often growing companies with limited cash
and resources.

Since these are primarily small companies, penny stocks are most suitable for investors who
have a high tolerance for risk.

Typically, penny stocks have a higher level of volatility, resulting in a higher potential for
reward and, thus, a higher level of inherent risk. Investors may lose their entire investment
on a penny stock, or more than their investment if they buy on margin. Buying on margin
means the investor borrowed funds from a bank or broker to purchase the shares.

Considering the heightened risk levels associated with investing in penny stocks, investors
should take particular precautions.

78
For example, an investor should have a stop-loss order predetermined before entering a
trade and know what price level to exit if the market moves opposite of the intended
direction.

Stop-Loss orders are instructions, placed with the broker, that set a price limit that once
reached, will trigger an automatic sell of the securities.

Although penny stocks can have explosive moves, it is important to have realistic
expectations whereby investors understand that penny stocks are high-risk investments
with low trading volumes.

Pros

1. Offer a place for small companies to gain access public funding.

2. In some few cases, penny stocks may provide a method to gain access to larger
marketplace listing.
3. With a lower price, penny stocks allow for significant upside in share appreciation.

Cons

1. Penny stocks lack a liquid market with few buyers, perhaps even after their price has
increased.
2. There is limited information available on the company's financial soundness or track
record.
3. Penny stocks have a high probability of fraud and bankruptcy of the underlying
company.

5.15 RISK

WHAT IS RISK?

All investments involve some degree of risk. In finance, risk refers to the degree of
uncertainty and/or potential financial loss inherent in an investment decision.

In general, as investment risks rise, investors seek higher returns to compensate themselves
for taking such risks.

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Every saving and investment product have different risks and returns.

Differences include: how readily investors can get their money when they need it, how fast
their money will grow, and how safe their money will be.

TYPES OF RISKS

1. Business Risk

With a stock, you are purchasing a piece of ownership in a company. With a bond, you are
loaning money to a company.

Returns from both of these investments require that that the company stays in business. If a
company goes bankrupt and its assets are liquidated, common stockholders are the last in
line to share in the proceeds.

If there are assets, the company’s bondholders will be paid first, then holders of preferred
stock. If you are a common stockholder, you get whatever is left, which may be nothing.

If you are purchasing an annuity make sure you consider the financial strength of the
insurance company issuing the annuity.

You want to be sure that the company will still be around, and financially sound, during your
pay-out phase.

2. Volatility Risk

Even when companies aren’t in danger of failing, their stock price may fluctuate up or down.
Large company stocks as a group, for example, have lost money on average about one out
of every three years.

Market fluctuations can be unnerving to some investors. A stock’s price can be affected by
factors inside the company, such as a faulty product, or by events the company has no
control over, such as political or market events.

3. Inflation Risk

Inflation is a general upward movement of prices. Inflation reduces purchasing power,

which is a risk for investors receiving a fixed rate of interest. The principal concern for
individuals investing in cash equivalents is that inflation will erode returns.

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 4. Interest Rate Risk

Interest rate changes can affect a bond’s value. If bonds are held to maturity the investor
will receive the face value, plus interest.

If sold before maturity, the bond may be worth more or less than the face value.

Rising interest rates will make newly issued bonds more appealing to investors because the
newer bonds will have a higher rate of interest than older ones.

To sell an older bond with a lower interest rate, you might have to sell it at a discount.

5. Liquidity Risk

This refers to the risk that investors won’t find a market for their securities, potentially
preventing them from buying or selling when they want.

This can be the case with the more complicated investment products.

It may also be the case with products that charge a penalty for early withdrawal or
liquidation such as a certificate of deposit (CD).

5.16 RETURN

What Is a Return?

A return, also known as a financial return, in its simplest terms, is the money made or lost
on an investment over some period of time.

A return can be expressed nominally as the change in dollar value of an investment over
time.

A return can also be expressed as a percentage derived from the ratio of profit to
investment.

Returns can also be presented as net results (after fees, taxes, and inflation) or gross returns
that do not account for anything but the price change.

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 RISK VS REWARD

Risk vs. Reward

The risk-return trade-off is the balance between the desire for the lowest possible risk and
the highest possible returns.

In general, low levels of risk are associated with low potential returns and high levels of risk
are associated with high potential returns.

Each investor must decide how much risk they’re willing and able to accept for a desired
return.

