Investment Management II 222 v1 PDF

INVESTMENT MANAGEMENT
Part - II
Sub Code-222
Developed by
Prof. Raghu Palat
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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CONTENTS
Contents
Chapter No. Chapter Name Page No.

1 Introduction 4-8
2 The Investment Decision 9-14
3 The Mathematics of Interest 15-23
PART I Interest Bearing Investments

4 The Public Provident Fund 25-32
5 National Savings Certificate 33-38
6 RBI Savings Bonds 39-45
7 Kisan Vikas Patra 46-49
8 Post Office Small Savings Schemes 50-60
9 Bhavishya Nirman Bonds 61-63
10 Bank Savings Account 64-74
11 Bank Fixed Deposit Account 75-87
12 Bank Senior Citizens Savings Scheme 88-96
13 Company Fixed Deposits 97-101
14 Deposit Scheme for Retiring Government Employees 102-104
15 Deposit Scheme for Retiring Public Sector Employees 105-107
PART II Mutual Funds

16 Introduction 109-112
17 History of Mutual Funds 113-118
18 What is a Mutual Fund? 119-121
19 Eligibility 122-127
20 Structure of Mutual Funds 128-134
21 Mutual Fund Concepts 135-146
22 Types of Schemes 147-169
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CONTENTS
23 Advantages of Mutual Fund Investment 170-176

24 Disadvantages of Investing in Mutual Funds 177-179
25 When to Buy 180-184
26 Factors to Consider in Choosing the Fund 185-191
27 Whom to Buy Mutual Funds From 192-197
28 Which Type of Plan to Buy 198-201
29 Systematic Investment Plans 202-207
30 Keeping Track of Invested Funds 208-214
31 When to Sell 215-219
32 Taxation 220-222
33 Investor Friendly Services 223-227
34 Complaints and Queries 228-231
PART III Exotic Investments

35 Antiques 233-239
36 Art 240-249
37 Books 250-254
38 Clocks and Watches 255-259
39 Diamonds 260-269
40 Gold 270-294
41 Silver 295-305
42 Farm Houses 306-309
43 Property 310-322
44 Horses 323-326
45 Vintage Cars 327-331
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INTRODUCTION
Chapter 1
INTRODUCTION
Learning Objective:
This chapter introduces the concept of investment, discusses the

formulation of a strategy and the need to achieve your aim.
Structure:
1.1 Purpose of Investment

1.2 Speculation
1.3 Strategy
1.4 Setting of Objectives
1.5 Achieving Goals
1.6 Self Assessment Questions
Money is an inextricable part of our lives. We toil to earn money to

purchase a house to marry off our children to live to eat and to save
so that we are not destitute at the time of our retirement. It is necessary
to survive.
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INTRODUCTION
1.1 PURPOSE OF INVESTMENT
The purpose of investment is to enable you to realize your needs, your

requirements through saving and investing your money. It requires you to
use your skills, your knowledge and analytical intelligence to make your
savings earn more and more money for you. It is not easy. Nothing in this
world that matters really is. Investment is a jealous goddess. It demands
dedicated study. It requires diligent work. The rewards are great.
Conscientious, careful investment of your savings would in time ensure
that you are comfortable, if not well off.
1.2 SPECULATION
Good, slow, steady investment is the kind that lasts. Speculation and gold
mine schemes are just flashes and like flashes they die fast. Speculation is
a disease. It is a drug and it is easy to get hooked on it as it gives an
instant high. This euphoria lasts as long as the fervour lasts and then
leaves you extremely depressed. It is something I do not recommend as
the downslide can destroy family and home and lives.
This book is on investment on how you could save your money and make
it grow.
In order to successfully invest, one should have an investment plan and

personal investment objectives (purchase of a house, a regular income
after retirement, monies for the marriage of ones children etc). The
purpose of the plan would be to achieve the objectives that you have
whatever it may be.
It must also be ensured that the purchasing power of the money saved is
not less than its present purchasing power.
It is necessary to make certain therefore that the return one gets is higher
than the rate of inflation. Only then one can, with hand on heart, say that
his worth in real terms has actually increased.
Objectives are often realized. One may be saving for a childs wedding. The
child grows up. The child marries. The money is spent. The objective is
realized. This does not mean a person puts up his feet and invests no
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INTRODUCTION
more. No. Needs will always be there. New objectives will need to be
achieved and new strategies devised.
As the need arises an investment plan to suit that needs and requirements
must be devised. This would of course, have to depend on:
a. Nature of the need. This may be to fulfill the short term or long term
needs of the individual or his family.
b. The period within which the amount is to be accumulated.
c. The rate at which your savings grows.
d. The amount you can regularly save and invest.
It is these that will determine whether you will achieve objectives.
1.3 STRATEGY
Once you know what your objectives are and the time within which you
must realize it you must devise a strategy. It must be well thought out,
clear and coherent and must make provisions for unanticipated letdowns.
Without these, by leaving it to chance the chances are the objectives
may not be achieved. Generals win their wars not by superior numbers. It
is by strategy, persistence and pure doggedness the staunch adherence
to a purpose. It is this that wins in the end. A philosopher quite aptly once
said: A battle is won even before it is actually fought. This is true. It is
planning and strategy that matters not pure numbers. History is strewn
with examples. Alexander defeated the numerically superior forces of King
Porus. Henry V won the Battle of Agincourt with 6,000 Englishmen whereas
the French has 40,000. Babur triumphed over the superior strength of
Ibrahim Lodi. All the great generals were supreme strategists. So are the
great entrepreneurs and managers of today strategists extraordinary.
They have reached where they have by planning every move and covering
every possibility and by hard work. Not by fluke or by chance.
1.4 SETTING OF OBJECTIVES
It is important to know the objectives and then to adhere to them. It is

important that the objectives are achievable and possible. There is no
purpose in setting impossible targets because apart from being an exercise
in computation, it would not amount to anything. A clerk earning
` 8,000 would be indulging in wishful thinking to aim at saving `
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INTRODUCTION
1,00,00,000 in five years whereas it would be possible for his savings to
grow by ` 1,00,000.
1.5 ACHIEVING GOALS
After having devised a strategy to achieve your objectives you should

constantly review your investments because times change and
opportunities that did not exist earlier may come into being. You may
decide to invest in the shares of Trilgat Limited. The company may lose
some major contracts and begin losing money. Its result may be bad. At
this time you should review your investment and decide whether you
should continue holding shares or sell them. You would need to re-work
your strategy. In order to be aware you need information (magazines,
newspapers, word of mouth etc,) and time to analyse the information in
order to continue the plan already decided or work out new plans.
If you do not have the time to constantly review and analyse information
then you should invest in those instruments that are safe and those which
assure you of a fair thought modest return.
To summarize after determining your objective, plan your strategy on

how to achieve it.
1.6 SELF ASSESSMENT QUESTIONS
1. What is the purpose of investment?
2. How important are objectives?
3. What should you do after arriving at a strategy?

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INTRODUCTION
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture
! !8
THE INVESTMENT DECISION
Chapter 2
Learning Objective:
The objective of this chapter is to explain the investment decision.
Structure:
2.1 Determinants of the Investment Decision

2.2 How the Decision Should be Arrived at?
The great Indian public are great savers. Savings in India is estimated at
33 per cent of GDP according to Edward Hugh in India Outlook August
2008. This is below China which is at 40%, among the highest in the world.
These savings must be put to work must be invested in order for it to

grow and earn an income. This is especially important in times of inflation
when the purchasing power of the rupee saved steadily erodes. An
individual must decide on the manner his monies are invested (taking into
account his priorities).
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2.1 DETERMINANTS OF THE INVESTMENT DECISION
The strategy will necessarily differ from individual to individual. Pratap is a

young executive who likes to dabble in the stock market. Sanjeev, on the
other hand, is a middle-aged manager who has two school-going children
and wants his investments to give him a regular income. Sumit is nearing
retirement and he has over the years saved enough for his needs. In a
country such as ours where there is no social security, his primary
objective is the assurance that he will not lose his life savings. The
objectives of each of these three worthies are different. Sanjeev in the first
flush of youth is adventurous. He wants to play the market and in order to
do so, he wants to keep his investments liquid. Sanjeev has commitments:
two children, a wife, a position to keep and a standard of living to
maintain. He needs a steady income. Sumit is at the dusk of his career and
he has to ensure that his capital remains intact and safe. These are the
basic criteria that determines an investment decision safety, liquidity and
returns.
Safety
Primarily, an investment should be safe. An investor, if he cannot afford to

chance the erosion of his capital should invest in instruments where the
chance of capital loss is minimal. The riskier the investment the greater the
possibility of loss. In our socialist country there are fortunately several
investments such as public sector bonds and schemes of nationalized
banks and financial institutions that are safe.
Liquidity
This term is used to determine the speed by which investments can be

converted into cash. Many deposits or investments made (such as fixed
deposits or national savings certificates) immobilize money for a period of
time. During this time the capital cannot be easily converted into money.
Shares on the other hand can be very easily changed into cash by selling
them on the stock exchange.
Returns
This really is the heart. How much income will the investment yield? It is
on this that every assessment and investment decision is based. An
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investors aim is to get the highest return possible. Investments that give
very high returns are also highly risky. Consequently, depending on
whether one seeks security or liquidity the return factor may have to be
compromised.
In our present scenario of rising prices and high inflation, returns are most
germane. Let us assume that inflation is at 11 per cent per annum. In
order to ensure against the erosion of the purchasing power of the capital,
the return (post tax) must be at least 11 per cent. Oscar Dsouza placed
his funds in a bank deposit yielding a return of 8%. The result is that at the
end of a year, he will be able to purchase less as the purchasing power of
his money has fallen. This clearly is not acceptable and one must choose
ones investments in such a way that the purchasing power is protected
and at the same time his investment objective is realized.
The classic investments that ensure against capital erosion are investments
in real estate or in art or some similar unusual investment. There are
limitations. One needs a lot of capital to invest in real estate and there is a
limit to the number of properties one can purchase. Additionally although it
may appreciate in value it may not yield an income.
In recent times property and exotic investments including gold has been
appreciating significantly. However there are points to remember such as
at the time one purchases a painting it is difficult to anticipate its growth
especially if the painting is be a relatively unknown artist. It may not
appreciate for years and then it may soar. This too yields a return only
when one sells.
Of the saving schemes available, the Public Provident Fund is probably the
best. It yields a tax free return of 8 per cent per annum. The PPF is a
useful capital accumulation scheme and can be used to build capital for a
need that may materialize in 15 years such as a marriage or for the
overseas education of a child.
Shares in the short term undoubtedly give the greatest return. The
greatest risk also lies with shares. Prices can crash overnight. So can they
rise. However dramatic fluctuations only occur on dramatic shares. The
blue chips improve by an average of 25 per cent to 30 per cent every year
and they are reasonably safe. Historically these have fallen only when
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there have been depressions or industrial recessions and they have
recovered when the times change.
2.2 HOW THE DECISION SHOULD BE ARRIVED AT?
The investment decision must thus be based on the ability of an individual

to take risk and thus bear a loss or on whether a steady dependable
(though small in comparison) income is the priority.
INVESTMENTS AND LEVELS OF RISK
Extent of risk Investments Usual returns
1. No real risk a) Savings Bank Accounts 3%
b) Rural Bonds and other 8%

Government Securities
c) National Savings Certificates 8%
d) Fixed Deposits with Banks Varies upon term

e) Public Provident Fund 8%
f) Real Estate Over 30% but not very

Liquid.
2. Practically no a) Debentures / Bonds issued by 12%-18%
risk good, wellreputed (blue-chip)
companies and public sector
Companies.
3. A little risk a) Debentures issued by other 10%-15%
public limited companies (other
than blue-chip)
4. Fairly risky Equity shares of blue-chip Around 20%
Companies
5. Risky Equity shares of other companies About 25%
6. Very risky Shares of new untried companies Over 35%
7. Others (safe) Investment in gold/silver and art Not Possible to
Quantify.
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RISK APPETITE
Stage Age Circumstances Investment strategy
Young adult 20s No dependents, low Pursue growth

investable surplus aggressively as risk-
taking ability is high at
this stage
Young family 30s Married, with young Continue aggressive

children, starts investing wealth creation
seriously
Mature family 40s Higher education of children Lower risk in investment

approaching; income by moving funds to safer
peaking instrument-speaking
Empty nesters 50s Children independent, Divert new surpluses to

surplus peaks, prepare for building retirement
liquidation corpus, keep reducing
portfolio risk
Retirement 60+ Creating regular cash flows Create adequate cash

and beating inflation are flows from safe
priority investments
1. Explain liquidity.
2. Explain safety.
3. What would your risk appetite be if you are over 50?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !14
THE MATHEMATICS OF INTEREST
Chapter 3
Learning Objective:
This chapter explains the mathematics of interest
Structure:
3.1 What is Interest?

3.2 Real Rate of Interest
3.3 Inflation and Risk Premium
3.4 Default Risk and Interest Rate Risk
3.5 Simple and Compound Interest
3.6 Present Value
3.7 Future Value
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3.1 WHAT IS INTEREST?
Banks pay interest on deposits they receive from the public and charge
interest on loans that they disburse. The latter is usually more than the
former and is the earning made by the banker.
Interest has been defined as, the compensation paid by the borrower of
capital to the lender, for permitting him to use his funds.
Interest can also be called, compensation for the loss of the opportunity
to use the funds when it on loan.
Interest rates are determined by the demand for capital and its supply.
3.2 REAL RATE OF INTEREST
The key determinants of interest are the pure rate or the real rate of
interest.
This is the rate of interest that would prevail (in the absence of inflation)
on a risk less investment such as a loan to the Central Government or
the Reserve Bank of India. It could also be termed as the rate of interest
as measured by our ability to buy goods and services.
3.3 INFLATION AND RISK PREMIUM
In the real world however inflation exists. Price levels are not constant
and there is erosion in the purchasing power of money. The rate of return
we get in real life is really the money rate of return and it is possible that
at the end of a year, we may be able to purchase less with the original
capital plus interest. Let us assume ` 100 could purchase 10 mangoes at
the beginning of the year. Inflation is at 20%.Therefore at the end of a
year, the price of mangoes has gone up to ` 12 per mango.If interest has
been paid at 10%, at the end of the year,the principal plus interest would
have risen to ` 110. At the end of the year, with the interest, only 9
mangoes could be purchased. In this scenario, the purchasing power has
eroded and inflation has been higher than the return earned.
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If the rate of inflation is 5% per annum and the interest paid is 7% per
annum, the real return the individual gets is 2%.
In an inflationary world, the investor will not be satisfied if he is paid the

anticipated rate of inflation as it could be higher than anticipated. To
tolerate this risk, the investor would expect a risk premium. If the
required real rate is 5% and the expected inflation is 8%, the nominal
rate would be 13%. If there is no risk premium and actual inflation is
more than 8%, the realized real rate would be less than 5%. The risk
premium therefore provides a cushion against inflation.
3.4 DEFAULT RISK AND INTEREST RATE RISK
The rate of interest is based on risk. The riskier the placement, the
higher the rate of risk. Deposits placed in a bank are considered very
safe. The rate of interest is therefore fairly low. On the other hand
interest charged by on loans is higher as there is the possibility of the
loan not being repaid. As large corporates are considered more
creditworthy than individuals, the rate of interest they pay is much lower.
Another factor that determines the rate of interest paid is the period the
deposit/ loan is given and the view the bank holds on how interest rates
move. On one year deposits the rate may be 8%,on two year deposits it
may be 9% and on three year deposits it may be 7.5%. This would be
because the bank believes that in the future interest rates would fall.
3.5 SIMPLE AND COMPOUND INTEREST
It is also important to be aware of the manner interest is calculated. The

two common methods are simple interest and compound interest.
Let us assume ` 100,000 is placed for two years at 10% per annum
simple interest. At the end of the first year, interest earned would be `
10,000. At the end of the second year interest at 10% will continue to be
calculated on ` 100,000. At the end of two year the interest paid would
be ` 20,000.
In the case of compound interest, the interest earned at the end of the
first year would be added to the principal (deposit) and that would be the
base on which interest would be calculated. Therefore at the end of the
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second year interest earned would be ` 11,000 (10% on ` 100,000 plus
` 10,000). By compounding interest an additional ` 1000 is received by
the depositor. The real rate of interest in the second year is therefore
11% and not 10%. If interest is compounded quarterly as many bank
deposits are, the real return would be much more though the nominal
interest would continue to be stated at the rate stated on the deposit
receipt.
In the absence of a statement or affirmation bank pays simple interest

on deposits.
TABLE - 1 SIMPLE INTEREST
Deposit of ` 10,000 placed in a bank for five years at 10% per

annum
Year Capital Accrued Interest Interest Paid
0 10,000
1 10,000 1,000
2 10,000 1,000
3 10,000 1,000
4 10,000 1,000
5 10,000 1,000
End of 5th year 5,000
Every year interest of ` 1,000 is accumulated and in the 5th year it is

distributed.
TABLE 2. COMPOUND INTEREST
Deposit of ` 10,000 invested at compound interest of 10% per

annum
Year Capital Interest Accumulated
0 10,000 10,000
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1 10,000 1,000 11,000
2 11,000 1,100 12,100
3 12,100 1,210 13,310
4 13,310 1,331 14,641
5 14,641 1,464 16,105
The interest of the first year is added to the capital of the second year and
the interest for that year is computed on the new capital of the second
year and so on. If interest is compounded the investor earns ` 1,105 more
than if he had received only simple interest. As the term of deposit
increases the gap will widen and yet further widen. If the deposit was for
15 years, the investor at 10% with interest compounded would receive `
41,722 (`10,000 capital + ` 31,772 interest) whereas if the funds were
receiving only simple interest, the investor would after 15 years receive
only ` 25,000 (capital ` 10,000 + interest 15,000). In 10 years the gap
from ` 1,105 has grown to ` 14,772 a very significant difference.
3.6 PRESENT VALUE
An aspect that must also be considered is that if a certain amount is due

at a time in the future, its value today cannot be the same amount.
If ` 110 is due one year from now and the rate of interest is 10%, the
present value i.e., the value today of ` 110 is ` 100. This submits that if
` 100 is invested at 10%, in one year the value will be ` 110.
This is the principle used when discounting bills and other amounts due
at a future date.
Illustration
Rajan Nair is due ` 10,000 in 5 years from a loan that he had given at 10%
per annum interest.
The value at which Rajan Nair could accept the money with no loss and on
the assumption that he can reinvest it at the same rate is ` 10,000 `
62091 = ` 6209.10.
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It is on this principle the companies discount bills due from customers with
banks.
3.7 FUTURE VALUE
A corollary is what would be the future value of an amount in the future.
An individual may wish to have ` 500,000 in three years to fund a childs

education.The interest rate is10%. He would need to place a deposit of `
3,75,000 at 10% per annum compounded annually for this to be
achieved.
The same principle is applied in recurring deposits where a person

deposits a fixed amount every month in order to arrive at a fixed sum in
the future.
Annuity
An annuity is a series of identical payments made at equally spaced

intervals like monthly installments on loans, rents etc.
With regard to an ordinary annuity the first payment will be made on a

date (monthly, quarterly etc.) and then payments will be made at the
same interval. In loan repayments the term used is equated months
installments (EMI).
To arrive at the periodic payment to be made, the principal and interest

payable is calculated based on the tenor of the loan (taking into account
periodic repayments) and then the actual installment payable is
calculated.
Similarly for insurance premium payments, if at the end of 25 years, a

certain sum has to be paid, the present value of installments is calculated
at a rate of interest.
Illustration
Ejaj Hameed is 39 years old. He wishes to ensure that he is able to

receive ` 4,000 per month when he retires at the age of 55. He wishes
to invest in interest accumulating securities in order to do so.
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If Mr. Hameed purchases 15% Bonds and the interest is not withdrawn
but reinvested resulting in interest being earned on interest, his annual
payment of ` 10,000 would amount to ` 4,75,800 at the end of 15 years
which even if invested at 10% per annum would give him an income of
around ` 4,000 per month.
If on the other hand you propose on the eve of your retirement to invest
the gratuity and provident fund that you receive in such a way as to
enable you to enjoy a certain income for a definite period of time at the
end of which the capital would cease to exist, this is how it would be.
If on retirement the sum of Gratuity and Provident Fund received

amounted to ` 5,00,000 the years within which it could be withdrawn if
the funds have been invested at 10% per annum are.
No. of years of withdrawal Amount of withdrawals `
5 1,26,530
10 78,770
15 64,100
20 57,550
25 54,250
It is assumed in this example that withdrawals are made at intervals

throughout the year and not in a lumpsum at the beginning or end of a
year.
There are a number of companies that take out annuities in the name of
their employees at the time of retirement as opposed to paying them
pensions as they find this much easier. Pensions are a perennial payment
which has to be paid every month and involves a lot of administrative
work-cheques to be prepared-taxes to be deducted and deposited, and
pension cheques have to be posted. The Life Insurance Corporation of
India (LIC) sells annuity policies which assures the beneficiary a certain
amount of money every month. The cost of this depends on the age and
the health of the individual. Similarly, you may require to pay ` 20,000
per year for five years while your daughter attends medical school. It
must be appreciated in this situation that the amount that is invested will
! !21
until it is completely utilized earn some money. In order to determine the
amount that would need to be invested the total amount that has to be
spent should be multiplied by the favor of the present value of money to
be received annually for N years.
Illustration
Ruby, the daughter of Mr. Anand is going to boarding school in the

Nilgiri Hills and Mr. Anand has to pay tuition and fees of ` 10,000 per
annum for 10 years.

The amount he would have to invest at say 10% per annum today to
pay for the tuition and fees would be ` 67,590. This is calculated by
multiplying ` 10,000 by 6.7590. It is assumed that the annual
payment of ` 10,000 is paid at the beginning of every year.
1. Differentiate between simple and compound interest.
2. What is present value?
3. Explain what you understand by annuity.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !23
CUSTOMER-CENTRICITY: WHY NOW MORE THAN EVER
PART - I
INTEREST BEARING INVESTMENTS
! !24
THE PUBLIC PROVIDENT FUND
Chapter 4
Learning Objective:
The following chapter gives a detailed picture of Public Provident Fund and
states its advantages
Structure:
4.1 Salient Features

4.2 Advantages
The Public Provident Fund Scheme evolved as a consequence of the Public

Provident Fund Act 1963 and is open to all.
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4.1 SALIENT FEATURES
1. A Public Provident Fund Account (PPF Account) may be opened as a

branch of the State Bank of India or at any branch of any of its
subsidiaries if they have been designated as account offices under the
scheme, or at specified branches of a nationalised bank.
2. It is also possible to open PPF accounts at the head offices.

3. An individual may have only one account at a time in his own name.
4. A guardian may open an account in the name of a minor.
5. The period of a PPF account is 15 years.
6. The limit on subscription in a year is ` 70,000 (it was ` 40,000 earlier)
7. PPF allows varying contributions to be made from year to year to
accommodate financial imperatives. The minimum subscription to be
made in a year is ` 500.
8. Subscription may be paid in multiples of ` 5 or in installments not

exceeding 12 in a year.
9. The PPF account gets credit from the date the cheque is presented.
10.If a subscriber does not subscribe even the minimum deposit of ` 500
to keep the account alive, the account is considered dead or
discontinued. Loans and withdrawals are not allowed. He will get his
deposit back with an interest at the end of the term (on completion of
15 years). The account can however be reactivated by the subscriber by
paying a fee of ` 50 per year of default and ` 500 as arrears of
subscription for each year.
11.Interest is currently 8% per annum and it is entirely tax-free. It is

calculated on the lowest balance in the account between the close of the
5th day and the last day of every month and is credited to the account
on March 31st.
12.An individual who does not wish to withdraw the entire balance at the
termination of 15 years may retain the balance in the account till it is
needed. There is no need to inform the branch where he holds the
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account of this wish. He may also make withdrawals in installments not
exceeding one in a year till the entire balance is withdrawn.
13.On maturity, after 15 years, an individual can continue his PPF account
for a period of 5 years. He can during this time, either subscribes to the
account or not subscribe to the account. If he does subscribe to the
account, he can at the expiry of 5 years, opt for an extension of a
further 5 years. This will effectively bring in a total period accounting to
25 years.
14.A subscriber who continues his account after 15 years, with fresh
subscription, can now make one withdrawal per year subject to the
condition that the total of the withdrawals during a block period shall
not exceed 60% of the balance to his credit at the time of
commencement of the extended period.
15.On the death of the subscriber, the balance of his PPF Account as
repayable on demand to his nominee or successor. If he has not
nominated anyone, a balance of up to ` 1 lakh can be paid to the legal
heirs on their producing a
a. Death certificate
b. Letter of indemnity
c. Affidavit
d. Letter of disclaimer or affidavit.
4.2 ADVANTAGES
1. Attachment
A PPF account is not subject to attachment under any order or decree of a

court.
2. Uneven Subscription
a) The biggest advantage in this scheme is that there is no need to

carry on making a similar contribution year after year. In a year when
one is flush with money or one has made some enormous gains, one
may subscribe a large amount (up to ` 70,000). On the other hand in
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a year that has not been very good financially, one may contribute a
much smaller amount or simply just the bare minimum of ` 500.
b) It should be noted that the term of the PPF 16 contributions would

have to be made. The first will be on the day of opening the
account. The last can be on the day before the account is closed. In
such a situation the last contribution is locked up for only one day but
the subscriber can avail of all the benefits given under Section 80C of
the Income-Tax act 1961.
3. Loans
a) A subscriber is entitled to a loan in or after the 3rd year of the

opening of the PPF Account.
b) The amount that may be borrowed should not exceed 25% of the
balance to the credit to the account at the end of the second
preceding financial year.
c) The loan can be repaid either in lump-sum or in convenient
instalments numbering not more than 36 instalments.
d) Interest is payable at 1% over the PPF Account interest rate if the

loan is repaid in 36 installments. This interest should be paid in not
more than 2 monthly installments. If the loan is not repaid within 3
months, interest on the outstanding amount of loan will be charged
at 6%.
e) Interest will be calculated from the 1st day of the month following
the month in which the loan is drawn upto the last day of the month
in which the last instalment is repaid.
f) A second loan may be availed of after the first loan is paid off.
g) No loan is given after the 6th year as from then on the subscriber
may begin to withdraw from the account.
4. Partial Withdrawals
! !28
a) A subscriber may from the 6th year withdraw upto 50% of the
balance standing to his credit at the end of the preceding year (in the
6th year he may withdraw 50% of the balance outstanding at the end
of the 5th year, in the 7th year 50% of the balance of the 6th year
and so on.) Provided it is atleast 50% of the balance of the 4th
preceding year.
b) A subscriber may withdraw from his PPF account and use the amount
for his expenses and at the same time contribute a similar amount
from his identifiable income to his PPF Account and enjoy the benefits
of Section 88 of the Income Tax Act 1961 without making any real
contribution.
Year Withdrawals Opening balance Contribution Closing balance
1 10000 10000
2 10000 20000
3 20000 10000 30000
4 30000 10000 40000
5 40000 10000 50000
6 10000 50000 10000 50000
7 15000 50000 10000 45000
8 20000 45000 10000 35000
9 17500 35000 10000 27500
10 13750 27500 10000 23750
11 11875 23750 10000 21875
12 10937 21875 10000 20938
13 10469 20938 10000 20469
14 10234 20469 10000 20235
15 10117 20235 10000 20118
16 20118 10000 30118
* Note: Interest has been ignored
! !29
In the period between the 6th year and the 15th year, the subscriber has
withdrawn more than he has put in. In effect he has returned the
withdrawals back partially. Yet he has got the advantage of Section 88 of
the IT Act 1961.
Under the GSR/727/(3) of April 1986, in the case where withdrawals are
made during the year, an amount equal to 1% of the amount withdrawn
shall be deducted from the interest creditable to the account of the
subscriber.
Income-Tax Act
a) Interest received on PPF Accounts is completely exempt from tax

(Section 10(ii)).
b) In normal cases, if contributions to the account of a minor and a

spouse can make contributions to his/her spouses account and claim
benefits under Section 80C of the IT Act.
c) Investment made in PPF is eligible for deduction under Section 80C of

the Income Tax Act.
Wealth tax
a) Under Section 5 of the Wealth tax act, the investment in a PPF

