1.

INTRODUCTION
1.1 What is Investment?
Investment is the employment of funds with the aim of achieving additional income or growth in value. The
essential quality of an investment is that it involves waiting for a reward. It involves the commitment of
resources, which have been saved or put away from current consumption in the hope that some benefits will
accrue in future. The term Investment does not appear to be simple, as it has been defined. Financial experts
and economists have further categorized investment. It has also often confused with the term speculation.
The following discussion will give an explanation of the various ways in which investment is related or
differentiated from the financial and economic sense and how speculation differs from investment. However,
it must be clearly established that investment involves long-term commitment.

1.2 Financial and Economic Meaning of Investment

Investment is the allocation of monetary resources to assets that are expected to yield some gain or positive
return over a given period of time. These assets range from safe investments to risky investments.
Investments in this form are also called Financial investments
From the point of view of people who invest their funds, they are the suppliers of capital and in their view,
investment is a commitment of a persons funds to derive future income in the form of interest, dividends,
rent premiums, pension benefits or the appreciation of the value of their principal capital. To the financial
investor, it is not important whether money is invested for a productive use or for the purchase of secondhand instruments such as existing shares and stocks listed on the stock exchanges. Most instruments are
considered to be transfers of financial assets from one person to another.
The nature of Investment in the financial sense differs from its use in the economic sense. To the economists,
Investment means the net additions to the economys capital stock, which consists of goods, and services
that are used in the production of other goods and services. In this context, the term investment therefore
implies the formation of new and productive capital in the form of new construction, new producers durable
equipment such as plant and equipment. Inventories and human capital are included in the economists
definition of investment.

1.3 Why Investments are Important?

Investments are important and useful in the context of present- day conditions. Some factors that have been
made investment decisions increasingly important are:
a)
b)
c)
d)
e)

Longer Life Expectancy or Planning for Retirement,

Increasing Rates of Taxation,
Higher Interest Rates,
Higher Rate of Inflation,
Larger Incomes, and
1

f) Availability of a complex number of investment outlets.

a) Longer Life Expectancy or Planning for Retirement:Investment decisions have become significant as most people in India retire between the ages 55 and 60.
Also, the trend shows longer life expectancy. The earnings from employment should, therefore be
calculated in such a manner that a portion should be put away as savings. Savings by themselves so not
increase wealth; these must be invested in such a way that the principle and income will be adequate for a
greater number of retirement years.
Increase in working population, proper planning for life span and longevity have ensured the need for
balanced investments.

b) Increasingly Rates of Taxation:

Taxation is one of crucial factors in any country which introduces an element of compulation in a
persons savings. There are various forms of saving outlets in our country in the form of Investments
which helps in bringing down the tax level by offering deductions in personal income. Benefits in tax
accrue out of investment in Unit Trust Certificates, Unit Linked Insurance Plan, Life Insurance, National
Savings Certificate, etc.

c) Interest Rates:Another aspect which is necessary for a sound investment plan is the level of interest rates. Interest rates
vary between on investment and another. These may vary between risky and safe investments: they may
also differ due to different benefits schemes offered by the investments. These aspects must be considered
before actually allocating any amount. A high rate of interest may not be the only factor favouring the
outlet for investments. Stability of interest is as important as receiving a high rate of interest.

d) Inflation:Inflation has become a continuous problem since the last decade. In these years of rising prices, several
problems are associated coupled with a failing standard of living. Before funds are invested, erosion of
the resources will have to be carefully considered in order to make the right choice of investments. The
investor will try and search an outlet which will give him a high rate of return in the form of interest to
cover any decrease due to inflation. He will also have to judge whether the interest or return will be
continuous or there is likelihood or irregularity.

e) Income:Another reason why investment decisions are assumed importance is the general increase in employment
opportunities in India. After independence, with the stages at development in the country, a number of
new organisations and services were formed. These employment opportunities gave rise in both male and
2

female working force. More incomes and more avenues of investment have led to the ability and
willingness of working people to save and invest their funds.

f) Investment Channels:The growth and development of the country leading to greater economic activity has led to the
introduction of vast arrays of investment outlets. Apart from putting aside savings banks where interest is
low, investors have the choice of a variety of instruments. The investors in his choice of investment will
have to try and achieve a proper mix between high rates of return to reap the benefits of both. Some of
the instruments available are corporate stock, provident fund, life insurance, fixed deposits in the
corporate sector, and so on.

1.4 Factors Favourable for Investment

The investment market should have a favourable environment to be able to function effectively. In India
where all business activities are marked by social, economic and political considerations, it is important
that the political and economic institutions are favourable. Generally, there are basic considerations which
foster growth and bring opportunities for investment. These are
a)
b)
c)
d)

Legal Safeguards,
Stable Currency,
Existence of Financial Institutions to aid savings, and
Form of Business Organisation.

a) Legal Safeguards:A stable government which frames adequate legal safeguards encourages accumulation of savings and
investments. Investors will be willing to invest their funds if they have the assurance of protection of their
contractual and property rights.
In India, the Investors have the dual advantage of free enterprises and government control. Freedom,
efficiency and growth are ensured form the competitive forces of private enterprise. On the other hand,
being a mixed economy, government control exerts discipline and curtails some element of freedom. A
combination of the public sector controlled by the government and private sector left free to operate,
hopes to achieve benefits of both socialistic and capitalist forms of government without their
disadvantages.
In India, the political climate is conducive to investment as government control lends stability to the
capital market.

b) A Stable Currency:-

A well organised monetary system with definite planning and proper policies is a necessary pre
requisites to an investment market. Most of the investments such as bank deposits, life insurance and
shares are payable in a fixed amount of the currency of the country. A proper monetary policy will give
direction to the investment outlets.Price inflation destroys the purchasing power of investments. Inflation
occurs generally in unstable conditions like war or floods but in the last decade, it is also discernible in
peace conditions especially in developing countries because of huge government deficit financed by bank
credit.A reasonable stable price level which is produced by wise monetary and fiscal management
contributes towards proper control, good government, economic well-being and a well-disciplined growth
oriented investment market and protection to investors.

c) Existence of Financial Institutions to Encourage Savings:The presence of financial institutions which encourage savings and direct them to productive uses helps
the investment market to grow. The financial institutions generally in existence in most countries are
commercial banks, life insurance companies and investment companies.
In India, the presences of large number of financial institutions under Central Government and State
Government and rural bodies have encouraged the growth of savings and investment. To maintain a few,
there are the life Insurance Corporation and Unit Trust of India. They offer a wide variety of schemes for
savings and give tax benefits also. Apart from these, there is well organised network of development
banks such as the Industrial Development Bank of India (IDBI), Industrial Credit Investment Corporation
of India (ICICI). At the state level, there are State Financial Corporations, for rural areas and agriculture,
the National bank of agriculture and Rural Development (NABARD). These Financial institutions and
development banks offer a wide variety of policies for encouraging savings and investment.

d) Form of Business Organisation:The form of business organisation which is permanent in existence aides savings and investment. The
public limited companies has been said to be the best form of organisation. The three characteristics of
the corporations which have been very useful for investors are limited liability of shareholders, perpetual
life and transferability and divisibility of stocks and shares. The public limited company with the ability
to continue its business irrespective of member comprises it, gives longevity and soundness to its
business activity.
In contrast to a public limited company whose shareholders have limited liability, the sole proprietor or a
partner in a partnership firm is liable for all the debts of the firm to the full extent of his personal wealth.
In these conditions, investors are hesitant to risk their savings in these forms of organisation. Besides
unlimited liability, the partnership and proprietor also suffer from short life of organisation. With the
death or retirement of any partners, a partnership firm is dissolved. Similarly, a sole proprietor carries on
business only during his lifetime.

2. FEATURES OF INVESTMENT PROGRAMME

The features of an investment programme consist of safety of principal, liquidity, income stability, adequate
income, purchasing power stability, and appreciation, freedom from management of investments, legality and
transferability.

1. Safety of Principal:The investor, to be certain of the safety of principal, should carefully review the economic and industry
trends before choosing the types of investment. Errors are unavoidable and, therefore, to ensure safety of
principal, the investor should consider diversification involves mixing investment commitments by industry,
geographically by management, by financial type and by maturities. A proper combination of these factors
would reduce losses.

2. Liquidity:Every Investor requires a minimum liquidity in his investments to meet emergencies. Liquidity will be
ensured if the investor buys a proportion of readily saleable securities out of his total portfolio. He may,
therefore, keep a small proportion of cash, fixed deposits and units which can be immediately made liquid.
Investment like stocks and property or real estate cannot ensure immediate liquidity

3. Income Stability:
Regularly of income at a consistent rate is necessary in any investment pattern. Not only stability, it is also
important to see that income is adequate after taxes. It is possible to find out some good securities which pay
practically all their earnings in dividends.

4. Appreciation and Purchasing Power Stability:Investors should balance their portfolios to fight against any purchasing power instability. Investors should
judge level inflation, explore the possibility of gain and loss in the investments available to them, limitations
of personal and family considerations. The investors should also try and forecast which securities will
possible appreciate. A purchase of property at the right time will lead to appreciation in time. Growth stock
will also appreciate over time. These, however, should be done thoughtfully and not in a manner of
speculation or gamble.

5. Legality and Freedom from Care:All Investments should be approved by law. Law relating to minors, estates, trusts, shares and insurance
should be studied. Illegal securities will bring out many problems for the investor. One way of being free
from care is to invest in securities like Unit Trust of India, Life Insurance Corporation or Savings
Certificates. The management of securities is then left to the care of the Trust who diversifies the investments
5

according to safety, stability and liquidity with the consideration of their investment policy. The identity of
legal securities and investments in such securities will also help the investor in avoiding many problems.

6. Tangibility:Intangibility securities have many times lost their value due to price level inflation, confiscatory laws or
social collapse. Some investors prefer to keep a part of their wealth invested in tangible properties like
building, machinery, and land. It may, however, be considered that tangible property does not yield an
income apart from the direct satisfaction of possession or property.

3. THE INVESTMENT PROCESS STAGES IN INVESTMENT

The Investment process is generally described in four stages. These stages are:1. Investment policy
2. Investment Analysis,
3. Valuation of securities, and
4. Portfolio Construction

1. Investment Policy:The first stage determines and involves personal financial affairs and objectives before making investment. 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.

2. Investment Analysis:When an 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 v/s Variable securities. The primary concern at this stage would be
from beliefs regarding future behaviour or prices and stocks, he expected returns and associated risk.

3. Valuation of Securities:The third step is perhaps the most important consideration of the valuation of investment. 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. Comparision 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.

4. Portfolio Construction:As discussed earlier under features of an investment programme, portfolio construction requires knowledge
of the different aspects of securities. These are briefly recapitulated here, consisting of safety and growth of
principal, liquidity of assets after taking account the stage involving investment timing, selection of
investment, allocation of savings to different investments and feedback of portfolio.

4. ANALYSIS OF INVESTMENT DECISIONS

4.1 Introduction
These days almost everyone is investing in something even if its a savings account at the local bank or a
checking account the earns interest or the home they bought to live in.
However, many people are overwhelmed when they being to consider the concept of investing, let alone the
laundry list of choices for investment vehicles. Even though it may seem the everyone and their brothers
knows exactly who, what and when to invest in so they can make killing, please dont be fooled. Majorities
of investor typically jump on the latest investment bandwagon and probably dont know as much about
whats out there as you think.
Before you can confidently choose an investment path that will help you achieve your personal goals and
objectives, its vitally important that you understand the basics about the types of investments available.
Knowledge is your strongest ally when it comes to weeding out bad investment advice and is crucial to
successful investing whether you go at it alone or use a professional.

% of people's preference

insurance; 18%
fixed deposit; 25%

mutual funds; 21%

stock market; 36%

The investment options before you are many. Pick the right investment tool based on the risk profile,
circumstance, time available etc. if you feel the market volatility is something, which you can live with then
buy stocks. If you do not want risk, the volatility and simply desire some income, then you should consider
fixed income securities. However, remember that risk and returns are directly proportional to each other.
Higher the risk, higher the returns.

The growth of alternative investment has been considerable in recent years. For both institutional and private
investors, it seems that alternative investment now constitutes a distinct class within their overall asset
allocation. A recent survey of institutional investors carried out by Goldman Sachs and Frank Russell1
revealed that the respondents invested more than 1.7% of their assets in hedge funds in 2001 and plan to
increase the investment to 3.4% for 2003. More generally, the year 2001 represented a record year for
investments in hedge funds, bringing together more than 30 billion dollars.
In a relatively difficult context for the asset management industry, the alternative class represents a
commercial eldorado. This attractiveness is reinforced by the difficult stock market situation, which increases
investors' interest in investment services that base their strategy on the decorrelation with the risks and
returns of the financial markets and therefore the search for an absolute return. Consequently, hedge funds,
which are often referred to as "pure alpha" funds, warrant significant remuneration, determined not only on
the basis of managed assets, but also on outperformance compared to the risk-free rate. That form of
remuneration and commercial arguments that equate hedge funds to low-risk investments, because they have
both low correlation with the risks of the financial markets and low volatility, obviously attracts the attention
of investors and the regulatory authorities.
Apart from evaluating the operational risks that may be incurred by funds that are managed in unregulated
zones and that invest in instruments traded on markets that are themselves unregulated, it is appropriate to
enquire into the nature of the financial risks of alternative investments.