This will be based on factors such as age, income, investment goals, liquidity needs, time
horizon, and personality.

Risk/Return Trade-off.

It’s important to keep in mind that higher risk doesn’t automatically equate to higher
returns.

The risk-return trade-off only indicates that higher risk investments have the possibility of
higher returns—but there are no guarantees.

On the lower-risk side of the spectrum is the risk-free rate of return—the theoretical rate of
return of an investment with zero risk.

It represents the interest you would expect from an absolutely risk-free investment over a
specific period of time.

In theory, the risk-free rate of return is the minimum return you would expect for any
investment because you wouldn’t accept additional risk unless the potential rate of return is
greater than the risk-free rate.

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Risk and Diversification

The most basic – and effective – strategy for minimizing risk is diversification. Diversification
is based heavily on the concepts of correlation and risk. A well-diversified portfolio will
consist of different types of securities from diverse industries that have varying degrees of
risk and correlation with each other’s returns.

While most investment professionals agree that diversification can’t guarantee against a
loss, it is the most important component to helping an investor reach long-range financial
goals, while minimizing risk.

There are several ways to plan for and ensure adequate diversification including:

Spread your portfolio among many different investment vehicles – including cash, stocks,
bonds, mutual funds, ETFs and other funds. Look for assets whose returns haven’t
historically moved in the same direction and to the same degree. That way, if part of your
portfolio is declining, the rest may still be growing.

Stay diversified within each type of investment. Include securities that vary by sector,
industry, region, and market capitalization. It’s also a good idea to mix styles too, such as
growth, income, and value. The same goes for bonds: consider varying maturities and credit
qualities.

Include securities that vary in risk. You're not restricted to picking only blue-chip stocks. In
fact, the opposite is true. Picking different investments with different rates of return will
ensure that large gains offset losses in other areas.

Keep in mind that portfolio diversification is not a one-time task. Investors and businesses
perform regular “check-ups” or rebalancing to make sure their portfolios have a risk level
that’s consistent with their financial strategy and goals.

Common Methods of Measurement for Investment Risk Management

Risk management is a crucial process used to make investment decisions. The process
involves identifying and analysing the amount of risk involved in an investment, and either
accepting that risk or mitigating it.

83
Some common measures of risk include standard deviation, beta, value at risk (VaR), and
conditional value at risk (CVaR).

 Standard Deviation

Standard deviation measures the dispersion of data from its expected value.The standard
deviation is used in making an investment decision to measure the amount of historical
volatility associated with an investment relative to its annual rate of return.

It indicates how much the current return is deviating from its expected historical normal
returns.

For example, a stock that has high standard deviation experiences higher volatility, and
therefore, a higher level of risk is associated with the stock.

 Beta

Beta is another common measure of risk. Beta measures the amount of systematic risk an
individual security or an industrial sector has relative to the whole stock market.

The market has a beta of 1, and it can be used to gauge the risk of a security. If a security's
beta is equal to 1, the security's price moves in time step with the market.

A security with a beta greater than 1 indicates that it is more volatile than the market.

Conversely, if a security's beta is less than 1, it indicates that the security is less volatile than
the market. For example, suppose a security's beta is 1.5.

In theory, the security is 50 percent more volatile than the market.

 Value at Risk (VaR)

Value at Risk (VaR) is a statistical measure used to assess the level of risk associated with a
portfolio or company.

The VaR measures the maximum potential loss with a degree of confidence for a specified
period. For example, suppose a portfolio of investments has a one-year 10 percent VaR of
$5 million. Therefore, the portfolio has a 10 percent chance of losing more than $5 million
over a one-year period.

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  Conditional Value at Risk (CVaR)

Conditional value at risk (CVaR) is another risk measure used to assess the tail risk of an
investment.

Used as an extension to the VaR, the CVaR assesses the likelihood, with a certain degree of
confidence, that there will be a break in the VaR; it seeks to assess what happens to
investment beyond its maximum loss threshold.

This measure is more sensitive to events that happen in the tail end of a distribution—the
tail risk.

For example, suppose a risk manager believes the average loss on an investment is $10
million for the worst one percent of possible outcomes for a portfolio. Therefore, the CVaR,
or expected shortfall, is $10 million for the one percent tail.

Categories of Risk Management

Beyond the particular measures, risk management is divided into two broad categories:
systematic and unsystematic risk.