Account qualifies for exemption. This is in addition to the general
limit of ` 5 lakh.
b) The provision that requires the asset to be held for at least a period
of 6 months is not applicable to PPF accounts.
Of many of the avenues of investment, the PPF is arguably the most

attractive and advantageous scheme presently available to the common
man.
The great advantage of the PPF is its simplicity and the ease by which it
can be maintained. Unlike life insurance premia and fixed savings schemes,
there is no need to make a contribution of a predetermined amount every
year. In a year when one is flush with money or one has made some
enormous gains, one may invest a large amount (up to ` 70,000). In a
! !30
year that has not been very good financially, one may contribute a much
smaller amount or simply just the bare minimum to keep the account alive.
Subscribers are also entitled to a loan against their deposits in the PPF in
or after the 3rd year of the opening of a PPF Account. On this loan interest
payable at 1% p.a above the PPF interest rate. A loan therefore at 9% is
reasonable and attractive.
Partial withdrawals are a great boon. As was mentioned earlier, a

subscriber may from the 6th year withdraw up to 50% of the balance
standing to his credit at the end of the preceding year and he can use this
to his advantage. This is how this can be done. He may withdraw and
utilize the amount withdrawn for his personal needs. He may, at a time of
withdraw or at a later time, deposit a similar sum in hid PPF account from
his identifiable income. He can, if he does this, be entitled to the rebate
from tax under Section 88 of the IT Act 1961 and this could be substantial
and without actually making any real contribution. The main factor one
must ensure is that the contribution is made from income and not from
capital or the amount withdrawn, as the benefit under Section 80C of the
IT Act is available for contributions made from income.
The major disadvantage of the PPF is that ones money is tied up in the
account for 15 years, which is quite a long period. It is argued that with
the inflation at the current rate, the real worth of the money on maturity
would be much lower than its initial value. This is true to an extent. PPF is
not as effective as shares as a hedge against inflation. However, this
disadvantage is negated by the fact that it is safe and the income earned is
tax-free.
1. State the salient features of PPF.
2. What are the tax benefits one gets from investing in PPF?
3. How does partial withdrawal affect investment in PPF?
4. State the advantages of investing in Public Provident Fund.
! !31
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !32
NATIONAL SAVINGS CERTIFICATE
Chapter 5
Learning Objective:
This chapter explains investment in National Saving Certificate.
Structure:

5.2 Advantages
5.3 Disadvantages
The National Savings Scheme was introduced on April 1, 1988 based on

the net saving principle. The Prime Minister at that time, the late Mr. Rajiv
Gandhi in his budget speech introducing the Finance Bill 1987 stated: I
propose to introduce a new savings scheme based on the net saving
principle.
The National Scheme is managed by the National Savings Organisation and

administered through post offices; individuals will maintain national saving
account at post offices.
! !33
1. Certificates may be purchased by
a. Cash,
b. Cheque, pay order or demand draft
c. POSB withdrawal form
d. Matured old certificates
2. Date of the certificate will be the date on which the cheque is cleared
and not on the date of its presentation as in the case of PPF certificates.
3. Certificates are issued to single holders or jointly to two adults that are
payable to
a. Both jointly or to the survivor (A Type) or

b. Either or survivor (B Type)
4. This is not open to Non-Resident Indians to Hindu Undivided families to

purchase.
5. Companies, trusts, societies and other institutions are not eligible to

purchase these certificates.
6. A power of attorney holder can purchase these on behalf of his principal

and can also encash these on maturity for his principal.
7. Minimum investment is ` 500. There is no ceiling on the investment

limit.
8. Interest on this scheme is cumulative at 8% and it is compounded half-

yearly. An investment of ` 1000 will grow to ` 1601 in six years.
9. Annual interest earned is deemed to be reinvested and qualifies for tax

rebate for the first 5 years under section 80C of the Income tax Act.
10.National savings certificates cannot normally be encashed prematurely.
11.A National savings certificate can be encashed prior to maturity only

under circumstances of death of a holder, forfeiture by a pledgee or
! !34
under orders of a court of law. Interest is not payable if encashment
takes place within one year. If encashment takes place anytime between
one to three years then simple interest is paid for the POSB rate for that
period of time.
12.Nomination is possible under this scheme. Joint holders of this

certificate can also benefit the advantage of nomination.
13.A nominee on the death of the certificate holder can claim a premature
encashment or get it transferred to his name. If, there is no nominee
present, then the probate of the will or letters of administration of the
estate of the deceased or a succession certificate is not produced in 3
months, and if the sum due on all savings certificates does not exceed
` 1 lakh, the authority may pay the same to any person appearing to be
entitled to receive the sum.
14.NSCs are transferable from one post office to another.
15.One year after expiry, NSCs are transferable from one person to
another. These transfers are allowed only between
a. Near relatives (husband, wife, lineal ascendants or descendant,

brother or sister)
b. Heir to the deceased holder
c. Under orders of a court of law
d. For pledging to an acceptable authority
e. The survivor in the case of a joint account.
16.An adult can purchase a certificate on behalf of a minor. However the

deduction of u/s 80C cannot be claimed by the purchaser on the
certificates purchased by a parent for the child but can be claimed by
the child himself.
17.An HUF cannot purchase a certificate on his name. It can be purchased

in the name of the members of the HUF Funds to claim deduction of the
u/s 80C
18.Fees of ` 5 is charges in case of
! !35
a. Transfer of certificates from one name to another other than when it
is done under the instructions of the court of law.
b. Issue of duplicate certificate.
c. Issue of a certificate of discharge.
d. Conversion from one denomination to another.
e. For registration or variation or cancellation of nomination other than
the first nomination.
19.NSCs are available in various denominations. They are ` 100, 500,

1000, 5000 and 10000
20.NSCs are usually encashed at the post office at which it was registered.
It can also be encashed at any other post office in India provided there
is a proof verification from the issuing post office that the person
presenting the certificate is the person entitled to the cash.
21.NSCs can be encashed through banks.
22.NSCs can be pledged as security against a loan to banks or Government

institutions.
23.A post office can also issue a certificate of holding or interest accrued
thereon, on application received from the holder of the certificate.
24.NSC s can pledged and can continue to be on the name of the holder.
The pledgee is entitled to the benefit of the interest accrued and also
the benefits of Section 80C. Premature encashment of certificates by
banks in the event of default on the part of the loanee has been
considered and not agreed to.
25.Post maturity interest up to a maximum of a period of 2 years will be

paid at simple POSB interest rate if the matured certificate is not
encashed. Any part of the period, which is less than one month shall be
ignored.
26.Matured certificates can be reinvested.
27.Income earned in taxable. However, tax would not be deducted at

source.
! !36
28.Investments in NSCs are exempt from wealth tax.
29.NSCs can be got in a demat format from a few post offices where this
facility is available.
5.2 ADVANTAGES
1. The deposits are exempt from wealth-Tax without limit.
2. It gives an individual a certain flexibility. If some unexpected income

has been earned it can be invested in this scheme and taxable income
reduced.
3. If an investor in NSS dies, his nominee will not be taxed on its

withdrawal.
5.3 DISADVANTAGES
1. Withdrawals are not available.
2. No real tax advantage is gained as the entire amount withdrawn is

taxable. At best, all that this scheme affords is the deferment of tax
1. State the salient features of NSC.
2. Who can invest in a NSC?
3. What are the nomination benefits of investing in NSC?
4. How is interest payable on investment in NSC?
5. Can a NSC be pledged? If so how?
6. What are the advantages and disadvantages of investing in NSC?
! !37
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !38
RBI SAVINGS BONDS
Chapter 6
RBI SAVINGS BONDS
Learning Objective:
This chapter explains investment in Reserve Bank of India.
Structure:

The RBI saving bonds are issued by the Reserve Bank of India. They are
taxable Bonds with a term of 6 years. The interest is 8% payable half
yearly on 1st February and 1st August. The interest for the initial and the
last period will be for the broken period.
! !39
RBI SAVINGS BONDS
Individuals, may hold the bonds singly or jointly (maximum 3 including

the first holder), or on anyone or survivor basis or on behalf of a minor
as father, mother or legal guardian.
HUFs also can subscribe to these bonds
NRIs are not allowed to hold these bonds.
Charitable institutions and Universities which have obtained the relative

certificates can purchase these bonds
Any organization that has obtained a certificate under section 80G of the
Income Tax Act can subscribe to these bonds.
The agencies which operate the 8% Savings Bonds schemes are:
State Bank of India

Seven Associate Banks of SBI viz.,
State Bank of Travancore

State Bank of Mysore
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Saurashtra
State Bank of Patiala
State Bank of Indore
14 Nationalised Banks viz.,
Central Bank of India

Bank of Maharashtra
Dena Bank
Punjab National Bank
Syndicate Bank
Canara Bank
Indian Bank
Indian Overseas Bank
Bank of Baroda
! !40
RBI SAVINGS BONDS
Union Bank
Allahabad Bank
United Bank of India
UCO Bank
Bank of India
4 Private Sector Banks viz.,
ICICI Bank Ltd.,

HDFC Bank Ltd.
IDBI Bank Ltd.
Axis Bank Ltd.
Stock Holding Corporation of India Ltd.
The bonds are issued at par (` 100).
The face-value of the bonds is ` 1000 and will be issued in multiples

of ` 1000. There is no upper limit.
Investors have a choice to opt for cumulative interest, which renders

the maturity value at ` 1601 on a face-value of ` 1000.
The ECS facility is available only to members having a bank account

in cities with cheque clearing centres.
Under RBI regulations the bank has to either issue a demand draft,
free of cost or an at par cheque payable at all branches of the bank.
The bonds will be issued in the form of stock certificate or may be

held at the credit of the holder in the account called Bond Ledger
Account. (BLA), which means that an account statement will be
issued in place of the normal certificate.
The BLA will be issued and held with designated branches of the
agency books and Stock Holding Corporation of India Ltd.
Interest on the bonds is taxable.
Tax will not be deducted at source on the interest paid to investors.
! !41
RBI SAVINGS BONDS
The bonds are exempted from wealth tax.
The deposit can also be held in the demat account of the holder.
Subscription to the bonds will be in the form of cash or drafts or

cheques, drawn in the favour of the bank, receiving office, at the
place where the applications are tendered.
The date of issue will be the date of receipt of subscription in cash or

the date of realization of draft or cheque.
These bonds are not transferable and cannot be gifted.
Premature encashment is not allowed.
The bonds are not tradable in the secondary market
With effect from August 2008 they are eligible as collateral for loans
from banks, financial institutions and Non-Banking Financial Company
(NBFC), etc.
In case the application is submitted by a PoA holder, the original PoA

has to be submitted along with an attested copy.
Certificate of holding will be issued within 5 days from the date of

tender of application.
An advice of payment of interest will be issued one month in advance

from the due date.
In the case of application on behalf of a minor, the original birth

certificate together with the attested copy is required to be submitted
for verification. The same conditions apply for senior citizens.
In case of a joint holding, interest warrants are issued in the names

of all the joint holders together. These can be issued in the name of
the first holder if the others holders execute a Poa as per the
prescribed format. Similarly, when the first holder expires, the
interest and the redemption amount is paid to all joint holders
together. As per the RBI regulations, the maturity proceeds can also
! !42
RBI SAVINGS BONDS
be in favour of the joint holders in whose favour all other remaining
holders have issued PoA.
In the case of nomination the above rules stated will apply.
An adult individual who is a sole holder can nominate one or more

persons. It is not available to joint holders, HUFs or minors.
If the nominee is a minor, the holder may appoint any person to

receive the proceeds during the minority of the nominee.
Nominations may be varied by a fresh nomination or may be

cancelled through prescribed forms. The BLA account holders are
allowed to make separate nominations for each deposit comprised in
the BLA even if the deposit relates to an earlier period.
NRIs can be nominated but the normal regulations related to the

foreign remittances will be applicable in respect to interest and
maturity proceeds.
On death of the single holder, the nominee/s will be able to withdraw

only on maturity. The nominee, now the holder can nominate
someone.
The 8% Bonds are attractive to non-tax payers. For a tax-payer, the

returns that he gets after deductions are 7.2% in the 10% tax-zone,
6.4% in the 20%,5.5% in the 30% and 5.3% in the 33% zones.
The bonds are exempt from wealth-tax under the Wealth Tax Act,
1957.
The bonds are repayable on the expiry of 6 years from the date of
issue. No interest would accrue after the maturity of the bond.
! !43
RBI SAVINGS BONDS
1. State the salient features of RBI saving bonds.
2. Who are the agencies that operate RBI saving bond schemes?
3. Who is eligible to invest in RBI saving bonds?
4. What are the tax benefits on investment in RBI saving bonds?
5. How does one invest in case of a minor and in case of a joint account
holder?
! !44
RBI SAVINGS BONDS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !45
KISAN VIKAS PATRA
Chapter 7
KISAN VIKAS PATRA
Learning Objective:
The following chapter explains investment Kisan Vikas Patra.
Structure:

Kisan Vikas Patras can be purchased from any post office.
This scheme doubles money invested in 8 years & 7 months. Interest is

compounded annually. (The rate of interest works out to be 8.41%).
This account can be opened by a single holder and a certificate may be

issued to an adult for himself or on behalf of a minor or to a minor. It can
also be purchased jointly by two adults.
Companies, societies, trusts and other institutions are not eligible to

purchase these securities.
Non-resident Indians and Hindu Undivided Families are also not eligible
to purchase these.
Power of attorney holders can purchase KVPs on behalf of eligible

principals. They can also receive payment on maturity on behalf of their
principals.
The interest on KVPs has to be assessed to income on accrual basis.
! !46
KISAN VIKAS PATRA
Denominations in which KVPs can be invested are in ` 100, 500, 1,000,
5,000, 10,000 and 50,000.
Facility for premature encashment as per the table given below and is
after 2 years.
PREMATURE ENCASHMENT VALUE OF ` 1,000/-DENOMINATION

CERTIFICATE
Period Amount receivable

inclusive of interest
2 years 6 months or more but less than 3 years 1170.51
3 years or more but less than 3 years 6 months 1207.95
KVPs are encashable at any post office before maturity by way of transfer
to another post office. The transfer can be to any post office in India.
These are transferable from one person to another before maturity.
Nomination facility is available on KVPs.
If a certificate is lost or destroyed, a duplicate can be issued on

furnishing an indemnity bond and sureties of a bank guarantee. If the
certificate is capable of being identified as the one originally issued, a
! !47
KISAN VIKAS PATRA
duplicate may be issued without any indemnity bond, surety or
guarantee.
While discharging a certificate purchased on behalf of a minor who has

attained maturity, the certificate shall be discharged by the minor who is
matured but his signature will be attested either by the person who
purchased the certificate on his behalf or by any other person who is
known to the post master.
Maturity proceeds not drawn will be eligible POSB interest for upto a
maximum of 2 years. Any part which is less than one month shall be
ignored.
KVPs can be reinvested on maturity.
Investors do not get tax benefits under section 80C of the Income Tax
act.
Interest received is taxable. Tax would not however be deducted at

source.
Deposits made are exempted from wealth tax.
These can be pledged as security against a loan to banks or Government

institutions.
KVPs can be taken in demat from a few specified account offices.
1. State the salient features of KVP.
2. What are the eligible criteria of investing in Kisan Vikas Patra?
3. What are the denominations in which KVPs can be invested in?
4. What are the tax benefits that an investor gets when he invests in KVP?
! !48
KISAN VIKAS PATRA
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !49
POST OFFICE SMALL SAVINGS SCHEMES
Chapter 8
Learning Objective:
This chapter explains in detail the various post office saving schemes.
Structure:
8.1 Post Office Savings Bank Account

8.2 Post Office Time Deposits
8.3 Five-Year Recurring Deposit Accounts
8.4 Monthly Income Schemes
8.5 Senior Citizens Saving Scheme
The National Savings Organisation (NSO) has taken a lot of effort to

encourage savings and it has harnessed the reach of post offices to offer
savings schemes to individuals. Post offices offer, as a consequence,
savings accounts, term deposits, recurring deposits and monthly income
schemes.
! !50
8.1 POST OFFICE SAVINGS BANK ACCOUNT
Opening a post office savings bank Account is a very easy task. It can be
opened with a small sum of ` 50, without a photograph and there are no
restrictions to the number of transactions per year.
A cheque facility is available for accounts maintaining a minimum balance

of ` 250.
Standing instructions can be given for crediting the interest earned on

POTD, MIS, SCSS to the POSB account in the same post office and also
for payment from POSB to RD.
The maximum limit that an individual can have in this account is ` 1

lakh. The limit for joint accounts is ` 2 lakhs and there are no limits on
group, institutional or official capacity accounts.
The interest rate of 3.5%. This is credited to the account totally tax-free.
There are charges levied on sleeping accounts. Accounts that have not
been operated continuously for 3 years are considered as sleeping
accounts.
Account holders who do not have a cheque facility and whose balance
has fallen below the minimum limit will have to pay service charge of `
20 per year as on 31st March every year.
If the balance goes into a negative balance after deducting service

charges, the account will be taken to be closed and the account holder
will be informed accordingly.
8.2 POST OFFICE TIME DEPOSITS
Post office time deposit accounts may be opened by individual, trust, and
welfare funds for upto 5 years.
The accounts can be closed after 1 year at a discount.
These accounts can be opened with a minimum of ` 200 and in multiples

thereof.
! !51
There is no maximum limit for deposits in this account.
Interest is payable annually but calculated quarterly.
Period Rate
1-Year 6.25%
2-Year 6.50%
3-Year 7.25%
4-Year 7.50%
An account can also be closed after six months but before one year
without interest. Thereafter, the amount of deposit shall be repaid with
interest at 2% below the corresponding TD rate for the completed
number of years and months.
On death, the account can be continued or closed. If closed, interest is

paid as though the account was closed prematurely.
Accounts can be pledged.
Joint as well as single accounts can have nominees.
8.3 FIVE-YEAR RECURRING DEPOSIT ACCOUNTS
These accounts can be opened with a minimum ` 10/- per month or any
amount in multiples of ` 5/- which is payable monthly. There is no
maximum limit.
On advance deposits, a rebate is offered @ ` 1 for 6 to 11 deposits and

@ ` 4 for every 12 deposits on an account for ` 10 is given. For instance
if 20 deposits are paid in any month, the rebate would be ` 4 for the first
12 months and ` 1 for the next 6 months. The extra 2 months are not
eligible for any rebate.
Maturity value of ` 10 denomination is stated below. This gives a picture

of the accrued annual interest for income tax purpose.
! !52
Period `
Prior to 1.1.99 833.40
Bet. 1.1.99 & 14.1.00 811.15
Bet. 15.1.00 & 28.2.01 789.60
Bet. 1.3.01 & 28.2.02 758.53
Bet. 1.3.02 & 28.2.03 748.49
1.3.03 Onwards 728.90
If there are not more than four defaults, the depositor may extend the
maturity period by as many as the number of defaults.
If there are more than four defaults, the accounts shall be treated as
discounted. Its revival shall be permitted only within 2 months from the
month of 5th default. For revival of interest there is a levy of 10 paise
per every ` 5 of a defaulted installment for each month of default will be
charged along with the deposit. If an account is not revived, the
depositor shall receive an amount in the same proportion to maturity
value as the number of monthly deposits made bears to 60 months.
The date of presentation of cheque, pay-order or demand draft shall be

deemed to be the date of the deposit.
If a depositor retains a discounted account after the date of maturity,

simple interest @ 9.25% p.a., (completed year) and the SB rates for
completed months will be paid. The post-maturity interest may be paid
up to a maximum period of 5 years.
Withdrawals (treated as loans) up to 50% of the balance is allowed

after one year at an interest of 15%.
One withdrawal up to 50% of the balance allowed after one year.
The table below gives a picture of the amounts, inclusive of the interest,
payable on accounts opened after 1.03.02 and continued beyond
maturity.
! !53
Maturity value of RD of ` 10
Years With deposits Without deposits
1 939.80 814.15
2 1147.90 885.60
3 1374.25 963.35
4 1620.50 1047.85
5 1888.30 1139.80
Premature closure after 3 years is permitted, but the interest will be at

the POSB rates.
Full maturity value allowed on RD Accounts restricted to that of ` 50

denomination in case of death of depositor subject to fulfillment of
certain conditions.
Instead of withdrawing the entire amount at maturity, the depositor can

either extend the term for 5 years or keep it in the account on a yearly
basis, earning the same rate of interest but only for the number of years
that are completed. The rate of interest that will apply will be the same
as that of the POSB.
If the account holder dies before paying in the 12 installments, no

interest is given. In many cases, either due to late submission of the
claim, or delay in sanction, the amount is paid to the claimant after the
expiry of one year. And the interest is not paid.
On death of the depositor, the legal heir may:
Continue the account till the maturity,
Discontinue the account and claim maturity on the proportionate amount.
Claim the proportionate amount immediately payable. If the legal heir

desires to continue the account, he can do so after completing the
formality of transferring the account in his name. The same conditions
are applicable to the survivor of a joint account on demise of one of the
holders or the legal heir on demise of the joint holders.
! !54
RD has introduced life insurance scheme, where in a depositor in a single
account or a surviving depositor in joint account dies during the tenure of
the account, the heir or the nominee will get the full maturity value,
subject to the ceiling of maturity value of an account of ` 50. If the
depositor has more than one account the ceiling is applicable to all the
accounts put together. This benefit is given only if death occurs after a
minimum of two years from the date of opening the account and further
provided that (a) the depositors age was between 18 and 53 at the time
of opening the account, (b) No withdrawals or defaults were made during
the first two years and (c) The account was current at the time of the
death of the depositor. The extended period (beyond 5 years) is not
covered by the PSS. For an unprotected account, the nominee or the
legal heir has the option to continue the account until its maturity or get
immediate payment as per the rules applicable to premature closure.
8.4 MONTHLY INCOME SCHEMES
POMIS Accounts can be opened by (a) a single adult, (b) two or three
adults jointly, (c) a minor who is 10 years and older (d)a guardian on
behalf of a minor or a person of unsound mind.
Monthly interest is payable from the month after the date of deposit.
Premature withdrawals are allowed after expiry of one year. Penalty of

3.5% of deposit amount shall be deducted if withdrawals are affected
within 3 years; no penalty thereafter, other than loss of the bonus. If
such a withdrawal is made after one year but before three years, 2% of
the deposit is deducted or else 1%.
The nominee or heir will is not allowed to continue the account by

transfer of name.
In case of death of depositor before maturity, the refund shall be made

to the nominee along with the interest earned upto the previous month
and will not attract penalty of premature withdrawal.
On death of a depositor, the account can be continued by other joint

holders if they desire to do so. However, the limit on the holding will
apply to each individual surviving account holder. The excess amount, if
any shall be withdrawn.
! !55
Deposits in multiples of ` 1000 up to ` 3 lakh in the case of joint
accounts are accepted provided at any given time the deposits in all the
accounts taken together shall not exceed these limits. The share of the
individuals in the joint accounts, considering they are equal, has to be
added to the single holding for arriving at the permitted limit.
Date of deposit shall be the date of encashment of the cheque or demand

draft.
A depositor having an SB account at the same branch can give standing

instructions for automatic transfer of interest to his account.
If the interest payable every month is not claimed by the depositor, no

overdue interest is paid.
Interest on overdue accounts will be allowed for a maximum period of 2

years subject to the conditions applicable for NSC accounts.
8.5 SENIOR CITIZENS SAVING SCHEME
The Senior Citizens Saving Scheme (POSCSS) was launched on 2.8.2004

and it replaced the Varishta Bhima Yogana of LIC. It is based on a
similar structure as its predecessor.
A POSCSS can be opened at post offices offering savings bank accounts

or nationalized bank
It can be opened by a person:
who has attained the age of 60 years or above on the date of opening
of an account.
who has attained the age of 55 years or more but less than 60 and
who has retired under VRS or Special voluntary retirement scheme. On
the date of opening an account subject to the condition that account is
opened within three months of retirement.
An account may be opened by making an application in the Form-A along

with age proof, a photograph of the account holder and amount
deposited. This should be submitted along with Form-D.
! !56
The account may be opened individually or jointly with a spouse. No
other joint holder is permitted. There is no bar of the age limit of the
spouse.
NRIs are not allowed to open such accounts. If a depositor becomes an

NRI after opening such an account, the account shall continue to operate
but shall be tagged as a Non-resident account.
A depositor may operate more than one account with the condition that
deposits in all such accounts shall not exceed the maximum limit as
specified under the rules provided that more than one account shall not
be opened in the same post office during a calendar month.
A depositor may operate more than one account provided that the total
amount in all the accounts does not exceed the ` 15 lakh.
A deposit in cash is permitted if it is less than ` 1 lakh. Where payment

is made by cheque or demand draft the date of deposit shall be date of
encashment of the cheque/demand draft.
The minimum deposit should be ` 1000
Subsequent deposits should be in multiples of ` 1000.
Withdrawals are allowed after five years from the date of opening of an
account
A depositor may withdraw the deposits and close the account at any time
after the expiry of one year from the date of the account opening subject
to the following deductions:
(i) Closure of account after one year but less than two years-1% of
the deposits.
(ii)Closure of account on or after two years-1% of the deposits.
The interest that is payable is done on the deposits made in the account
shall bear interest at the rate of 9% per annum from the date of deposit.
! !57
Interest shall be payable from the date of deposit to 31st March/30th
June/30th September/31st December.
The interest earned is taxable.
The maturity amount shall be paid at be paid at the end of a period of 5

years on production of the passbook along with a filled up withdrawal
form.
Within one year of its maturity, the depositor may apply for its one-time
extension of 3 years. Irrespective of the date of application, extension
shall be deemed to have been made from the date of maturity.
A premature closure of an extended account may happen any time after

the expiry of one year from the date of extension of account without
deduction.
An account, neither closed nor extended at maturity, shall attract post

maturity interest at POSB rates existing at that juncture, up to the end of
the month preceding the month of the closure of the account.
The account shall be closed with the death of the depositor if he is a

single holder and the spouse is not a nominee. If the spouse is a
nominee, then the account will be continued even if the spouse is not 60
years of age.
In the case of a joint account, if the first holder expires, the spouse may
continue the account. But if the 2nd holder dies then the total deposits in
his own name along with the deposits in the name of the deceased
should not be more than 15 lakhs.
However, if both the spouses have separate accounts and either of them
die; the account standing in the name of the deceased depositor will be
closed. This will also be in the case if the total deposit in own name and
the deceased is well below the ` 15 lakh limit.
TDS is applicable from the first day of the SCSS. Tax that is deducted is
at 10% if interest is paid or it exceeds ` 10000.
! !58
In case the pass book is damaged or lost, a duplicate may be issued at `
10 in case it the first replacement and ` 20 if it is the subsequent one.
A depositor may apply for a transfer of his account from one branch to
another only when there is a change in the residential address. A transfer
fee for a transfer of ` 1 lakh or more will be ` 5 per 1 lakh and ` 10 for a
subsequent transfer.
Following is the list of the forms and its related purposes
FORM-A : Application for opening form

FORM-B : Post-maturity continuation
FORM-C : Nomination
FORM-D : Pay-in-Slip
FORM-E : Post-maturity extension for 3 years.
FORM-F : Claim at death of the depositor
FORM-G : Transfer of account from one post office to another
Write a note and explain in detail the operation following schemes:
1. Post Office Savings Bank Account.