4.2

Advantages of alternative diversification

Investors' interest in hedge funds can be explained in particular through the fact that alternative funds
actually present real diversification strengths through their exposure to risks other than market risks.
These strengths are all the more attractive in a context of relative decline of investment opportunities in
traditional asset classes due to the low degree of diversification offered by a purely geographical or sectorial
asset distribution.
It is actually well known that the limitations of international diversification tend to take effect at the exact
moment that the investor has a need for it, namely in periods when the markets drop significantly. In short,
the correlation between the stock markets in different countries converges towards when there is a sharp drop
in the American markets.
Conversely, it seems that the diversification offered by hedge funds, or to be more precise, certain hedge
funds, is relatively stable: the conditional correlations between the returns on alternative funds and those of
stock and bond market indices are relatively similar to the unconditional correlations. For example, the
Market Neutral and Macro strategies retain a stable market risk exposure whatever the market conditions.

4.3

Difficulties in measuring alternative investment risks

Wanting to use hedge funds as a risk diversification tool presupposes that we have mastery over the issues at
stake in the control of hedge fund risks. Even though recent research work has given us a better
understanding of the subject, it is certainly the area in which the most progress remains to be made.
There are in fact at least three reasons for alternative funds posing specific problems for measuring and
controlling risks:
Difficulties in accounting for the dimensions of credit and liquidity risks
Difficulty in developing relevant benchmarks
Difficulties in accounting for the dynamic and non-linear aspects of alternative risk.
Before going into these difficulties in more detail, it is important to note that it is not because a fund is a
hedge fundthat the risk-free asset is necessarily a good benchmark. While nearly all hedge funds highlight a
so-called "absolutereturn" policy, the risk-free rate is only a good benchmark if the following two conditions
are respected:
Assumption 1: the fund has a market beta equal to zero
Assumption 2: the CAPM is an appropriate model for the alternative universe.
While the first assumption is respected for certain types of alternative funds, such as equity market neutral or
fixed-income arbitrage, it is certainly not valid for the other categories.
The second assumption is even more debatable. In order to have a better comprehension of the issues at stake
in the performance of alternative funds, it is important to understand first of all that the excess return of a
risky portfoliocompared to the risk-free rate, as it is measured for a given sample, can, in general, come from
three distinct sources, as described in the following equation:

Excess Return of the Portfolio = Normal Return + Abnormal Return + Statistical Noise
10

1. Credit and liquidity risks

Among the risk factors that should be taken into account to evaluate both the reality of the return and also the
alternative investment risk, particular attention should be paid to the liquidity and credit risks, for two
essential reasons:

Unlike other risks, where there is general consensus as to how to measure them, accounting for credit
and liquidity risks still constitutes both an operational and a theoretical challenge;
The near-bankruptcy of the LTCM fund significantly highlighted the interdependence between the
two risks, which makes it difficult to model them separately, as the multifactor approach suggests.
The multifactor approach is the dominant doctrine in analysing portfolio risk and return.

In the area of credit risk, the financial literature is particularly rich in terms of both modelling and pricing.
This abundance of models is a relative reflection of the lack of maturity of the practices (cf. the most recent
research carried out on this subject for drawing up the new Basel accord) faced with risks with returns that
are not normally distributed and with diversification that is only effective after taking a very large number of
positions into account.
Even though the conceptual foundations of these models are very similar and constitute an
application/extension of the work of Merton (1974), the implementation conditions and empirical tests of the
models, because they are still very approximate, give results that are not very robust on account of the
assumptions chosen.
Integrating the interdependence between credit risk and liquidity risk should notably lead to the modelling of
the consequences of using leverage effects in arbitrage operations. But today, with the exception of highly
academic research, such as applying mathematical network theory to the construction of systemic measures
of credit andliquidity risk, professionals do not have robust and simple microeconomic results at their
disposal in this area.
Faced with these modelling difficulties, certain authors have proposed measuring the exposure to liquidity
risk by using the degree of auto-correlation of fund returns as a measure of the fund's liquidity risk.
Auto-correlation coefficient analysis concentrates on the problem posed by the consequences of liquidity or
illiquidity on asset prices and position valuation. It is therefore only a partial view of the liquidity risks, but it
does nevertheless correspond to an area that is of considerable concern to professionals. Asness, Krail and
Liew (2000) highlighted the risks posed by the valuation of illiquid positions. In the same way, a recent study
carried out by Capital Market Risk Advisors (2001) observed that substantial price and valuation differences
(30 40%) wererelated to the choice of valuation methods and/or valuation models for the least liquid assets
(high yield and distressed bonds, private securities, OTC options, structured notes and mortgage derivatives).

11

5. INVESTMENT ALTERNATIVES
Investment avenues are the outlets of funds. There are varieties of investment avenues or alternatives. The
investors are free to select any one or more alternative avenues depending upon their needs. All categories of
investors are equally interested in safety, liquidity, and reasonable return on the funds invested by them. In
India, investment alternatives are continuously increasing along with the new corporate securities, public
provident fund, mutual fund etc. thus, wide variety of investment avenues are now available to the investors.
However, investors should be very careful about their hard money. An investor can select the best avenues
after studying the merits and demerits of different avenues. Even financial advertising, newspaper
supplements on financial matters and investment journals offers guidance to investors in the selection of
suitable investment avenues.

STOCK
MARKE
T

FIXED
DEPOSI
TS

INVESTMENT
OPTIONS

MUTUA
L
FUNDS

INSURAN
CE

The following investment avenues are popular and used extensively in India:1. Investment in shares, debentures and bonds of different types issued by companies and Public Sector
Organisations.
2. Postal Savings Schemes
3. Public Fund (PF), Public Provident Fund (PPF), and Other Tax sheltered savings schemes such as
National Savings Schemes, National Saving Certificates and Tax Saving Schemes of LIC, ICICI,
Infrastructure Bonds and so on.
4. Investment in investment intermediaries such as UTI and Mutual funds run by LIC, Banks and
HDFC, etc.
12

5. Deposits in Companies, (public Deposit) or deposits in Public Sector Organisations and Banks.
6. Life Insurance Investment i.e. Investment in different life policies such as Whole Life Policy,
Endowment Policy, and so on.
7. Investment in Real Estate.
8. Investment in Gold, Silver, Precious Metals and Antiques.
9. Investment on GILT edged Securities and securities of government and semi government
organisations (e.g. Relief Bonds, Bonds of Port Trusts, Treasury bills, etc.
It may be noted that there are some avenues / investment schemes where tax benefits are available. Such
schemes are called Tax Savings Schemes of Investment. The tax liability reduces when investment is made in
such schemes. The schemes are decided by the government and announced along with the annual budget. A
tax payer can take the benefit of such schemes and bring down his total tax liability. The basic purpose of
such schemes is to encourage investment in certain investment avenues, in some schemes, the entire
investment is made tax free i.e. it is deducted from yearly taxable income.

Popular Tax Saving Investment are noted as below:

1. Public Provident Fund (PPF)
2. Tax Sheltered saving schemes of post office such as NSC, NSS, etc.
3. Investment in Infrastructure Bonds of IDBI, ICICI.
4. Life Insurance Schemes where insurance premium is given tax benefits.
5. Investment in mutual funds. Here, the tax benefits relates to income earned through such investment.
6. Investment in Residential House. Principal as well as Interest Provide tax benefits.
7. Investment in Pension Plan of insurance Companies.
8. Medi-claim i.e. Health Insurance.

5.1

Non-Marketable Financial Instruments

The Financial Instruments which are not transferable are known as non marketable Financial assets. The
investors can invest in these financial assets but they cannot sale these financial instruments in the capital
market like shares and debentures. These investments include the following:
13

1. Post Office Savings Schemes.

2. Public Provident Fund.
3. Deposits with Banks.

1. Post office Savings Schemes

Post office operates as a financial institution. It collects small savings of the people through savings bank
account facility. In addition time deposits and government loans are also collected through post offices.
Certain government securities such as KisanVikasPatras, National Saving certificates, etc. are sold through
post offices. New schemes are regularly introduced by the postal Department in order to collect savings of
the people. This includes recurring deposits, monthly income schemes, PPF, and so on
Postal savings bank schemes were popular in India for a long period as banking facilities were limited and
were available mainly in the urban areas upto 1950s. The popu8larity of postal savings schemes is reducing
due to the growth of banking and other investment facilities throughout the country. However, even at
present, small investors use postal savings facilities for investing their savings / surplus money for short
term / long term due to certain benefits like stable return, security and safety of investment and loss facility
against postal deposits. Even tax benefits is one attraction for investment in post office. Investment in postal
office is as good as giving money to the government for economic development along with reasonable return
and tax benefits.
Post Office Savings Bank (POSB) has a customer base of 11 crores account holders with annual deposits
exceeding Rs.70,000 crores and a network of 1,55,000 branches. The outstanding balance under all national
savings schemes in post offices stood at Rs. 2,18,695.15crores by march 2001.
Post Office Saving Schemes includes the following:
i.
KisanVikasPatras
ii.
National Savings Certificate
14

iii.
iv.
v.
vi.

i.

Post Office Saving Account.

Post Office Monthly Income Account.
Post Office Monthly Recurring Account.
Post Office Time Deposit Account.

KisanVikasPatras:

KisanVikasPatras (KVP) doubles your money in 7 years and 3 months with the advantage of premature
withdrawal. KVP is sold through all Head Post Offices and Other authorised post offices throughout India.
The rate of returns is 9.75%, compounded annually. KVP scheme doubles in seven years and three months.
KVP accumulates money at a fixed rate, and your money doubles in 7 years and 3 months. But KVP is not
meant for regular income. It is for those looking for a safe avenue of investment without the pressing need
for a regular source of income.
The minimum investment in KVP is Rs. 100. certificates are available in denominations of Rs. 100, Rs.500,
Rs.1000, Rs.5000, Rs.10000 and Rs.50000. the denomination of Rs. 50,000 is sold through head post offices
only. There is no limit on holding of these certificates. Any number of certificates can be purchased. A KVP
is sold at a face value, the maturity value is printed on the certificate .
It is a good option if you are looking for hassle free investment as it assures a certain sum of money at the
expiry of the duration of your investment.
Income is assured at the prescribed rate of interest. As mentioned, this is a risk-free investment channel as the
KVP comes with the backing of the government of India. Since the KVP has the backing of the Government
of India and is, therefore, extremely safe, it does not require any commercial rating.
KVP is not a bearer certificate, and is not easily transferable. Permission of the post-master is required for
any transfer for any transfer. KVP cannot be traded in the secondary market and hence, the question of its
market value does not arise.
Although no TDS is applicable on the interest income from KVP, there are no tax incentives as per the
provisions of the Income Tax Act, 1961.

ii.

National Savings Certificate:

National Savings Certificates (NSC) is certificates issued by Department of post, Government of India and is
available at all post office counters in the country. It is a long-term safe savings option for the investor. The
scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax
act, 1961. The duration of a NSC Scheme is 6 years.
National Savings Certificate can be Purchased by the following:
An Adult in his own name or on behalf of a minor,
A minor,
15

A trust
Two adults jointly,
Hindu Undivided family

National Savings certificates are available in the denominations of Rs. 100, Rs.500, Rs.1000, Rs.5000,
Rs.10000. there is no maximum limit on the purchase of the certificates. It is having a high interest rate at 8
% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate
applicable to individual savings account. A 1000 Rs. Denomination certificate will increase to Rs. 1601 on
completion of 6 years.

Maturity value of a certificate of any other denomination is at proportionate rate. Premature encashment of
the certificate is not permissible except at a discount in the case of death of the holder(s) forfeiture by a
pledgee and when ordered by a court of law.
Interest accrued on the certificates every year is liable to income tax but deemed to have reinvested. Income
Tax rebate is available on the amount invested and interest accruing under Section 88 of Income Tax Act, as
amended from time to time. Income tax relief is also available on the interest earned as per limits fixed vide
section 80L of Income Tax, as amended from time to time.

iii.

Post Office Saving Account:

Post office saving account is similar to a savings account in a bank. It is a safe instrument to park those
funds, which you might need to liquidate fully or partially at very short notice. Post office savings accounts
are especially suited for those living in rural and semi-rural areas where the reach of banks is very limited.
The account can be opened at any post office with a minimum balance of Rs. 20. Maximum of Rs.One lakh
for a single account holder and Rs. Two lakhs for joint account holders can be deposited. There is no lock-in
or maturity period. The amount can be withdrawn anytime subject to keeping a minimum balance of Rs. 50
in simple account and Rs. 500 for cheque facility accounts.

16

Rate of interest is decided by the central Government from time to time. Interest is calculated on l monthly
balances and credited annually. Income tax relief is available on the amount of interest under the provisions
of section 80L of Income Tax Act.

iv.

Post Office Monthly Income Account:

Post Office Monthly Income Account is meant for those investors who want to invest a lump sum and earn
interest on monthly basis for their livelihood. The scheme is therefore, a boon for retired persons.
The account can be opened by a single adult or 2-3 adults jointly. Period of maturity of an account is six
years. Only one deposit can be made in an account. Minimum deposit limit is Rs. 1000. Maximum deposit
limit is Rs. 3 lakhs in case of single account and Rs. 6 lakhs in case of joint account.
Interest @ 8%per annum is payable monthly. In addition, bonus equal to 10%of the deposited amount is
payable at the time of repayment on maturity. Premature closure facility is available on the interest earned as
per limits fixed vide section 80L of income Tax, as amended from time to time.