Systematic Risk

Systematic risk is associated with the market. This risk affects the overall market of the
security.

It is unpredictable and undiversifiable; however, the risk can be mitigated through hedging.

For example, political upheaval is a systematic risk that can affect multiple financial markets,
such as the bond, stock, and currency markets.

An investor can hedge against this sort of risk by buying put options in the market itself.

Unsystematic Risk

The second category of risk, unsystematic risk, is associated with a company or sector. It is
also known as diversifiable risk and can be mitigated through asset diversification.

This risk is only inherent to a specific stock or industry. If an investor buys an oil stock, he
assumes the risk associated with both the oil industry and the company itself.

85
For example, suppose an investor is invested in an oil company, and he believes the falling
price of oil affects the company.

The investor may look to take the opposite side of, or hedge, his position by buying a put
option on crude oil or on the company, or he may look to mitigate the risk through
diversification by buying stock in retail or airline companies.

He mitigates some of the risk if he takes these routes to protect his exposure to the oil
industry.

If he is not concerned with risk management, the company's stock and oil price could drop
significantly, and he could lose his entire investment, severely impacting his portfolio.

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 CHAPTER 6. DATA ANALYSIS & INTERPRETATION

Analysis in this report:

An analysis is made on the responses received from 100 sample investors. The objective of
the report is to find out the investor's behaviour on various investment avenues, to find out
the needs of the current and future investors.

The questionnaire contains various questions on the investor's financial experience, based
on these experiences an analysis is made to find out a pattern in their investments.

Based on these investment experiences of the 100 sample investors an analysis is made and
interpretations are drawn. Interpretations are made on a rational basis; these
interpretations may be correct or may not be correct but care is taken to draw a valid and
approvable interpretation.

Analysis is made only from the information collected through questionnaires no other data
or information is taken in to consideration for purpose of the analysis

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 Analysis of the Survey:

TABLE 1: DEMOGRAPHICS OF THE SAMPLE INVESTOR

88
PARAMETERS NO. OF PERCENTAGE
INVESTORS
GENDER

FEMALE 68 68%

MALE 32 32%

TOTAL 100 100%

AGE GROUP

25-30 84 84%

30-40 4 4%

40 ABOVE 12 12%

100 100%
TOTAL

SALARY
56 56%
20,000-40,000
4 4%
40,000-50,000
40 40%
50,000 ABOVE
100 100
TOTAL

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Interpretation:

Table 1 above shows, that 32 (32%) of the investors are men and the rest 68(68%) are
females. Generally, males bear the financial responsibility in Indian society, and therefore
they have to make investment (and other) decisions to fulfil the financial obligations. But in
this Case, there is a huge number of females bearing the financial Responsibilities

90
When it comes to age, it was found that 84% are young and significant number under the
age group of 20 - 30. 4% of them are in the age group of 30 to 40. 12% of them are above 40
years of age. There are no investors below 20 years of age.

The whole class of investors are Salaried staff In IT sector

It was found that irrespective of annual income they earn all the investors interested in
investments since today's inflated cost of living is forcing everyone to save for their future
needs and invest those saved resources efficiently. 39(39%) of the individual investors
covered in the study are postgraduates; 46(46%) investors are graduates. It is interesting to
note that most investors (covered in the study) can be said to possess higher education
(Bachelor’s Degree and above), and this factor will increase the reliability of conclusions
drawn about the matters under investigation.56(56%) investors are earning between 2 lakhs
and 4 lakhs, 4(4%) investors are earning between 4 lakhs and 6 Lakhs, 40(40%) investors are
earning more than 6 lakhs per annum. Since most of the investors are below 5 lakhs annual
earnings, many of them are non-risk takers.

TABLE 2 OTHER CHARACTERISTICS OF SAMPLE INVESTOR

Table 2.1 INVESTORS WILLING TO LOSE PRINCIPAL AMOUNT

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 PARAMETER NO OF INVESTORS PERCENTAGE

YES 5 5%

NO 95 95%

TOTAL No of100
Investors 100%

5%
Yes
No

95%

Interpretation:

Since many of the investors annual earnings are below 2 lakh and 4 lakhs,
many of them do not take the risk of losing their principal investment amount
95% of the sample investors are not ready to lose their principal investment
amount. 5% are ready to take risk of losing their principal up to certain extent.