2. Post Office Time Deposits.
3. Five-Year Recurring Deposit Accounts.
4. Monthly Income Schemes.
5. Senior Citizens Saving Scheme.
! !59
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !60
BHAVISHYA NIRMAN BONDS
Chapter 9
Learning Objective:
This chapter explains the features and working of Bhavishya Nirman Bonds.
Structure:

Bhavishya Nirman Bonds are issued by the National Bank for Agriculture
and Rural Development (NABARD).
These bonds are zero coupon bonds. A coupon is an interest guarantee

attached to a debt instrument. The coupon is the interest rate the holder
of the debt instrument will receive.
Zero coupon bonds have no coupon rate and therefore no interest will be
paid out. Instead they are offered at a discount to their face value. The
difference between the offer rate and the redemption rate (face value) is
the interest. This is why it is also known as a deep discount bond.
They are issued with a lock in period of 10 years. There is no call or put
option i.e., investors cannot prematurely liquidate their investments in
BNB through NABARD. However, to provide liquidity the bonds are listed
on the BSE.
These bonds are offered by NABARD every month from the 1st to the
20th. The issue price is declared by NABARD and published on the
NABARD website.
! !61
These bonds can be held either in the physical form or the dematerialised
form. The bonds held in the physical form, being negotiable instruments,
are transferable by endorsement and delivery.
These bonds however can be traded only on the demat mode.
Since the Bhavishya Nirman Bonds are issued by NABARD, they are
virtually risk free. Therefore, people looking for a long term, fixed
interest rate and risk-free option for investment should opt for these
bonds.
They are available for investment only during a fixed period each year.
They have obtained highest safety rating from CARE and CRISIL.
The income is treated as capital gains in the year of maturity. The bonds
were originally issued at ` 8,250 and the face value was ` 20,000.
Therefore in the year of maturity, the difference of ` 11,750 will be
treated as capital gains. Capital gains tax will be payable by the investor.
These bonds do not attract TDS as it is considered capital gains.
The real return, after taking into account capital gains, will be 8.51%.
They can be bought in the name of minors.
Deep discount bonds are used extensively for gifting purposes to minors
in such a way that they mature when the minor becomes a major. By this
clubbing provisions are avoided.
9.2 SELF ASSESSMENT QUESTION
1. Write a note on Bhavishya Nirman Bonds.
! !62
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !63
BANK SAVINGS ACCOUNT
Chapter 10
Learning Objective:
This chapter explains in details of how one should invest in Bank Savings
Accounts.
Structure:
10.1 Definition
10.2 Who can open a Savings Account?
10.3 Savings Account Operation
10.4 Banking Cash Transactions Tax
10.5 Passbook/Statement
10.6 Interest
10.7 Stopping Operations
10.8 Inactive or Dormant Accounts
10.9 Charges
10.10 Nomination
10.11 Transfer
10.12 Closing an Account
10.13 Organisations that can have Savings Account
! !64
10.1 DEFINITION
Savings accounts have been defined by the Reserve Bank as a deposit

account ..which is subject to the restrictions as to the number of
withdrawals as also the amounts of withdrawals permitted by the bank
during any specified period.
A savings account is meant to encourage savings and is focused on

individuals.
By opening an account an individual begins a relationship with the bank.
10.2 WHO CAN OPEN A SAVINGS ACCOUNT?
Individuals open savings accounts.
With regard to those who intend to keep balances not exceeding `

50,000 in all their accounts taken together and the total credit in all
advances taken is not expected to exceed ` 100,000, banks can open
accounts with:
Introduction from another account holder who has been subject to

full know your customer (KYC) procedure. The introducers account
must be at least six months old and satisfactorily operated.
Photograph of the person opening the account and his address must
be certified by the introducer or there must be some other acceptable
evidence of identity and address.
The customer must be made aware that if his balances exceed `

50,000 or his advances exceed ` 100,000 no further transactions will
be permitted till full KYC procedures are completed. The customer
should be made aware when either balance touches 80 per cent of
the amount permitted.
At the time of opening the account customer should be advised in a

transparent manner the requirement of maintaining minimum balance
and levying of charges if minimum balance is not maintained. Any
charge levied subsequently should be transparently made known to
all depositors in advance with one months notice.
! !65
In times of calamity like the floods in Maharashtra, the RBI permitted
banks to open accounts with:
Introduction from another account holder.
Documents of identity along with document of address (electricity bill

or ration book)
Introduction by two neighbors who have documents of identity.
Savings accounts cannot be opened in the name of government

departments except in the case of certain specified institutions such as
primary cooperative credit societies financed by the government, khadi
and village industries board and societies registered under the Societies
Registration Act 1860.
The RBI has also asked banks to make available a basic no frills
account either with nil or very low minimum balances that would make
such accounts accessible to vast sections of the population. Banks have
been asked to give wide publicity to this.
Banks may open savings bank accounts in the names of State

Government departments/bodies/agencies in respects of grants/subsidies
released for implementation of various programmes/schemes sponsored
by State Governments on production of an authorization to the bank by
the State Government certifying that the department/body has been
permitted to open a savings account.
10.3 SAVINGS ACCOUNTS OPERATION
If an individual has cash/cheques which he wishes to deposit into his

account. To do so the details are entered in a paying in book/slip and
then the book/slip along with the cheques/cash is handed over to the
teller.
The teller verifies the amount and stamps the customers copy confirming
receipt.
! !66
The Reserve Bank has stated that no bank should refuse an
acknowledgement if the customer makes a deposit at the counters of the
bank.
Customers can also deposit cheques/cash in drop boxes/ATMs but they

do so at their risk as they would not receive a confirmation of the
deposit.
Both the drop box facility and the facility for acknowledgement of
cheques at regular collection counters should be available to customers.
The customer has to be made aware that he has the option of dropping
cheques in the drop box or tendering them at the counters. Banks have
to display on the drop box a sign stating Customers can also tender
the cheques at the counter and obtain acknowledgement on the
pay in slips.
There is no restriction on the amount that may be deposited in a savings

account.
Third party cheques may not be deposited in savings accounts.
Customers make withdrawals from the account by drawing cheques (or

withdrawal slips if they do not have a cheque book).
The banker will compare the signature on the cheque, the amount,
whether the customer has sufficient balance and the date. If all are in
order payment will be made.
With regard to customers who are too ill to sign a cheque or cannot be
physically present they can put their thumb impression or a mark on the
cheque and this must be identified by two independent witnesses known
to the bank.
There are restrictions on the number of withdrawals that may be made in

a period. This number varies from bank to bank.
If the number of transactions is more than that permitted, a service

charge is levied for every transaction that exceeds the permitted number.
! !67
10.4 BANKING CASH TRANSACTIONS TAX
Banking cash transactions tax is not payable in the case of savings

accounts.
Cheque book
When a cheque book is exhausted, the customer should fill in a cheque

requisition form (contained in the cheque book) and hand it to the bank.
Normally banks send new cheque books to customers by courier. The RBI
has stated that cheque books should be handed over to customers/their
representatives at the branch of the bank where they bank if they want it
given to them at the bank.
10.5 PASSBOOK STATEMENT
Banks either give customers a passbook which details their account or at

the end of a month send their customers a statement of their account
with the bank.
The Reserve Bank has stated that entries on statements/passbooks

should not be inscrutable and that brief, intelligible particulars must be
entered.
The passbook/statement must have the full address of the branch and
telephone number.
Banks must offer pass book facility to all its customers. In case
statements are offered and the customer chooses statements, then
statements must be issued monthly.
The cost of providing passbooks statements must be borne by the bank.
10.6 INTEREST
Interest is paid on these accounts as it is intended to encourage savings.
! !68
The Reserve Bank stipulates the interest that may be paid on these
accounts. It is currently 3% per annum. The Governor of the Reserve
Bank has stated that this may be deregulated as it is unfair to pay
interest at a rate lower than the rate of inflation.
Interest is normally payable at quarterly or longer rests. Interest should

be rounded to the nearest rupee.
Interest is calculated on the lowest balance in the savings account

between the 10th and the end of the month.
Interest is credited only if it is one rupee or more.
Scheduled banks with deposits of less than ` 25 crores are permitted to

give, at their discretion, an additional %.
Banks are permitted to pay their employees an additional 1% interest.

This is subject to a declaration from the employee that the money
belongs to him. If the account is in the name of the employees child, the
additional interest cannot be paid as the money is that of the child and
does not belong to the employee. Furthermore, additional interest
admissible to banks staff cannot be paid on the compensation awarded
by the court to a minor child and deposited in the joint names of the
minor child and parent (as the money belongs to the minor child).
Additional interest of 1% is also payable to retired employees (but not

those who have resigned) and the spouse of a deceased retired
employee.
Additional interest of 1% per annum may be paid to an association or

fund whose members are employees of the bank.
Additional interest of 1% per annum may also be paid to the chairman

and executive director of the bank during their tenure.
All transactions including the payment of interest should be rounded off

to the nearest rupee.
! !69
If interest over ` 10,000 is paid, tax must be deducted at source. Tax
need not deducted if the depositor files form 15H or 15G or a certificate
under section 197(1) of the Income Tax Act, 1961.
Regional rural banks/local area banks may allow additional interest of

% per annum on saving deposits. The RBI does not however encourage
the practice of paying more interest than that paid by commercial banks.
10.7 STOPPING OPERATIONS
Operations in an account will be stopped:
On receipt of notice of death of a customer;

On receipt of notice of the insanity of a customer;
On being advised that the customer is insolvent;
On receipt of a garnishee order from the court;
On receipt of notice of assignment of the credit balance in the
account of a customer to a third party
10.8 INACTIVE AND DORMANT ACCOUNTS
If there has been no customer initiated transaction for one year, the
account is classified as an inactive account.
If there has been no customer initiated transaction in the account for two
years the account will be designated a dormant account. In some banks
an account is designated dormant if there are no customer generated
transactions for six months.
These accounts are subject to greater checks as they are susceptible to

fraud.
These are of two types with very little balance and with a substantial
balance. It is the latter that is susceptible to fraud. Where the balance is
minimal, the amount automatically gets wiped out by the bank levying
charges for non maintenance of the required balance.
Banks have a right to freeze these accounts. These are unfrozen only
after the account holder asks for it to be activated.
! !70
10.9 CHARGES
Banks often insist on a minimum average quarterly balance to be

maintained in the account. If the balance is not maintained a service
charge is levied.
At the time of opening account, banks must advise customers of the

requirement of maintaining minimum balance and levying of charges if
the minimum balance is not maintained.
Clients must be advised of any changes in charges atleast a month in

advance.
10.10 NOMINATION
Nomination facility exists.
10.11 TRANSFER
Depositors of senior citizens saving schemes may transfer the account

from one deposit office to another on payment of a transfer fee (` 5 per
lakh for first transfer and ` 10 per lakh for second transfer). The fee
received is to be credited to government.
10.12 CLOSING AN ACCOUNT
To close an account all the account holders should write to the bank
stating their intent to close the account. They must also submit all
unused cheques to the bank.
The bank usually asks the account holder/s to sign one cheque in blank.
This is the demand by the account holder for the balance in his account.
The bank may also request the customer to close his account if:
The customer is no longer a desirable person.
The account has not been operated for a long time.
! !71
If a customer cannot be traced, the balance is placed in an unclaimed
deposits account.
If a statement or correspondence sent to the customer is returned, the

balance should be transferred to a dormant account (to keep a check on
the account) or in some other watch account.
10.13 ORGANIZATIONS THAT CAN HAVE SAVINGS

ACCOUNT
1. Primary Cooperative Credit Society financed by bank.
2. Khadi and Village Industries Boards.
3. Agriculture Produce Market Committees.
4. Societies registered under the Societies Registration Act, 1860 or any

other corresponding law in force in State or a Union Territory.
5. Companies governed by the Companies Act, 1956 which have been

licensed by the Central Government under section 25 of the Act or
under the corresponding provision in the Indian Companies Act, 1913
and permitted not to add to their names the words Limited or the
words Private Ltd.
6. Institutions whose entire income is exempt from payment of income

tax.
7. Government departments/bodies/agencies in respect of grants subsidies

released.
8. Organizations involved in the development of women and children in

rural areas.
9. Self help groups engaged in promoting savings habits among their

members.
10.Farmers Clubs - Vikas Volunteer Vahini.
! !72
1. Define a Bank Savings Account.
2. Who can open a Bank Savings Account?
3. What are the mandatory conditions to fulfill to open a savings account?
4. How do Savings Accounts operate?
5. What are the tax benefits on investment in Bank Saving Accounts?
6. What and how is the interest earned on saving accounts?
7. Under what circumstances will the account stop from being operated?
8. What are inactive or dormant accounts? How are they treated?
9. How does one close an account?
10.Who are the agencies that can open a Bank Saving Account?
! !73
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !74
BANK FIXED DEPOSIT ACCOUNT
Chapter 11
Learning Objective:
This chapter explains in details of how one should invest in Bank Fixed
Deposit Accounts.
Structure:
11.1 Definition
11.2 Who can open a Fixed Deposit Account?
11.3 Interest
11.4 Tax Deduction
11.5 Operation
11.6 Nomination
11.7 Early Withdrawal
11.8 Renewal
11.9 Maturity
11.10 Renewal of Overdue Deposits
11.11 Advance on Fixed Deposits
11.12 Joint Holdings
11.13 Loss of Fixed Deposit Receipt
11.14 Repayment
11.15 Banking Cash Transactions Tax
11.16 Conversion of Term Deposit
11.17 Recurring Deposit
11.18 Reinvestment Deposit
11.19 Deposit Schemes with Lock-In Period
! !75
11.1 DEFINITION
A fixed or time deposit is defined by the Reserve Bank as a deposit

received by a bank for a fixed period and which is withdrawable
only after the expiry of the said fixed period and shall also include
deposits such as recurring, cumulative, annuity, reinvestment
deposits, cash certificates and so on.
In short, fixed deposits are:
Placed with the bank for a fixed period

It is repayable on the expiry of that period
The rates offered on these are higher than on savings accounts as
the banker knows in advance when repayment has to be made
A variation is the notice deposit which is a term deposit for a
specific period but withdrawable on giving at least one complete
days notice
Pre-liberalization (prior to 1992) the Reserve Bank stipulated the rates

banks may offer customers. Now banks are permitted to fix their own
rates on fixed deposits of different maturities.
Changes in rates are to be decided by the board of directors or a body/

group authorized by the board.
Banks must disclose in advance the schedule of interest rates that they
offer on deposits.
The minimum period a fixed deposit may be placed is 7 days.
The maximum period a deposit may be placed is 120 months (IBA Code
for Banking Practices). Banks can accept deposits for a longer period if
ordered to do so by the courts (such as in the case of minors who have
more than 10 years to become majors). It is unusual for deposits to be
placed for more than 5 years.
Banks have been permitted to formulate fixed deposit schemes for

resident Indian senior citizens offering higher and fixed rates of interest
as compared to normal deposits of any size. These schemes should
! !76
incorporate simplified procedures for automatic transfer of deposits to
nominees in the event of death.
11.2 WHO CAN OPEN A FIXED DEPOSIT ACCOUNT?
Those who have funds in hand open fixed deposits. These include:
Individuals;
Sole Proprietorships;
Hindu Undivided Families (HUF);
Partnerships;
Trusts;
Associations/Societies and Clubs;
Limited Companies.
11.3 INTEREST
Interest is paid on fixed deposits placed with banks.
Banks are free to determine the rate of interest that may be paid on
fixed deposits. The rates must be approved by the board or a body to
whom the board has delegated this responsibility to.
Banks may offer deposits on a floating rate. These must be clearly linked
to an anchor rate. RBI stipulates that to offer transparency banks should
not use internal or derived rates while offering floating rate deposit
products. Only market based rupee bench mark rates which are directly
observable and transparent to the customer should be used by banks for
pricing their floating rate deposits.
Interest should be paid at quarterly or longer rests. Interest is normally

paid on the maturity of the deposit.
Interest can be paid monthly by discounting the quarterly interest. This is

done in the case of monthly deposit schemes.
Interest is calculated on the daily balance.
! !77
On deposits of less than 3 months or where the quarter is incomplete,
interest should be paid on the number of days reckoning the year at 365
days.
In leap years some banks have calculated interest on 366 days. The
Reserve Bank, in this instance, leaves it to the bank to determine how
interest is to be calculated.
Banks should provide information to depositors on the method of

calculation of interest while accepting deposits and display this at their
branches.
Interest is credited only if it is one rupee or more.
No bank can discriminate in the matter of interest paid on deposits

between one deposit and another, accepted on the same date and for the
same maturity, whether such deposits are accepted at the same office or
at different offices of the bank except in respect of fixed deposit schemes
specifically for resident Indian senior citizens or single deposits of ` 15
lakhs and above on which varying rates of interest may be permitted on
the basis of the size of the deposit.
Differential rate of interest can be paid on a single term deposit of ` 15

lakhs and above but not on the aggregate of individual deposits where
the total exceeds ` 15 lakhs.
Scheduled banks with deposits of less than ` 25 crores are permitted to

give, at their discretion, an additional %.
Banks are permitted to pay their employees an additional 1% interest.

This is subject to a declaration from the employee that the money
belongs to him. If the deposit is in the name of a child of the employee
additional interest cannot be paid on that deposit as it is not the money
of the employee. Furthermore, additional interest admissible to banks
staff cannot be paid on the compensation awarded by the court to a
minor child and deposited in the joint names of the minor child and
parent (as the money belongs to the minor child).
! !78
Additional interest of 1% is also payable to retired employees (but not
those who have resigned) and the spouse of a deceased retired
employee.
Additional interest of 1% per annum may be paid to an association or

fund whose members are employees of the bank.
Additional interest of 1% per annum may also be paid to the chairman

and executive director of the bank during their tenure.
All transactions including the payment of interest should be rounded off

to the nearest rupee.
The Reserve Bank permits banks to offer senior citizens a higher rate of
interest on their deposits.
If the deposit matures on a Sunday/holiday/non-working day, the bank

should pay interest atthe originally contracted rate on the deposit
amount for the Sunday/ holiday/non-business day. The deposit would be
paid on the succeeding working day.
Public sector banks may pay additional interest of 1.28% per annum over
the normal rate of interest on deposits over 2 years to Army Group
Insurance Directorate (AGID), Naval Group Insurance Fund (NGIF) and
Air Force Group Insurance Society (AFGIS) if these deposits are not
linked with payment of insurance premia by the banks.
11.4 TAX DEDUCTION
Banks are to deduct tax at source on interest paid in excess of ` 10,000

per annum to any depositor. This is not per deposit but per individual.
Therefore if an individual has 5 deposits and the aggregate interest
earned on these is ` 15,000 though in each individual deposit, interest
does not exceed ` 10,000, tax must be deducted at source.
Tax need not be deducted if the depositor files Form 15H or 15G or a
certificate under section 197(1) of the Income Tax Act, 1961.
! !79
If the deposit is for 5 years or more, the deposit is eligible for deduction
from taxable income upto the limit (along with other eligible
investments) under Section 80C of the Income Tax Act
11.5 OPERATION
On opening a fixed deposit account, the bank must issue a fixed deposit
that states on its face:
The date of issue;

The due date;
The amount;
The rate of interest;
The period of the deposit; and
The amount at maturity
11.6 NOMINATION
Nomination facility exists.
11.7 EARLY WITHDRAWAL
Sometimes a customer may want to encash his deposit before maturity.
In that case, the customer would have to request the bank to do so.
Banks should permit early withdrawal. Banks have freedom to determine

its own penal interest for premature withdrawal. Banks must ensure
depositors are aware of the applicable penal rate along with the deposit
rate.
The Reserve Bank states that penal interest should not be charged if the
deposit is reinvested in a fresh deposit immediately.
The rate of interest that will be paid is the rate for the period the deposit
has been with the bank.
! !80
Banks may, at their discretion, disallow premature withdrawal of large
deposits held by entities other than individuals and HUFs if such
depositors have been so advised at the time the account was opened.
11.8 RENEWAL
Deposits are renewed on maturity on the request of the depositor.
Deposits may be renewed before maturity provided:
It is renewed before the date of maturity and
The period of renewal is longer than the remaining period of the

original deposit.
Interest on renewal will be:
On the original deposit at the rate applicable to the period for which
the deposit has actually run
Interest for the period from the date of renewal will be allowed at
the rate prevailing on the date of renewal.
11.9 MATURITY
The deposit matures at the end of the period it has been placed for.
On maturity, the depositor must instruct the bank to renew the deposit.
The bank cannot do so on its own.
The depositor if he does not want to renew the deposit can ask for it to
be paid to him either by a cheque/draft or credited to an account he has.
This instruction would normally be in the account opening instructions.
On maturity, with regard to an either or survivor deposit either party can,

on surrendering the deposit receipt ask for payment (DV Sheth vs.
Cosmos Co-operative Bank).
! !81
If the depositor does not renew or claim the deposit on maturity, the
deposit will be designated as an overdue deposit in the books of the
bank.
The bank cannot close the deposit and repay the depositor if the
depositor does not make a demand.
If the deposit matures on a Sunday/holiday/non-working day, the bank

should pay interest at the originally contracted rate on the deposit
amount for the Sunday/ holiday/non-business day. The deposit would be
paid on the succeeding working day.
11.10 RENEWAL OF OVERDUE DEPOSITS
All aspects concerning renewal of overdue deposits may be decided by

banks laying down a transparent policy which is non-discretionary and
nondiscriminatory. This should be notified to customer at time of opening
account.
Banks may renew deposits at an interest rate prevailing on the date of

maturity provided the depositor approaches the bank within 14 days
from the date of maturity of the deposit.
If the application for renewal is made after 14 days the rate of interest
should be the rate prevailing on the date of renewal of deposit.
Banks are free to determine the rate of interest between the date of
maturity and the date of renewal.
The policy on all aspects of renewal of over due interest are to be

decided by the respective boards of banks. This policy must be non-
discretionary and nondiscriminatory.
11.11 ADVANCE ON FIXED DEPOSITS
Banks may grant loans on the security of the fixed deposit.
The decision in regard to margin is left to the discretion of individual

bank.
! !82
Banks are free to charge a rate of interest without reference to its prime
lending rate (BPLR) if the advance is given and the deposit is in the name
of the borrower (singly or jointly), one of the partners of a firm and the
loan is to the firm, the proprietor of a proprietary concern, a ward whose
guardian is borrowing on behalf of the ward. If the term deposit is
withdrawn before completion of the prescribed minimum maturity period
it should not be treated as an advance against the term deposit and
interest should be charged at the rates prescribed by the RBI.
On advances given on the security of fixed deposits to third parties upto

` 2 lakhs banks can charge interest without reference to its BPLR. If it
exceeds ` 2 lakhs it should be at the rates prescribed by the RBI.
All transactions should be rounded to the nearest rupee. Fractions of 50

paise and above are to be rounded up and fractions below 50 paise
should be rounded down.
Cheques issued by customers containing fractions of a rupee should not

be rejected or dishonored.
11.12 JOINT HOLDINGS
Fixed deposits may be in the joint names of two or more persons.
If one of the joint depositors requests for premature withdrawal, it should

be done only after getting the consent of the other depositors.
If one joint depositor wants a loan against a fixed deposit, it should be

given only after all the other joint holders have signed the request.
No one joint depositors request should be entertained. All the joint

holders must sign all requests.
The question arose on whether, on the maturity of a fixed deposit, a joint

holder can ask for the proceeds to be given to him if he submits all the
deposit receipts. The Maharashtra State Consumer Disputes Redressal
Commission held that the bank in question (Cosmos Cooperative Bank)
has no right to withhold payment when the complainant had produced
all the original fixed deposit receipts. It was also noted that when fixed
deposits are issued with either or survivor clause instructions given by
! !83
one of the joint holders will not hold good. The bank is not concerned
with the disputes between the joint holders. It has to make payment on
maturity of the FDR to the person tendering it with a valid signature. In
this case the FD had matured in 1997 but the complaint was lodged in
2002. The commission ordered the bank to pay the aggrieved party
interest at 14% for the intervening period.
11.13 LOSS OF FIXED DEPOSIT RECEIPT
A fixed deposit receipt is not negotiable nor is it transferable.
If the receipt is lost, customers will ask for a duplicate. This is because
banks insist on fixed deposit receipts to be discharged and surrendered
before payment is affected.
Therefore to issue a duplicate, all the holders should request for a

duplicate receipt in writing and execute a letter of indemnity. A note
must also be made in the banks records that a duplicate has been
issued.
11.14 REPAYMENT
Repayment must be by an account payee cheque if the deposit with

interest is ` 20,000 or more. Repayment can also be made by crediting
the current/savings account of the depositor.
Repayment of interest or principal must not be made to the account of

another person.
Repayment is usually made in the name of the first named person.
11.15 BANKING CASH TRANSACTIONS TAX
If an individual or a Hindu undivided family withdraws ` 50,000 or more

in one day in cash, banking cash transactions tax is payable. In the case
of companies and other bodies, the tax is payable if the withdrawal is `
100,000 or more in cash from an account. However, if the repayment is
to a bank account or by a demand draft, this tax is not payable.
! !84
11.16 CONVERSION OF TERM DEPOSIT
Banks should allow conversion of a term deposit, a deposit in the form of

a daily deposit or recurring deposit to allow depositor to immediately
reinvest to amount lying in the deposit with the same bank in another
term deposit.
Interest should be paid on the term deposit without reducing the interest
by any penalty provided the deposit remains with the bank after
reinvestment for a period longer than the remaining period of the original
contract.
11.17 RECURRING DEPOSIT
A variant is the recurring deposit or cumulative deposit.
Its intent is to inculcate the habit of saving.
Depositors can save a recurring amount every month for the period
selected.
If the depositor closes his account within three months no interest is

paid.
11.18 REINVESTMENT DEPOSIT
Deposits where interest (as and when due) is reinvested at the same
contracted rate till maturity. This interest is withdrawable with the
principal amount on maturity.
11.19 DEPOSIT SCHEMES WITH LOCK-IN PERIOD
Deposits with lock in periods (when premature withdrawal is not

permitted during the lock in period) is not permitted. In these deposits
interest is not paid if premature withdrawal (for some reason) takes
place. Rates of interest in these deposits are not in tune with rates on
normal deposits.
! !85
1. Define a Bank Fixed Deposit Account.
2. Who can open a Bank Fixed Deposit Account?
3. How do Bank Fixed Deposit Accounts operate?
4. What are the tax benefits on investment in Bank Fixed Deposit Account?
5. What and how is the interest earned on saving accounts? What if an

early withdrawal takes place? How is interest calculated?
6. Write a short note on renewal of fixed deposit accounts before maturity

and renewal after maturity.
7. How is advance treated on Bank Fixed Deposit Accounts?
8. How are joint holdings on fixed deposits treated?
9. What are recurring deposits?
10.How are term deposits converted?
! !86
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
! !87
BANK SENIOR CITIZENS SAVINGS SCHEME
Chapter 12
Learning Objective:
This chapter gives details of investment in Bank Senior Citizens Savings

Scheme.
Structure:
12.1 Eligibility
12.2 Tenure
12.3 Interest and Tax
12.4 Investment
12.5 Other Features
12.6 Nomination
12.7 Death of Account Holder
12.8 Loans
12.9 Premature Withdrawal
12.10 Account Opened in Contravention of the SCSS Rules
Bank senior citizen scheme is for senior citizens and offers them a higher
rate of interest.
! !88
12.1 ELIGIBILITY
The senior citizen scheme is for elderly citizens. Minimum eligible age for
investment is 60 years (55 years for those who have retired on
superannuation or under a voluntary or special voluntary scheme). The
retired personnel of Defence Services (excluding Civilian Defence
Employees) shall be eligible to subscribe under the scheme irrespective
of the age limit of 60 years subject to the fulfillment of other specified
conditions.
Retirement benefits for the purpose of SCSS Rules have been defined as
any payment due to the depositor on account of retirement whether on
superannuation or otherwise and includes Provident Fund dues,
retirement/superannuation gratuity, commuted value of pension, cash
equivalent of leave, savings element of Group Savings linked Insurance
scheme payable by employer to the employee on retirement, retirement-
cum-withdrawal benefit under the Employees Family Pension Scheme
and ex-gratia payments under a voluntary retirement scheme (Rule 2
(a) of the Senior Citizens Savings Scheme (Amendment) Rules, 2004
notified on October 27, 2004)
In case an investor has attained the age of 60 years and above, the
source of amount being invested is immaterial. However, if the investor is
55 years or above but below 60 years and has retired under a voluntary
scheme or a special voluntary scheme or has retired from the defence
services, only the retirement benefits can be invested in the SCSS.
If the investor is 60 years and above, there is no time period prescribed

for opening the SCSS account(s). However for those below 60 years, the
time period prescribed are:
Persons who have attained the age of 55 years or more but less than
60 years and who retired under a voluntary retirement scheme or a
special voluntary retirement scheme on the date of opening of an
account under these rules, subject to the condition that the account is
opened by such individual within three months of the date of
retirement.
Persons who have retired at any time before the commencement of

these rules and attained the age of 55 years or more on the date of
! !89
opening of an account under these rules, shall also be eligible to
subscribe under the scheme within a period of one month of the date
of this notification (27th October 2004), subject to fulfillment of other
conditions
The retired personnel of Defence Services (excluding Civilian Defence

Employees) shall be eligible to subscribe under the scheme
irrespective of the above age limits subject to the fulfillment of other
specified conditions
Non resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu
Undivided Family (HUF) are not eligible to invest in the accounts under
the SCSS, 2004. If a depositor becomes a Non-resident Indian
subsequent to his opening the account and during the currency of the
account under the SCSS Rules, the account may be allowed to continue
till maturity, on a non-repatriation basis and the account shall be marked
as a Non-Resident account.
12.2 TENURE
The tenure of the scheme is 5 years which can be extended by 3 more

years.
The deposit can be prematurely withdrawn after one year of holding but
with penalty
12.3 INTEREST AND TAX
Rate of interest on these is usually per cent per annum higher than
the interest paid to those who are not senior citizens.
The frequency of computing interest is quarterly
Interest is fully taxable. Tax is deductible at source if interest exceeds `

10,000. To avoid this a declaration in Form 15H (person above the age of
65) or Form 15G (a person below the age of 65) or a certificate from the
assessing officer under section 197(1) of the Income Tax Act would need
to be filed stating no tax is payable.
! !90
The Finance Act 2008 has added deposits to this scheme in the basket of
tax saving instruments under Section 80C of the Income Tax Act.
12.4 INVESTMENT
The investment has to be in multiples of 1000.