Advantages
Premature closure of the account is permitted any time after the expiry of a period of one year of
opening the account. Deduction of an amount equal to 5 per cent of the deposit is to be made when
the account is prematurely closed. Investors can withdraw money before three years, but a discount of
5%.
Closing of account after three years will not have any deductions. Monthly interest can be
automatically credited to savings account provided both the accounts standing at the same post office.
The interest income accruing from a post office MIS is exempt from tax under Section 80L of the
Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt
from Wealth Tax.

v.

Post office Recurring Deposit Account

A Post Office Recurring Deposit Account (RDA) is a banking service offered by Department of post.
Government of India at all post office counters in the country. The scheme is meant for investors who want to
deposit a fixed amount every month, in order to get a lump sum after five years. The scheme, a systematic
way for long term savings, is one of the best investment option for the low income groups. The Post- Office
recurring deposits offer a fixed rate of interest, currently at 7.5 per cent per annum compounded quarterly.
The recurring deposit account can be opened at any post office. Period of maturity of account is 5 years.
Sixty equal monthly deposits shall be made in an account in multiplies of Rs. Five subject to a minimum of
ten rupees.

17

Premature closure of accounts is permissible after expiry of three years. In case of premature closure of
account, the interest at the rate applicable to post office savings account shall be payable.

vi.

Advantages
The post office offers a fixed rate of interest unlike banks which constantly change their recurring
deposit interest rates depending on their demand supply position.
As the post office is a department of the government of India, it is a safe investment. The principal
amount in the Recurring Deposit Account is assured. Moreover Interest earned on this account is
exempted from tax as per Section 80L of Income Tax Act.

Post Office Time Deposit Account

A Post - Office Time Deposit Account (RDA) is a banking service similar to a bank Fixed Deposit offered by
Department of post, Government of India at all post office counters in the country. The scheme is meant for
those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of
one year to two years, three years and a maximum period of five years. Investor gets a lump sum (principal +
interest) at the maturity of the deposit. Time Deposits scheme return a lower, but safer, growth in Investment.
The amount can be deposited for 1 year, 2 year, 3year, and 5years. The deposited amount is repayable after
expiry of the period for which it is made viz; 1 year, 2 years, 3 years or 5 years.
This investment option pays annual interest rates between 6.25 and 7.5 per cent, compounded quarterly. Time
deposit for 1 year offers a coupon rate of 6.25%, 2-year deposit offers an interest of 6.5%, and 3 years is
7.25% while a 5- year Time Deposit offers 7.5% return.
Interest is calculated on quarterly compounding basis, and is payable annually. Rate of interest varies
according to the period of the deposit and is decided by the Central Government from time to time. Income
tax relief is available on the amount of interest under the provisions of section 80L of Income Tax Act.
Premature withdrawals from all types of post office time deposit accounts are permissible after expiry of 6
months with certain conditions.

2.

Public Provident Fund

Public Provident Fund, popularly known as PPF, is a savings cum tax saving investment for middle class and
salaried persons. It is even useful to businessmen and higher income earning people. It was introduced in
1969. The PPF scheme is very popular among the marginal income tax payers. It also serves as a retirement
planning tool for many of those who do not have any structured pension plan covering them.

The features of PPF scheme are:

18

Public Provident Fund account can be opened at designated post offices throughout the country and at
designated branches of Public Sector Banks throughout the country. The account can be opened by an
individual in his own name, on behalf of a minor of whom he is a guardian, or by a Hindu Undivided
Family.
Minimum deposit required in a PPF account is Rs.500 in a financial year. Maximum deposit limit is
Rs. 70,000 in a financial year.
The account matures for closures after 15 years. Account can be continued with or without
subscriptions after maturity for block periods of five years. Premature withdrawal is permissible
every year after completion of 5 years from the end of the year of opening the account.
The PPF account is not transferable, but nominee facility is available.
Loans from the amount at credit in PPF amount can be taken after completion of one year from the
end of the financial year of opening the account and before completion of the 5TH year
Interest at the rate notified by the central Government from time to time, is calculated and credited to
the accounts at the end of each financial year. Presently, the rate of interest is 8% per annum.
Income Tax rebate is available on the deposits made under section 80C of Income Tax Act, as
amended from, time to time. Interest credited every year is Tax Free.

Limitations of PPF Account

Low Liquidity as one withdrawal is allowed in a year.

The PPF account is for a period of 15 years which is very long period.

In spite of limitations, PPF is an attractive avenue for investment in the case of tax payers/salaried class /
businessmen / professionals.

3. Deposits with Banks

Investment of surplus money in bank deposits is quite popular among the investors (particularly among
salaried persons). Banks (co operative and commercial) collect working capital for their business through
deposits called bank deposits. The deposits are given by thje customers for specific period and the bank pays
interest on them. The deposits can be accepted from the individuals, institutions and even business
enterprises. The business and profitability of banks depend on deposit collection. For depositing money in the
bank, an investor / depositor has to open an account in the bank.

Different types of deposits accounts are:

a) Savings Bank Account:
A Saving Bank account (SB Account) is meant to promote the habit of saving among the people. It also
facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever required,
without any condition. Hence a savings account is a safe, convenient and affordable way to save your
money. Bank deposits are fairly safe because banks are subject to control of the reserve bank of India
19

with regard to several to several policy and operational parameters. Bank also pays you a minimal interest
for keeping your money with them. The Interest Rate of Savings bank account in India varies between
2.5%and 4%. In Savings Bank account, bank follows the simple interest method. The rate of interest may
change from time to time according to the rules of Reserve Bank of India.

b) Fixed Deposits Account:

A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period,
say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in
return. Investor gets a lump sum (principal + Interest) at the maturity of the deposit.
Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed
deposits also give a higher rate of interest than a saving bank account .the facilities vary from bank to
bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited,
premature withdrawal before maturity period (which involves a loss of interest) etc. bank deposits are
fairly safer because banks are subject to control of the Reserve Bank of India.
The rate of interest for Bank Fixed Deposits varies between 4 and 11 percent, depending on the maturity
period (duration) of the FD and the amount invested. Interest rate also varies between each bank. A bank
FD does not provide regular interest income, but a lump-sum amount on its maturity.

c) Recurring Deposit Account

The Recurring deposit in bank is meant for someone who wants to invest a specific sum of money on a
monthly basis for a fixed rate of return. At the end, you will get the principal sum as well as the interest
earned during that period. The scheme, a systematic way for long term savings, is one of the best
investment options for the low income groups. The rate of interest varies between 7 and 11 percent
depending on the maturity period and amount invested.
The interest is calculated quarterly or as specified by the bank

Advantages of Bank Deposits

Investment is reasonably safe and secured with adequate liquidity.

Banks offer reasonable rate of return on the investment made and that too in a regular manner.

Banks offer loan facility against the investment made.

Procedures and formalities involved in a bank investment are limited, simple and quick.

Banks offer various services and facilities to their customers.

20

 Limitations/Demerits of Bank Deposits

The rate of return in the case of bank investment is low as compared to other avenues of investment.
The return on the investment is not adequate even to protection against the present inflation rate in
the country.

5.2

Capital appreciation is not possible in bank investment.

Money Marketable Instruments

Money market is a market for borrowing and lending for short periods. It is one constituent of capital market.
However, it is basically concerned with short-term investment. Money market securities are fixed income
securities similar to gilt-edged securities, preference shares and debentures. Normally individual investors are
not interested in money market securities as the return on the investment is not attractive. However,
institutional investors with huge surplus funds purchase money market securities for short term investments.

A money market security is a debt instrument of short period maturity. Money market securities in India are
as explained below:

1. Treasury Bills
21

Treasury bill is a short-term money market instrumental used by the Central Government for short term
borrowing from the market for meeting urgent needs. Treasury Investors in T-bills generally include banks
and other institutional investors.

Features of Treasury Bills

It is GILT Edged securities. Being issued by the government they are considered to be risk free as
they are issued by the Government. As such, they are highly marketable.
Investors prefer treasury bills because of high liquidity, assured returns, eligibility for statutory
requirements, no default risk, on capital depreciation etc.
Investors prefer treasury bills because of high liquidity, assured returns, eligibility for statutory
requirements, no default risk, no capital depreciation etc.
The T bills are issued for a minimum amount of Rs. 25,000/- and in multiples of Rs. 25,000. T-bills
are issued at a discount and redeemed at par. Though the yield on treasury bills is less when compared
to other money market instruments, the risk adverse investors and banks prefer to invest in these
securities. At present, The Government of India (GOI) issues 4 types of T-Bills i.e. 14 day, 91 day,
182 day and 364 day.
Thus, RBI rises on behalf of the Government of India by acting as an issuing agent to meet the latters
short term funds requirement.

2. GILT Edged Securities

Government (Central and States) securities and securities issued by financial institutions such as IDBI,
ICICI, etc. are called GILT Edged securities. These are debt securities issued by the central government,
state government, and Semi governments agencies. The market for such securities is called gilt edged
market. Securities are also gilt securities. Such securities are in the form of bonds and credit notes.
Institutional agencies such as banks, insurance companies, employees provident funds are the buyers of such
securities. Such securities are fully secured as they have government backing. The maturity period is varying
generally upto 10 to 20 years. Gilt edged securities market constitutes the largest segment of the Indian
Capital Market. This market is expanding rapidly in recent years. Gilt edged security is highly liquid asset
as it can be sold easily. Tax benefits are available to gilt edged securities.

3. Commercial Paper
CPs as a source of short term finance is used by corporates as an alternative to bank Finance for working
capital. Generally, corporates prefer to raise funds through this route when the interest rate on working
capital charged by banks is higher than the rate at which funds can be raised through CP. CP is a short-term,
unsecured usuance promissory note issued at a discount to face value by well-known or reputed companies
who carry a high credit rating and have a strong financial background.
Any private sector company, public sector unit, non banking company can raise funds through commercial
paper. CPs is generally open to all the investors individuals, banks, corporates and also non-resident Indians
22

(NRIs).CPs are backed by the liquidity and earning power of the issuer, but are not backed by any assets.
Hence they are unsecured. Investors prefer to invest in CPs due to high liquidity, varied maturity and high
yield when compared to bank deposits. Moreover, the liquidity is high because it can be transferred by
endorsement and delivery.CPs is issued in multiples of Rs. 5 lakhs and the minimum size of each issue is Rs.
5 lakhs. Also CPs has a minimum maturity period of 15 days and a maximum of 1 year. Unlike Certificate of
Deposits, the issuer can Buy-Back its Own CP.The company needs to get the commercial paper credit rated
by one of the approved credit rating agencies like CRISIL/ICRA/DCR, as prescribed by RBI.

4. Certificate of Deposits
Certificate of deposits (CDs are issued by banks in the form of usuance promissory notes. Due to their
negotiable nature, these are also known as negotiable certificate of deposits (NCDs).CDs are issued by
commercial banks and six financial institutions IFCI, IDBI, ICICI, EXIM Bank, IIB, and SIDBI etc.CDs
are considered as virtually risk less instruments as the defaults risk is almost nil and investors are sure of
receiving the invested amount with interest. CDs are freely transferable by endorsement and delivery,
immediately after the date of issue and can be traded in secondary market from the date of issue, unlike
conventional deposits.CDs are issued at a discount to face value. The discount rate is freely determined by
the issuing bank considering the prevailing call money rates, treasury bills rate, maturity of the CD and its
relation with the customer, etc.Banks can issue CDs for a minimum period of 15 days to a maximum of one
year whereas a financial institution can issue CDs for a minimum of 1 year and a maximum of 3 years.The
minimum size for the issue of CDs is Rs. 5 lakhs (face value) and thereafter in multiplies of Rs. 1 lakh.

23

6. INVESTMENT IN STOCK MARKET

The Indian Stock Market is also the other name for Indian Equity Market or Indian Share Market. The forces
of the market depend on the monsoons, global funding flowing into equities in the market and the
performance of various companies. The market of equities is transacted on the basis of two major stock
indices, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE), the trading
being carried on in a dematerialized form. The physical stocks are in liquid form and cannot be sold by the
investors in any market.
The equity indexes are correlated beyond the boundaries of different countries with their exposure to
common calamities like monsoon which would affect both India and Bangladesh or trade integration policies
and close connection with the foreign investors. From 1995 onwards, both in terms of trade integration and
FIIs India has made an advance.
Indian Equity Market at present is a lucrative field for the investors and investing in Indian stocks are
profitable for not only the long and medium-term investors, but also the position traders, short-term swing
traders and also very short term intra-day traders. In terms of market capitalization, there are over 2500
companies in the BSE chart list with the Reliance Industries Limited at the top. The SENSEX today has rose
from 1000 levels to 8000 levels providing a profitable business to all those who had been investing in the
Indian Equity Market. There are about 22 stock exchanges in India which regulates the market trends of
different stocks. Generally the bigger companies are listed with the NSE and the BSE, but there is the OTCEI
or the Over the Counter Exchange of India, which lists the medium and small sized companies.
In the Indian market scenario, the large FMCG companies reached the top line with a double-digit growth,
with their shares being attractive for investing in the Indian stock market. Such companies like the Tata Tea,
Britannia, to name a few, have been providing a bustling business for the Indian share market. Other leading
houses offering equally beneficial stocks for investing in Indian Equity Market, of the SENSEX chart are the
two-wheeler and three-wheeler maker Bajaj Auto and second largest software exporter Infosys Technologies.
Thus, the growing financial capital markets of India being encouraged by domestic and foreign investments
is becoming a profitable business more with each day. If all the economic parameters are unchanged Indian
Equity Market will be conducive for the growth of private equities and this will lead to an overall
improvement in the Indian economy.
Now apart from all these, the first question that comes in our mind is,
1) Why do so many people invest in shares?
Simply put, you want to invest in order to create wealth. While investing is relatively painless, its rewards are
plentiful. To understand why you need to invest, you need to realize that you lose when you just save and do
not invest. That is because the value of the rupee decreases every year due to inflation.Historically shares
have outperformed all the other investment instruments and given the maximum returns in the long run. In
the twenty-five year period of 1980-2005 while the other instruments have barely managed to generate
returns at a rate higher than the inflation rate(7.10%), on an average shares have given returns of about 17%
in a year and that does not even take into account the dividend income from them. Were we to factor in the
dividend income as well, the shares would have given even higher returns during the same period.
24

[Inflation: general rise in prices and wages caused by an increase in the money supply and demand for
goods, and resulting in a fall in the value of money. Inflation occurs when most prices rise by some degree
across the economy.]