Table 2.2 TIME PERIOD PREFERED TO INVEST

PARAMETERS NO OF INVESTORS PERCENTAGE

SHORT TERM 52 52%

MEDIUM TERM 28 28%

LONG TERM 20 20%

TOTAL 100 100%

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Interpretation:

It's interesting to know that many of the investors prefer to invest their money
for SHORT term i.e. from 0- 1 years, instead of medium term or long term. 52%
preferred short term, 28% preferred medium term, and 20% preferred long
term.

20%
Ta
SHORT TERM
52%
MEDIUM TERM PARAMETE
28% LONG TERM
DAILY
MONTHL
OCCATIONA
TOTAL

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 FREQUENCY OF MONITORING THE INVESTMENT

24%
32%
Monthly
Occationally
Daily

44%

Interpretation:

Due to the busy life schedule, many of the investors are not able to spend time in
monitoring their investments, only 124% of the investors are monitoring their investments
daily, 32% are monitoring on a monthly basis, 44%, the majority investors are monitoring
their investments occasionally. Many of them who have invested in safe investment
avenues do not bother about their investments, some of them forget about the investments
for many years

Table 2.4 FAMILY BUDGET

PARAMETERS NO. OF INVESTORS PERCENTAGE

YES 60 60%

NO 40 40%

TOTAL 100 100%

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 FAMILY BUDGET

40% YES
NO
60%

Interpretation:

73% of the sample investors had a monthly family budget for their daily expenditure. 27% of
the investors replied they never thought of having a budget calculation, and few think of
having a budget but never implemented so far. Many people with excess money never
cared to make any family budgets.

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 Table 2.6 SAVINGS OBJECTIVE
TABLE 2.5 INVESTMENT OBJECTIVES
PARAMETERS VOTES WEIGHTS
PARAMETERS VOTES WEIGHTS
CHILDREN’S EDUCATION INVESTMENT
40 OBJECTIVES 40%
ASSEST GENERATION 28 28%
RETIREMENT
SHORT TERM GAIN
28 28%
CAPITAL PRESERVATION 20 20%
HEALTH
LONG CAREGAIN
TERM
LONG TERM GAIN 452 52%
4%
MARRIAGE
SHORT TERM GAIN 20 20%
18 18%
FAMILYCAPITAL PRESERVATION
TOTAL
MEMBERSHIP 100 100%
9 9%
ASSET GENERATION
TOTAL 100 100%
0% 10% 20% 30% 40% 50% 60%

Series3 Series2 INVESTMENT OBJECTIVES

Interpretation:

Table 2.5 shows the savings objectives of the sample investors, investors are given option to
select one or more savings objectives, since there may be one or more answers, weights are
given for each parameter bases on the votes given by the investors, the maximum
weightage represents many investors have that as main objective. Based on the weights
calculated ranks are given in the order of maximum weightage given by investors. The
highest rank goes to long term capital gain. After that is asset generation. Short term gain
and asset generation is given equal weightage.

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 45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
CHILD'S EDU- RETIREMENT HEALTH CARE MARRIAGE FAMILY MEMBERS
CATION
NO. OF INVESTORS Column1 Column2

INTERPRETATION:

Table 2.6 shows the savings objectives of the sample investors, investors are given option to
select one or more savings objectives, since there may be one or more answers, weights are
given for each parameter bases on the votes given by the investors, the maximum
weightage represents many investors have that as main objective. Based on the weights
calculated ranks are given in the order of maximum weightage given by investors. First rank
is given to children's education, many investors feel that, investing money for the future of
the Childs education is very important than any other need. Many of the investors are in the
age group of 20 - 30 and 30 - 40 as of now they are thinking of saving for their children's
marriage. After children's education investors are saving for their own Retirement. There is
a greater need for Indians to save for their Retirement. Family members and child’s

marriage is given subsequent ranks after Retirement. Last Priority is given to Healthcare.

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 Table 2.7 PURPOSE BEHIND INVESTMENT

PARAMETERS VOTES WEIGHTAGE

WEALTH 36 36
CREATION TAX
20 20
SAVING
16 16
EARN RETURNS
28 28
FUTURE

PURPOSE
EXPENDITURE BEHIND INVESTMENT

TOTAL 28%
100 100%
WEALTH CREATION
36%
TAX SAVING
EARN RETURNS
16% FUTURE EXPENDITURE
20%

INTERPRETATION:

All the investors have very common purposes for investing, they have more than one
purpose for investing their money. Salaried people invest for tax savings, and for future
expenditure, and mostly for earning returns. Almost all the investors have all the 4 purposes
behind investing their money.