The maximum investment limit is 15 lakh
12.5 OTHER FEATURES
The deposit (as it is specifically for senior citizens) is not transferable to

others
Accounts can be held both in single and joint holding modes. Joint
holding is allowed but only with spouse. The spouse need not be a senior
citizen.
The whole amount of investment in an account under the scheme is

attributed to the first applicant/depositor only. Therefore the question of
any share of the second applicant/joint account holder (i.e. spouse) in
the deposit in the account, does not arise.
If the spouses are senior citizens both the spouses can open individual
and/or joint accounts with each other with the maximum deposits upto `
15 lakh each, provided both are individually eligible to invest under
relevant provisions of the Rules governing the scheme.
A senior citizen can get application forms from post offices and
designated branches of banks.
Transfer of account from one deposit office to another in case of change

of residence is permitted. If the deposit amount is rupees one lakh or
above, a transfer fee of rupees five per lakh of deposit for the first
transfer and rupees ten per lakh of deposit for the second and
subsequent transfers is payable.
The rule that a depositor cannot open more than one account in the
same month at the same office in has been removed. In May 2007, the
Government regularized multiple accounts opened at the same branch by
merging the accounts subject to the provision that deposits under the
! !91
merged accounts shall not earn any interest for the period from the
opening of the first account to the date of opening of the second/
subsequent irregular account which would have been merged with the
first account.
NRIs and persons having dual citizenship (Indian and other) can be
nominees under the scheme. However, if the depositor dies, they can
neither continue the account nor can they repatriate the proceeds of the
account.
12.6 NOMINATION
Nomination facility is available on these deposits.
The depositor may, at the time of opening of the account, nominate a

person or persons who, in the event of death of the depositor, shall be
entitled to payment due on the account
Nomination may be made by the depositor at any time after the opening
of the account but before its closure.
The nomination made by the depositor may be cancelled or varied by

submitting a fresh nomination at the deposit office where the account is
being maintained
Nomination can be made in joint account also. In such a case, the joint
holder will be the first person entitled to receive the amount payable in
the event of death of the depositor. The nominees claim shall arise only
after the death of both the joint holders.
A person holding the Power of Attorney cannot sign for the nominee in
the nomination form.
No fee has been prescribed for nomination and/or change/cancellation of

nomination(s) in the accounts under the SCSS, 2004.
! !92
12.7 DEATH OF ACCOUNT HOLDER
In case of a joint account, if the first holder/depositor expires before the

maturity of the account, the spouse may continue the account on the
same terms and conditions as specified under the SCSS Rules. However,
if the second holder i.e., spouse has his/her own individual account, the
aggregate of his/her individual account and the deposit amount in the
joint account of the deceased spouse should not be more than the
prescribed maximum limit. In case the maximum limit is breached, then
the remaining amount shall be refunded, so that the aggregate of the
individual account and deceased spouses joint account is maintained at
the maximum limit
If both the spouses have opened separate accounts under the scheme
and either of the spouses dies during the currency of the account(s), the
account(s) standing in the name of the of the deceased depositor/spouse
shall not be continued and such account(s) shall be closed.
12.8 LOANS
The facility of pledging the deposit/account under the SCSS, 2004 for
obtaining loans, has not been permitted since the account holder will not
be able to withdraw the interest amount periodically, defeating the very
purpose of the scheme.
12.9 PREMATURE WITHDRAWAL
Premature withdrawal/closure of the deposits from the accounts under

the SCSS, 2004 has been permitted after completion of one year from
the date of opening of the account after deducting the penalty amount as
given below:
If the account is closed after one year but before expiry of two years
from the date of opening of the account, an amount equal to one and
half per cent of the deposit amount shall be deducted.
If the account is closed on or after the expiry of one year from the date
of opening of the account, an amount equal to one per cent of the
deposit shall be deducted
! !93
However, if the depositor is availing the facility of account under Rule

4(3), then he can withdraw the deposit and close the account at any time
after the expiry of one year from the date of extension of the account
without any deduction.
Under Rule 9(1)(a)(b) penalty amount has to be deducted from the
amount of the deposit at the time of premature withdrawal. This is
deducted from the principal amount. Interest at the rate of 9% has to be
calculated on the total amount of the deposit till the date of premature
closure.
If the depositor dies before the maturity of the deposit and the nominee/
legal heir approaches the bank for closure of the deposit, the nominee/
legal heir is entitled to the savings bank rate from the date of death of
the depositor to the closure of the account.
12.10 ACCOUNT OPENED IN CONTRAVENTION OF THE

SCSS RULES
If an account has been opened in contravention of the SCSS Rules, the

account shall be closed immediately and the deposit in the account, after
deduction of the interest, if any, paid on such deposit, shall be refunded
to the depositor.
! !94
1. What is a Bank Senior Citizens Savings Scheme?
2. Who is eligible to open a Bank Senior Citizens Savings Account?
3. Write a note on how is interest earned and tax paid on Senior Citizens
Savings Accounts?
4. State some features of BSCSS.
5. What are the nomination facilities available in the above scheme?
6. What happens in the eventuality of death of an account holder?
7. Write a short note on premature withdrawal of money in this account.
8. How are loans treated on BSCSS?
9. How is the account treated if it is opened in contravention of the SCSS

Rules?
! !95
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !96
COMPANY FIXED DEPOSITS
Chapter 13
Learning Objective:
This chapter talks of investment in Company Fixed Deposits.
Structure:

Companies and Non-Banking Finance Companies (NBFC) accept fixed

deposits from investors. They usually offer better rates than banks. This is
because they are not as safe as bank deposits. To protect investors
(depositors), several rules have been introduced.
Penalties for non-compliance of the Companies Act 1956 have increased 10

fold.
Offences relating to the acceptance of deposit would be made cognizable

under the Criminal Procedure Code.
Investor Education and Protection Fund (awareness and protection of

investors) Rules, 2001 has been introduced
A director of a company which has defaulted on its interest or repayment

of capital is debarred from being on the board of any other company.
Where a company has defaulted, it shall not accept or renew any deposits,
make any loans or give nay guarantee or invest in the share of any other
corporate body till the default is made good.
! !97
A penal rate of interest of 18% shall be paid for the overdue period in the
case of public deposits matured and claimed but remained unpaid.
No non-banking financial company shall commence or carry on the

business without obtaining a certificate of registration with the RBI and
having the net owned fund of less than ` 1 crore.
Credit rating is important. Investing in a highly rated instrument is safe but

not sufficient. There are instances where the issuer has got rated by
different agencies but chooses to publish only the higher ones.
Registration with the RBI is imperative.
Maximum brokerage paid can be term up to one year, 1 per cent;

between 1-2 years, 1.5 per cent and 2 per cent above 2 years. Brokers
play a major role in deciding the investment mix of their clients. This is the
main reasons why insurance companies offer hefty commissions.
A depositor may make a nomination at any time under the provisions of

Section 109A and 109B of the Companies Act.
A company is required to file an audited return with the Registrar of

Companies with a copy to the RBI on or before the 30th June every year
containing information as on 31st March that year.
It is mandatory for all the cheques to bear the account numbers and
address of the bank branch of the depositor, ensuring no loss in transit.
The ceiling on the interest payable on public deposits is 11 per cent pa.
Companies that accept public deposits are of 3 types
NBFC: A Non-banking Financial Company is one that is registered under

the Companies Act, 1956 and is engaged in the business of loans and
advances, shares, stocks, bonds, debentures, securities issued by
Government or local authority or other securities of the like with the
same marketing nature, leasing, hire and purchase, insurance business
and chit business but does not include any institutions whose principal
business is that of agriculture, industry and immovable property.
! !98
RNBC: Residuary Non-banking Company is a class of NBFC which
receives deposits as its principal business and is not an investment,
leasing, hiring or loan Company. Their method of mobilization of deposits
and requirement of deployment of depositors funds is different from that
of NBFCs, RNBCs are required to invest 80 per cent of their deposit in the
prescribed categories stipulated by the RBI and the remaining 20 per
cent at their discretion. The RNBCs usually raise deposit through various
schemes either as fixed tenure, or recurring or daily deposits.
MNBC: Miscellaneous Non-Banking Financial Company deals with chit

funds or kuri. These are riskiest of all and not worth any consideration by
a serious investor.
An NBFC or MNBC is not permitted to repay any public deposit or grant any
loan against such deposit within 3 months from the date of acceptance.
The corresponding period for an RNBC is 12 months.
In the event of the death of a depositor, repayment may be done to the

surviving holder in the case of joint holding with either or survivor clause,
or to the nominee or the legal heir/s.
After the lock-in, unless the existing contracts confer the right for
premature withdrawal, the premature repayment is solely at the discretion
of the company. The problem-companies are prohibited from making
premature repayment, but in the case of tiny deposits (up to ` 10000) pay
or grant a loan against the principal sum for meeting expenses.
After the lock-in period of 6 months, in the case of NBFC and MNBC and of
12 months in the case of RNBC during which no interest is payable, interest
payable shall be 2 per cent lower than the interest rate applicable for the
period for which the deposit has run or if no rate has been specified for
that period, then 3 per cent lower than the minimum rate at which the
deposits are accepted.
Companies shall intimate their depositors at least 2 months in advance to

ensure that the mature deposits do not remain idle with the company.
! !99
1. What are Company Fixed Deposit Accounts?
2. Who can invest in a Company Fixed Deposit Account?
3. What are the types of public deposits that companies accept?
4. In the eventuality of death of the account holder how is the deposit

treated?
! !100
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !101
DEPOSIT SCHEME FOR RETIRING GOVERNMENT EMPLOYEES
Chapter 14
DEPOSIT SCHEME FOR RETIRING
GOVERNMENT EMPLOYEES
Learning Objective:
The chapter explains the deposit scheme opened for retiring Government
employees.
Structure:

14.2 Self Assessment Question
The scheme is open to retired central and state governments employees

and retired judges of the Supreme Court and High Courts.
The account can be opened at designated branches of nationalized

banks.
Investment should be a minimum ` 1000/- and in multiple thereof. The

maximum should not exceed the total retirement benefits.
Retirement benefits in this context means:
Balance at the credit of the employee in any of the Government

Provident Fund.
Retirement/superannuation gratuity.
Commuted value of pension.
Cash equivalent of leave.
Savings element of Government insurance scheme payable to the
employee on retirement.
! !102
Interest rate is 7 per cent per annum payable half yearly on 30th June
and 31st December.
Interest earned is completely tax free.
The amount deposited is free from wealth tax.
Only one account can be opened by Retired Central/State Govt.

employee in his own name or jointly with the spouse.
The account can be opened within three months from the date of
receiving the retirement benefits.
Entire balance or part thereof can be withdrawn after the expiry of 3

years from the date of deposit (account matures for closure after three
years).
The account can be continued with the whole or a part of the deposits
after maturity.
Only one withdrawal in multiples of ` 1000/- can be made in a calendar

year. Premature encashment can be made after one year from the date
of deposit but before the expiry of 3 years in which case the interest on
the amount so withdrawn will be payable at 4% from the date of deposit
up to the date of withdrawal.
The excess interest paid will be adjusted at the time of such withdrawal.
1. Write a short note on Deposit Scheme for Retiring Government

Employees.
! !103
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !104
DEPOSIT SCHEME FOR RETIRING PUBLIC SECTOR EMPLOYEES
Chapter 15
DEPOSIT SCHEME FOR RETIRING PUBLIC
SECTOR EMPLOYEES
Learning Objective:
The chapter explains the deposit scheme opened for retiring Public Sector
employees.
Structure:

The scheme is open to retired/retiring employees of public sector

undertakings, institutions and corporations.
The account can be opened at designated branches of nationalized

banks.
Investment should be a minimum ` 1000/- and in multiple thereof. The

maximum should not exceed the total retirement benefits.
Retirement benefits in this context means:
Balance at the credit of the employee in any of the Government

Provident Fund.
Retirement/superannuation gratuity.
Commuted value of pension.
Cash equivalent of leave.
! !105
Savings element of Government insurance scheme payable to the
employee on retirement.
Interest Rate is 7% per annum payable half yearly on 30th June and 31st
December.
Interest earned is completely tax free.
The amount deposited is free from wealth tax.
Only one account can be opened by Retired Central/State Govt.

employee in his own name or jointly with the spouse.
The account can be opened within three months from the date of
receiving the retirement benefits.
Entire balance or part thereof can be withdrawn after the expiry of 3

years from the date of deposit (account matures for closure after three
years).
The account can be continued with the whole or a part of the deposits
after maturity.
Only one withdrawal in multiples of ` 1000/- can be made in a calendar

year. Premature encashment can be made after one year from the date
of deposit but before the expiry of 3 years in which case the interest on
the amount so withdrawn will be payable at 4 per cent from the date of
deposit upto the date of withdrawal.
The excess interest paid will be adjusted at the time of such withdrawal.
1. State the features of the deposit scheme for Retiring Public Sector
Employees.
! !106
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !107
PART - II
MUTUAL FUNDS
! !108
INTRODUCTION
Chapter 16
INTRODUCTION
Learning Objective:
This chapter introduces mutual funds
Structure:
16.1 View on What Mutual Funds will do.

16.2 Growth of Mutual Funds.
16.3 What Mutual Funds Offer?
16.4 Self Assessment Questions.
16.1 VIEW ON WHAT MUTUAL FUNDS WILL DO
The eminent economist, Dr. Freddie Mehta said just before Indias
liberalization in the early nineties, mutual funds will be the wave of the
future; and for no other reason than that it will represent an excellent
instrument for the mobilization of savings of the middle class offering, as it
does, to them the benefit of capital appreciation with the assistance of
professional management and a diversified portfolio.
These were indeed fortuitous words because shortly afterwards mutual

funds which were till then the domain of public sector undertakings was
thrown open to the private sector and foreign players. The next decade
witnessed a large number of mutual funds being established with multiple
and varied offerings. The timing was right because the individual investor
had fled the equity market following the Harshad Mehta scam and the
economic downturn. They needed a vehicle to place their savings a
vehicle that offered returns better than bank fixed deposits. Mutual funds
became the investment of choice.
! !109
INTRODUCTION
16.2 GROWTH OF MUTUAL FUNDS
Mutual funds enables individual investors to, based on their risk appetite,
invest in a sector or companies they are interested in. To purchase 10
shares in Infosys Technologies, an investor (on the assumption that a
single share of Infosys Technologies costs ` 1800), would need to spend `
18000. If he wants to invest in several information technology companies,
hed need much more (possible` 50,000). If he invests in a technology
sector fund he can for as little as ` 5,000 have a stake in several
information technology companies. This is because the money collected by
the mutual fund which may be several crores of rupees would be invested
in several information technology companies spreading and diversifying
the risk and maximising the profit potential. This is why mutual funds are
called investment products that operate on the principle of strength in
numbers as they collect money from a large group of investors and invest
them in several securities in line with their objective.
Mutual funds target the small investor. The small investor does not have
the funds to invest in an array of shares to balance his risks. The small
investor does not often have the expertise or the access to information to
determine where he should invest, when he should buy and when he
should sell. The small investor does not have the time to review his
investments. Mutual funds take these concerns away. They are managed
by professional managers who track investment all the time selling and
buying at the appropriate time. In addition, investment in certain mutual
fund schemes gives one tax breaks. Furthermore, dividends received are
tax free. Mutual funds are also liquid and units can be sold at its break up
value (net asset value) and the proceeds are given within 24 - 48 hours. In
addition gains (as a result of capital appreciation) are tax free if the mutual
fund units had been held for a year or more. If not the gains are taxed at
10 per cent.
16.3 WHAT MUTUAL FUNDS OFFER?
Mutual funds offer the small investor a plethora of options income or

capital appreciation, sector focus, debt, equity, blue chips or a
combination. In addition as banks and others receive commission from
mutual funds for selling schemes, mutual funds have become the
instrument advisors recommend. It has thus become the investment
option of the lay investor.
! !110
INTRODUCTION
1. What did Freddie Mehta say regarding mutual funds?
2. How do mutual funds help individuals?
! !111
INTRODUCTION
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !112
HISTORY OF MUTUAL FUNDS
Chapter 17
Learning Objective:
This chapter will explain the world history of mutual funds and its scenario
in India which is about 45 years old.
Structure:
17.1 World History of Mutual Funds

17.2 Mutual Funds in India
17.3 Landmarks in the Indian History of Mutual Funds
17.1 WORLD HISTORY OF MUTUAL FUNDS
In 1774, a Dutch merchant invited subscriptions from investors to set up

an investment trust by the name of Eendragt Maakt Magt (unity creates
strength) with the objective of providing diversification at a low cost to
small investors. It was very successful. As a consequence others launched
investment trusts with names which, when translated, read Profitable and
Prudent or Small Matters Grow by Consent. The Foreign and Colonial
Government Trust, formed in London in 1868, promised the investor of
modest means the same advantages as the large capitalist... by spreading
the investment over a number of stocks.
On March 21, 1924 the Massachusetts Investor Trust was formed by three
Boston financial executives. This fund is widely seen as the first organized
mutual fund and the one that popularised the concept of mutual funds in
the twentieth century. Within a year of floatation it had 200 investors and
$392,000 in assets. The entire industry at this time had less than $10
million in invested funds. There was tremendous excitement and interest
among American investors over the new investment vehicle. However, its
popularity suffered tremendously during the depression in 1929. It took a
series of confidence-building measures the birth of a powerful market
regulator, laying down the rules for all industry participants and enactment
! !113
of legislation (Securities Act, 1933 and Securities Exchange Act of 1934)
for the mutual fund juggernaut to start rolling again. These laws required a
fund to be registered with the Securities and Exchange Commission (SEC)
and to provide investors with a prospectus that contained disclosures about
the fund, the securities market and the fund manager. The SEC helped
draft the Investment Company Act of 1940 which sets forth the guidelines
that SEC registered funds must comply with.
With regulations in place and renewed confidence in the stock market

mutual funds gained in popularity. This resulted in more and more financial
entities launching funds. The 80 schemes and $500 million assets in the US
mutual fund industry had in 1940 multiplied to 160 schemes and $17
billion in assets by 1960.
New types of schemes were launched and new services were introduced.
The industry got a visible push in the 1970s on all fronts and captured the
attention of the small investor. Retirement funds were allowed to invest in
mutual funds. Schemes offered new investment exposures and higher
returns than banks. By the end of the 1970s, there were 524 schemes
were managing $95 billion in the United States of America.
At the end of 2007 there were 8015 mutual funds that belong to the
Investment Company Institute, (ICI), a national association of investment
companies in the United states with combined assets of $12.356 trillion.
Presently more than 80 million people or one half of the households in the
United States invest in mutual funds.
17.2 MUTUAL FUNDS IN INDIA
During the growth of mutual funds in the west, India relied on the state for
economic growth and development. The government suppressed private
participation in the financial sector and showed a sense of inactivity,
disinterest and a marked lack of imagination in developing investment
options for households. With the private sector marginalized in the
economic sphere, the stock market was the only alternative for
investments.
In 1963, an initiative to introduce a mutual fund in India was taken. Unit

Trust of India (UTI) was created in December 1963 by an Act of Parliament.
UTI launched its first scheme, US-64 in July 1964. In the 1st week, UTI
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received 1,26,000 applications for ` 17.4 crores which was a huge amount
at that time. US-64 assets crossed ` 100 crores in 1991. Its annual
dividends increased from 6.1 per cent in 1964 to 16 per cent in 1986, to a
high of 26 per cent in 1994.
In 1987, public sector banks and insurers were allowed to float mutual
funds. Public sector undertakings such as State Bank of India, Canara
Bank, Life Insurance Corporation and General Insurance Corporation
launched a few funds. They were successful in capturing some business.
UTI, however, remained the leader and had the largest corpus.
The early 1990s the Indian capital market had an excess of funds. As
economic reforms were being initiated in the country, the stock market
boomed resulting in large investments in shares.
In 1992, Harshad Mehta scam, the fall of the stock market and the decline
of mutual funds, shook the investors confidence. The government ushered
in reforms. It took three major initiatives to get regain investor confidence.
Firstly, SEBI was set up to regulate the capital market including capital
funds. Secondly, private and foreign players were allowed to run mutual
funds, and thirdly, the mutual fund regulations were re-designed to make
fund houses more accountable.
The 5-year period from 1998 to 2003 saw the economy go through a
radical change from a public-sector driven market to a private sector
dominated industry. The upswing in equity markets since 2003 has brought
mutual funds sharply in focus for the retail equity investor.
The tax incentives given to the industry, such as tax exemption from
dividends and long-term capital gains for equity funds making them more
attractive. In 1999-2000, a lot of investors invested in mutual funds for the
first time. They were adversely affected with the fall of the stock market
due to depreciation of investment and a weak system of management.
US-64, the most-trusted one in the market collapsed. A combination of bad

management and a bearish market left it in no state to declare dividends,
leave alone paying the investors the principal. The UTI Act was repealed
and it was bifurcated into two entities. The assured return schemes and
US-64 went to UTI to be dealt by with the Government and UTI 2, in its
new form as UTI Mutual Fund, took over the control of the other schemes.
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It came under the purview of the SEBI. In May 2007, fund houses were
managing ` 3,53,000 crores of investor money. Out of this, 80 per cent
was being managed by private funds.
Compared to the United States, the number of retail investors in India is

still low. According to a survey by the SEBI, 2000-01 saw 11.8 million
households investing in mutual funds. Retail investors held nine times more
money in bank deposits than in mutual funds. This trend is changing.
2005-06 saw domestic savings rising to 3.6 per cent, a rise of 0.4 per cent
from the previous year. Returns from safe instruments are barely beating
inflation. The changing face of the capital market means that the small
investor finds himself left out of many investment opportunities. If he
wants to earn returns that are in excess of inflation by a fair margin,
mutual funds are the most accessible and convenient way of doing so.
The assets under management (amounts invested by investors) as on

March 31, 2008 was 505,152 crores as against ` 326,388 crores at the
end of the previous year an increase of 55 per cent. Of these 80 per cent
are managed by private funds.
17.3 LANDMARKS IN THE INDIAN HISTORY OF MUTUAL

FUND
INDIAN HISTORY OF MUTUAL FUND
Year Landmarks
1963 UTI, Indias first mutual fund launched
1964 UTI launched US-64
1986 UTI Mastershare, Indias first true mutual fund scheme, launched
1987 PSU banks and insurers allowed to float mutual funds, SBI first off
the block
1992 Harshad Mehta- fuelled bull market arouses middle-class interest

in shares and mutual funds
1993 Private sector and foreign players allowed; Kothari Pioneer first
private fund house to start operating, SEBI setup to regulate the
industry
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1994 Morgan Stanley is the first foreign player
1996 SEBIs mutual fund rules and regulations, which form the basis of
most current laws, come into force
1998 UTI Master Index Fund is Indias first index fund
1999 The take over of 20th Century AMC by Zurich Mutual Fund is the
first acquisition in the industry
2000 The industrys assets under management cross (AUM) ` 1,00,000

crore
2001 US-64 scam leads to UTI overhaul
2002 UTI bifurcated, comes under the purview of SEBI, mutual fund
distributors banned from giving commissions to investors, floating
rate funds and foreign debt funds debut
2003 AMFI certification made compulsory for new agents
2004 Long term capital gains exempt from tax for equity funds.
Securities transaction tax introduced
2005 The industrys AUM crosses ` 2,00,000 crore, Section 80C

introduced, which allows up to ` 1 lakh in equity-linked savings
schemes (ELSS) for deduction from total taxable income
2006 AUM crosses ` 3,00,000 crore in October
2007 Mutual funds launch Gold ETFs schemes
2008 Bharti Axa launches mutual fund
1. How was the concept of mutual funds generated? What was its
objective?
2. What were the landmarks that mutual funds created in world history?
3. Write a short note on how mutual funds were introduced in India and
how it has progressed as a tool of investment over the years.
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REFERENCE MATERIAL
chapter
Summary
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MCQ
Video Lecture
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WHAT IS A MUTUAL FUND?
Chapter 18
Learning Objective:
This chapter defines a mutual fund and explains its role in the financial
sector of the economy.
Structure:
18.1 Definition of Mutual Funds

18.2 Role of Mutual Funds
18.1 DEFINITION OF MUTUAL FUNDS
A mutual fund in simple terms is made up of money that is pooled together

by a large number of investors who give their money to a fund manager to
invest in stocks and/or bonds. Mutual funds pool the savings of many
investors and channel them directly into liquid assets. It is also defined as
a professionally managed firm of collective investments that collect money
from many investors and puts it in stocks, bonds, short term money
market instruments and/or other securities. It is also defined as a vehicle
to pool money from investors with a promise that the money would be
invested in a particular manner by professional managers who are
expected to honour the promise.
A mutual fund is a trust that mobilizes the savings of retail investors, who
share a common financial goal. These investors buy the units of a fund that
best suits their needs. The Fund then invests the pool of money called a
corpus in securities. These could be in the form of shares, debentures,
money market instruments, etc., depending on the constitution and
objective of the scheme. The income, earned through the investments, as
well as the capital appreciation, realized by the investments, is allocated
amongst the investors, in proportion to the number of units they own.
These gains are distributed to investors in the following ways (i) by way of
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dividends, (ii) through an increase in the value of their units, (iii) through
an allocation of additional units, (iv) a combination of the three.
In short
Investors buy these units of a fund that best suits their needs.
The fund then invests the pool of money (called a corpus) in securities -
this could be shares, debentures, money market instruments, etc.-
depending on the constitution and objective of the scheme.
The income earned through the investments, as well as the capital

appreciation realized by the investments, is allocated amongst the
investors in proportion to the number of units they own.
These gains are distributed to investors either by way of dividends or

through an increase in the value of their units, or through an allocation of
additional units or a combination of the three.
18.2 ROLE OF MUTUAL FUNDS
Mutual funds are a financial intermediary. They intermediate between the

source of the saving and the user of those savings and help to mobilize
capital.
Mutual funds also impart liquidity to the capital markets, since

collectively they trade much more actively than individual investors. The
frequent buying and selling of mutual funds, based on specific
information, provides the price signals that make capital markets more
efficient.
Mutual funds help move companies towards higher corporate governance

standards, because their large holdings give them voting power.
1. Define Mutual funds.
2. What is the role of mutual funds in the financial sector of an economy?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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ELIGIBILITY
Chapter 19
ELIGIBILITY
Learning Objective:
This chapter talks of investors who are eligible to invest in a mutual fund.
It explains the method of investing in mutual funds and explains the
various documents that are mandatory when investing in mutual funds.
Structure:
19.1 Who is Eligible to Invest in Mutual Funds?