Investment options
Stock market
Bank fixed deposits
Gold

Returns per annum

17%
9%
5.7%

Advantages of investing in shares:

There are lots of advantages of investment in share market. Some of these are:

Dividend income: investments in shares are attractive as much for the appreciation in the share prices
as for the dividends their companies pay out.

Tax advantages: shares appear as the best investment option if you also consider the unbeatable tax
benefits that they offer. First, the dividend income is tax-free in the hands of investors. Second, you
are required to pay only a 10% short term capital gains tax on the profits made from investments in
shares, if you book your profits within a year of making the purchase. Third, you don't need to pay
any long-term capital gains tax on the profits if you sell the shares after holding them for a period of
one year. The capital gains tax rate is much higher for other investment instruments: a 30% short-term
capital gains tax (assuming that you fall in the 30% tax bracket) and a 10% long-term capital gains
tax.
25

Easy liquidity: shares can also be made liquid anytime from anywhere (on sharekhan.com you can
sell a share at the click of a mouse from anywhere in the world) and the gains can be realized in just
two working days. Considering the high returns, the tax advantages and the highly liquid nature,
shares is the best investment option to create wealth.

2) How people earn from the investment in shares?

Shares can give us returns in two forms.
A. Appreciation in share prices: You buy shares with the belief that their price will increase and that when
this happens you will be able to sell off your shares and earn profit. For example, if you bought a share for
Rs100 three years ago and it is Rs500 today, then you have earned Rs400 in three years.
B. Dividend: when a company makes profits, it can choose to share part of its profits with its shareholders by
paying out dividend. This dividend is paid as a percentage of the face value of the share. For example, a
company may declare a dividend of 25%. Then if the face value of its share is Rs10 you will get Rs2.50 for
every share you own of that company, irrespective of the market price. In itself this might not be much, but
over a longer period of time or if you have a lot of shares, you could earn quite a bit from the dividend itself.
The best thing about dividends is that they are tax-free in the hands of investors. Dividend yield stocks are
known to give returns higher than fixed deposits [dividend yield = (dividend per share / market price of the
share) x 100].
3) What are the expenses during transaction?
Every share transaction attracts some tax or the other. Some of the main expenses are as follows.
A. Capital gains tax: If you purchase a share and sell it at a price higher than the purchase price and
if this sale is within a year of the purchase, then a 10% capital gains tax is levied on the profit that you make.
For example, if you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July 1, 2005, then
you have to pay a tax of 10% on the Rs50 profit that you make. If you sell after a year of purchase, there is
no tax on the long-term gains.
B. Securities transaction tax: Securities transaction tax (STT) is levied by the government on every
transaction you do on a stockex change. You dont have to pay this separately; its collected by your broker.
As per the Union Budget 2005 the STT will be 0.10% on delivery-based transactions and 0.02% on intra-day
transactions.
C. Brokerage: Brokers get a commission on every trade that they do for you. This commission varies
from broker to broker; at sharekhan.com the brokerage is 0.5% for delivery-based transactions and 0.10% for
intraday transactions. On the brokerage amount you are required to pay a service tax to the government (to be
collected by the broker). The brokerage varies depending on the service that the broker provides you. Some
brokers, such as Sharekhan, offer its clients regular updates on companies, multiple means to transact and
customer service support.
26

D. Depository fees: Since most of the shares exist in a dematerialized form, every time you buy or
sell shares the transactions are being noted by your DP. The DPs normally levy a charge which is an annual
charge or a charge on ach transaction.
Risks - the only disadvantage in investing in shares:
There are two types of risk associated with this kind of investment: company specific risk and market risk.
Set of risks that deals with a company and its sector are referred to as company specific risk.
Examples of company specific risk: bad management, bad marketing strategies, sector disturbances that have
an impact on industry etc.
External factors (economic, global factors) that affect the market as a whole are referred to as market risk.
Examples of market risk: political instability, high inflation, rupee depreciation, rising interest rates, global
incidents like wars and disasters that throttle the nation's economy etc.

4) How company specific risk can be identified?

With careful scrutiny and proper homework, it might be easy to identify and be forewarned of the risks a
company may be carrying. Specifically check out for the mergers and acquisitions that do not have a real
synergy or are a nightmare after reconciliation (A O L - Time Warner, Hewlett Packard-Compaq).
Also is suspicious of diversifications that do not really add value to a company's core offering. A third kind of
risk would be with the companies that have bet their stakes on a single product offering and are high on debt.
Likewise companies that depend on research could be prone to higher risk, if the research doesn't come to
fruition.
5) How to identify sector driven risk?
If steel prices rise, auto companies get affected. If low cost Chinese products invade the country's market,
then local fast moving consumer goods companies might find no takers for their products. The changing
nature of the industry itself may lead to dipping stock prices; a print publication may see revenue loss if
everyone moves to reading on the Internet.
6) How to predict market risk?
It is difficult to predict market risks. The only thing we can say here is that start noticing all the small signs
early. If the election results are feared to lead to a fall in the stock market, notice the signals beforehand.
Read Sebi's bulletins and track companies whose shares prices are very volatile.
7) How people can minimize their risk and maximize their return?
Buy when stocks are falling, sell when these are rising. This works well when you are a long-term investor
and there is an extended bear or Bull Run. Don't try to second guess or predict that the market will fall today
and rise tomorrow. Even seasoned investors cannot do that!
8) Don't try to guess the market's favourites
27

Your instincts might tell you that pharma or technology stocks are hot due to certain policies or events, but
remember millions of investors have already guessed that and bought these stocks. The prices of these stocks
would therefore be at a higher level when you buy them. Instead focus on the long term and don't get swayed
by short-term events.

9) Aim for the long haul

Short-term investing is prone to higher risks. When investing in stocks, aim to get good returns after a period
of three to five years at the minimum. Also churn your portfolio periodically and based on the progress that a
company makes in a quarter or in six months, decide whether to hold the stock or get out of it.
10) Avoid hot tips
You may have overheard some news about a stock or your friend may advise that a particular stock is all
geared to move up. Avoid such tips like the plague and your investments will remain safe.
11) Blue-chips are safe bets
Blue-chip companies are there because they have done well in the past and have a high market capitalization.
It is a likely guess that they will maintain their track record and give you higher returns even in future.
Therefore invest in companies that have a good track record.
12) Slow and steady stream of investments
Set aside a certain portion of your earnings every month and invest that sum in shares irrespective of the
market conditions. This way, over a period of time you can amass a substantial number of shares of the
stocks in your portfolio.
13) Think portfolio
Don't put all your earnings in a single stock. Try to have a diverse portfolio ofstocks. This way even if one
stock doesn't do well, you are still well protected. Also invest across sectors, since any problem in one sector
would affect all stocks in the sector. As a thumb rule, if you have investments of up to Rs50, 000 invest in
two to three stocks. For about Rs150, 000 invest in three to five stocks, for around Rs500, 000 have five to
seven stocks and around ten stocks for higher amounts.
14) Dont invest all your savings
Always maintain a core set of reserves. You should never touch these reserves for investing, so that even in
the worst case you still have some money. Typically these reserves should be your salary of about six months.
15) Be level-headed
Invest wisely, don't get swayed by rumours and allow Sharekhan to be your guide at all times. Investment
success won't happen overnight, so avoid overreacting to short term market swings.

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7. INVESTMENT IN EQUITY AND PREFERENCE SHARES

These are ownership securities. Shares bestow certain advantages to both the listing companies and
the investors. Investment in this financial instrument is of long-term nature. This, however, does not mean
loss of liquidity for the investor. Depending upon availability of investors interest in the company, shares can
be easily converted into cash in the secondary market. Joint stock companies collect their long term/fixed
capital by issuing shares (equity and preference). This is called Stock Financing. Shares constitute the
ownership securities and are popular among the investing class. Investment in shares is risky as well as
profitable. Transactions in shares take place in the primary and secondary markets.
A shareholders bears the highest risk in the companys operations. Conversely, he is also entitled to
participate in the earning and wealth of the company without limit. Issue of shares is of advantage to the
company, as payment of dividend is discretionary. Equity is not required to be refunded. This instrument is
quite popular with individual investors in India.Face value of ordinary shares in India can be any amount
from Re. 1 to Rs. 1,000 but the most common denomination of shares is Rs.10.
Large majority of investors (particularly small investors) prefer to purchase shares through brokers
and other dealers operating on commission basis. The shares available for investment are classified into
different categories such as blue chip shares, growth shares, speculative shares, income shares, and so on.
Shares certificates in physical form are no more popular in India due to Demat facility.

Blue Chip Shares:

Shares of known and financially sound companies are called Blue Chip Shares. Such companies are also
known as blue chip companies as they are well established over a long period and are stable and profitable.
Blue Chip Companies are popular in the stock market and they carry goodwill and market reputation.
Investors prefer to invest in Blue Chip Shares due to safety, security and attractive return. In India, Reliance,
Tata companies, L & T Companies relating to information technology are regarded as bleu chip companies.

Preference Shares:
A preference share (PS) is said to be a hybrid financial instrument. Companies have issued preference shares
with a large number of innovations. PS, as its name suggests, is an ownership security, but unlike an ordinary
share where dividend is discretionary, PS carries a fixed rate of return (dividend) like a debenture. In order of
preference, PS holders rank below the claims of creditors of the company, but above those of ordinary
shareholders.

29

7.1

Types of Preference Shares available in the market:

i.

Cumulative and Non-cumulative.

In case of Cumulative Preference Shares, the dividend(s), if not paid in any period(s) are accumulated as
a liability of the company and has to be paid subsequently.

ii.

Convertible and Non convertible

Convertible Preference Shares can be converted into ordinary share on terms and condition fixed at the
time of issue of such shares.Convertible Preference Shares can be converted into ordinary share on terms
and condition fixed at the time of issue of such shares.

iii.

Redeemable and Non redeemable.

Redeemable preference shares have fixed period of maturity and are repayable at the end of that period. It
is because of this property. Such Preference Shares are regarded more as a debt instrument than an
ownership security.

iv.

Participating and Non participating.

Participating preference shareholders have the best of both the worlds in as much as they are not only
entitled to a fixed rate of dividend, but can also expect to earn a higher dividend in case the company
makes good profits.

7.2

Advantages of Investment in Shares

Equity shareholders get income in the form of dividend. Profitable and stable companies offer good
reward to their investors in the form of high rate of dividend.
Shares are easily transferable and this facilitates easy transfer of ownership at the option of the
shareholders (investor). It also brings liquidity to the investment in shares.
The equity shareholders get an opportunity to participate in the profitability of their company in the
course of time.
Equity shares carry tax benefits. At present, dividend on shares of Indian companies has been tax
free as per the government policy.
Capital gain to the equity investor is possible in the case of shares as the prices of shares fluctuate
along with the future prospects of the company. Due to rise in the prices of the shares, there is capital
appreciation and this offers extra benefit to the shareholders.
Focus on absolute returns. Opportunistic investments generally aim to achieve absolute positive
returns, irrespective of the performance of the broader financial markets even when traditional asset
classes experience downturns.
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7.3

Wider choice of investment opportunities. Opportunistic investments access a range of investment

opportunities that may not be typically available to investors in more traditional publicly-listed
investment markets.

Limitations of Investment in shares

Uncertainty of Income / Return:
The return as regards investment in shares is uncertain as it is linked with the profitability of the
company.

Risky Investment:
In the case of shares, there is an element of risk as regards changing market values. The shares price
may go down due to various reasons. Secondly, selling at low price is bound to bring financial loss.
This suggests that investment in shares is always risky.

Speculative activities are harmful:

Speculative activates are quite common as regards shares. However, such speculative deals affect
genuine investors and they may suffer loss even when they are not directly involved in such
speculative activities.

Future linked with the company:

In the case of shares, the future of the shareholder is linked with the future of the company. The return
on investment will be attractive, if the company makes good profit. However, a shareholder may not
get any return on his investment if his company fails to get reasonably high profit.