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 Table 2.8 FACTORS CONSIDERED BEFORE INVESTING

PARAMETERS VOTES WEIGHTAGE RANK

SAFETY OF PRINCIPAL 36 36 1

LOW RISK 28 28 2

HIGH RETURNS 28 28 3

MATURITY PERIOD 8 8 4

TOTAL 100 100

Chart Title
40%

35%

30%

25%

20%

15%

10%

5%

0%

SAFETY OF PRINCIPAL LOW RISK HIGH RETURNS MATURITY PERIOD

INTERPRETATION:

When the investors are asked about the factors considering before investment many of
them have voted for safety of principal and low risk. First rank is given to safety of principal
and 2nd to low risk. Here there are some contradicting results, some investors expect high
returns at a very low risk, and this is not possible in practical Indian investment avenues.
Investment believes in a proved principle, "higher the risk higher the returns, lower the risk
lower the returns". Investors need to know about this principle before investing.

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 TABLE 2.9 INVESTMENT GROWTH RATE

PARAMETERS NO. OF INVESTORS PERCENTAGE

STEADILY 44 44%

AVERAGE 28 28%

FAST 28 28%

TOTAL 100 100

NO. OF INVESTORS

28%
44% STEADILY
AVERAGE
FAST

28%

INTERPREATTION:

When the investors are asked about at what rate they want their investment to grow, most
of them answered steadily. I believe this was the answer since steadily growth covers all the
risk and principle amount is safe. After that, people vote for average rate and fast rate of
growing equally.

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 TABLE 2.10 SOURCE OF INVESTMENT ADVICE

PARAMETERS NO. OF INVESTORS PERCENTAGE

FRIENDS AND FAMILY 56 56%

LEGAL ADVISORS 20 20%

INTERNET 28 28%

NEWS 0 0%
PAPERS/CHANNELS

TOTAL 100 100

INTERPRETATION:

SOURCES OF INVESTMENT ADVICE

0 10 20 30 40 50 60

NEWS INTERNET CERTIFIED ADVISORS FRIENDS AND FAMILY

80% of the investors never had a financial advisor, they never approached an advisor for
their financial needs, the reason may be inadequate income and excess expenditure, and
there wouldn't be surplus money to worry about. 20% of the investors have financial
advisors, who manage their investments. 44% people take advice from friends and family
and 26% from the internet.

Table 5: INVESTMENT PREFERENCE BASED ON OCCUPATION

Table 3 Preferred investment avenues for salaried

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 INVESTMENT AVENUES VOTES WEIGHT RANKS

LIFE INSURANCE 16 16 1

GOLD 12 12 2

BANK FIXED DEPOSITS 11 11 3

MUTUAL FUNDS 11 11 4

REAL ESTATE 11 11 5

POST OFFICE SAVINGS 9 9 6

PPF 8 8 7

NSC 8 8 8

EQUITY SHARES 7 7 9

SAVINGS ACCOUNT 7 7 10

TOTAL 100 100 100

INTERPRETATION:

Since the investor has an option to invest in more than one Investment Avenue, weights are
given on the basis of preference to investment avenues. The avenue which is given
maximum weightage by the investors is ranked first. First Ten ranks are given to the first ten
preferred investment avenues. First preference is given to life insurance, second to investing
in gold, third to bank fixed deposits. Tenth preference is given to bank savings account.

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 CHAPTER 7. FINDINGS & SUGGESTIONS

• Most of the investors possess higher education like graduation and above.

• Majority of the active and regular Investors belong to accountancy and related
employment; non-financial management and some other occupations are very few.

• Most investors opt for two or more sources of information to make investment decisions.

• Most of the investors discuss with their family and friends before making an investment
decision.

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• Percentage of income that they invest depend on their annual income, more the income
more percentage of income they invest.

• The investors' decisions are based on their own initiative.

• The investment habit was noted in most of the people who participated in the study.

• Most Investors prefer to park their funds in avenues like Life insurance, FD, Gold and Real
Estate.

• Most of the investors get their information related to investment through electronic
media (TV) next to print media (Newspaper/ Business newspaper/ Magazines)

• Increase in age decrease the risk tolerance level.

• Women are attracted towards investing gold than any other investment avenue.