19.2 Documents that are Mandatory While Investing in Mutual Funds.
19.1 WHO IS ELIGIBLE TO INVEST IN MUTUAL FUNDS?
Who can invest in mutual funds? Who are eligible? Those who may invest
are:
Adult individuals (or minors, holding through their parents or guardians)

holding singly or jointly (not exceeding three in all).
Hindu Undivided Families (HUF), through their respective Kartas
Companies, corporate bodies, public sector undertakings, financial

institutions, banks, partnerships, associations of persons or bodies of
individuals, religious and charitable trusts and other societies, registered
under Societies Registration Act, 1860. (However, the purchase of units
must be permitted under their respective constituent documents).
Non-resident Indians or Person of Indian Origin (PIO) residing abroad

(collectively, NRIs) on a full repatriation basis or non-repatriation basis.
Overseas Corporate Bodies (OCBs) firm or societies, which are held

directly or indirectly but, ultimately to the extent of at least 60% by NRIs
and Trusts, in which at least 60% of the beneficial interest is similarly
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ELIGIBILITY
held irrevocably by such persons on a full repatriation or non-repatriation
basis.
Foreign Institution Investors (FIIs), registered with Security Exchange

Board of India (SEBI) and the Reserve Bank of India, on full repatriation
basis.
At the time of investing, investors have to furnish information to the

mutual funds to satisfy their know your customer requirements. This is
essential to guard against money laundering and the need to know the
source of the money had is being invested.
Securities and Exchange Board of India (SEBI) has advised all mutual fund
intermediaries to take necessary steps to ensure compliance with the
requirements of the Prevention of Money Laundering Act, 2002 (PMLA).
This requires obtaining and maintaining the particulars of the investors of
Mutual Funds in accordance with KYC norms issued by SEBI including proof
of their identity and proof of address.
KYC norms are applicable to all investors. It is in the interest of all

Investors to obtain KYC Acknowledgement and submit it to the Mutual
Fund to avoid any inconvenience in future.
1 9 . 2 D O C U M E N T S T H AT A R E M A N D ATO R Y W H I L E
INVESTING IN MUTUAL FUNDS
Investors in mutual fund schemes have to provide the following documents

to satisfy KYC requirements:
1. Photograph
2. Proof of Identity
3. Proof of Address
4. PAN Card
The originals of these documents along with a copy each have to be

presented and the original will be returned after verification. Alternatively,
investors can also provide an attested true copy of the relevant documents.
Attestation could be done by Notary Public/ Gazetted Officer/Manager of a
Scheduled Commercial Bank.
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ELIGIBILITY
Instead of providing the required documents again and again to different
mutual funds in which one would like to invest, CVL, on behalf of all mutual
funds will do the process and issue a unique Mutual fund Identification
Number (MIN).
Announcing the launch of MIN, Mr. A. P. Kurian Chairman, AMFI said,

Investors have to provide KYC documents and information only once to
obtain MIN. Quoting the MIN, investors could invest in the schemes of all
mutual funds without the necessity to submit the KYC documents. Further,
changes in address or other details could be intimated to any of the POS
and the same will get updated in all the mutual funds where the investor
has invested.
This facility is being provided absolutely free of cost to the investors. To

begin with, investors investing ` 50,000 or more will have to comply with
KYC effective from 1st February, 2008. Investors could complete the
formalities by submitting the KYC and relevant documents at the Points of
Services (POS). To start with, these POS will be the select branches/offices
of mutual funds, registrars and select branches of some distributors. The
application form for complying with KYC will be available from these POS.
The application form could also be downloaded from the websites of all
mutual funds and CVL Investors could contact offices of mutual funds,
registrars and mutual fund distributors (ARN Holders) for further details
and assistance.
Currently, all investors (Individuals or Non Individuals) who wish to make

an investment of ` 50,000 or above will be required to be KYC Compliant.
This would also apply to new Systematic Investment Plan (SIP)
transactions on or after 01 February 2008, if each installment of value
greater than or equal to ` 50,000. The list of personnel who are required to
be KYC compliant are detailed below:
Joint Holders: Joint holders (including first, second and third if any, are
required) to be individually KYC compliant before they can invest with
any Mutual Fund. e.g., in case of three joint holders, all holders need to
be KYC compliant and copies of each holders KYC Acknowledgement
must be attached to the investment application form with any Mutual
Fund.
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ELIGIBILITY
Minors: In case of investments in respect of a Minor, the Guardian
should be KYC compliant and attach their KYC Acknowledgement while
investing in the name of the minor. The Minor, upon attaining majority,
should immediately apply for KYC compliance in his/her own capacity and
intimate the concerned Mutual Fund(s), in order to be able to transact
further in his/her own capacity.
Power of Attorney (PoA) Holder: Investors desirous of investing

through a PoA must note that the KYC compliance requirements are
mandatory for both the PoA issuer (i.e. Investor) and the Attorney (i.e.
the holder of PoA), both of whom should be KYC compliant in their
independent capacity and attach their respective KYC Acknowledgements
while investing. Financiers will have to be KYC compliant at the time of
Lien Marking.
For transmission (In case of death of the unit holder): If the

deceased is the sole applicant, the claimant should submit his/her KYC
Acknowledgement along with the other relevant documents to effect the
transmission in his/her favour
Investors must attach their KYC Acknowledgement along with the

Investment Application Form(s)/Transaction Slip(s) while investing for the
first time in every folio. Applications Forms/Transaction Slips not
accompanied by KYC Acknowledgement are liable to be rejected by the
Mutual Funds. If you do not obtain a KYC Acknowledgement, you will not
be able to invest` 50,000 or more in a Mutual Fund.
Once an account is opened with a Mutual Fund by 1st, 2nd & 3rd holder by
completing the necessary formalities and the investors return to make a
fresh investment, Investors must attach their KYC Acknowledgement along
with the Investment Application Form(s)/ Transaction Slip(s) while
investing for the first time in every folio.
In the event of any KYC Application Form being found deficient for lack of
information/ insufficiency of mandatory documentation, further
investments will not be permitted.
Once the KYC Acknowledgement is obtained and informed to a Mutual

Fund, it will be registered against the folio and quoted in all future account
statements. The same will exist in perpetuity, unless cancelled by CVL.
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ELIGIBILITY
If the investor has multiple folios/accounts with a Mutual Fund, the Mutual
Fund should be informed to update the KYC Acknowledgement against all
the folios/accounts you have with it. However, each of the holders in these
folios/accounts should be KYC Compliant.
1. State the various individual and bodies that can invest in mutual funds
in India.
2. What are the documents that an investor should submit to satisfy KYC
requirements?
! !126
ELIGIBILITY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !127
STRUCTURE OF MUTUAL FUNDS
Chapter 20
Learning Objective:
This chapter explains the structure of a mutual fund.
Structure:
20.1 Structure of Mutual Funds
20.1.1 Sponsors
20.1.2 Trustees
20.1.3 Asset Management Company
20.1.4 Custodian
20.1.5 Registrar
SEBI regulates the mutual fund sector in India. Earlier, the RBI was
responsible for the regulation of money in the money market mutual funds
(MMMFs), but even this responsibility now vests in the SEBI. The guidelines
applicable to mutual funds are set out in the SEBI (Mutual Funds)
Regulations, 1996 (the regulations).
SEBI has prescribed a legal structure with inbuilt checks and balances in
the form of independent agencies for the various critical roles. SEBI has
clearly outlined the role and responsibilities of each entity. How well they
function, determines the quality of the mutual fund.
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20.1 STRUCTURE OF MUTUAL FUNDS
The structure on which a mutual fund is as follows:
Sponsor
Trustees
Asset Management Company (AMC)
Custodian
Registrar
20.1.1 Sponsor
A sponsor of a mutual fund is similar to the promoter of a company. The

sponsor initiates the idea to set up a mutual fund. It could be a financial
services company, a bank or a financial institution. It could be Indian or
foreign. It could carry out this venture on its own or as a joint venture. The
regulations define a sponsor as any person who, acting alone, or in
combination with another body corporate, establishes a mutual fund. The
sponsor must be a fit and proper person. The sponsor nor any director or
principal officer of the fund should be guilty of an offence involving moral
turpitude or found guilty of any economic offence.
The sponsor has to contribute atleast 40 per cent of the net worth of the
asset management company (AMC). Anyone who holds 40 per cent or
more of the net worth is deemed to be a sponsor and should therefore
meet the qualifications prescribed for sponsors.
In India, the mutual fund sponsor has to obtain a license from SEBI and
has to have satisfactory capital and profits, a good track record for the last
five years and a good reputation. The sponsor takes decisions related to
mutual funds leaving money management and other operational issues to
those given specific responsibility or assigned to the specific jobs.
The sponsor should work in order to boost the confidence and trust of the
investor by appointing the best talent, technology and services provided to
the investors. In earlier days sponsors had to return promised returns to
the investors. But today with the uncertainty in the market, it is best to
choose those who have a good and fair reputation in the market and those
who are good money managers.
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20.1.2 Trustee
A mutual fund has to be created or constituted in the form of a trust and is

created through a trust deed. The trust deed (which has to be registered)
has to be in the form stipulated by SEBI and must not contain any clause
that:
Limits or extinguishes the obligations and liabilities of the trust with

respect to the mutual fund or its investors.
Indemnifies the trustees or the AMC for loss or damage caused to the
unit holders on account of negligence or acts of commission or omission.
Trustees are internal regulators in a mutual fund who are appointed by

sponsors and their job is to protect the interests of the unit holders. SEBI
rules a mandate that at least two-thirds of the trustees are independent,
i.e., not have any association with the sponsor so that they are impartial
and fair.
Trustees may be individuals or companies. A person cannot be appointed a

trustee unless the person is a person of ability, integrity and standing; has
not been found guilty of moral turpitude; and has not been convicted for
any economic offence or violation.
In addition:
A mutual fund should have a minimum of four trustees;
Two thirds of the trustees must be independent trustees;
Relatives of the sponsor, directors of the sponsor company or relatives of

associate directors of the AMCs and trustee companies are considered to
be associate.
Nominees of companies who are stakeholders in the sponsor companies

or AMC are considered associates.
Persons providing any type of professional service to the mutual fund,

asset management company, trustee company and the sponsors are
considered as associate directors.
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Persons having any pecuniary relationship with the trustees, sponsor or
AMC which, in the opinion of the trustees may affect the judgment of the
directors are treated as associate directors.
An asset management company, or any of its or any of its officers or

employees are not eligible to act as trustee of any mutual fund.
No person who has been appointed as trustee of a mutual fund can be

appointed as trustee of any mutual fund unless the person is an
independent trustee and the mutual fund where the individual is already
a trustee has no objection.
With regard to obligations:
Trustees have to enter into an investment management agreement with

the AMC.
Trustees have to ensure all permissions and systems are in place before
the launch of any scheme.
Trustees are accountable for and are custodians of the fund and property
of the schemes.
Trustees have to ensure that all activities of the AMC are in accordance
with SEBI regulations.
Trustees have the right to obtain such information as they deem

necessary from the AMC. Additionally, the trustees have the right to
terminate the appointment of an AMC.
The AMC is appointed by the trustees and reports to them about the
business management and takes their approval on the same. The
trustees keep a check on the limits of the funds and see tote the fund
assets are protected. They are responsible for any financial irregularity in
the mutual fund.
20.1.3 Asset Management Company (AMC)
An AMC is the legal entity formed by the sponsor to run the mutual fund by
appointing fund managers and analysts to handle operational matters right
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from launching the fund scheme to managing the financial affairs and
interacting with the investors. The most important person who takes the
investment decisions is the head of the fund house/ chief executive officer
(CEO). The investment decisions are taken by the chief investment officer
(CIO), who shapes or formulates the funds investment and is backed by a
team of fund managers who are in-charge of the schemes. A team of
analysts assists them who keep a track record of markets, sectors and
companies.
Each scheme pays the AMC an annual fund management fee which is
linked to the scheme size and results in a corresponding drop in your
return. If a schemes corpus is up to ` 100 crores, it pays 1.25 per cent of
its corpus a year; the fee is 1 per cent of the corpus over the ` 100 crore.
Hence, if a fund house has two schemes with a corpus of ` 100 crore and `
200 crore, respectively, the AMC will earn` 3.25 crore as fund management
fee that financial year. If the expenses of the AMC exceed its earnings, the
balance has to be met by the sponsor.
20.1.4 Custodian
A custodian handles the investment back-office of a mutual fund. Its

responsibilities include receipt and delivery of securities, collection of
income, distribution of dividends and segregation of assets between
schemes. A sponsor cannot act as a custodian to the fund. This ensures
that the assets of the mutual funds are not in the hands of the sponsor.
20.1.5 Registrar
Registrars, also known as transfer agents, handle all investor-related

services. This includes issuing and redeeming units, sending fact sheets
and annual reports. Some fund houses handles these functions in-house.
What matters most importantly is that the mutual fund appoints a registrar
that is prompt and efficient in services. Many mutual funds also have
investor service centres in various cities.
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1. State the structure on which mutual funds are based.
2. What is a Sponsor and what is a trustee? Explain the differences

between the both.
3. What is an AMC?
4. Who is the custodian of a mutual fund and what is his job?
5. What is the Registrar? How does it work?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !134
MUTUAL FUND CONCEPTS
Chapter 21
Learning Objective:
This chapter explains the concept of a mutual fund and talks of the
importance of understanding it before investing.
Structure:
21.1 Open-ended/Closed-end Schemes

21.2 Corpus
21.3 Price
21.4 Unit
21.5 Net Asset Value (NAV)
21.6 Load
21.7 Expenses
21.8 Disclosures
21.9 Redemption
21.10 Schemes Versus Options or Plans
21.11 Churn
Prior to investing in mutual funds it is imperative to understand the

concepts.
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21.1 OPEN-ENDED/CLOSED-END SCHEMES
Based on the accessibility, mutual fund schemes can be classified into

open-ended and closed-end schemes.
Open-ended schemes are those to which one can subscribe throughout the
year and are not listed on the stock exchanges. These do not have a fixed
maturity and the main feature of an open ended fund is that it can be
encashed at any time. One can invest and withdraw at any given point of
time which makes it popular among prudent investors or investors who are
new into the arena of investing. Open ended funds do not have a fixed
capital and the number of unit holders keep changing.
Close-ended schemes are for a fixed tenure which is announced the minute
they are introduced into the market. The period ranges from 3 to 15 years.
These schemes are open for subscription only for a specified period.
Investors can invest in the schemes of these funds at the time of the
offering and after that they can buy or sell units on the stock exchanges
where they are listed. However, the listing does not guarantee liquidity.
Investors also have the option to sell the units to the mutual fund at the
net asset value (NAV) related prices. SEBI mandates that investors must
have atleast one exit route. These terminate on specified dates at which
time, investors can redeem their units. Investing in close-ended schemes is
not very advisable since these units trade at a value lower than their true
value making it less liquid. Hence, investing in open-ended schemes would
be a more sensible/profitable solution.
Interval funds combine the features of open and close ended funds. They
are open for sale or redemption during pre-determined intervals at NAV
based prices. As of now there are no interval funds in India.
21.2 CORPUS
Investing in a mutual fund is as easy as a visit to a bank to open up an

account. All that needs to be done is to walk into an office of a mutual fund
agent, fill in a form, hand over a cheque and some identity papers and the
job is done. Investment in these funds can also be done online. The money
that you invest is added top a pool with other investors in the market. This
pool of money that is available to the scheme at any point of time is called
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the corpus or asset under management. The fund invests this money in
various securities in line with its stated objective.
21.3 PRICE
When units are purchased in an initial offer, they are priced at par value -
normally ` 10 per unit. A load factor (explained below) is usually
incorporated if it is an equity fund or the bulk of investments are in equity.
When units are purchased at a time other than the initial issue, the
purchase price is the net asset value (NAV) plus (wherever applicable) a
front-end load.
In the case of a closed-ended fund, the purchase is based on the price that
is being quoted on the stock exchange where it is listed. The quoted price
would usually be at a discount to the NAV.
21.4 UNIT
The mutual fund in which you have invested issues you units against your
investment. A unit is the currency of a mutual fund. What a share is to a
company, a unit is to a mutual fund.
21.5 NET ASSET VALUE (NAV)
Net Asset Value (NAV) indicates the intrinsic worth of a scheme. NAV per
unit represents the worth of each unit that investors hold. Once an investor
invests, he becomes the holder of units. These units are have a value
based on the assets in the scheme. This is comparable to the book value of
a share of a company. This value is called NAV. A schemes NAV is its net
assets divided by the number of units issued. This value is variable in
nature and keeps changing on a day to day basis. This happens because
there are changes in the investment holdings (shares/securities are bought
and sold daily and the market values of existing holdings change daily).
The NAV of any scheme tells us the worth of the unit at any point of time
which gives the investor a fair idea of the worth his investment and how
well his scheme is performing. A rise in the NAV is profitable and a fall
depicts a loss in the value of units. NAVs are calculated and disclosed by
fund houses daily in newspapers and on the internet. This allows an
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investor to keep track of his investment and may thus make his purchase
or sale accordingly.
For the valuation of assets and liabilities, different methods are used
depending upon the circumstances, the purposes of the valuation or the
regulations that may apply. For funds, the most common method of
valuation is to use the market value of the assets. Other possible methods
of valuation are:
Book value
Carrying value
Historical cost
Amortized cost
NAVs are helpful in keeping an eye on your mutual funds price movement,
but NAVs are not the best way to keep track of performance. The reason
for this is mutual fund distributions. Mutual funds are forced by law to
distribute at least 90% of its realized capital gains and dividend income
each year. When a fund pays out this distribution, the NAV drops by the
amount paid. This is important because an investor may become frightened
when they see their funds NAV drop by ` 3 even though they havent lost
any money as the ` 3 was paid out to the shareholder.
The most important thing to keep in mind is that NAVs change daily and
are not a good indicator on how your portfolio is doing because things like
distributions reduce the NAV.
For open-ended funds, shares and interests are not traded between
investors but are issued and redeemed directly between the fund and the
investor. The price of those shares or interests in the fund is determined by
the NAV at the time when the investor subscribes for them or withdraws
his investment. In contrast, closed-end funds are traded in the open
market between investors and so the price of shares or interests in a
closed-end fund will be whatever the parties agree to be the price, and
might not correspond to the funds NAV.
In determining whether a company is a cheap or expensive investment,

one tool used by investors is a comparison of the companys current
market capitalization (being the price that the market values the company
! !138
at) with its NAV. The NAV will usually be below the market price for the
following reasons:
The NAV describes the companys current asset and liability position.
Investors might believe that the company has significant growth
prospects, in which case they would be prepared to pay more for the
company than its NAV.
The current value of a companys assets may be higher than the

historical financial statements used in the NAV calculation.
Certain assets, such as goodwill (which broadly represents a companys

ability to make future profits), are not necessarily included on a balance
sheet and so will not appear in an NAV calculation.
A companys NAV will not always be above its market value. For example,
analysts and management estimated that ABC Ltd. was trading for 30-50%
below its net asset value (or core asset value). Where a companys
market value is lower than its NAV, it may be considered more profitable to
windup the company and sell off its assets individually rather than
continue to run it as a going concern.
To calculate NAV, treat a mutual funds net asset value as its price per
share. Simply take the current market value of the funds net assets
(securities held by the fund minus any liabilities) and divide by the number
of units outstanding. So if a fund had net assets of ` 50 million and there
are one million units of the fund, then the price per share (or NAV) is `
50.00.
Since mutual funds hold a number of securities, the net asset value must
be calculated at the end of day on a daily basis (as opposed to stocks that
change prices by the second).
21.6 LOAD
NAV may definitely help an investor rate his investment but this may not
be the exact price at which he enters or exits the scheme. This is because,
when a fund house operates, it has to cover costs and charges for the
whole process of investment when one enters or leaves the scheme. This
charge is called load. The investors pays an entry load when he enters
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the market and an exit load when he exits. The exit load is charged so as
to discourage investors from making an early exit. Loads are calculated as
percentage on the NAV and reduce returns. An entry-load increases the
NAV but reduces the number of units in hand, whereas an exit-load
decreases the NAV and reduces the value of the units for sale.
On purchases you invest ` 1,00,000 in a new fund offering of a mutual

fund at ` 10 per unit. You expect to get 10,000 units (` 1,00,000 divided
by ` 10) of the same but are shocked when you find about 200 units less
in your account. This is because you have been charged a fee called the
front end load. Do you know how and why this happens? It is very simple
to begin with.
Most of the mutual funds that come up with a new scheme tax the
investors by charging a fee that they call entry load. While this charge
differs from one mutual fund scheme to another the standard practice is to
charge a flat 2.25 per cent entry load on your initial investment. This is
how it works and for simplicity and comprehension let us assume that a
mutual fund charges only a 2 per cent entry load (dont get carried away;
this is just an assumption).
That is, for every ` 100 that you invest the mutual fund company takes
away ` 2 as charges that they pay to distributors for distributing the fund.
The distributor (bank, agent etc.) is an entity that helps you decide upon a
good mutual fund but is not accountable (not all distributors are fly-by-
night operators; there are good mutual fund distributors as well) if your
investments go sour. So for every ` 1,00,000 that you invest in a mutual
fund ` 2,000 goes towards paying up the distributor who has advised you
to select a particular fund and who will keep on assisting you in making
such decisions in the future.
That is, a mutual fund would deduct this amount before investing your
money into its scheme. This, however, denies the poor investor the chance
of getting an additional 200 units (` 2,000 divided by ` 10). There is no
gain without the pain, you see. But is there no way that an investor can be
saved from this tax? Of course, there is. There are a few mutual fund
companies that charges no loads on its schemes. However, those funds
expect you to you to invest ` 1,00,000 atleast in their funds. Again if you
invest directly on your own, like investing your money online
(icicidirect.com and a host of other online brokerage houses that offer
! !140
online applications in mutual funds) there is no load on your investments.
Of course, then you dont get any expert advice (like that from distributors
in the earlier example) and you have to put money at your own risk. So
how important are distributors in spreading the mutual fund investing
culture amongst the ordinary investors like you and me? Responding to a
query raised by this correspondent during Vivek Kudwa said that choosing
a distributor is like choosing a doctor. Like you dont trust your life to a
doctor whos not good at her/his work or with whom youve had a bad
experience in the similar manner mutual fund investors should choose their
distributors after doing their home work.
According to him, we need distributors because they are a channel through

which mutual funds can reach ordinary investors. Do you think that all
mutual funds can open new offices in all important rural and urban centres
across India? As of today only 4 per cent of Indians invest in mutual funds
and the mutual fund-distributor-investor chain will have to remain for this
penetration to improve. He said that investors should remember that
investing in mutual funds can bear fruit only in the long term and
advocated that investor should at least put their money into mutual funds
for five years. If you were to amortise the entry load charge over a period
of five years then the load will not pinch investors too much. And it is a
small fee to be paid for getting an experts advice (distributor).
Having said that The Securities and Exchange Board of India (SEBI) has
given a New Year gift to investors in 2008. The regulator has finally
decided to waive the entry load for direct applications, effective from
January 4, 2008. In a circular, SEBI said no entry load would be charged
for applications received directly by asset management companies on the
Internet or at collections centres. In other words, the entry load will be
waived if applications are not routed through distributors, agents or
brokers. SEBI said, the waiver will be applicable to investments in existing
schemes from January 4, 2008 and to new schemes launched on and after
the date.
Reacting to the move, Samir Kamdar, national head (MF), Mata Securities,
said, It will sound the death knell of open-ended funds as no one would
market them any more. This move will also drive the fund industry,
including the distributors, to sell only close-ended funds. It will skew the
already unviable dynamics of the fund industry and give an unbeatable
edge to the sales of unit linked insurance policies. Investors, especially
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high networth individuals will take advise from distributors but would
prefer to invest directly.
On redemption When units are sold some funds charge their unit holders a
redemption fee which can be upto 3%. This is also called back-end load or
deferred sales charge. It gets reduced the longer you own the units in
some cases.
On switchover Some funds charge this fee if the investor moves from one
scheme to another within the same group or fund family. Loads can be as
high as 5%
21.7 EXPENSES
Expenses is the fee that the funds charge for managing your investments.
This is the money paid to the fund managers and others for managing the
fund. This naturally reduces your returns. The fund on a yearly basis,
charges a certain amount to cover costs for managing the scheme and
reduces your returns by that amount. SEBI permits equity schemes to
charge upto a maximum of 2.50% of the corpus as expenses. Debt
schemes are permitted to charge a maximum of 2.25% of the corpus. The
limits are as follows:
First 100 crores: 2.50%

Next ` 300 crores: 2.25%
Next ` 300 crores: 2.00%
Over ` 700 crores: 12.75%.
The 2.5% of the first slab is made up of
Investment management fee 1.25 Per cent
Custodial fees 0.50 per cent
Shareholder servicing fee 0.50 per cent
Trustee remuneration, audit fees etc. 0.25 per cent
Total 2.50 per cent
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SEBI caps investment management fees (the fee given to the managers for
making investment decisions) at 1.25 per cent on the first ` 100 crores of
the daily/weekly average net assets and 1 per cent of fund in excess of `
100 crores. Administrative costs in India are around 0.20 per cent.
Distribution expenses are, for new funds, between 2 to 55. This is the
amount spent on marketing advertising and paying commission to
distributors.
SEBI also decides what kind of expenses a fund can charge its unit holders
and what it cannot. Certain expenses such as an ad campaign publicising
its winning am award cannot be charged.
21.8 DISCLOSURES
A fund house releases information relating to the scheme in various ways

from time to time. The fund has to send annual reports to all of its unit
holders giving details of the complete portfolio of their investments. Half
yearly results are also published in newspapers. Some fund houses also
publish monthly and quarterly results. All this information if studied well
can guide an investor through his investment portfolio.
21.9 REDEMPTION
A redemption or a re-purchase is a sale of mutual funds units by the

investor. In order to sell units, the investor has to fill in a form that is
submitted and the fund house will pay you for the units at the prevalent
NAV minus the exit load by cheque in 5 days.
21.10 SCHEMES VERSUS OPTIONS OR PLANS
Every scheme has its own investment portfolio. At times there is a need to
differentiate between investors with the same scheme. Such instances are
described as follows.
Dividend, Growth and Dividend Re-investment Plans: Among the

investors who subscribe to a schemes investment philosophy, some
prefer a regular flow of income (dividend option), while others might
prefer their income from the scheme to grow in the scheme itself (growth
option). Some may like the amount to be declared as a dividend, but re-
! !143
invested in the same scheme (dividend reinvestment option). For
instance, an investor who has been paid out a dividend, his/her
investment in the scheme would be worth less than an investor who has
let his/her dividend grow in the scheme. Similarly, the new units issued
in a dividend re-investment option will bring down the per unit value.
Wholesale versus Retail: There is a difference in time and cost

implications between servicing a single investor who invests ` 1crore and
servicing 1000 investors who have invested their money, although assets
under management are the same under both the cases. Accordingly, a
mutual fund may choose not to penalize a large investor with the costs
associated with servicing the small investor. On the other hand, a whole
sale oriented investor base makes the fund corpus volatile. A fund
manager of such a scheme would need to maintain higher cash positions
and an extremely liquid portfolio too. A fund manager of a retail-oriented
scheme does not need to lose his sleep over liquidity and hence is in a
better position to make liquidity-return trade-offs.
21.11 CHURN
Portfolios cannot be static. Investments are made and investments are

sold. The extent depends on the funs style. If a manager believes in long
term gains the churn will be low whereas an aggressive investment
manager will have a higher churn. Higher churn means higher costs on
account of brokerage, custody fees, registration fees etc. The more
transactions a fund does, the more its costs increase. This is known as the
churn rate or turnover rate.
The churn rate represents the percentage of funds holding that changes
every year through its buying and selling of investments. On an average,
mutual funds have a churn rate between 85% and 100%. This means that
funds are nearly turning over their portfolio once a year. A high churn rate
leads to lower returns as more money is paid on brokerage, custody fees
etc. It should also be remembered that short term transactions attract
capital gains tax.An investor should look for achurn rate of below 50%.
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1. What are open-ended and close-ended schemes? State the differences

between them.
2. What is a corpus?
3. What is a unit and how are they priced?
4. State the impact of price on NAV.
5. What is load? What are the types of load?
6. What are the expenses that are incurred when investing in a mutual
fund?
7. What is the difference between a scheme and an option or a plan?
! !145
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !146
TYPES OF SCHEMES
Chapter 22
TYPES OF SCHEMES
Learning Objective:
This chapter explains the various types of mutual funds.
Structure:
Mutual funds are classified into the following types of schemes:
22.1 Open-ended Schemes