31

8. MUTUAL FUND SCHEMES

UTI had virtual monopoly in the field of mutual fund from 1964 to 1987. After 1987, state bank of India,
bank of India, and other banks started their mutual funds. After 1991 (due to economic liberalisation) many
financial institutions started their mutual funds (e.g. Kothari Pioneer Fund, CRB Capital Markets and so on).
In brief, along with UTI, many more mutual funds are now started for the benefits of small investors. A
mutual fund is formed by coming together of a number of investors who hand over their surplus to a
professional organisation to manage their funds.
Mutual Funds are essentially investment vehicles where people with similar investment objective come
together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion
of pool owned by the unit holder (investor).
Mutual Funds in India are financial instruments. These funds are collective investments which gather money
from different investors to invest in stocks, short-term money market financial instruments, bonds and other
securities and distribute the proceeds as dividends. The Mutual Funds in India are handled by Fund
Managers, also referred as the portfolio managers. The Securities Exchange Board of India regulates the
Mutual Funds in India. The share value of the Mutual Funds in India is known as net asset value per share
(NAV). The NAV is calculated on the total amount of the Mutual Funds in India, by dividing it with the
number of shares issued and outstanding shares on daily basis.
The main function of mutual fund is to mobilize the savings of the general public and invest them in the
stock market securities. At Present, there is diversion of savings of the middle class investors from banks to
mutual funds.
More than 63 mutual funds are operating in India. The popular mutual funds in India are as noted below:
1. HDFC Mutual Fund.
2. Birla Sun Life Mutual Fund.
3. Alliance Capital Mutual Fund.
4. Tata Mutual Fund.
5. Templetion India Income Fund.
6. Standard Chartered Mutual Fund.
7. Kotak Mutual Fund.
Mutual fund is a financial intermediary which collects savings of the people for secured and profitable
investment. The mutual funds in India are registered as trusts under the Indian Trust Act. These funds are
managed by financial and professional experts.
In brief, small investors get many benefits (and that too without any botheration) due to formation of mutual
funds in India. Mutual funds such as SBI Mutual Fund, LIC Mutual Fund, Shriram Mutual Fund,
Tata Mutual Fund and ICICI Mutual Fund are popular as they offer various services and benefits to the
investing class.
A Mutual Fund is an entity that pools the money of many investorsits Unit-Holders -- to invest in different
securities. Investments may be in shares, debt securities, money market securities or a combination of these.
32

Those securities are professionally managed on behalf of the Unit-Holder and each investor hold a pro-rata
share of the portfolio i.e. entitled to any profits when the securities are sold but subject to any losses in value
as well.
Mutual Funds and sell stocks, bonds or other securities. A Fund raises money to make its purchases, known
as its underlying investments by selling shares in the fund. Earnings the fund realizes on its investment
portfolio, after the trading costs and expenses of managing and administering the fund are subtracted are paid
out to the funds shareholders.

8.1

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned
mutual fund companies and the decline of the companies floated by nationalized banks and smaller private
sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to
a good start due to the stock market boom prevailing them. These banks did not really understand the mutual
fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and
generally chose to transfer staff from the parent organizations. The performance of most of the schemes
floated by these funds was not good. Some schemes had offered guaranteed returns and their parent
organizations had to bail out these AMCs by paying large amounts of money as the difference between the
guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been to
retain staff, float new schemes etc., and it is doubtful whether, barring a few exceptions, they have serious
plans of continuing the activity in a major way.
The foreign owned companies have deep pockets and have come in here with the expectation of a long haul.
They can be credited with introducing many new practices such as new product innovation, sharp
Improvement in service standards and disclosure, usage of technology, broker education and support etc. In
fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have
improved dramatically in the last few years in response to the competition provided by these.

8.2

Types of Schemes

1) Schemes According to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its
maturity period.

Open Ended Fund/Scheme

An open-ended fund or scheme is one that is available for subscription and repurchases one continuous basis.
These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices, which are declared on a daily basis. The key feature of Open-End
Schemes is liquidity.
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 Close-Ended Fund / Scheme

A Close-Ended Fund or Scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch of the scheme. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the
stock exchanges where the units are listed. In order to provide an exit route to the investors, some closeended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor
i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose
NAV generally on weekly basis.

2) Schemes according to Investment Objective

A Scheme can also be classified a growth scheme, income scheme or balanced scheme considering its
investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such
schemes may be classified mainly as follows.

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes
normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These
schemes provide different options to the investors like dividend option, capital appreciation etc. And the
investors may choose an option depending on their preference. The investors must indicate the option in
the application form. The mutual funds also allow the investors to change the options at a later date.
Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of
time.

Income /Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally
invest in fixed income securities such as bonds, corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to equity schemes. These funds are not affected
because of fluctuations in equity markets. However opportunities of capital appreciation are also limited
in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If
the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However,
long term investors may not bother about these fluctuations.

Balanced Fund
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The aim of balanced funds is to provide both growth and regular income as such schemes invest both in
equities and fixed income securities in the proportion indicated in their offer documents. These are
appropriate for investors looking for moderate growth. They generally invest 40%-60% in equity and
debt instruments. These funds are also affected because of fluctuations in share prices in the stock
markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Sector specific Funds schemes

These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in
the offer documents. E.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum
stocks etc. the returns in these funds are dependent on the performance of the respective sectors/industries.
While these funds may give higher returns, they are more risky compared to diversified funds. Investors
need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
They may also seek advice of an expert.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the
Government Offers Tax Incentives for investment in specified avenues. E.g. Equity Linked Savings Schemes
(ELSS). Pension schemes launched by the mutual funds also offer tax benefit. These schemes are growth
oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any
equity-oriented scheme.

8.3

Appeal of Mutual Funds

Mutual Funds simplify what you may find most complicated about investingfiguring out what to buy and
when to sell to meet your particular goals or objectives. For example, if you are seeking growth by investing
in blue chip stocks, there are a wide variety of funds to choose from that pursuing precisely this strategy.
To choose the fund that will help you meet a specific goal, you can compare its long-term performance over
5 or 10 years to other funds with similar objectives learn about whom the manager is and how the fund is
run and check out its fee structure. You can use the funds prospectus, information on the fund companys
Web Sites and professi0onal advice. Mutual funds can help you diversify your portfolio or spread out the
money you have to invest to meet different goals. One way to diversify is to choose funds with different
objectives aligned with your own, or representing different segments of the market as follows:

1) Diversification
Most experts agree that its more effective to invest in a variety of stocks and bonds than to depend on a
strong performance of just one or two securities. But diversifying can be a challenge because buying a
portfolio of individual stocks and bonds can be expensive. And knowing what to buy and when taken
time and concentration.

35

Mutual funds can offer solution. When you put money in to a fund, its pooled with money from other
investors to create much greater buying power than you build a diversified portfolio. Since a fund may own
hundreds of different securities, its success isnt dependent on how one or two holding do.

2) Investment objectives
To achieve its investment objective whether it is long term growth or capital preservation or anything in
between the funds manager invests in securities he or she believes will provide the result the fund seeks.
To identify those securities, a funds research staff often uses whats known as a bottom up style, which
involves a detailed analysis of the individual companies issuing the securities. When the object is small
company growth or the focus is on emerging markets, the process can be more difficult because theres
limited information available.
You may choose mutual funds with specific investment objectives to round out your portfolio of individual
holdings. Or you may choose a number of mutual funds with different objectives creating a diversified
portfolio in that way.

3) Professional management
Another reason investors are attracted to mutual funds is that each fund has a professional manager who sets
its investment buying style and directs the key buy and sell decisions.
A buying style defines the particular investments or types of investments a fund makes from the pool that
may be appropriate for meeting its objective. For example, in seeking long-term capital appreciation, some
equity fund managers stress value investments, which mean they buy stocks whose prices are lower than
might be expected. Others stress growth investments; often younger, dynamic companies the manager
believes will become major players in their industry or in the economy as a whole.
Some experts believe that a funds manager has a major role in determining the results a fund achieves. They
advise that you confirm that a successful manager is still with the fund before you invest and that you
consider selling your shares if that manager leaves.

4) Reinvestment
Being able to reinvest your distributions to buy additional shares is another advantage of investing in mutual
funds. You can choose that option when you open a new account, or at any time while you own shares. And
of course you also have the option to receive your distributions if you need the income the fund would
provide.
By investing regularly, you build the investment base on which future earnings will be able to accumulate, a
process known as compounding. The more you have invested, the greater youre potential for future growth.
And because the fund handles the process, rolling over distributions into new shares as they are paid, you
dont have to budget for investing or remember to write the check.

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5) Risk
There is always the risk that a mutual fund wont meet its investment objective or provide the return you are
seeking. And some funds are by definition, riskier than others. For example a fund that invests in small new
companies-whether for growth or value exposes you to the risk that the companies will not perform as well
as the fund manager expects. And in market downturns, falling prices for a funds underlying investment may
produce a loss rather than a gain for the fund.

6) Short-Term Gains
Each time a mutual fund sells an investment for more than the fund paid to buy it, the fund realizes a capital
gain. And those gains are passed along to the funds investors in proportion to the number of shares in the
fund that investor owns.
Most actively managed funds dont wait more than a year before selling investments. That means that any
profit on the sale is a short-term capital gain, which is taxed at your regular tax rate. And since a fund
typically doesnt withhold taxed on your behalf, as an employer does, you must come up with the amount
your own from other sources if you dont want to sell shares-at a potential additional gain to raise the
money you owe.

8.4

Advantages of Mutual Funds

Mutual funds are the best tools to counter volatility. It is more effective for an investor as professional and
experienced fund managers handle the investors money.
Professional wealth management comes at a heavy price that is not affordable for solo investor today. The
choices before investor today are enormous. There are so many funds with varying risks available and returns
available. Mutual funds plays a crucial role in channelling savings of millions parts of the country into
investment in both equity and debt instruments. The other obvious advantages of investing in a Mutual Fund
are:

Diversification:
The best mutual funds design their portfolios so individual investments will react differently to the
same economic conditions.
For example, economic conditions like a rise in interest rates may cause certain securities in a
diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same
economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the
overall portfolio should gradually increase over time, even if some securities lose value.

Professional Management:
Professional fund managers who regular monitor market trends for taking investment decisions
manage mutual funds. The also dedicated research professionals working with them who make an in
37

depth study of the investment option to take an informed decision. Most mutual funds pay topflight
professionals to manage their investments. These managers decide what securities the fund will buy
and sell.

Regulatory Oversight:
Mutual funds are subject to many government regulations that protect investors from fraud.

Liquidity:
One of the greatest advantages of mutual funds is liquidity. Its easy to get your money out of a
mutual fund. Write a check, make a call, and youve got the cash.

Convenience:
With features like dematerialised account statements, easy subscription and redemption processes,
availability of NAVs and performance details through journals, newspaper and updates and lot more;
Mutual funds are sure a convenient way of investing. We can usually buy Mutual fund shares by
Mail, Phone, or over the Internet.

Low Cost :
Mutual Fund expenses are often no more than 1.5 % of your investment. Expenses for index funds are
less than that, because index funds are not actively managed. Instead, they automatically buy stock in
companies that are listed on a specific index.

Flexibility:
In term of needs based choices
1. Choices of schemes
2. Well regulated

Tax Benefits:
Investment in Mutual Funds also enjoys several tax benefits and advantages.

8.5

Disadvantages of Mutual Funds

Unless an investor would like to venture into sector specific funds, which are high risk in nature, he would
generally be able to optimise his risk-return quotient in fact mutual funds are gaining acceptance all over
India. We have also witnessed a shift from the traditional to professional fund management houses even from
satellite towns. The factors affecting mutual fund growth are:
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 No Guarantees
No investment is risk free. If the entire stock market decline in value, the value of mutual fund shares
will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when
they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who
invests through a mutual fund runs the risks of losing money.

Fees and Commissions

All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales
commissions or loads to compensate brokers, financial consultants, or financial planners. Even if
we dont use a broker or other financial adviser, we will pay a sales commission if we buy shares in a
Loan fund.

Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 % of the
securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income
you receive, even if you reinvest the money you made.

Management risks
When we invest in a mutual fund, we depend on the funds manager to make the right decisions
regarding the funds portfolio. If the manager does not perform as well as you had hoped, we might
not make as such money on our investment as we expected. Of course, if we invest in Index Funds,
we forget management risk, because these funds do not employ managers.

8.6

Mutual Fund Risks

Having understood the basics of mutual funds the next step is to build a successful investment portfolio.
Before you can begin to build a portfolio, one should understand some other elements of mutual fund
investing and how they can affect the potential value of your investments over the years. The first thing that
has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up
with more money when you withdraw your investment than what you started out with.
That is the potential of loss is always there. Even so, the opportunity for investment growth that is possible
through investments in mutual funds far exceeds that concern for most investors. Here's why.
At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the
potential reward. Risk then, refers to the volatility -- the up and down activity in the markets and individual
issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate
changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that
causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. Different
types of mutual funds have different levels of volatility or potential price change, and those with the greater
chance of losing value are also the funds that can produce the greater returns for you over time. You might
find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe
havens and those simply don't pay enough to beat inflation over the long run.
39

40

9. LIFE INSURANCE INVESTMENT

Life Insurance is income protection in the event of your death. The person you name, as your beneficiary will
receive proceeds from an insurance company to offset the income lost as a result of your death. You can
think of life insurance as a morbid form of gambling: if you lived longer than the insurance company
expected you to then you would lose the bet. But if you died early, then you would win because the
insurance company would have to pay out your beneficiary.

Insurers (or underwriters) look carefully at decades worth of data to try to predict exactly how long you will
live. Insurance underwriters classify individuals based on their height, weight, lifestyle (i.e. whether or o not
they smoke) and medical history (i.e. if they have had any serious health complications). All these variables
will determine what rate class category a person fits into. This doesnt mean that smokers and people who
have had serious health problems cant be insured, it just means theyll pay different premiums.