Risk tolerance level and Suggestion of Suitable Portfolio to the Investors

The role of uncertainty and the knowledge about the return on Investment Avenue are
important components of any investment. The extent of an investor's ability to tolerate
these uncertainties of return is referred as risk tolerance level of an investor (Schaefer,
1978). Risk tolerance tends to be subjective rather than objective.

Schaefer described the relation this way: "two persons may very well agree on the riskiness
of a set of gambles, but may nevertheless prefer different gambles, rank ordering them
differently according to their personal tolerance. There are two common methods of
estimating investors' tolerance of risk. The first method is a clear understanding of the
investor and his/her history with investment securities. The second method is to use a
questionnaire designed to elicit feelings about risky assets and the comfort level of the
investor given certain changes in the portfolio or certain investment scenarios.

The second method is used to know the risk tolerance level of the investors. Based on the
responses to the questionnaire, the cumulative scale is constructed, and scores are assigned
to each investor accordingly to categorize the respondents in to i.e. Low, Moderate and
High-risk tolerance level. The investors are divided into 3 categories i.e., A, B and C

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 depending on their risk tolerance starting with Low risk tolerance, Moderate risk tolerance
and High-risk tolerance.

Generally, investors with a low risk tolerance act differently with regard to risk than
individuals with a high-risk tolerance. Investor with a high level of risk tolerance would be
comfortable with market volatility, while low risk-tolerance individuals require stability and
are averse to uncertainties. (McCrimmon & Wehrung, 1986). Individuals with low levels of
risk tolerance require lower chances of a loss, choose not to operate in unfamiliar situations
and require more information about the performance of an investment (McCrimmon &
Wehrung).

Table 4: SUGGESTED PORFOLIO CONSTRUCTION BASED ON AGE GROUP AND

LEVEL OF RISK

PARAMETERS LEVEL OF RISK % OF INCOME TO BE TOTAL

APPORTIONED

AGE GROUP LOW RISK MEDUIM RISK HIGH RISK

BETWEEN 20-30 30% 50% 20% 100%

BETWEEN 30-40 50% 35% 15% 100%

ABOVE 40 70% 20% 10% 100%

TOTAL 100% 100% 100%

Portfolio construction:

Step 1: Identify the age group of the investor, check in which age group he comes under.
Suggest suitable portfolio from the above table.

Example: An investor of age 36 working in public sector Company has approached you to
invest his 8 lakhs of money in a suitable investment.

Advice: The investor comes under the age group 30 - 40. His suitable portfolio will be

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• 50% invest in low risk investment avenues. • 35% invest in medium risk avenues. • 15%
invest in high risk avenues. Step 2: investment preference made from the table 5.5 or based
on his occupation.

Since he come under the occupation salaried, he can choose the preferred investment
avenues from table 5.1

CHAPTER 8. SUMMARY & CONCLUSION

Summary

This report reflects the behaviour of various categories of investors.

Selection of a perfect investment avenue is a difficult task to any investor. An effort is made
to identify the tastes and preferences of a sample of investors selected randomly out of a
large population. Despite of many limitations to the study I was successful in identifying

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some investment patterns, there is some commonness in these investors and many of them
responded positively to the study.

This report concentrated in identifying the needs of current and future investors, investor's
preference towards various investment avenues are identified based on their occupation.
Investors risk in selecting an avenue is dependent on the age of that investor.

Conclusion

This study confirms the earlier findings with regard to the relationship between Age and risk
tolerance level of individual investors. The Present study has important implications for

investment managers as it has come out with certain interesting facets of an individual
investor. The individual investor still prefers to invest in financial products which give risk
free returns. This confirms that Indian investors even if they are of high income, well
educated, salaried, independent are conservative investors prefer to play safe. The
investment product designers can design products which can cater to the investors who are
low risk tolerant and use TV as a marketing media as they seem to spend long time watching
TVs.

CHAPTER 9. BIBLIOGRAPHY

Books

a) “The Mindful Investor” - Maria Gonzalez and Graham Baryon.

b) “Understanding Indian Investor’s- Jawahar Lal.

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c)” Security Analysis and Portfolio Management - Ranganatham.

d) “investment analysis and portfolio management”– Rishabh publications

Website

a) www.nseindia.com

b) www.moneycontrol.com

c) www.bseindia.com

d) www.investing.com

e) Wikipedia.com

f) www.investors.in

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