22.2 Close-ended Schemes
22.3 Equity Schemes
22.4 Debt/Income Schemes
22.4.1 Gilt Funds

22.4.2 Bond Funds
22.4.3 Index Funds
22.5 Balanced Funds

22.6 Sector Funds
22.7 Money Market Funds
22.8 Other Types of Funds
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TYPES OF SCHEMES
22.1 OPEN-ENDED SCHEMES
In an open-ended scheme, subscriptions to and redemptions from the

mutual fund scheme are open at all through the year excepting the
period of book closing.
The number of units outstanding in an open-ended scheme vary, as

investors buy and sell units.
In an open-ended fund, there is no fixed number of units issued.
Open-ended schemes are not listed on the stock exchanges. Units are
purchased and sold directly through the mutual fund.
Open-ended schemes can be purchased and sold at close to their Net

Asset Value (plus or minus an entry or exit load).
They may or may not have a specified redemption period.
22.2 CLOSED-ENDED SCHEMES
These are open only during a specified period.
The units of a closed-ended scheme have a fixed maturity period. This

can vary from 3 to 15 years. An individual investor can move into and
out of the investment, but the unit remains outstanding.
After the initial offer, a closed-ended fund is listed on a stock exchange

and thereafter, investors can purchase and sell these units only through
the stock exchange.
Close-ended schemes generally trade at a discount to the net asset value

(NAV), but the discount narrows as the date of maturity approaches.
22.3 EQUITY SCHEMES
A growth funds objective is to provide the maximum returns through

capital appreciation, over the medium to long term, by investing in
equities. An equity fund may be of a diversified nature, or may be sector-
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TYPES OF SCHEMES
oriented. Equity funds have often given excellent dividends when stock
markets have risen sharply.
Equity funds performance has been better than those of other asset
classes. When picked carefully and managed smartly, equities can work
wonderfully into your personal finances. You can either build and
maintain a portfolio by yourself or buy and sell them through a broker
and then follow up regularly. If you dont have the time or the
understanding of how to study the market, equity funds will do the
magic.
They are just as effective as direct investments and in many ways a lot
more convenient.
Equity funds pool savings of many investors and invests this sum in a
number of stocks across various sectors. So, a portfolio of the average
equity will have a variety of funds. You can pick up a stake in all these
companies and the fortunes they make through equity funds by investing
a small amount. The fund house does all the requirements and charges
you a fee. The funds managers and analysts track the market and sift
through the universe of stocks and construct portfolios capable of
delivering returns. If you are looking to maximize returns on your
investment and can bear the risks of eroding it temporarily in that
pursuit, consider equity funds. Equity funds are broken down into five
categories, which collectively cover the risk-return spectrum of equities.
Your choice of schemes should match the risk profile and investment
objective you have.
Diversification of Equity Funds
Of the various types of equity schemes, diversified equity funds are the
most popular. This is due to wide spectrum of exposure to the market
that they have to offer. Equity funds have the advantages of modifying
portfolios as they like. Diversified equity funds aim to outperform the
market, which is represented by stock indices such as the BSE 30-share
Sensex or the NSEs Nifty. Compared to most other types of equity
schemes, diversified funds are governed by fewer rules. They can invest
in whichever sector and ratio they feel the best.
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TYPES OF SCHEMES
It is intended to give maneuvering room to fund managers to maximize
returns and control risks. But this can also generate excesses for fund
managers like committing an unrealistic amount of its corpus to a
particular stock or sector. The intent behind this may bring in higher
returns but also increases the risk on the investment. These deviations
may be extreme in nature - bringing in huge returns or very low returns.
Hence it is important that you choose the fund house and the scheme in
a prudent manner.
Equity-linked Saving Scheme (ELSS)
Equity-linked saving schemes (ELSS) are equity funds that come in with
income tax benefits to individuals. ELSS is one of the many instruments
of Section 80C, along with the more popular options like PPF, NSC and
insurance premium. In this group of Section 80C, ELSS is uniquely pure
in the exposure. Under the same Section, individuals can claim up to ` 1
lakh as deductions from taxable income on making investment in specific
instruments. You can invest the entire ` 1 lakh in ELSS in a financial year
and claim deduction of this amount from the total taxable income. If
more than ` 1 lakh is invested the slab for the redeemable amount still
stays at ` 1 lakh. This benefit in these schemes is possible when the
lock-in period is 3 years. No other open-ended equity funds impose such
a condition.
The staple, debt-based Section 80C instruments like PPF, NSC and
notified bank fixed deposits yield assured returns of 5.5 to 8 per cent a
year. Although stocks do not assure returns, they have the potential to
deliver much more than this. In 2007, infrastructure bonds were offering
an interest rate of 5.5 p.a. This works out to an annual yield of 5.8 per
cent over 3 years. In other words, assuming parity in taxation, for an
ELSS to top infrastructure bonds, its NAV has to appreciate 17.4 per cent
in 3 years, which is not a far-fetched deal.
Equity funds investing require regularity and patience. An investment

made through a tax-saving fund and with a lock-in period of at least 3
years is long enough to get used to the market conditions.
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TYPES OF SCHEMES
Index Funds
An index fund is a diversified equity fund with a difference where the

fund manager has no say in the stock selection. At all times, the portfolio
of the index fund reflects as index, both in its choice of stocks and their
percentage holding. As of July 2008, most index funds tracked either the
Sensex or the Nifty. So an index fund that reflects the Sensex will invest
only in the Sensex stocks in the same proportion as their weightage in
the index.
This correlation moves the NAV of the index funds virtually in line with
the index it tracks. If the Sensex rises 10 per cent in a month, the NAV
of a Sensex-linked index fund will also roughly appreciate 10 per cent
over the same period. If the Sensex drops 10 per cent, so will the NAV of
the index fund. Although the index fund aims to reflect the market
movement, their returns tend to be marginally lower than the index that
they track. This variation is termed as tracking error and occurs due to
various costs an index fund has to bear such as brokerage, marketing
and management expenses. So, if during a period the Sensex gains 10
per cent and the index fund gains 9 per cent, the tracking error is said to
be 1 per cent. The lower the tracking error the better it is.
The index fund is popular for the convenience it offers. While it continues
to track the market all along, you dont need to track the fund. The
passive nature of index funds makes them less risky than actively
managed equity funds. This profile also ensures that several tenets of
fund management, like adequate portfolio diversification is taken care of.
Exchange-Traded Funds (ETFs)
Like the index funds, ETFs also reflect the market. For instance, the
countrys first ETF, Nifty Benchmark Exchange Traded Scheme (Nifty
BeES), tracks the Nifty.
Unlike the index fund, which can be transacted only through the fund
house at the following days NAV, an ETF is listed on the stock exchange
and can be bought and sold at real time prices through a broker. For
example, each unit of Nifty AQ roughly equal 1/ 10th of the Nifty value.
So if the Nifty is trading at 3,700, the NAV of a Nifty BeES unit will be
about ` 370 with buy and sell quotes based on this price.
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TYPES OF SCHEMES
EFT will also tend to show a lower tracking error than index funds.
The unique operational mechanism of ETFs means that they do not have
to pay brokerage hence bringing down the expenses.
EFTs are popular globally.
In May 2008, there were only six equity EFTs in India, EFTs have the
potential to become the rage of the market.
Sector Fund
A sector fund is one whose portfolio is built around a particular sector or

theme. It could be appropriate for an investor who lacks expertise or
knowledge about a particular sector. Some of the recent sector funds
floated have included those focusing on the information technology,
infrastructure, pharmaceuticals, information technology and fast moving
consumer goods (FMCG) sectors.
A sector fund is inherently riskier than a diversified fund because the

portfolio is concentrated in one sector only. However, in good markets,
sector funds can provide above average returns.
Its focus is very narrow and hence the risk high. In September 2006,
there were funds dedicated to sectors such as IT, pharmaceuticals,
FMCG, infrastructure and banking. Fund houses tend to chase hot
sectors. So, sector funds sprout when a particular sector is in the news.
In the mid-9os, when the market just wouldnt move, pharma and FMCG
delivered consistently and were considered safe sectors. Later, the IT
boom saw a deluge of IT funds. The roller-coaster ride for investors in
the IT funds have had since sums up the high-risk and the reward sector
funds offer, and why they are an option only for the savvy investors.
In a diversified fund, even if one sector performs badly, others can cover
up and pull it back for you. But if the chosen sector of a sector fund
performs badly, its entire portfolio suffers. Thats why sector funds are
recommended for only those who understand the working of the sector
they are investing in. This understanding can take many forms, like
working in the industry or having some kind of interest in it.
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TYPES OF SCHEMES
Specialty Funds
Subscriptions are the lifeline of a mutual fund. The more it gets from
investors to manage, the more money it will make. One important way to
make a pitch for your savings is new schemes. On investment merit,
though, these new schemes are an assortment. Some of these new
offerings are genuine attempts to offer value to you through new
investment exposures, while others are pure marketing gimmicks aimed
at raking in subscriptions. In an attempt to reduce this, SEBI has
disallowed fund houses from launching schemes that are not distinct
from existing schemes.
Mid-cap Funds
These are diversified funds that target companies on the fast-growth

course. In the long run, share prices are driven by growth in a companys
turn-over and profits. Companies at an infant stage are known to a point
where their growth is curtailed. Companies, that can expand briskly, at
reasonable level of risk, lie somewhere in between the small and the big
league. They are referred to as mid-sized companies and mid-sized
stocks, with size in context being bench marked to a companys market
value. So while a typically large-cap stock would have a market
capitalization of over ` 5,000 crore, a mid-cap stock would have a
market value of ` 1,000 crores ` 5,000 crore.
Mid-sized companies have more scope to expand than their larger

counter-parts, who have already walked the growth plan. The same is
the case with share prices and risks. Most equity funds invest to a large
extent in large-cap stocks, where growth forecasts are relatively more
predictable and easier to make, and investment is relatively easy. Mid-
cap funds, though, venture into the relative unknown, where both risk
and reward is greater.
22.4 DEBT/INCOME SCHEME
This is aimed at maximizing current income (interest and dividend) of

investors. It is a scheme that is typically debt-oriented, which provides
interest at regular intervals and has limited downside. Capital
appreciation in such a scheme is generally less than in a pure equity
fund. Income schemes normally provide higher returns than bank fixed
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TYPES OF SCHEMES
deposits. Many income schemes invest about 15% of the corpus in
equities as a result of which they have the potential to provide much
higher returns than a pure bond fund.
Debt funds are schemes that invest only in fixed-income instruments

such as company bonds, debentures and government securities-where
the returns are fixed for a particular period of time. The objective here is
to generate steady returns keeping capital safe making it a good choice
for investors who are prudent with their investment.
The general belief is that debt funds invest in debt instruments and that
they are safe. Unlike equity funds, investments in a debt will not
depreciate in value and will always generate returns. But practically,
although debt funds are less risky when compared to equity funds, they
still have a risk factor present. Debt funds invest in fixed-income
instruments, but they do not always yield a steady return. They could
sometime even encounter losses. The following are the various risks that
an investor will have to face while investing in debt funds.
Default Risk
Debt funds are of two types; one is issued by the government and those
issued by companies. All government debt is guaranteed by the
exchequer and there is no risk of defaulting. Corporate debt on the other
hand depends on the financial health of the company.
Debt funds that invest in corporate paper can hold up to 10 per cent of
their corpus in a single company though they very rarely cross the 5 per
cent mark. With high levels of exposure given to a single company,
defaults can hurt funds. For instance, a debt fund that holds 10 per cent
in a company bond and if the company defaults, 10 per cent gets wiped
out of the NAV of the scheme.
Hence a debt fund has to keep a tab on the companies that it invests in.
This is done by credit rating. This indicates the financial health of the
companies.
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TYPES OF SCHEMES
Interest Rate Risk
When debt funds invest, they give a fixed interest income but the actual
income can fluctuate. This happens due to certain reasons as explained
below.
A debt fund has two income streams. One is interest earnings and the
other is the capital gains. Interest accrues on debt securities on a daily
basis. Interest earnings are the staid, predictable component of a debt
funds return. The increase in returns comes from capital gains, the basis
of which is the inverse relationship between interest rates and bond
prices. When there is a fall in the interest rates, bond prices rise and vice
versa. The inverse relationship between interest rates and security prices
can also work against a debt fund. So if the interest rates rise, bond
prices will fall and so will the NAV. A majority of debt securities are listed
and traded on the market.
Prices and NAV s change everyday, thus keep fund managers guessing
about such fluctuations and work towards being on the right side. A
failure in doing so will depreciate the value of the NAV.
Liquidity Risk
In spite of active trading of stocks, government securities and treasury

bills in big quantities, the corporate bond market faces liquidity issues.
Trading is confined to mostly high rated bonds.
As the rating move downwards, the volumes also drop. This may lead a
fund wanting to sell a security, but is not able to do so because there are
no buyers or the buyers want a discounted rate.
Indirect over Direct Investment
Investing directly in debt instruments or indirectly through debt funds

has their own share of pros and cons. A bond, which is a debt
instrument, is issued by a company. If everything goes well, the bond is
held till maturity and, the company pays the promised interest along with
the capital. Returns are known to the investor at the time of investing.
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TYPES OF SCHEMES
With debt funds, the value of the investment depends on the NAV which
fluctuates daily.
A debt fund delivers a total return which includes the capital gains and
the interest income. If interest falls, a debt fund investor will have the
advantage of higher returns which is earned from capital appreciation. A
debt fund holds the advantage of delivering a higher return although at
greater risks.
Access to Debt Instruments
One can at any given point of time an investor can either purchase or sell
the various listed stocks. In case of a debt instrument, which is often out
of the purview of the small investor, one can invest in government saving
schemes, bank deposits and infrastructure bonds. All of this is a small
section of the debt market. A huge section of the corporate bonds and
debentures, government securities and money market instruments are a
part of the market for large investors. The government and companies
would prefer having 100 large investors rather than a few thousands of
small investors since this involves less work. Debt funds are among these
large investors. When you invest in them, you indirectly get access to
this large pool of otherwise largely in accessible debt securities.
Diversified Portfolio
With a small amount of funds an investor will be able to invest in a

handful of debt securities. Whereas, a debt fund can invest in a huge
number of securities and spread its risk wider. The chance of a company
defaulting on its debt commitments is low but the risk is present. If 20%
of an investors portfolio is invested in the fixed deposit of one company,
and if the company defaults, the loss would be huge. Debt funds are
more diversified, which reduces risks of default.
High Liquidity
One can exit a debt fund whenever he wishes to at prevalent NAV prices.
So is not the case with all debt instruments. Some are invested in for a
lock-in period and some are hardly traded.
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TYPES OF SCHEMES
Tax Advantages
Usually, investing through debt funds is more tax-saving than investing

directly.
Some of these debt funds are:
Income Funds
Income funds aim to maximize debt returns for the medium to the long
term. They invest mostly in bonds issued by companies. Corporate paper
offers a higher return than government paper. This is because corporate
paper is riskier. The government is unlikely to default. Returns and risk
from a debt instrument increases with tenure. An increase in tenure means
an issuer keeps your money for a longer time. It would appear that income
funds because they are invested in corporate paper and government
securities would generate higher income. This does not always happen
especially when there is a boom in the stock markets.
Floating Rate Funds
The funds of floating rate funds are invested in floating rate securities. As
the coupon of these securities adjusts automatically and in exact
proportion to changes in the benchmark interest rates, these funds are
more insulated from interest rate risk.
Overseas Debt Funds
These are income funds that invest in debt instruments of foreign

countries. This is not very popular in India as the interest paid on debt
instruments abroad is much lower than in India.
22.4.1 Gilt Funds
Gilt funds invest much of their corpus in sovereign securities issued by the
Central Government, with a very small portion invested in the inter-bank
call money market. All these instruments carry the highest credit rating,
thus providing the highest level of safety. The default risk in these
instruments is virtually zero. Regulations in force now, permit non-
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TYPES OF SCHEMES
government provident funds, superannuation funds and gratuity funds to
invest in 100 per cent gilt schemes floated by mutual funds.
Serial Plan
A serial plan is an open ended plan with a fixed tenure. From the time of
the launch, a serial plan invests in debt instruments whose maturity
matches its tenure and hold them till maturity.
Liquid Fund
Liquid funds cater to the short-term upto one year. These funds invest in
high safety financial instruments whose tenure ranges from a day to a
year, issued by the Government and companies.
Short-term Fund
These are open ended funds with a medium focus. They mature in about
two years. Investments made are predominantly in money market
instruments. They often invest about 30 per cent in government securities
to earn higher returns.
Flexible Fund
Most funds have to operate within certain guidelines invest in equity or

debt or a combination. A flexible fund is free to invest in equity or in debt
without any limitation as to the extent that may be invested in equity or
debt instruments. As a consequence returns are higher than pure income
schemes.
22.4.2 Bond Fund
A bond fund is a different form of an income fund, with the only difference
being that the entire corpus is invested in bonds. Unlike some income
funds, no portion of the corpus is invested in equities. Thus, the returns on
a bond fund will generally be less than the returns on an income fund that
may have a 10-15% equity component.
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TYPES OF SCHEMES
22.4.3 Index Fund
An index fund is a fund that has the objective of tracking one of the
popular stock market indices. Thus, the returns on an index fund will
approximate the changes in the index that is used as the base. Of all the
investment options, an index fund is one of the more passive avenues.
22.5 BALANCED FUNDS
Balanced funds are funds that invest both in shares and fixed income
securities in the proportion indicated in their offer document. The returns
to investors provided by these schemes are moderate and at a moderate
risk. A typical equity/debt mix in a balanced fund could be 40:60. Hence
the average returns and risk will also fall in that proportion in the two asset
classes.
Initially when balanced funds were introduced a 50:50, equity: debt mix
was considered right. As time progressed fund houses changed this
proportion due to the flexibility feature which is a requisite to get better
returns on investments in fund. Two noticeable trends characterize
balanced funds in the market. One, as a group, their asset mix takes on a
wide range. So, the equity-debt spill could be 80:20, 60:40, 50:50, 30:70,
20:80 Secondly, the intended split is not a single figure, but covers a fair
range. Most balanced funds give themselves maneuvering room. Such
flexibility means there is plenty of choice on the offer. It is up to the
investor to pick up his choice of a balanced fund whose asset allocation
suits his risk profile and investment needs.
Funds that are aggressive in nature invest anywhere between 50-75% in

equities and the others in debt. This is done because only equity is capable
of delivering top returns. So, in a bullish market, the equity allocation is
close to its peak and in a bearish market the fund exercises restrain and
moves towards its lower side. Timing this transaction is a difficult task
because with the high equity exposure, returns of equity-loaded balanced
funds tend to be volatile, as happened during the boom and bust in IT
stocks. NAVs of such funds rose but went down as quickly when the market
swayed again. Funds with greater exposure to equity tend to do well in
bullish times but face a downward trend in a bearish market. The budget of
2006 re-defined equity fund for the purpose of tax-exemptions as one
holds at least 65% in equities. This created a lot of balanced funds re-
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TYPES OF SCHEMES
structure on their equity exposure. This is advised for investors who have
the ability to face risk.
A large number of fund houses believe in investing in moderation into

equity. They hold a 40-60% in equities because lowerthe equity exposure,
lower isthe risk. Conservative funds prefer to lean more heavily towards
debt and limiting their investment in equity to 40%. This is suitable for
investors who do not want to take high risks.
Ultra-Conservative funds are the ones with monthly-income plans (MIPs).

When they were initially introduced they gave areturn of 12-14%. Butwith
time MIPs havenot been able to generate more than 10-12% annual by
investing in instruments that yield 7-9%. Fund houses found it difficult to
shut down MIPs since there was a demand and a steady income. So they
stopped assuring returns. They shed their debt tag and started dealing
with a marginal exposure to equity. The objective was to generate a
marginally higher rate of return than debt over a period of time, while
declaring dividends monthly. Almost all MIPs now give themselves an
option to invest in 10-30% equity. Though investment in equity increases
returns, it reduces dividend surety. In certain months when the market is
in a downturn, it even skips its dividends. And when the share prices are
on the rise, MIPs can more than make up for the earlier shortfall. When
investing in MIPs, investors should be prepared for a nil or low period.
Fund houses are constantly working around basic concepts to come up with
new investment exposures. There are passive approaches to investing like
FT PE Ratio Fund. While fund managers of conventional balanced funds are
at liberty to choose their asset mix, PE Ratio Fund managers dont have the
same powers. Instead, the equity debt split in its portfolio is based on
prevailing stock valuations as represented by the PE (price to earnings)
ratio of the 50 share S&P CNX Nifty index. The scheme has outlined an
asset allocation matrix, based on which the schemes equity component will
fall (and its debt portion will show a corresponding rise) as the PE ratio of
the Nifty increases, and vice versa. By reducing the equity exposure in a
rising market and increasing it in a falling one, the PE Ratio Fund will
effectively try and move towards the buy low and sell high formula. The
scheme also eliminates the fund managers risk in stock selection, as its
equity proportion will always mirror that of the Nifty, both in the choice of
stocks and weightage.
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TYPES OF SCHEMES
Balanced Fund vs. Other Types of Funds
The objective of the fund is to generate income while being able to grow
capital.
Blend of Growth and Safety: The unique proposition of spreading the

investment into two broad divisions of mutual fund investing is hard to find
in other types of funds.
Freedom to decide allocation: Freedom to switch over from one

proportion to the other, which is from 60:40 to 40:60 patterns. You can
switch over when you perceive a growth opportunity or a threat into the
other from the existing. This you can reverse when you perceive the
situation leading to it has changed. No other type of fund has this freedom,
having chosen the fund you have to go through the mandate of the fund.
Best balanced mutual funds keep allocation flexible and open to changes as
per demands of market conditions but subject to regulations by laws of
government and SEC (Securities & Exchange Commission).
Risky Proposition: Consider a situation when the stock market is having

a bull run (long rally). Then you can expect a great appreciation in its
principal. Naturally any manager would be tempted to divert as much cash
at his command to stocks as possible. It could go as high as 80 per cent
with just 20 per cent for debt instruments. Other types of funds differ here
because of SEBI regulations and funds own mandate.
Advantages/Disadvantages of Balanced Mutual Funds
Advantages:
1. Obviously the most striking advantage is being able to switch over from
one combination to the other depending on the market at the time.
2. Diversity in true sense with portfolio containing top stocks and bonds for
a blend of growth and safety.
3. Hassle free management of an assortment of investments yourself..
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TYPES OF SCHEMES
Disadvantages:
1. Fees remain same regardless of whether you hold 60:40 patterns in

favor of stocks or the low return and sloppy 40:60 bond orientation.
2. If you forgot to switch back to growth 60:40 patterns even after market
turning around, you will lose out on the low risk high growth potential of
bull market.
3. Funds may have bonds of lower tenures while your need is for a longer
term. Long term bonds earn significantly more than short term bonds.
Going by the objective, a balanced mutual fund has to perform even in

distress times. Best performing balanced mutual funds are those that tides
over the circumstances by actively managing the asset to maximize growth
and regular incomes come what may. A fund manager is at liberty to sell
and buy stocks and bonds any number of times in his endeavor to track the
market. A good fund will not down play the contribution of bonds at times
of bear runs.
22.6 SECTOR FUND
A sector fund is one whose portfolio is built around a particular sector or

theme. It could be appropriate for an investor who lacks expertise or
knowledge about a particular sector. Some of the recent sector funds
floated have included those focusing on the information technology and
fast moving consumer goods (FMCG) sectors. A sector fund is inherently
riskier than a diversified fund because the portfolio is concentrated in one
sector only. However, in good markets, sector funds can provide above
average returns.
22.7 MONEY MARKET FUND
Money market funds provide easy liquidity, preservation of capital and

moderate income. They are low risk as they invest in safer, short-term
money market instruments such as treasury bills, certificates of deposit,
commercial paper and Inter-bank call money. Returns on these schemes
may fluctuate, depending upon the interest rates prevailing in the market.
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TYPES OF SCHEMES
22.8 OTHER TYPES OF FUNDS
Fund houses are spreading their circle of work beyond the conventional
kinds of schemes and introducing new ones.
Fund of Funds (FOFs)
A fund of funds (FOF) is an investment fund that uses an investment

strategy of holding a portfolio of other investment funds rather than
investing directly in shares, bonds or other securities. This type of investing
is often referred to as multi-manager investment. There are different types
of fund of funds, each investing in a different type of collective investment
scheme (typically one type per FoF), e.g., mutual fund FOF, hedge fund
FoF, private equity FoF or investment trust FoF
These schemes invest in other mutual fund schemes and not in shares and
other debt securities. An equity of FOF invests in equity and a debt of FOF
invests in debt schemes. A composite FoF invests in both types of schemes.
The objective hence is to spread risk widely. Ideally, one should spread his
investment across various schemes so that there is a proper balance when
there is a fall in one area, you are safe in the other and can make up for
losses incurred. This approach requires you to commit a certain amount of
money- most fund houses ask for an investment of at least ` 5000 and
have the inclination to choose and track a portfolio of schemes.
A FOF enables you to achieve greater diversification of through just one

scheme, for just` 5000. It spreads your risk across a greater platform.
Since FOFs track the whole arena of mutual funds, it relieves you of the
hassle of scouting for and staying invested in the best schemes in the
market. There is also a chance where FOFs can fall prey to questionable
investment practices. Multi manager schemes are an exception to this as
these schemes aim at selecting managers across the industry based on
their performance. Strategic asset allocation is combined with active
tactical shifts to reflect manager performance and market cycles.
Advantages:
Investing in a collective investment scheme will increase diversity

compared to a small investor holding a range of securities directly.
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TYPES OF SCHEMES
Investing in a fund of funds arrangement will achieve even greater
diversification.
An investment manager may actively manage your investment with a view

to select the best securities. A FOF manager will try to select the best
performing funds to invest in based upon the managers past performance
and other factors. If the FoF manager is skillful, this additional level of
selection can provide greater stability and take on some of the risk relating
to the decisions of a single manager. As in all other areas of investing,
there are no guarantees for regular returns.
Disadvantages:
Management fees for funds of funds are typically higher than those on
traditional investment funds because they include part of the management
fees charged by the underlying funds.
Since a fund of funds buys many different funds which themselves invest in
many different securities, it is possible for the fund of funds to own the
same stock through several different funds and it can be difficult to keep
track of the overall holdings.
Funds of funds are often used when investing in hedge funds, as they
typically have a high minimum investment level compared to traditional
investment funds which precludes many from investing directly. In addition
hedge fund investing is more complicated and higher risk than traditional
collective investments this lack of accessibility favours a FoF with a
professional manager and built in spread of risk.
Pension funds and other institutions often invest in funds of hedge funds
for part or all of their alternative asset programs, i.e., investments other
than traditional stock and bond holdings.
Dynamic Fund
All schemes have to spell out, in their offer document, where and in what
proportion they intend to invest their corpus. For instance, equity schemes,
unless stated in their offer document, need to have atleast 65% of their
corpus invested in stocks at all times. Infact most diversified equity
schemes prefer to stay benchmarked to the market and hold 90% in stocks
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TYPES OF SCHEMES
at all time. This regulation is meant to ensure that schemes always provide
investors the promised exposure. On the other hand, in an bullish market,
equity schemes can not do much to save themselves. They cannot sell
wholesale and move to debt or cash. It is up to the investor to stay, leave
or cut back.
Dynamic funds can however, invest in both debt and equities, in any ratio.
In other words, a dynamic fund could have cushioned its fall by selling its
stocks and re-entering at lower levels. Thats the magnitude of flexibility on
offer it helps avoid sharp falls, the danger being of missing out on market
rallies. Their fund management is aggressive, characterised by short-term
positions and portfolio planning. Its a high-risk, high-return proposition,
suitable only for those willing to take a high risk.
Gold Fund
Investing in gold is easier than buying property, but comes with its own
share of drawbacks. Gold may vary in its purity levels. Owning gold can be
expensive because it needs to be stored in lockers and the rent has to be
paid. If this was to be avoided then holding golds could be risky if it was
stored at home. Like real estate funds, a gold fund handles all such
peripheral issues while you hold gold as a mere passbook entry. Gold BeES
from Benchmark Mutual Fund and UTI Gold Fund are gold ETFs are good
funds for investment.
Funds Investing in Overseas Securities
The 2007 budget permitted individuals to invest in overseas securities

through mutual funds. Schemes that would give geographical
diversification to an investors portfolio have been launched in the market.
RISK FACTOR OF THE VARIOUS FUNDS
Index Funds/Exchange Traded Funds
Objective Long-term growth