There are two very common kinds of life insurance term life and permanent life. Term life insurance is
usually for a relatively short period of time, whereas a permanent life policy is one that you pay into
throughout your entire life. These payments are usually fixed from the time you purchase your policy.
Basically, the younger you are when you sign-up for this type of insurance, the cheaper your monthly
payments will be.

9.1

Need for life insurance

Assets are insured, because they are likely to be destroyed or made non-functional before the expected life
time, through accidental occurrences are called perils. Fire, floods, breakdowns, lightning, and earthquakes
such things are called perils. If such perils can cause damage to the assets, we say that the asset is exposed to
that risk. Perils are the events. Risks are the consequential losses or damages.
The risk only means that there is a possibility of loss or damage. The damage may or may not happen, but the
word possibility implies uncertainty. Insurance is relevant only if there are uncertainties. If there is no
uncertainty about the occurrence of an event, it cant be insured against.
Insurance doesnt protect the asset. It does not prevent its loss due to the peril. The peril cant be avoided
through the insurance. The risk can sometimes be avoided, through better safety and damage control
measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who
depend on that asset. They are the ones who benefit from the asset and therefore, would lose, when the asset
is damaged. Insurance only compensates for the losses-and that too, not fully.
Risks and uncertainties are part of lifes great adventure accident, illness, theft natural disaster theyre all
built into the working of the Universe, waiting to happen. Insurance then is mans answer to the vagaries of
life. If you cannot beat man-made and natural calamities, well at least be prepared for them and their
aftermath.
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9.2

Life insurance products

There are various products available in the market. Life insurance products are usually referred to as plans
of insurance. These plans have two basic elements. One is the death cover providing for the benefit being
paid on the death of the insured person within a specific period. The other is the survival benefit providing
for the benefit being paid on survival of a specific period.
Plans of insurance that provide only death cover are called term assurance plans. Those that provide only
survival benefits are called pure endowment plans.
All traditional life insurance plans are combinations of these two basic plans. A term assurance plan with an
unspecified period is called a whole life policy under which the sum assured is paid on death, whenever it
may occur.
In recent times, linked policies have become popular. These are very different from the traditional plans of
insurance.

9.3

Types of life Insurance

Most of the products offered by Indian Life insurers are developed and structured around these basic
policies and are usually an extension or a combination of these policies. So, the different types of insurance
policies are

The cheapest form of assurance is the Term Assurance Plan. Under this, the SA is payable on the
death of the insured during the specified period. If death doesnt occur, there is no payment from the
insurer. The SA may be kept constant throughout the period, or be made to increase or decrease
during the period. Term assurances, by themselves, are not very popular, as there is no saving content.
Surviving policyholders feel that they got nothing out of the policy. They are useful only when death
cover is required and other arrangements are available for survival benefits. Term assurances form
part of linked policies.

In a Whole Life Plan, the SA becomes payable only on death whenever it may occur. But unlike a
term assurance plan, some payment will be made at some time. Although n case of whole life
policies, the sum assurance is payable on death, some insurers pay the sum assured, when the life
assured completes say, 80 years.

In an Endowment Plan, the sum assured is payable on survival to the end of term on earlier death. A
Marriage Endowment Plan has nothing to do with the contingency of the marriage. It only
stipulates the date on which the sum assured will be paid, even if the life insured dies early. That date
can be chosen to coincide with the age of a son or daughter, for whose marriage the sum assured
would come in handy.

42

Similarly, the Educational Annuity Plan is not an annuity. It is an ordinary endowment plan, which
states that the sum assured would be paid on instalments, commencing from a date, which may be
chosen as the likely date when the child may be old enough for higher education.

An Interesting Plan is a term assurance plan for a specified term, at the end of which the premiums
paid till date is refunded, but cover continues indefinitely thereafter. To a layman, this looks like a
free cover being granted gratis. In effect, the premium is calculated in such a way that the interest
accumulated on the premium during the term, is enough to meet the single premium cost of the
extended cover.

Convertible plans of assurance are plans, which provide, in its terms and conditions, that it can be
changed to another plan after, or within, a certain period after commencement. For example, a
convertible term assurance plan can be converted into a whole life policy or an endowment policy,
within a period specified in the original plan.
The advantage of convertible plan is that, when the right of conversion is exercised, there would be
no further underwriting decision to be made. There would be no medical examination at that time. So,
even if the insured has an adverse medical condition at that time, the policy of his choice will not be
denied to him. Such policies usually taken by persons in the early stages of their careers, who expect
their financial conditions to improve soon, but would not like to delay the benefits of insurance till
then.

With profit and without profit plans: Without profit or non-participating policies are not entitled
to bonuses, which are declared after actuarial valuations. With profit or participating policies pay a
slightly higher premium for the right to participate in the progress of the insurer. Participating policies
are popular as the bonuses are expected to be more than the extra premium paid. Participating
policies, where the premium is payable for a limited period, will continue to participate even after the
premium have ceased.

Joint life policies: 2 or more life can be covered under 1 policy. Such policies usually cover married
couples or partners. The sum assured paid on the death of any of the insured persons during the term
or at the end of the term. Some plans also provide payment of sum assured, on the death of one life
and the policy is continued to cover the second life till maturity, without payment of further premium.

Children plans: Insurance can be taken on the lives of children, who are minors. The proposal will
have to make by a parent or guardian. In these plans, risk on the life of the insured child will begin
only when the child attains a specific age. The time gap between the date of commencement of the
policy and the commencement of the risk is called the deferment period.
There is no insurance cover during the deferment period. If the child dies during the deferment
period, the premiums will be returned. Risk will commence automatically on the deferred date,
without any medical examination. The main advantage of these plans is that the premium would be
relatively low and cover will be obtained irrespective of the state of health of the child.

43

These policies have conditions whereby the title will automatically pass on to the insured child, on his
attaining to the age of majority. This process is called vesting. The policy anniversary after attaining
the age of majority that is the age of 18, or any later date may be chosen will be the vesting date.
After vesting, the policy becomes a contract between the insurer and the insured person.
The vesting date cannot be earlier than 18. This is because there cannot be a valid contract with a
minor. The deferred date however, can be fixed without such limitation. The vesting date and the
deferred date need not be the same.

Industrial assurance plans: Industrial assurance plans are designed for the workers with low
incomes. The policies are issued for small sum assures, with weekly premiums. The arrangements are
that the agents will visit the house or place of work of the policy holder to collect the premiums for
every week. The administrative costs are high for this. Agents have to remunerate differently because
they are expected to visit every policyholder every week, to collect the premium.

Salary savings scheme (sss) policies:

Sss policies, sometimes also called payroll insurance, are also intended to cater to the needs of the working
classes. The insurer arranges with the employer to deduct the premium from the salary of the worker
policyholder and remit the same to the insurers office every month. This scheme benefits,

To the policyholder, because the premium is deducted, making premium payment easy and without a
default.
The insurer, as he is assured of the premium without a default and receives in one remittance the
premium of many workers in that establishment. This makes for lesser administrative costs, and
therefore, the extras, any for monthly modes are not charged although the collections made monthly.
The agent, because the chances of lapses are less and he can be assured of his renewal commission
coming regularly.

Because of these benefits, the sss is popular. The amount to be deducted from the salary is worked out by
calculating the premium without adding extras for monthly mode. The employer makes deduction on the
basis of an authority letter signed by the employee, who is collected with the proposal and is sent to the
employer by the insurer, when the policy is accepted.
An added advantage of sss is that there is a group pressure to buy life insurance, making the job of an agent
slightly easier. The resistance would be less and the relationship with the group can be strong.
Riders:
A rider is a clause or condition that is added on to a basic policy providing an additional benefit, at the choice
of the proposer. For example, a provision that in the event of death of the life assured by accident, the sum
assured would be double can be a rider of an endowment policy. This rider can be added on to a policy under
any plan.
44

Some of the riders offered by insurers in India are as follows:

Increased death benefit, being twice or even bigger multiple of the survival benefit.
Accident benefit allowing double the sum assured if death happens due to the accident.
Permanent disability benefits, covering loss of limbs, eyesight, hearing, speech etc.
Premium waiver, which would be useful in the case of childrens assurances, if the parent die before
vesting date or in the case of permanent disability or sickness.
Dreaded disease or critical illness cover, providing additional payments, if the life insured requires
medical attention because of specified ailments like cancer, cardiac or cardiovascular surgeries,
stroke, kidney failure, major organ transplants, major burns, total blindness caused by illness or
accidents etc.
Cover to meet major surgical expenses.
Guaranteed increase in cover at specified periods or annually.
Cover to continue beyond maturity age for same sum assured or higher sum assured.
Option to increase cover within specified limits or dates.
Option to cover spouse without medical examination.

As per the regulations made by IRDA in April 2002 and amended in October 2002,

The premium in all the riders relating to health or critical illnesses, in the case of term or group
products shall not exceed 100% of the premium of the main policy.
The premiums on all the riders put together should not exceed 30% of the main policy.
The benefits arising under each of the riders shall not exceed the sum assured under the basic product.

Annuities:
Annuities are practically same as the pensions. Pensions provide regular periodical payments (usually every
month) to employees, who have retired. They are paid as long as the recipient is alive. Sometimes the
pension is also paid to the dependents after the pensioners death. Annuities are also periodical payments, not
necessarily monthly, and are not related to employment.
Annuities are also called reverse of life insurance. In annuity contracts, a person agrees to pay to the insurer
a specified capital sum in return for a promise from the insurer to make a series of payments to him so long
as he lives, while in insurance, the insured pays a series of payments in return for a promise of a lump sum on
his death.
Annuities are paid by insurers in monthly, quarterly, half-yearly or annual installments, as may be preferred
by the annuitant. An annuity can be made payable

During the life time of the annuitant, in which case it ceases on his death. This is called a life
annuity or annuity for life
During the life time of the annuitant or his spouse, whichever is longer
45

For a fixed number of years like 5, 10, 15, 20 or 25 years and thereafter, as long as the annuitant is
alive. This is called an annuity certain.
For a fixed number of years and thereafter till the death of the annuitant or the annuitants spouse
As long as the annuitant lives and thereafter, at 50% to the spouse as long as the spouse lives.
Annuity for life and return of premium on annuitants death
On any of the above terms, but with the annuity increasing every year by a fixed rate or amount

The annuity may commence immediately after the contract is concluded. Such annuity is called immediate
annuity. The purchaser of an immediate annuity pays the purchase price in lump sum. The first instalment
will start at the end of the month, quarter, and half year or at the end of the year as the case may be.
The alternative of an immediate annuity is called deferred annuity. In this case, the annuity payment will
start after the lapse of a specified period, called the deferment period. The purchase price can be paid as a
single premium at the commencement or may be paid in installments during the deferment period.
The annuity will commence at the end of the deferment period, which is called the vesting date. The amount
due on that date can be used to buy annuities at the rate prevalent on that date, from the same or another
insurer. The annuitant may have the option to receive as a lump sum, a certain portion of the amount due on
that date and use only the balance for the purchase of annuity. This is called commutation. The lump sum is
called the commuted value.

UNIT-linked insurance

Bima Plus is a unit-linked endowment plan. The plan is available over duration of 10 years. Premium can be
paid either yearly, half-yearly, or at one shot.
The premium is used to purchase units in a fund of one's choice, after the necessary deductions.
The value of the units varies with the investment performance of the assets in the fund.
Investments can be made in one of three types of funds: Secured fund, which invests predominantly in debt
and money market instruments; Risk fund, in which the tilt is towards equities; and a Balanced Fund, a blend
of the two. Switching between funds is allowed twice during the policy term, subject to the condition that
they are at least two years apart. Charges for switching are 2 per cent of the fund's cash value.
What the beneficiary receives depends on when the death of the policyholder occurs.
If death occurs within the first six months of the policy, the payout is 30 per cent of the sum assured
plus the cash value of the units.
Between months seven and 12 of the policy, the payout is 60 per cent of the sum assured plus cash
value of units.
After first year, the sum assured and cash value of the units is paid.
During the 10th year, 105 per cent of the sum assured and cash value of units is paid out.
If death occurs due to an accident, a sum equal to the sum assured, over and above the benefit
mentioned above is paid.
On survival up to maturity, the policyholder will receive 5 per cent of the sum assured plus the cash
value of the units.
46

As is the case with unit-linked plans, this plan, too, comes with a set of charges. This includes a level annual
mortality charge, the quantum of which is a function of the policyholder's entry age; accident benefit charge
at Rs.0.50 per thousand sum assured; annual administrative and commission charges; and a fund management
charge.
On surrendering the policy, the cash value of the units, subject to certain deductions that depend on the year
surrendered, is paid out to the policyholder.

9.4

Advantages of life insurance

Life insurance has no competition from any other business. Many people think that life insurance is an
investment or a means of saving. This is not the correct view. When a person saves, the amount of fund
available at any time is equal to the amount of money set aside in the past, plus interest. This is so in the
fixed deposit in a bank, in national savings certificate, in mutual funds or any other savings instruments. If
the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations
of the stock market. Even if there is no loss, the available money at any time is the amount invested plus
appreciation. In life insurance, however, the fund available is not the total of the savings already made
(premiums paid), but the amount one wished to have at the end of the savings period (which is next 20/30
years). The final fund is secured from the very beginning. One is paying for it over the years, out of the
savings. One has to pay for it only as long as one life or for a lesser period, if so chosen. The assured fund is
not affected. There is no other scheme which provides this kind of benefit. Therefore life insurance has no
substitute.
A comparison with other forms of savings will show that life insurance has the following advantages:

In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the
facility of nomination and assignment. The facility of nomination is now available for some bank
accounts, provident fund etc
There is a certain amount of compulsion to go through the plan of the savings. In other forms, if one
changes the original plan of savings, there is no loss. In insurance, there is a loss.
Creditors cant claim the life insurance moneys. They can be protected against the attachments by
courts.
There are tax benefits, both in income tax and in capital gains.
Marketability and liquidity are better. A life insurance policy is property and can be transferred or
mortgaged. Loans can be raised against the policy.
It is possible to protect a life insurance policy from being attached by debtors. The beneficiaries
interest will remain secure.

The following tenets help agents to believe in the benefits of the life insurance. Such faith will enhance their
determination to sell and their perseverance.

Life insurance is not only the best possible way for family protection. There is no other way.
Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable.
The terms of life are hard. The term of insurance is easy.
47

The value of human life is far greater than the value of any property. Only life insurance can preserve
it.
Life insurance is not surpassed by any other savings or investment instrument, in terms of security,
marketability, stability of value or liquidity.
Insurance, including life insurance, is essential for the conservation of many businesses, just as it is in
the preservation of homes.
Life insurance enhances the standards of living.
Life insurance helps people live financially solvent lives.
Life insurance perpetuates life, life, liberty and the pursuit of happiness.
Life insurance is a way of life.

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10.

BONDS OR FIXED INCOME SECURITIES

There are various investments which provide fixed income from the investments to the investors.
Bonds, debentures, public deposits are some of the example of fixed income securities. The investors get
interest regularly from the companies. The investors may be paid quarterly, half yearly, or yearly. The
details of these securities are as follows:

A. Company Deposits / Public Deposits

In order to meet temporary financial needs, companies accept deposits from the investors. Such
deposits are called public deposits or company fixed deposits and are popular particularly among the middle
class investors. Almost all companies collect crores of rupees through such deposits. Companies were
offering attractive interest rates previously. However, the interest rates are now reduced considerably. At
present, the interest rate offered is 9 to 12 percent.
At present along with private sector companies, even public sector companies and public utilities also accept
such deposits in order to meet their working requirements. This source is popular and used extensively by the
companies.

Advantages of Company Deposits / Public Deposits:

Public deposits are available easily and quickly, provided that company enjoys public confidence.
This method of financing is simple and cheaper than obtaining loans from commercial banks. This
makes public deposits attractive and agreeable to companies and also to depositors.
Public deposits enable the companies to trade on equity and pay higher dividends on equity shares.
The depositors receive interest in their deposits. This rate is higher than the interest rate offered by the
banks. The interest rate is also paid regularly by reputed companies.
The formalities to be completed for depositing money are easy and simple. There is no deduction of
tax at source where interest does not exceed a particular limit.
The risk involved is also limited particularly when money is deposited with a reputed company.

B. Bonds And Debentures

In addition to company deposits, it is possible to purchase bonds and debentures of joint stock
companies for investment purpose. Both represent creditor ship securities. Debentures indicates loan given to
the company at a specific rate of interest and on certain terms and conditions. Debentures are more popular
than shares due to the safety and security available. Companies issue different types of debentures for the
convenience of investors. At present, convertible bonds and debentures are popular among Indian investors.
49

In India, bonds and debentures are also issued by public sector companies and financial institutions. IDBI
issues flexi-bonds, deep discount bonds, retirement bonds, growing interest bonds and regular income bonds.
Such infrastructure bonds are popular among the investors and their response is encouraging. Public sector
bonds normally get good response from the investing class.
Advantages Of Bonds

Easy transferability by endorsement and delivery

Safety and security due to government backing
Attractive interest and other favourable terms and conditions including wide choice as regards
selection of bonds.
Investment exempted for wealth tax
Maturity period from 5 years to 25 years.
Listing on nearby stock exchange
Simple procedure for investment

C. Government Of India Savings Bonds

(a) Government of India 8.0% Savings (Taxable) Bonds: The GOI has recently introduced these 8%
savings (taxable) bonds. These bonds are convenient for charitable trusts. It is the best option for investment
of surplus funds. There is no maximum limit for investment in the bonds. 8% interest payable is taxable.
Important Features of 8% India Savings (Taxable) Bonds:
Resident individuals (not NRI), minor, HUF, Charitable Institutions and universities can buy these
bonds.
8% p.a. interest is payable half yearly or Rs. 1000 becomes Rs. 1601 after 6 years. Half yearly or
cumulative interest payment options are available. Interest is eligible for deduction u/s 80C (upto Rs.
1,00,000).
It is for the period of six years.
Bonds are not transferable and pledgable.
No TDS will be deducted on interest.
Nomination facility is available.
(b) 9.00% GOI Senior Citizens Savings Schemes: It is a special investment scheme introduced for the
benefits of senior citizens. And its important features are as follows:

Resident Indians aged 60 years and above can invest in this scheme.
Interest rate is 9% and is payable quarterly.
Period of scheme is 5 years
Ceiling for maximum permissible deposit per person is Rs. 15,00,000.
50

Account can be opened jointly with spouse only.

No TDS will be deducted but interest is taxable.
Premature withdrawal facility is available after one year.
Nomination facility is available.

(c) Government of India 6.50% Savings (Tax free) Bonds

Recently, the government has started issuing 6.50% (tax free) bonds which are reasonably attractive and
secured investment for individuals and institutions.
Important Features of Government of India 6.50% Savings (Tax free) Bonds:

Resident individuals (not NRI), HUF, and minor through guardian can invest in this bonds.
No maximum limit on the amount of investment in this bonds.
Interest 6.50%, interest is payable half yearly or cumulative. Interest payment in exempted from
income tax no wealth tax.
Maturity period is of 5 years.
Pledge and transfer are not allowed. However, the bonds can be transferred only by way of gifts.
Cumulative as well as non cumulative facility is available
Redemption (pre mature encashment) is allowed after 3 years only.
Nomination facility is available.

It may be noted that 6.50% savings bonds offers more benefits / concessions as compared to 8.0% savings
(taxable) bonds. Both the bonds are popular and used extensively as a safe and secure investment avenue by
large number of rich investors. Both the investments are not available to NRIs. The new savings bonds of
GOI are similar to relief bonds which RBI was issuing previously on behalf of the Government of India. RBI
relief bonds are discontinued till further notice. The appreciation for both categories of bonds may be
submitted to SBI or HDFC banks. They issue bond of certificates of GOI.

51

11.REAL ESTAES INVESTMENT

Before the stock market and mutual funds became popular places for people to put their investment dollars,
investing in real estate was extremely popular. We still maintain that investing in real estate is not just for
land barons or the rich and famous. As a matter of fact, the home we buy and live in is often our biggest
investment.

Flying high on the wings of booming real estate, property in India has become a dream for every potential
investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons
its ever growing economy, which is on a continuous rise with 8.1% increase witnessed in the last financial
year. The boom in economy increases purchasing power of its people and creates demand for real estate
sector
Once you have made the decision to become a homeowner, it usually means you will have to borrow the
largest amount you have ever borrowed to purchase something. This realization may make you want to bury
your head in the sand and sign on the dotted line, but you shouldnt. For most people, this is the largest
purchase they will ever make during their lifetime, and this makes it all the more important to gather as much
knowledge as possible about what theyre getting into.
We give you the information you need, including making the decision on whether, when and what you should
purchase; finding the types of mortgages and financing available; handling the closing; and knowing what
youll need when its time to sell your home. We also explain the income tax consequences and asset
protection advantages of home ownership.
You can also use real estate, whether land or building strictly as investment vehicles, and depending on your
individual situation, you can do it on a grand or smaller scale. Lets look at the world of real estate and the
investing options available.

Home as an Investment: Owing a home is the most common form of real estate investing. Let us show
you how your home is not just the place you live, but its also perhaps your largest and safest investment
as well.
Investment Real Estate: The ins and outs of investing in real estate and whether its the right
investment vehicle for you. Whether you are thinking in terms of renting out your first home when you
move on to a bigger one or investing in a building full of apartments we will explain what you need to
know.
52

11.1 Real Estate & Property

Usually, the first thing you look at when you purchase a home is the design and the layout. But if you look at
the house as an investment, it could prove very lucrative years down the road. For the majority of us, buying
a home will be the largest single investment we make in our lifetime. Real estate investing doesnt just mean
purchasing a house- it can include vacation homes, commercial prosperities, land (both developed and
undeveloped), condominiums and many other possibilities.

When buying property for the purpose of investing, the most important factor to consider is the location.
Unlike other investments, real estate is dramatically affected by the condition of the immediate area
surrounding the property and other local factors. Several factors need to be considered when assessing the
value of real estate. This includes the age and condition of the home, improvements that have been made,
recent sales in the neighborhood, changes to zoning regulations etc. You have to look at the potential income
a house can produce and how it compares to others houses in the area.

11.2 Objectives and Risks

Real estate investing allows the investor to target his or her objectives. For example, if your objective is
capital appreciation, then buying a promising piece of property in a neighborhood with great potential will
help you achieve this. On the other hand if what you seek is income then buying a rental property can help
provide regular income.
There are significant risks involved in holding real estate. Property taxes maintenance expenses and repair
costs are just some of the costs of holding the asset. Furthermore real estate is considered to be very illiquid
it can sometimes be hard to find a buyer if you need to sell the property quickly.

How to Buy or Sell it.

Real estate is almost exclusively bought through real estate agents or brokers their compensation usually is a
percentage of the purchase price of the property. Real estate can also be purchased directly7 from the owner,
without the assistance of a third party. If you find buying property too expensive, then consider investing in
real estate investment trusts (REITs) which are discussed in the next section.

Real Estate Returns

Real Estate industry in India has come of age and competes with other investment options in the structured
markets. Commercial real estate continues to be a desirable investment option in India. On an average the
returns from rental income on an investment in commercial property in metros is around 10.5%, which is the
highest in the world. In case of other investment opportunities like bank deposits and bonds, the returns are in
the range of 5.5% - 6.5%. Rejuvenated demanded since early 2004 has led to the firming up of real estate
markets across the three sectors commercial, residential and retail.The supply just about matches demand in
almost all metros around the country. There has been an upward pressure on the real estate values. From a
technical perspective, robust demand and upward prices are helping revive investment and speculative
53

interest in real estate and this is being further aided by excess money supply, stock market gains and policy
changes in favour of the real estate sector.
Lets take a look at the different types of investment real estate you might contemplate owing.

Fixer-Uppers
You can make money through investing in real estate if you buy houses, condominiums, buildings etc., which
need some work at a bargain price and fix them up. You can probably sell the real estate for a higher price
than you paid and make a profit. However, dont underestimate the work, time and money that goes into
buying, repairing and selling a home when you are determining whether it will be profitable for you to invest.
Also remember that different tax rules will apply to the purchase and sale of a home if it is not your principal
residence.

Rental Property
You can buy real estate for rental purposes and receive an income stream from renters. You may also be able
to eventually sell the property for more than you bought it for and make a good profit. Although, dont forget
that you will now be a landlord who may have to deal with nonpaying tenants and destructive tenants. Even
if you have the worlds best tenants, you still have to deal with upkeep of the property and any problems that
come up. Some investors hire a property manager or management company to manage their investment real
estate. This is fine but dont forget to factor in the management fees when you are calculating your profit
from the investment.
Please remember that rental real estate is subject to different tax rules than the home you reside in. you may
be able to take tax deductions for losses, capital expenditure and depreciation if you meet certain
requirements, but other deductions specific to principle residence may not be available to you.

Unimproved Land
Unimproved land is difficult investment to make a profit in. Unless you manage to buy a piece of land that is
extremely desirable at a good price and are certain that it is not barred from profitable use for the
neighbourhood it is located in (because of zoning or other issues), it will probably cost you more to own the
property than you will ever make selling it. (Remember you will still have to pay property taxes and will also
likely incur other upkeep costs on the land and you wont be receiving any income from rents).
If you have some sort of inside scoop on a piece of land (for example the person in the house on the lot next
to the land is a wealthy recluse and does not want the property built upon so you can name your price to sell
it to him) or plan on developing it yourself (building you home on a piece of property next to a lake), in that
case it may be a good investment.

Second Homes

54

Second Homes or vacation homes should be purchased primarily for vacation purposes not investment
purposes. Most people end up with a loss on their vacation home properties because even if you can manage
to rent the home, the costs of owning the home almost always exceed the rental income it bring in.

12.

CASE STUDY: TATA GROUP

There are many companies and advisors to guide people regarding the selection of a particular investment
option. They analyse the market situation and refer a suitable investment option for people. People can take
their help if they want to reduce their risks and increase their profits. There are even many investment
brokers and investment analysts to help people with the process of investment.

12.1 About the Tata Group

The Tata Group comprises 98 operating companies in seven business sectors: information systems and
communications; engineering; materials; services; energy; consumer products; and chemicals. The Group
was founded by Jamsetji Tata in the mid-19th century, a period when India had just set out on the road to
gaining independence from British rule. Consequently, Jamsetji Tata and those who followed him aligned
business opportunities with the objective of nation building. This approach remains enshrined in the Group's
ethos to this day.