Ideal Tenure 5 years and more
Risk Medium
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TYPES OF SCHEMES
Equity Linked Savings Schemes
Objective Long-term growth with tax saving

Ideal Tenure 3 year and more
Risk High
Diversified Equity Funds
Objective High growth

Risk High
Sector Funds

Risk Very high
Speciality Funds

Risk Very high
Income Funds
Objective To maximize steady and regular returns

Ideal Tenure 1 year or more
Risk Medium
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TYPES OF SCHEMES
Gilt Funds
Objective Steady and regular returns

Risk Medium
Liquid Funds
Objective Earn more than bank deposits

Ideal Tenure 6 months to a year
Risk Low
Short-term Funds
Objective Earn more than bank deposits

Ideal Tenure 6 months to a year
Risk Low
Flexible Funds
Objective Maximize returns from debt funds

Risk High
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TYPES OF SCHEMES
1. What are open-ended and close-ended schemes? State the differences

between them.
2. What is an equity/growth scheme? Explain the various types.
3. What are the various Debt/Income schemes?
4. What are balanced funds? What are the advantages and disadvantages
that an investor faces?
5. Explain Sector funds.
6. What are the various funds in and out of the money market?
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TYPES OF SCHEMES
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !169
ADVANTAGES OF MUTUAL FUND INVESTMENT
Chapter 23
ADVANTAGES OF MUTUAL FUND
INVESTMENT
Learning Objective:
This chapter explains the advantages of investing in mutual funds.
Structure:
23.1 Tailored Products

23.2 Investment Know How
23.3 Convenience
23.4 Flexibility
23.5 Affordability
23.6 Liquidity
23.7 Opportunity to Invest in Diverse Investments/Securities
23.8 Tax Benefits
23.9 Choice of Risk Position
23.10 Professional Management
23.11 Investment Convenience
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23.1 TAILORED PRODUCTS
Mutual Funds provide investment products that are more tailored to the
needs of different classes of investors, unlike Banks, for instance, which
offer only a few standardized products. Mutual Funds occupy the middle
ground-between large financial institutions, which offer standardized
financial products, and the very small so-called boutiques or private banks
that offer extremely customized products and services.
23.2 INVESTMENT KNOW HOW
Mutual Funds also provide investment know-how and trading capabilities

that small or novice investors cannot be expected to possess.
23.3 CONVENIENCE
Mutual Funds reduce or largely eliminate the burden, paperwork and

hassles that small investors experience in managing a diverse portfolio on
their own. Its so much simpler and more convenient for investors to
transfer their worries to people, who have specialized in managing other
peoples money.
Additionally units can be bought by mail, telephone or the internet. You can
also plan automatic investments into a fund from your bank account or
arrange for automatic transfers from a fund to your bank account to meet
expenses at pre determined times.
23.4 FLEXIBILITY
Most fund companies have a variety of mutual funds (income, growth,

balanced etc.) and it is possible to switch from one to another. This helps
you to balance your portfolio.
23.5 AFFORDABILITY
Mutual fund units can be bought for a small amount of money (` 5000 for
initial purchase).
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23.6 LIQUIDITY
Mutual Funds also give an investor a high degree of liquidity. A Mutual Fund
investment can be purchased and sold quickly. This is often not true of
individual shares and debentures, many of which may not be frequently
traded.
23.7OPPORTUNITY TO INVEST IN DIVERSE INVESTMENTS/

SECURITIES
Buying a mutual fund unit is like holding shares in a number of companies

at the same time. Most investors cannot afford to do this on their own.
Mutual Funds also make it possible for small retail investors to invest in
instruments that are otherwise not available to them. For instance, high
quality debentures may not be offered directly to small investors. The
issuers may choose to place these with large institutions, including Mutual
Funds. For the borrower, this kind of a bulk placement lowers the cost of
raising funds. When the investor invests in the mutual fund, he/she, in
effect, gets access to investments in these debentures. The same is the
case with Government Securities. As of now, this is a wholesale market.
However, an investor can invest in Government Securities through a Gilt
Fund.
23.8 TAX BENEFITS
Various tax laws govern mutual fund investments out of which some lower
the returns while the others save or higher them. There are various ways
to use these laws with larger objectives of maximizing the take-away home
pack. Mutual funds do not pay any tax on their income. So the earnings in
a mutual fund scheme could facilitate a higher level of re-investment. This
offers the investor an opportunity to multiply their money within a scheme
without paying tax. Taxation can be postponed until the investor needs the
money at which point of time the income can be structured as a long-
term capital gain with incidental tax efficiencies.
There are two forms of distribution:
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Income Dividends (interest and dividends generated by a funds
investments)
Capital Gains (the fund subtracts its capital losses from its capital gains
to determine its net capital gains, which it distributes to shareholders)
There are some things you can do in order to avoid getting hit with a big
tax bill:
Look for funds with low turnover sometimes funds buy and sell
constantly in an attempt to maximize returns and generate big
distributions, but these are subject to taxes, which will cut into your
gains. If you hold the units for less than a year then you pay short-term
capital gains tax. As of May 2007, in case of equity funds the short-term
capital gains was 10%. Incase of debt funds, the rate is the personal
income tax rate that is applicable to you, plus a surcharge if applicable
and an education cess of 3%.
If units are held for a year or more, you will have to pay long-term
capital gains tax. Long-term gains from equity are exempt from tax. For
debt funds, long-term capital gains; work out the tax payable at a flat
rate of 10% or at 20% with indexation benefits for the debt funds.
Whenever carrying long-term capital gains, work out the tax payable
under the two options and use the one that requires you to pay less. The
basic concept of indexation is that inflation eats into returns from
financial assets, and so tax should be paid only on real gains, not all
gains. In order to compute actual gains, the government has
constructed an inflation index. It is called the cost of inflation index and
is updated every year. In order to determine the capital gains, the ratio
of the index in the year of the sale to its value in the year of purchase
price. This is multiplied by the purchase price. This gives the indexed
cost of acquisition, which is subtracted from the sale proceeds to arrive
to the capital gains.
Use tax-deferred accounts for tax-inefficient funds. Tax laws allow capital
gains to be set off against capital losses. Short-term losses against short-
term gains, long-term losses against long-term gains. This is a good way
to save tax. When ever you make capital gains, be it from the sale of
units or shares, check your portfolio. The reluctant loss can be used to
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set off capital gains from other investments. Capital gains and losses can
be carried forward for 8 years.
Buy and hold; the more you sell or exchange shares, the more capital
gains you are likely to realize, so seek long-term capital gains.
Taxation of dividends is a sensitive between the government and the tax-

payer. The government wants to tax dividends to earn more income and
the investors want the government to leave us alone. Same is the case
with mutual funds. Taxes levied drive away investors. The government
has frequently changed the rules. So, dividends have become tax-free
one year, taxable in the hands of mutual funds in the following year. For
tax-saving, one needs to weigh your investment needs against tax
consideration and then take a decision.
You can invest in other types of funds. Index Funds simply follow a stock
index like the S&P 500. Since the turnover is lowerthan 40%,they have
lower taxable distributions. Tax-Managed or Tax-Efficient Funds focus on
after-tax returns; their goal is to keep taxable gains low.
One can invest up to ` 1 lakh in a specified instrument, within limits and

avail of a deduction from taxable income. Among the specified
instruments are equity-linked saving schemes (ELSS) and pension funds.
(Section 80C)
23.9 CHOICE OF RISK POSITION
There are many risk levels that mutual funds offer in their schemes. Each
mutual fund guarantees a certain risk level is an expected to stick by it. If
the fund does not stick to their promise, then they are not worth investing
in.
An investor will naturally be happy when risk levels are lower than what
was promised. However, a variation from the promised risk level is
unethical, irrespective of whether it is higher or lower than the promise.
The trustees are responsible for ensuring that the AMC invests as per its
committed investment objective, and maintains the promised risk character
of the scheme.
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23.10 PROFESSIONAL MANAGEMENT
Investment is specialized and requires constant evaluation. AMC s are

expected to have the professional people and the establishment to carry
out this specialized work.
Moreover, professional managers can take more realistic decisions, such as

selling in a stop-loss situation, which investors find difficult on emotional
grounds.
23.11 INVESTMENT CONVENIENCE
The facility of making investments through service centres as well as

through the internet, a facility offered by some AMCs, ensures
convenience. Similarly, through standing instructions, it is possible for
investors to adopt SIP, SWP or STP. Mutual funds that permit switches
between schemes without any cost, help investors to manage their
exposures economically.
1. What are the various advantages of investing in a mutual fund?
2. Explain the tax benefits that an investor will gain when he invests in
mutual funds.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !176
DISADVANTAGES OF INVESTING IN MUTUAL FUNDS
Chapter 24
DISADVANTAGES OF INVESTING IN
MUTUAL FUNDS
Learning Objective:
This chapter explains the disadvantages of investing in mutual funds.
Structure:
24.1 Uncertainty of Returns

24.2 Not Better Returns
24.3 Costs
24.4 Lack of Control
24.5 Risk
24.1 UNCERTAINTY OF RETURNS
Unlike savings instruments, offered by banks, returns from mutual funds

are not fixed. Dividend payouts can vary sometimes there may be no
dividend declared for a particular period.
24.2 NOT BETTER RETURNS
The lay investor buys units in the belief that the professional manager will
know where to invest and will ensure that he gets the best return. This
need not always be the case. Some studies prove that the choices a
professional fund manager makes is no better than random stock picking
by an amateur.
24.3 COSTS
The investor in a mutual fund has to pay various costsload on entry and
exit, management fees etc. This is quite high. Buying shares are much
cheaper.
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24.4 LACK OF CONTROL
When you buy units in a fund, you abdicate control of your funds. You have
no real say in what is bought or sold or when that is bought or sold. You
are at the mercy of the fund manager.
24.5 RISK
If a bank fails, depositors are guaranteed to get upto ` 100,000 by the

Deposit Insurance Credit Guarantee Corporation (DICGC). Mutual fund
units are not insured or guaranteed by any state agency.
Conceptually, another disadvantage, is that, when an investor buys or sells

a unit of a Mutual Fund, he, in effect, buys or sells every share/security in
that funds portfolio, whether that is the right time to trade or not. An
investor, managing his own portfolio, can separately sell those shares that
have gone up and, buy those whose price has decreased. This individual
discrimination is not available to investors in Mutual Funds.
1. What are the various advantages of investing in a mutual fund?
2. Explain the risk that an investor will face when he invests in mutual
funds.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !179
WHEN TO BUY
Chapter 25
WHEN TO BUY
Learning Objective:
This chapter emphasizes on the right time to invest in mutual funds.
Structure:
25.1 Time your Investments

25.2 Think Long-Term
25.3 Debt Funds
25.4 New or Old Schemes
Timing matters. Returns from a mutual fund are influenced by the time of
investment. You will make money from an asset if you sell it at a price that
is higher than what it was bought for. Lower the price that it was purchased
for, bigger are the returns. An asset class like equity, whose prices rise and
fall constantly, offers many such price points for entry.
Even if a purchase is made from a seemingly low price, you still have to
ride the upward move which may be time consuming. Security prices take
their cue from events and happenings that affect them. A favourable
confluence of such factors is a good time to invest, as the gains will be
quick and sharp.
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WHEN TO BUY
25.1 TIME YOUR INVESTMENTS
The basic principle of buying low and selling high is very important. But
where an investors money is locked into a market thats ticking, thoughts
can easily get clouded by sentiments. In case of equity investments in a
bearish market when share valuations are low and falling, people tend to
shy away from investing because they fear prices may drop further. In a
dullish market, when the valuation is high and rising, the same people
believe that prices will increase further, when it should be the other way
round.
It is difficult to time the market and to quantify the impact an event will
have on prices. It is difficult to predict how soon the market may swing
around. The nature of equity investing is such that even if the investor
buys at a low value, he might have to wait long before realizing the true
worth of the investment and may even suffer the fear of seeing it
depreciate further.
With regard to mutual funds there are triggers which indicate when units
can be bought.
Scheme Trigger
Diversified equity fund Market rally
Index fund Market rally
Sector fund Upturn in sector performance
Debt fund Cut in interest rates
25.2 THINK LONG-TERM
Investment is profitable only when it happens at the right time. Surveys

show that every increase in the holding period increases the probability of
an asset class delivering the kind of returns it is capable of. For instance, it
is often said that one can expect an annual return of 15% from equities.
This does not mean that an investment in an equity fund made at any point
in time will appreciate 15% a year later. It or may not happen, but options
should be kept open and stay invested for, say 10 years to have a greater
chance to earn that 15% annualized return than you would if you had
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WHEN TO BUY
invested with an intention of exiting in a year. Greater surety in returns is
one of the virtues of long-term investing and it does away with having to
agonise over when exactly to invest. Another way to achieve the same
objective is to average your purchase price by investing regularly, either by
you or through a systematic investment plan (SIP).
Equity Funds
No scheme can insulate itself completely from market conditions. When the
market is going through a down turn equity funds also go through a
downturn. When the market booms, equity funds do very well. These
swings distort pricing though over a period of time (10 to 15 years) the
effect of the swing tends to even out.
If you are a regular investor invest regularly even if the prices are falling
because a good scheme will pick up when conditions improve.
25.3 DEBT FUNDS
Timing entry is less critical; for debt funds. The returns do not have wild
swings as in equity funds and are relatively steady. Interest is stable and
accrues to debt funds daily. This guarantees some return. Its gain is from
security price changes as a result of a rise or fall in interest rates.
The best time to invest in a debt fund is when there is a cut anticipated in
interest rates. The inverse relationship between interest rates and security
prices pushes up NAVs of debt funds.
25.4 NEW OR OLD SCHEMES
Should one invest in an ongoing scheme or in a new scheme? Many

investors believe a new fund offer (NFO) is cheaper as it is priced at an
NAV of ` 10 while existing schemes have an NAV more than ` 10. This is
not correct as in an existing scheme one buys a unit at its NAV. A NFO is
yet to invest in shares and therefore its units are at par. It is submitted
that it is better to invest in existing schemes as they are easier to evaluate
and have a track record. It is tested whereas an NFO is not.
! !182
WHEN TO BUY
1. What are the various things that an investor should keep in mind at the
time of investing in a mutual fund?
2. Explain the importance of the time factor while investing in mutual

funds.
! !183
WHEN TO BUY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !184
FACTORS TO CONSIDER IN CHOOSING THE FUND
Chapter 26
FACTORS TO CONSIDER IN CHOOSING THE
FUND
Learning Objective:
This chapter helps one to choose the fund he wants to invest in and
explains the factors to be considered.
Structure:
26.1 The Scheme

26.2 The Offer Document
26.3 Fund Fact-sheet
26.4 Objective of the Fund
26.5 Performance
26.6 Fund Managers Track Record
26.7 Portfolio
26.8 Diversified Investor Base
26.9 Number of Retail Investors and Size of Corpus
26.10 Expenses
26.11 Reasonable Load Structure
26.12 Suitability
! !185
26.1 THE SCHEME
Every scheme invests in a particular kind of security, which determines how

much risk it entails and how much returns can be expected. It should be
seen to that these schemes match the investment objective and risk
profile. If you are looking out for safety of your investment, invest in debt
funds and avoid equity funds. If money growth over a period of time is the
objective then equity funds should be the choice. Whatever the objective
is, it is important to get a hold of it and then see which scheme serves it
best. This will make the choice easier because by this exercise you would
have narrowed down to about 20-30 schemes. Once you have short listed
on 4-5 consistent and good scheme, tell your agent to give you the offer
document and the latest fact-sheet or scan through the websites of these
fund houses.
26.2 THE OFFER DOCUMENT
The offer document of any scheme is the most comprehensive docket on it.
It dwells on important specifics such as objectives and asset mixes. It is
first released at the time of the schemes launch and an updated one is
issued periodically. The document can be had from any seller of the
scheme.
26.3 FUND FACT-SHEET
The offer document tells you all that you need to know about a scheme,
except its latest performance and portfolio, for which you need to go
through its latest fact sheet. It is released usually on a halfyearly/
quarterly basis by fund houses. It also shows exactly where each scheme
has invested its money.
26.4 OBJECTIVE OF THE FUND
The investment objective section in the offer document gives a good idea
of what the scheme is all about. Study its asset allocation pattern to know
where and in what proportion the scheme plans to invest its money. Be
wary of words that are ambiguous or vague. Though the usage of these
words may be to give the fund manager maneuverability, it can legitimize
deviations from the stated objectives of the fund.
! !186
26.5 PERFORMANCE
The main thing that one wants is the returns from a scheme. Although the
past-performance of both the fund house and the scheme might not be
replicated, it sheds light on its fund management abilities. If, within its
peers, a scheme is not as consistent, then there must be something wrong.
If it is, in the same circumstances, a front-runner., then there must be
something right which the others are wrong in, if a scheme is perennially
languishing; it is probably poor money management. A good record speaks
well of a fund house. Talk to people with a fair idea and experience of
investments and knowledge of fund houses. Study performance cards
collated by independent agencies to see if the invested fund houses are
among the top performers. The performance of a fund house should be
studied but not in isolation. Absolute performance can be misleading;
whereas a relative performance will give a more accurate picture. The
study should be done over various periods of time comparing it with its
peers and relevant benchmarks.
Fact-sheets tabulate scheme performance figures over various time-periods

ranging from the latest quarter to the trailing five years. In order to put a
schemes performance into perspective, they also give the corresponding
return figures for a comparable benchmark, as specified by SEBI. It speaks
well of a scheme if it consistently features among the best in its category
and best benchmarks.
26.6 FUND MANAGERS TRACK RECORD
The Fund Manager should have a proven track record regarding efficient
fund management. Further, the investor must examine the returns over
longer periods, in up markets and down.
26.7 PORTFOLIO
The scheme in which you have invested should devotedly remain on the
track of its investment objective. That means staying within its chosen
investment space and following some basic fund management tenants. Like
spreading its risk across many securities, or what is referred to as portfolio
diversification. Adequate diversification, across companies and sectors,
! !187
ensures that when one security/sector goes down, your schemes NAV
doesnt plunge.
In equity funds, a common deviation is of schemes investing a big chunk of

their corpus in a single stock or a single sector (sector funds are excluded
here). There are checks and balances in the system intended to ensure this
doesnt happen. For instance, SEBI prohibits equity schemes from
investment more than 10% of their corpus in a stock. However, this limit is
applicable only at a time of investment; overshooting the ceiling due to
subsequent appreciation in the share price doesnt invite censure, as a
result of which some schemes do hold more than 10% in a stock. Similarly,
there is no regulatory limit on sector holding. An equity fund can hold 30
stocks, but if stocks from just one sector account for 40% of its portfolio,
the risk is high. Such concentration is not healthy. In debt funds, portfolio
concerns revolve around the safety of your principal. So besides
diversification, an income fund should hold corporate paper that is safe. If
safety is first, then returns should be your objective. You can measure the
schemes interest rate risk by looking at its average portfolio maturity.
The fund should generally have investments in high quality shares and
securities that are reasonably liquid. Beware of speculative grade paper
that is very risky and, can backfire at anytime. Further, ensure that all the
eggs are not in one basket a good portfolio should be reasonably
diversified.
A portfolio (debt fund) that is weighted towards securities of longer

maturities proves advantageous if interest rates move down. However, if
interest rates rise, such a portfolio loses out.
26.8 DIVERSIFIED INVESTOR BASE
A scheme should have a large investor base. This ensures that a large
investor cannot use its money power to dictate investment decisions
because such a thing would be risky for unit-holders. It is mandatory for a
fund house to disclose the number of investors holding 25% or more of a
schemes corpus and the aggregate percentage held by such investors in
its reports, and offer documents. SEBI makes it mandatory for fund houses
to have a minimum of 20 investors in its scheme with no investor holding
more than 25% of its corpus.
! !188
26.9 NUMBER OF RETAIL INVESTORS AND SIZE OF

CORPUS
It is easier to deploy and manage a small fund. The flip side is that if even
a few investors exit, a small fund could find itself in trouble. On the other
hand, large funds can seize opportunities that smaller funds may not be
able to capitalize on.
26.10 EXPENSES
Fund houses charge asset management fee which is an add-on to other

expenses incurred in the management of the fund. These expenses are
deducted from the NAV reducing returns. Details of expenses charged are
stated as expense ratio in the annual report. The lower the expense ratio
the better it is for the investor. To keep a control over charges, SEBI lays a
limit on the expense that it can charge its unit holders. Equity fund
expenses are limited to 2.50% of their average weekly assets and its
2.25% for equity funds. Experience show that equity fund management is
usually more expensive than debt fund management and active funds are
more expensive than passive ones. That is the reason why active equity
funds hit against the limits set by SEBI. One should keep in mind that the
fund doesnt over-charge its expenses and at the same time should be able
to give back returns. A comparative study of the schemes in the industry
should also be made.
26.11 REASONABLE LOAD STRUCTURE
Load is the fee that is charged during an entry or an exit in a scheme. They
are known as the entry load and exit load respectively. They usually
range anywhere between 0.5% and 2.5%. It is important to see that a
major chunk of the returns do not get eaten up by the expenses, fees and
loads that a fund charges.
26.12 SUITABILITY
The investor needs to make sure that the fund fits his investment
objectives and criteria in terms of risk, total returns, tax objectives,
frequency of dividend payouts, etc.
! !189
1. What are the various factors that an investor should keep in mind at the
time of choosing a mutual fund to invest in?
2. What is a fund-fact sheet?
3. How important is it to study the portfolio of a mutual fund before

investing in it?
4. What difference does it make if a mutual fund has a small or wide

investor base?
! !190
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !191
WHOM TO BUY MUTUAL FUNDS FROM
Chapter 27
Learning Objective:
This chapter guides an investor to the various institutes or agents from

where he can buy his mutual funds.
Structure:
27.1 New Fund Offerings (NFO)

27.2 Mutual Funds
27.3 Intermediaries
27.4 Internet
27.5 Stock Exchange
27.1 NEW FUND OFFERINGS (NFO)
The process for investing in mutual fund NFOs (New Fund Offerings) is
similar to that of new share issues. All that has to be done is to fill in a
form, make a cheque and deposit them both at a collection centre. The
mutual fund in a weeks time will send you an account statement which is
proof of your holding. An NFO is generally preferred by investors to buy
from because they are, at` 10 believed to be cheaper than units bought at
an NAV of greater than ` 10 (this is totally untrue).
27.2 MUTUAL FUNDS
Buying mutual fund units could not have been easier than it is now. All one
has to do is to fill in an application form, make a cheque to the amount
that you want to invest, receive an acknowledgement that the mutual fund
house will give you and in a matter of 3 to 7 days you will receive an
account statement. The other benefit of buying directly from a fund house
is that there is no entry load.
! !192
A fund house markets only its own schemes and so you will have to have
full knowledge of what you are buying. If you are selling units, the relevant
document is a redemption form, which sometimes forms part of your
account statement and can be torn off it, or can be had from the fund
house. The fund house will mail you the cheque within 3 days.
The problem with transacting through fund houses is that they have a very
thin presence. Most fund houses have just an office or two in big cities
moreover, since such offices are located in the central business zones
making it difficult for investors to reach. The scenario is worse in smaller
centres- only a few fund houses have scattered presence. As the industry
grows and gains greater investor acceptance, mutual funds are bound to
expand beyond cities.
27.3 INTERMEDIARIES
Distributors such as agents, banks and stock brokers are the preferred
choice of investors. While dealing with an intermediary, make sure that
they are AMFI (Association of Mutual Funds in India) certified. This is a
SEBI requirement. This is to give the investors a security about who is
advising them for their financial investors. AMFI issues these agents with a
photo identity card with which they register themselves and get certified.
Agents: Agents are preferred by investors because they are a one

stop to shop for financial products. They score over mutual fund
houses on convenience, choice and quality of service. They operate
from multiple locations and are supported by a large number of
registered agents. Many of these offer you services at your door-step.
A big agent has a huge stock of practically every fund house scheme
along with other investment products. A good agent very often is able
to guide you and help you decide on which scheme you should invest
in. An agent should ideally not favour one particular scheme and
should be ethical about giving his opinion to the investor on the best
buy.