The Tata Group is one of India's largest and most respected business conglomerates, with revenues in 200607 of $28.8 billion (Rs129,994 crore), the equivalent of about 3.2 per cent of the country's GDP, and a market
capitalization of $72.8 billion as on January 10, 2008. Tata companies together employ some 289,500 people.
The Group's 27 publicly listed enterprises among them stand out names such as Tata Steel, Tata
Consultancy Services, Tata Motors and Tata Tea have a combined market capitalization that is the highest
among Indian business houses in the private sector, and a shareholder base of over 2.9 million. The Tata
Group has operations in more than 85 countries across six continents, and its companies export products and
services to 80 countries.

The Tata family of companies shares a set of five core values: integrity, understanding, excellence, unity and
responsibility. These values, which have been part of the Group's beliefs and convictions from its earliest
days, continue to guide and drive the business decisions of Tata companies. The Group and its enterprises
have been steadfast and distinctive in their adherence to business ethics and their commitment to corporate
social responsibility. This is a legacy that has earned the Group the trust of many millions of stakeholders in a
measure few business houses anywhere in the world can match.

55

12.2 About American International Group, Inc. (AIG)

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading
international insurance organization with operations in more than 130 countries and jurisdictions. AIG
companies serve commercial, institutional and individual customers through the most extensive worldwide
property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading
providers of retirement services, financial services and asset management around the world. AIG's common
stock is listed on the New York Stock Exchange, as well as the stock exchanges in Paris, Switzerland and
Tokyo.

12.3 About Tata Aig Life Insurance Company Ltd.

Tata AIG Life Insurance Company Limited, which is a joint venture between Tata Group and American
International Group, Inc. (AIG), offers a number of standard and custom-made life insurance policies. Tata is
one of the oldest and leading business groups of India. Tata Group has had a long association with India's
insurance sector being the largest insurance company in India prior to the nationalization. American
International Group, Inc (AIG) is the leading U.S. based international insurance and financial services
organization.

Tata AIG General Insurance Company Limited (Tata AIG General) is a joint venture company, formed by the
Tata Group and American International Group, Inc. (AIG). Tata AIG General combines the Tata Groups preeminent leadership position in India and AIGs global presence as the worlds leading international insurance
and financial services organization. The Tata Group holds 74 per cent stake in the insurance venture with AIG
holding the balance 26 percent. Tata AIG General Insurance Company, which started its operations in India
on January 22, 2001, offers complete range of general insurance for motor, home, accident & health, travel,
energy, marine, property and casualty, liability as well as several specialized financial lines.

According to The Economic Times, Tatas are more reputed than Google, Microsoft (published on 11th May,
2009 in The Economic Times). They are at 11th position in the trust factor, way ahead of Disney (21th),
Google (23rd), SBI (29th), Microsoft (30th), INFOSYS (39th), Nokia (45th), L&T (47th), Maruti Suzuki (49th),
Hindustan Unilever (70th), & ITC (96th).

The list is made on the basis of admiration, trust and good feeling that consumers have towards a company.
Other Indian companies that are in the list of top 200 are Canara Bank, HPCL, Wipro, Reliance, M&M, and
BhartiAirtel, BPCL, Punjab National Bank. The report revealed that corporate trust is higher in the emerging
markets, while companies in industrialized markets are trusted less.
56

Tata-AIG Life Insurance Company is a joint venture between the Tata Group (74% equity stake) and
American International Group Inc. (AIG) (26% equity stake). The company offers a broad range of life
insurance products to individuals and groups. The products offered to individuals are variations of term life
with or without a savings element, e.g., endowment policies and money back policies. Tata-AIG Life has
been in operation since April 2001 (incorporated on Aug 23, 2000). While the company itself is relatively
new, the Tata group is widely known in Indian households.
The Tata Group is one of the oldest and largest industrial conglomerates in India. Established in 1868, it has
interests in engineering, consumer products, chemicals, financial services, hotels, information technology and
telecommunications. With over 80 companies, and with revenues close to 1.8% of the countrys GDP, the
Tata brand is very well respected across the socioeconomic classes. Most importantly, it manufactures a large
variety of goods that are highly visible to low-income households, like consumer goods, trucks and
automobiles that bear the Tata logo. Having been around for over a century, the name Tata introduces
immediate credibility in its micro insurance operations. Agents selling micro insurance products are able to
assure potential clients that such a large conglomerate would have little interest in stealing their miniscule (in
relative terms) premiums.
AIG is the one of the worlds largest insurers. Aside from its massive pool of in-house technical capacity, it
has experience working on micro insurance in Uganda.7 Although Tata is the largest shareholder in TataAIG; AIG manages the company with strategic guidance from AIGs Hong Kong office. Tata-AIG was
among the few private sector insurance players to have a well-known, reputable local brand, but it did not
have a strategic banking alliance with domestic banks or branch presence in smaller towns that could enable
it to promote micro insurance sales. As a result, its micro insurance strategy had to be developed around other
partner organizations to enable the insurer to penetrate rural areas. Rural India comprises of over 650 000
villages with over half of them having a population of less than 500. Even the state relies on NGOs to
provide services to remote and poorly connected locations. For Tata-AIGs rural programme, it was evident
that the main partners would need to be NGOs. Fortunately, Tata has the reputation of having contributed to
community development over the years. Substantial parts of the groups profits go into a trust and several
social organizations across the country receive grants and assistance from these trusts. The link with Tata
helped to create a climate in which many NGOs were favourably disposed towards Tata-AIG.
Although AIG was forced to find a local partner to get a license to do business in India, the choice of
Tata, with its excellent reputation in the development community, made it an invaluable partnership.
This was especially significant in India where many multinational corporations have faced significant
difficulties in entering the India market.
Tata-AIG embraced micro insurance as an opportunity, rather than purely as a cost of doing business in India.
Ian Watts, the CEO, envisioned a need for a separate rural and social strategy and created a separate
department, the de facto micro insurance division. The importance of micro insurance is reflected in the
organizational chart. The CEO had the foresight to recognize that micro insurance was not simply a matter of
selling existing policies cheaply, but required new products and distribution mechanisms. Crucially the CEO
approved of the distribution of resources towards micro insurance and the hiring of a specialized micro
57

insurance team. He gave it space to think creatively about how the sustainable promotion and servicing of
micro insurance products might work. The CEO has been supportive of the micro insurance programme for a
variety of reasons. Most obviously, the insurer is compelled to meet the rural and social sector obligations.
That said, many insurers have simply seen the obligations as a cost of doing business in India. They have
responded to the obligations by essentially selling only the required quantity of policies, and there are reports
that those have been poorly serviced. Tata-AIG could have responded in this way, but instead saw micro
insurance as a marketing opportunity. Although micro insurance would not make much profit (if any)
initially, it helps get Tata-AIGs brand name out into the market place. With Indias high growth rate, it is
possible that todays micro insurance policyholder will be tomorrows high value client. In particular,
research by the National Council of Applied Economic Research has predicted rising levels of overall wealth
in both the rural and urban areas of India, The IRDA is very concerned with the promotion of micro
insurance. By engaging so positively with micro insurance, Tata-AIG was able to strengthen its relationship
with the regulator. Its micro insurance programme has generated considerable publicity for Tata-AIG because
it is innovative. Much of the media in India is hostile or at least suspicious of the multinational corporations.
The micro insurance activities helped promote a positive image of Tata-AIG.

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12.4 Core Values

Integrity:
We must always conduct our business with fairness, honesty and transparency, so that we can at all times
stand public scrutiny. We will never undermine the heritage of trust that comes with the Tata brand.
Entrepreneurship:
We would encourage innovative ideas for individual and organizational development. This thinking would be
fostered, encouraged and recognized for enhancing business. We would take delight in stretching our goals
and each of us would have a sense of ownership and responsibility for all our business dealings.
Agility:
We will encourage an organizational culture and structures that has capacity for change. Flexibility and
adaptability will be critical to our operations. We will aim for nimble, flexible and customized responses at
all times to all our stakeholders.
Excellence:
All our activities must be driven by a passion for excellence. We must strive, uncompromisingly, to achieve
the highest standards in our daily work and in the quality of the goods and services we offer. We would
endeavour to achieve 'best in class' status in all our processes and results.
Unity:
We must work cohesively with our colleagues, customers and partners around the world, leveraging
synergies and building strong networks based on collaboration and mutual cooperation.
Mission:
To be a competitive value provider in international business for Group companies and all our partners.
Vision:
Become a globally networked enterprise seizing opportunities worldwide to generate USD 25 million annual
profits by.
Vivid Description of Vision:

Achieved aggressive and profitable growth of our 5 core businesses and initiated new businesses

Become a cohesive, integrated and synergized global entity providing horizontal and vertical reach
and infrastructure to all our partners worldwide

Consistently achieved customer delight by focusing on value adding activities throughout our value
chain
59

Achieved best partner status with Group Companies in international business on a sustained basis

A strong global supply base for world class goods and services

Become a learning and knowledge rich organization acknowledged as thought leaders in international
business

Institutionalized Tata Business Excellence Model and achieved best in class status

Effective and responsive systems and processes that will underpin our business decisions to manage
risks

Become an exciting organization which attracts and retains best talent worldwide for global
competitiveness

Become a proactive, integral and responsible member of our environment and communities

12.5 Resources:
Besides company funds, the micro insurance team has been able to harness external funds. In September
2002, DfID put out the bidding process for its Financial Deepening Challenge Fund, a matching grant for
which the private sector could bid based on innovative ideas to each the poor. Tata-AIG bid for an assistance
of 89 500 ($168 620) and committed matching funds to the tune of 104 000 ($195 520). The FDCF grant is
being used for product development, capacity building, and physical and communication infrastructure like
vans and the Internet portal.

12.6 Profit allocation and distribution:

Tata-AIG is private company and all profits generated by the company go to its owners (shareholders). The
exception to this is with endowment policies where regulations require that 90% of profits must be returned
to policyholders.

12.7 Partnerships:
Tata-AIG has NGO partnerships with over 50 NGOs. Over 40% of its 35 000 social sector policies were sold
through the partner-agent model. In this model, the NGO/MFI partner performs the sales and servicing
functions, primarily for its current microfinance clients. The two other models, the business associate model
and the CRIG model, account for the remaining 60% of the new business and are described in more detail
below.

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TATA-AIG organizational chart

12.8 SWOT analysis of insurance industry:

STRENGTHS

Premium rates are increasing and

so are commissions
The variety of products are
increasing
Customers expects more services
from their brokers

OPPORTUNITIES

Ability to cross sell financial

services barely being tapped
Technology is improving to that
point that paperless transactions
are available
Clients increasing need for
insurance consultant can open
new ways to service the client
and generate income

WEAKNESS

Companies are slow respond to

changing needs
Increasing trend of financial weakness
among the companies
More competitors for agencies to
compete with banks & internet players

THREATS

Increasing cost and need for insurance

might hit a point where a backlash will
occur
Increasing expenses and lower profit
margins can hit smaller agencies and
insurance companies

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CONCLUSION
There are several investments to choose from these include equities, debt, real estate and gold. Each class of
assets has its peculiarities. At any instant, some of those assets will offer good returns, while others will be
losers. Most investors in search of extraordinary investments try hard to find a single asset. Some look for
the next Infosys, other buys real estate or gold. Many of them deposit their savings in the Public Provident
Fund (PPF) or post office deposits, others plump for debt mutual funds. Very few buy across all asset classes
or diversify within an asset class. Therefore it has been widely said that Dont put all your eggs in one
basket. The idea is to create a portfolio that includes multiple investments in order to reduce risk.

Things changed in early May 2006 since then the stock market moved up more than 70%, while many stocks
have moved more. Real estate prices are also swinging up, although it is difficult to map in this fragmented
market. Gold and Silver prices have spurted.

Bonds continue to give reasonable returns but it is no longer leads in the comparative rankings. Right now
equity looks the best bet, with real state coming in second. The question is how long will this last? If it is a
short-term phenomenon, going through the hassle of switching over from debt may not be worth it. If its a
long-term situation, assets should be moved into equity and real estate. This may be long-term situation.
The returns from the market will be good as long as profitability increases. Since the economy is just getting
into recovery mode, that could hold true for several years. Real estate values, especially in suburban areas or
small towns could improve further. The improvement in road networks will push up the value of far-flung
development. There is also some attempt to amend tenancy laws and lift urban ceilings, which have stunted
the real estate market.
My gut feeling is that a large weightage in equity and in real estate will pay off during 2007-2008. But dont
exit debt or sell off your gold. Try and buy more in the way of equity and research real estate options in
small towns/suburbs.

Regardless of your means of method, keep in mind that there is no generic diversification model that will
meet the needs of every investor. Your personal time horizon, risk tolerance, investment goals, financial
means, and level of investment experience will play a large role in dictating your investment experience will
play a large role in dictating your investment mix. Start by figuring out the mix of stock, bonds and cash that
will be required to meet your needs. From there determine exactly which investments to in completing the
mix, substituting traditional assets for alternatives as needed.

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BIBLIOGRAPHY
WEBSITES

www.tata-aig-life.com
www.moneycontrol.com
www.investsmartindia.com
www.insurancejournal.com
www.irdaindia.org
www.bseindia.com

www.mutualfundsindia.com

www.crisil.com

www.gold.org.com

www.investopedia.com

www.licofindia.com

REFERENCE BOOKS

Investment Analysis and Portfolio Management

- Prasanna Chandra

Investments

- Sharpe & Alexander

Security Analysis and Portfolio Management- Fischer & Jordan

MAGAZINES

Business world

Business Today

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