The relationship between an intermediary and a fund house is that the
fund house pays intermediaries on the amount of business they bring
in. If fund house A pays more than fund house B to sell their schemes,
the intermediary will definitely sell the former since he earns bigger
from them. To help you ascertain if you are getting misled on this
basis, the entry load of a scheme may help you out. The entry load
! !193
represents the upfront cost an investor pays to invest in a scheme, and
the agents; commission is a part of it. The higher the entry load,
higher may be the chances that the agents commission is high. It
therefore pays to know what the entry load is of a particular scheme.
There was a situation till 2002 when intermediaries could lure investors
by giving them money for their investment in a particular fund house,
creating an unhealthy atmosphere. SEBI put a stop to that. But
intermediaries earnings are commission-based and thus chances are
there that they may favour particular fund house. Hence it is important
to work on gathering information other than what the agent has to
give you.
Banks: A number of banks, especially the private and the foreign ones
are aggressively marketing mutual fund schemes. Banks are a good
choice for purchase of mutual fund units because they are accessible
to the general public. This has made selling mutual funds an easier
task.
Banks are not up to the mark for services when compared to agents.
Whatever the profile maybe, the agent will work to your choice of
investments, but a bank may not do that unless you are an
exceptionally important or big-time client that effects the funds of the
bank. With passing time, competition is also increasing and there are
various banks working on giving the investor better services.
Stock brokers: Big stockbrokers are a combination of agents and

banks. That means they give you personalized service after analyzing
the industry for your need. Their charges are usually high and
affordable by big investors. Small brokers are for retail investors and
usually market schemes of fund houses from where their earnings are
high.
Certified Financial Planners (CFPs): These are independent

professionals trained to advice you on financial matters. They along
with giving advice sell financial products and do this at a service
charge. Beware: A CFP may also have favourite schemes from where
his earnings are high.
! !194
27.4 INTERNET
The internet is a big choice of investors wanting to invest their money
directly into funds. The authorization of digital signatures will also provide
a strong base for investment without physical documentation. Fund houses
enable buying and selling on the following basis:
Own Website: Most mutual fund houses allow purchase and sale of
their schemes through their websites. All one wants is a Net banking
account with any of the banks the fund houses have tied up with. All
one needs to do is to log on to the funds site, choose the scheme and
invest the amount. A link on the website takes you to the website of
the designated bank where you make you payment.
Money is transferred from Net banking account to the mutual fund and
units are allocated immediately. The transaction is also documented in
the physical form and the fund house sends you an application form to
sign and send back. Once the transaction is done with the fund house,
you can open an online account. This enables you to sell units, switch
between schemes and purchase units online.
Financial Portals: Units of mutual funds can also be bought through

financial portals such as myiris.com, timesofindia.com,
indiainfoline.com, etc. The process and requirements are same as
buying from the website of the mutual fund. It should be noted that
many portals enable only purchase.
Online Trading Portals: Share trading portals like ICICI Direct and
Sharekhan offer number of mutual fund schemes. One needs to
register and then can buy and sell units of schemes on offer at no
extra cost.
27.5 STOCK EXCHANGE

Close-ended schemes are traded on some stock exchanges. Since fund
houses do not offer a NAV-based repurchase during their term, the only
way out is through the stock exchange. This is usually not at NAV, but at a
discount of NAV. Open-ended schemes are not available at the stock
exchange. This medium of investment is not as popular as fund houses do
not want to pay a listing fee and increase the burden on the unit holder
which could go up to 5%.
! !195
1. What are the various sources from where an investor can purchase his
mutual fund units?
2. How do intermediaries work as sources of mutual fund investment?
3. State the ways and advantages of investing on the internet.
! !196
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !197
WHICH TYPE OF PLAN TO BUY
Chapter 28
Learning Objective:
This chapter explains the different plans of mutual fund schemes.
Structure:
28.1 Growth Plans

28.2 Dividend Plans
28.3 Dividend Reinvestment Fund
28.4 Systematic Withdrawal Plan
Once if youve decided on the scheme that you would like to invest in, you
need to decide on the plan and how you should receive the gains or income
from the scheme. All fund houses offer options. You must examine these
and choose the one that is most suited to you.
The choice of a plan will depend on your reasons for investing in the
scheme growth or income or a combination of both. If you want your
investment to grow you should opt for a growth plan. On the other hand, if
you require regular income, then you should opt for an income plan. You
should also consider the tax implications. Dividends received from a mutual
fund is not taxable whereas a short term gain is subject to tax.
There are four plans. These are growth plans, dividend plans, dividend
reinvestment plans and systematic withdrawal plans.
! !198
28.1 GROWTH PLANS
If you wish to increase net worth then you should opt for a growth plan. In
a growth plan the gains that you make remain in the plan. The NAV as a
consequence grows. Let us assume that you invest ` 5,000 in an equity
plan and receive 500 units. The NAV of a unit would be ` 10. If the
portfolio appreciates by 15 percent at the end of a year, the NAV of a unit
would have grown to` 11.5. The gain gets reinvested in the scheme. The
NAV per unit will increase, increasing the value of the investment. It is upto
you when to encash the unit and realise the gain.
28.2 DIVIDEND PLANS
Your intent when investing may be to receive regular income. This is given
by dividend or income plans. The portfolio of the fund usually consists of
fixed interest securities. This ensures that there is a regular stream of
income. Periodically (at the end of a month, quarter, half year or year), a
dividend is paid out the dividend representing partly the appreciation the
fund had made. While you can opt for dividend plans in equity schemes,
the dividend is not always as certain. There are times when companies do
not pay dividends. There are also times when, because the market has
fallen, shares are not sold. In that scenario there are no profits to
distribute.
As a rule, you should opt for a dividend plan if you want a regular income
to meet your day to day expenditure or if you want to encash your gains
periodically.
28.3 DIVIDEND REINVESTMENT FUND
A dividend reinvestment fund is a combination of a growth plan and an

income plan. In this plan dividends are declared but the dividend is not
paid to the investor. It is reinvested in the plan and you receive additional
units.
! !199
28.4 SYSTEMATIC WITHDRAWAL PLAN
Systematic withdrawal plans are an alternative to dividend plans when

dividend plans are more taxing than growth plans. This plan gives you the
chance to automatically redeem units worth a pre-specified amount
periodically. In short, dividends are not paid as dividends. The dividend is
added to the corpus and a certain amount is paid every month / year.
1. What is a growth plan?
2. What is the difference between dividend plan and dividend reinvestment

plan?
! !200
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !201
SYSTEMATIC INVESTMENT PLAN
Chapter 29
Learning Objective:
This chapter explains the different types of systematic investment plans.
Structure:
29.1 Systematic Investment Plan (SIP)

29.2 Systematic Withdrawable Plan (SWP)
29.3 Systematic Transfer Plan (STP)
29.4 How to get the maximum out of a SIP?
The market is volatile. Prices will flare or plummet or move up and down. It
is not always possible to buy at the bottom or sell at the top. A way to
cushion again volatility and keep the price down is to invest regularly at
given periodicities. Let us assume that you have ` 100,000 to invest every
month. As opposed to waiting for the right time, if you invest that amount
every month, over a period of time the cost of your purchases will even
out. In one month you may get 1000 units, in another 950 and in yet
another 1100. Systematic investment is making investments regularly
without too much concern on the time you are investing, for the log-term
as over the long-term the price of purchase will even out.
The benefits of having a diversified portfolio are what a prudent investor

will always look for. Rather than investing, disinvesting of switching the
entire portfolio at a single point of time, it is sensible to space out these
investments over a period of time.
This is known as systematic investment plan (SIP) and is offered by all

mutual funds. They are most effective for equity plans as equities are the
most volatile asset class. It helps you to profit from price ups and downs
by automatically buying more units when
prices are falling and fewer units when prices are rising thus lowering
average purchase price. It also brings in some discipline to the investment
! !202
process. This principle of time diversification has given rise to the concepts
of:
Systematic Investment Plan (SIP),

Systematic Withdrawable Plan (SWP),
Systematic Transfer Plan (STP)
29.1 SYSTEMATIC INVESTMENT PLAN (SIP)
SIP refers to the practice of investing a constant amount regularly at a

span of a month. When the market goes up, then the money invested in
that period gets translated into a fewer number of units for the investors. If
the market goes down, then the same money invested gets translated into
more units.
SIPs are based on the principle of rupee cost averaging an investment

strategy share prices rise and fall in line with the market, often driven not
by fundamental factors, but by sentiments. When the stock falls based on
sentiments, a rebound is a matter of time. This gives you an opportunity to
buy more of the same stock.
For instance, if Mr. Modi invested ` 1000 to buy 100 shares of M/s Mario
Co. Ltd., at ` 10 each, and the fall in the market brings down the value to
` 5. At this price, Mr. Modi invests another ` 1000 to buy 200 shares. He
now owns 300 shares at an average cost of ` 6.6 per share. If the M/s
Mario Ltd is an undervalued stock, it is likely to appreciate. On 100 shares,
the break even is ` 10. After the bout of cost averaging, the break-even
has dropped to ` 6.6 a share. Due to cost averaging, Mario needs to
appreciate by a smaller amount than before for Mr. Modi to make his
money on the investment. The important thing here is that the fall in the
share price of Mario is due to reasons unrelated to the companys
prospects. If the drop was due to the company directly, then it would not
be worth the risk of investing money even after a loss. As long as the
intrinsic value of the underlying asset hasnt depreciated, cost benefit
should have its benefits.
A SIP enables one to use a fall in his schemes NAV to his advantage. When
the NAV falls due to a fall in the market, you will accumulate more units at
a lower price. A SIP restrains one from going over board in a rising market
by giving you fewer units at the higher levels. In the long run, this
! !203
disciplined approach to investing tends to bring down your average unit
price.
Very often, the average unit cost will always be lower than the average sale
price per unit, irrespective of whether market is rising or falling. Only in
extreme bearish phases, a SIP investor will face a loss. SIPs are most
effective in the long run. It is only then wise to capitalize on the periodic
dips in the market and accumulate a larger number of units at lower levels
and over time, reduce your average unit cost. In spite of it all, it is best to
choose your scheme well. Cost averaging will fire back if you do it on a
losing portfolio.
Most mutual funds mark their minimum investments to ` 100, making it

viable for a small investor. An investor states the intended period at which
his investment should be made and gives post-dated cheques. There is no
lock-in period and investors are entitled to dividends as and when they are
announced by the scheme. The SIP option can be terminated at anytime by
informing the fund house, who will return the unused cheques and encash
the units that you hold.
29.2 SYSTEMATIC WITHDRAWABLE PLAN (SWP)
SWP is a mirror image of SIP, where the investor can withdraw constant
amounts periodically. The investor, like in the case of SIP, can temper gains
and losses though it does not prevent losses. SWP has income tax
implications, which does not tempt an investor much.
29.3 SYSTEMATIC TRANSFER PLAN (STP)
An investors exposure to different types of securities is a function of his

financial position and personal choice. His exposure to securities changes in
two situations:
On investment or disinvestment
On change of value of the securities in the market place. For instance,

an investor may start with a 40:60 mix of debt and equity. If the
market booms and debt securities lose value then the 40:60 mix could
move towards equity. In such a case it would be prudent to sell and re-
invest the redeemed amount in debt to re-balance the mix of debt and
! !204
equity. Such re-balancing can be achieved by systematically moving
money between schemes. Mutual funds make it convenient and at
times free of cost to transfer investments between schemes of the
same mutual fund.
29.4 HOW TO GET THE MAXIMUM OUT OF A SIP?
SIPs which are best in the long run are for those investors who invest
regularly and who would like to tap the long-term potentials of the same. It
also helps those investors who cannot put in large chunks of money into
investment at one shot. They invest in periods of time thus making
investment an easier task for a small investor.
Assign an objective: An objective indicates the time horizon of an

investment and gives you a clear idea of how much you need to invest.
Investment should depend on the end point. What you want should be
achieved if the objective in mind is clear.
Break-up the investment amount: One should decide on the amount

of money that can be invested periodically. This would depend on his
financial status. It should be a realistic figure. Do not stretch the amount
that may force you, at a later stage, to discontinue the SIP due to lack of
funds.
Fix the period between each investment: Today two options are
offered to the investor. One is the monthly investment plan and the other
is the quarterly investment plan. Out of the two, the monthly plan is
more advantageous as it gives the investor the benefit that can be
gained from market swings. The more and the longer one invests in SIPs,
the better the average cost graph will be.
Categorize the investment scheme: SIP option is available with all

kinds of funds. One should choose such that fits in his risk profile and
investment objective. As one rises on the risk scale, he should be aware
of the balanced funds and diversified equity funds.
Approach a trusted and reliable fund house: One should select a

scheme from a proven and reputed fund house. It should preferably be
one with a steady performance for the last 3 years.
! !205
Rise and fall in the market can be misleading: A bearish market may
get the investor pondering over whether his equity investment is going
the right way or not. The best stance to take is to ignore the trends of
the market. If the investor is one who believes in the long-term, then he
is sure to get the gains because, during the fall in the market he
accumulates to get more units, which brings down the average cost
price. When the market trends goes up again, his gains increase. Hence
once has to stick by an SIP through the weak phase of the market to
reaps its benefits.
Review investments periodically: The success a SIP depends on its

corresponding schemes performance. This should be studied periodically
and if it is doing badly in comparison with its competitors for quite a span
of time, then one should consider switching to another one.
1. What are the different types of Systematic Investment plan?
2. How does one get the maximum out of a SIP?
! !206
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !207
KEEPING TRACK OF INVESTED FUNDS
Chapter 30
Learning Objective:
This chapter teaches how an investor can keep track of fund invested.
Structure:
30.1 Fund House

30.2 Newspapers/Websites
30.3 Magazines
30.4 Expert Opinion
30.5 Frequency
30.6 What to Track?
After investing in mutual funds it is important to check how well the fund is
doing. There are several ways in which one can do this.
! !208
30.1 FUND HOUSE
Fund houses update investors about their various schemes. It documents

information that will help keep the investor informed about how the and
guided about his investments. All the printed matter may not be as useful
but picking out relevant information will definitely be advantageous to track
how well the investment is doing and as an aid to investment decision-
making. This information will help the investor to manage his investment
portfolio better and change track where he sees danger.
Fund houses send out three documents, each of them giving various details
of schemes that are relevant to investors.
Annual Report
This is the most important document sent out by fund houses sand SEBI
regulations mandate that all unit holders be sent a copy. In the Annual
report the performance and details of each scheme is explained in detail in
several pages. As an investor you should study the pages assigned to the
schemes that you have invested in. You should focus on the schemes
performance and portfolio composition. The only downside in an annual
report is that it is received several months after the year end and the
information in the report may no longer be relevant due to the time gap.
Half-yearly Report
All fund houses prepare half-yearly reports which they either send the unit
holders or publish in newspapers. Half-yearly reports are less intimidating
and more accessible than the annual report. The time lag is also less
gaining its advantage over an annual report.
Fact-sheet/Newsletters
Many fund houses in addition to these two documents also publish

quarterly or monthly reports which are often called as fact-sheets or
newsletters. These are less technical and easier to follow. They give the
investor views of their fund managers, portfolio composition of schemes
and performance.
! !209
30.2 NEWSPAPERS/WEBSITES
The NAV of all schemes is updated daily in the newspapers. Financial

papers publish NAV of almost all open-ended and close-ended schemes.
The latest NAV of schemes are also available from the website of the
Association of Mutual Funds of India (AMFI) which is www.amfiindia.com.
And from the website of mutual funds themselves. Some mutual fund
houses even send daily emails of the NAV of their various schemes. There
are some other websites such as www.mutualfundsindia.com,
www.indiainfoline.com, www.moneycontrol.com and www.valuesearch
india. com that give good insights into mutual funds.
Apart from this several newspapers have articles on mutual funds the
performance of some of these and discussions on performance of various
schemes. These are extremely useful.
30.3 MAGAZINES
There are several magazines that have articles written by experts on

different fund houses and schemes. Reading these will give you insights on
different schemes and fund houses and help you to determine how well
your scheme is performing.
Websites of independent financial service providers in the mutual funds

space are also useful to gather information.
30.4 EXPERT OPINION
On television, in seminars and at meetings experts speak on different

schemes. It is good to listen to these as there are often audiences who
would voice concerns that you may have.
30.5 FREQUENCY
How frequently should you track? This is a no brainer. You should track as
frequently as you can.
If investments are short-term in nature then a daily follow-up of the NAV

should be done and a monthly record should be maintained. Fund houses
! !210
upload their scheme in the first week of every month. A long-term
investment may not need a day to day follow up but it would be useful to
check these in monthly intervals to see how well the investment is doing.
30.6 WHAT TO TRACK?
Having decided that tracking is necessary, the issue then is what should be
tracked. The purpose of tracking is to ascertain whether the reasons you
put your money in the scheme still holds and whether it is doing what you
thought it would do.
Objective
The main objective of the scheme should be kept in mind. A fund house
should be able to maintain its objective while investing on behalf of its unit
holders because a slight deviation can affect the ultimate goal. Fact-sheets
and reports detail check this to ensure the scheme is not straying from its
objective. An pharma sector fund should not be investing in infrastructure
or IT stocks. If it is, it is straying from its objective.
Performance
Your scheme should out-perform the market and compete with its peers.
Attention should be given on a long-term because focus in the short-term
will not give an accurate picture. Analysis should not be done in isolation
but should be done keeping in mind the market trend. How well has your
scheme done with comparative schemes and against stock market indices
the Sensex and the Nifty. If your scheme has given you a return of 5%
when the market has fallen 30%, then your scheme is not doing too badly.
Your scheme need not be the best, but it should deliver returns worthy of
its profile and should be on the upper grade of its peers. The right time to
compare would be when independent agencies come out with results of
their studies. If the top 15 shares in a portfolio remain the same over a
long period, the manager is seeking to make money from a value
perspective. On the other hand if they are changing often, the manager is
trading to make money. In a debt fund, look at the sources of money. If
the funds main source of income is capital gains, then it may not have a
very secure future performance
! !211
Portfolio Quality
If money is invested in an income fund, safety of the capital (principal) is

the top priority. So a check should be made as often as three months on
the quality of capital. The credit rating in fact-sheets and reports reflect the
safety of your investment. The greater the percentage of the portfolio in
high rated paper (AA or AAA for bonds and P1 and P1+ for commercial
paper), the safer is your investment.
For equity funds, there is no system of credit rating. An equity funds

portfolio derives its strength from the quality of companies its holds. It will
help you to find out about the companies the fund has invested in. You
could go through the list of companies the fund has invested in and check
whether it meets your laid down criteria.
Portfolio Diversification
Your scheme should spread its risk across a large pool of securities.
Although there is no scientific measurement, reasoning says that the
equity fund should hold anywhere between 20-30 stocks and a debt fund
should have between 20-50 securities. Too few holdings make your fund
volatile while too many will make it a slow runner. A big risk that fund
houses take is placing disproportionate amount of money in a single
security or sector. It is important therefore to check which are the funds
large holdings and which sectors the fund is invested in. With regard to
how much should be placed in a single fund there is no consensus though
there is a view that for a debt fund upto 5% can be in a single security and
in equity schemes upto 10 per cent can be in a single stock.
Single Investor Holding
High single-investor holder is not desirable. This is because the entry or

exit of a large investor can affect the returns. The scheme should have a
wide investor base and this information can be got in the annual report in a
section called notes to accounts. Always aim to invest in funds that has a
large investor base.
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Expenses
Expenses are not avoidable for any scheme, but they can be controlled.
The expense ratio expresses a schemes annual expenditure as a
percentage of its corpus. This will be in the notes to accounts section.
Study this section to see if the scheme is in line with the other schemes in
the industry. You should also check to ensure the expenses are in line with
that stipulated by SEBI.
Disclosures
The fund house should be prompt at sending or disclosing details of its

schemes. And as you are an investor, the fund must share all the
information that you need to know. If there is a back-log in disclosure of
information, one should be concerned because the fund house may have
something that they wish to hide from its unit holders.
1. What are the various ways in keeping oneself updated with the
functioning of a mutual fund?
2. What should an investor look for if he wants to know that the mutual
fund in which he has invested is faring well?
! !213
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !214
WHEN TO SELL
Chapter 31
WHEN TO SELL
Learning Objective:
This chapter explains the right time and reason to sell a mutual fund and
how to do it.
Structure:
31.1 Investment Objective

31.2 Quality of Fund Management
An investor when deciding on the right investment scheme keeps in mind

the returns he gets from the investment. When he wants to sell, his
investment should have achieved the return he had wanted or he should be
selling to cut losses (as the investment is likely to fall in value). The main
reason, however, for investors wanting to sell, is because they are in need
of cash. Well-performing schemes are often held while the slow money-
makers are usually sold. Some times it works the other way round. They
sell the better running ones because they have made their profits and keep
the slow ones so that they wait for them to turn around and regain their
actual value. This is all done on a random thought process. But the safer
way to determine when to sell would be arrive at the decision after
considering several factors.
! !215
WHEN TO SELL
31.1 INVESTMENT OBJECTIVE
It always helps to invest with a reason and a goal in mind. The answers to
Why and How much should be able to help you evaluate your
investment.
An aggressive investor is one who wants to make money on the first

instance. So the minute he sees a rise in a certain industry, he invests and
when he makes his money, he exits. Whereas a long-term investors looks
at his purchasing into a scheme as a saving-cum-investment. He would
invest for the future. That doesnt mean that he turns a blind-eye towards
his investment. He should periodically study the market and evaluate how
well the investment is doing.
Asset allocation is best when a good mix of investments is made. Need for
a study on asset allocation is when there has been a sharp rise in price and
it alters the share in your investment portfolio.
31.2 QUALITY OF FUND MANAGEMENT
It is always important to keep track of schemes being managed. A few

signals to watch out for are:
Consistent Underperformance
Compare your schemes performance with others of its kind once a year. A
scheme that continuously underperforms its peers is not a safe choice of
letting your investments remain with them. If the underperformance is
logical and in-tune with the market conditions, then it is acceptable.
Otherwise, you should think again. For instance, Templeton India Growth
Fund returned 30 per cent in 2006 in comparison to 35 per cent the
previous year. This was because the fund followed the value-style of
investing, which takes longer to be discovered by the market. This is
acceptable. But if the problem is more serious then it would be wise to
withdraw you money from there.
Risky Course
A funds offer document lays down the broad rules and draws boundaries
for the fund manager, leaving the particulars to him. So, while an equity
! !216
WHEN TO SELL
fund can be directed to invest at least 90 per cent of its corpus in stocks,
the fund manager is free to choose its sectors and stocks. This structure
lends itself to transgression, which generally gets reflected in the fund
taking on more risk. In the roller-coaster ride in 200 of the diversified
equity funds, many funds held 80-90 per cent of IT stocks alone. This
resulted that when the sector did well, these funds gave excellent results,
but when it went crashing, the NAVs tanked. Had they stuck to their
diversified structure, the swings would have had less impact. When a
product changes, you need to review whether the makeover is suitable for
you or not. It is not then you should leave.
Takeover of Fund
Things can change when your scheme is acquired by another fund house
(Standard Chartered took over UTI Securities). When a new management
takes over, one must check out the credentials of the acquiring fund house,
particularly its performance record of the category that your scheme
belongs to. If its track record is not clean, then you should leave. If your
experience with your fund house has been good, continuity is what you
seek. Continuity in investment style and the fund management team is
what should be looked into. If the acquiring fund house promises and
delivers, a smooth transaction, you should continue with them. However, if
the new objective does not suit your investment need or if the existing
fund manager with a good track record is thrown out, then you should
beware.
Tax Planning
Income tax rules allow capital losses to be set off against capital gains
short-terms against short-term and long-term against long-term. Its an
easy and effective way to save tax while weeding out under-performing
schemes from ones portfolio. This strategy is effective in a portfolio that
has a sizeable number of holdings (shares and mutual funds), with a mix of
performers and laggards. Whenever you make capital gains, be it from sale
of units or shares, go over your portfolio. The natural thing to do would be
to sell investments that you are running a loss at. Think of it the other way.
The resultant loss can be set off against the capital gains from other
investments.
! !217
WHEN TO SELL
1. What is the objective of an investment? Why should it be reconsidered

while wanting to decide on selling a mutual fund?
2. What should one look out for when studying the quality of the Fund
Management?
! !218
WHEN TO SELL
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !219
TAXATION
Chapter 32
TAXATION
Learning Objective:
This chapter talks of the taxation effects in mutual fund investment.
Structure:
32.1 Capital Gains Tax

32.2 Dividends
32.3 Section 80C Deduction
No investment can be made without considering the tax implications.

Therefore, as an investor you should know about how tax will affect your
investment as it has a direct impact on the returns or gains that you make.
! !220
TAXATION
32.1 CAPITAL GAINS TAX
If you hold an investment in a mutual fund scheme the gain that you make
is considered a capital gain.
If the investment has been for less than a year it is a short-term gain and
if it has been for more than a year it is a long-term gain. With regard to
equity funds, short-term gains are taxed at 10 per cent whereas the gain
on debt funds are taxed at your personal income tax rate which could be
10 per cent or 20 per cent or 30 per cent. And in this case, if your income
exceeds ` 10 lakhs a surcharge of 10 per cent plus education cess of 3 per
cent would have to be paid.
If you had held the investment for over a year, the gain would be a long-
term gain. Long-term gains from equity funds are exempt from tax. Long-
term gains from debt funds are subject to tax. You can pay either a flat
10% of the gain or at 20% with indexation. Indexation works on the
principle that the value of your investment rises every year you hold it.
Short-term losses can be set off against short-term gains and long-term
losses can be set off against long-term gains.
32.2 DIVIDENDS
Dividends are tax free in the hands of investors
32.3 SECTION 80C DEDUCTION
Investment can be made in certain mutual funds (equity linked savings

schemes and pension funds) upto an aggregate (along with other eligible
investments) of ` 1 lakh. The investment upto` 1 lakh can be deducted
from taxable income
1. What is the effect of taxation on capital gain?
2. How does section 80C affect investment in mutual funds?
! !221
TAXATION
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !222
INVESTOR FRIENDLY SERVICES
Chapter 33
Learning Objective:
This chapter states the various value added services mutual fund houses
offer today.
Structure:
33.1 Information Over the Phone

33.2 Triggers and Alerts
33.3 Cheque Book Facility
33.4 New Point-of-Purchase
33.5 Anytime Mutual Fund
33.6 Online Transactions
33.7 Kiosks
Today mutual funds in India are investor focused. Tom compete with others
offering similar scheme, they offer several additional services to investors.
These range from giving them information to informing them on how their
fund is doing to facilitating ease of sale/purchase.
! !223
33.1 INFORMATION OVER THE PHONE
Almost all fund houses have toll-free numbers. Investors can call up the
fund house to enquire about schemes and to get an update on NAV,
dividend, load structure, account balance, performance figures, etc.
Transactions were earlier allowed over the phone, Today with facilities of
direct credit, most fund houses have stopped giving that service. Unit
holders are issued with a PIN, which they can use to transact over the
telephone which is similar to the concept of phone banking. To avail the
facility of direct credit facility, investors have to fill in a form that is
submitted to the fund house which in turn sends you the PIN number.
Trigger and GSIP are two new services that have been launched for the
investors comfort. Trigger enables the investor to give standing
instructions to automatically switch between schemes when it is activated.
GSIP encourages the investor to save and invest regularly through salary
debit by corporates.
33.2 TRIGGERS AND ALERTS
This is for an investor who after investing forgets about his investment.
Triggers and alerts are great tools to inculcate some discipline. A trigger is
a facility that lets you pre-specify exit targets for your investment. Triggers
are based on value or time limits. The moment a target is reached, the
trigger gets activated and the fund house (with no other instruction
required) will redeem your units and send you a cheque. Triggers are also
for investors who want to invest short-term in the market. It is possible to
sell your units before the trigger target has been reached. The trigger can
be deactivated any time.
An alert is just an alert when your mutual fund will intimate the activation
of the trigger to you by phone, post or email. It is then up to the investor
to decide if he wants to sell or invest and then intimate the fund house
accordingly. If you want to keep your options open, it is advisable to take
the alert option. All fund houses offer theses services on certain schemes.
Mobile tracking is another facility that has been introduced.
! !224
33.3 CHEQUE BOOK FACILITY
Very often a lot of time is lost in cheque clearance. Fund houses are now
working towards cutting down on loss due to processing time, especially
where quick turnover of money is important for investors. Investors usually
invest short-term funds in liquid funds. Some schemes give unit holders
the option to take redemption cheques of upto 75 per cent of their
investment value at the time of investment itself. Them when money is
required the redemption cheque can be deposited in your account. This will
save you the time that would have been spent on processing the request
and transfer of funds. Encashment of cheques is treated as a withdrawal,
at the schemes NAV on the day you deposit it. You still have to contact the
fund house to redeem your balance investment amount. The advantage is
that you are allowed to liquidate three-fourth of your investment, at your
convenience whenever you want.
33.4 NEW POINT-OF-PURCHASE
Fund houses are looking for ways to use technology to their benefit. They
are supplementing the distribution channels with points-to-purchase.
Some of these channels do not require the investor to get in direct contact
with the fund house.
33.5 ANYTIME MUTUAL FUND
Buying and selling mutual fund units is now as easy as withdrawal from an
ATM machine. Certain mutual funds offer this facility.
33.6 ONLINE TRANSACTIONS
An investor can now buy, sell and redeem units and also switch between
schemes online. He can avail of facilities like an e-statement, latest NAV
values, dividends, and account balances. Almost all mutual funds all
transactions online. To buy, one needs to have a net banking account with
any bank that the fund house is tied up with. Then he can log on to the
website and start buying. Money gets transferred from the net bank
account to the mutual fund and the units are allotted instantly. Some
financial portals also provide facilities of buying but not selling or switching
between schemes.
! !225
33.7 KIOSKS
To give better services and convenience to investors, companies are

venturing in Kiosks or hubs. These are manned or unmannedw and are
basically one-stop shops for mutual fund or other financial products. This
saves the investor the trouble of going through an agent.
1. What are the various ways in which fund houses make it a friendly
environment for investors?
! !226
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !227
COMPLAINTS AND QUERIES
Chapter 34
Learning Objective:
The intent of this chapter is to advise how complaints can be made and
queries resolved.
Structure:
34.1 Fund House

34.2 Regulator
34.3 Investment Associations
34.4 Consumer Forums
34.5 Courts
There may be times that you may have some complaints regarding the
service. You may not have received a dividend cheque or you may want to
enquire about an aspect of the scheme. As an investor you must be aware
of whom you can approach.
! !228
34.1 FUND HOUSE
The first entity you should approach should be the fund house. The fund
house would, in most cases, be able to resolve the problem you have or
answer your query. You can get their contact details from the account
statement or the fact sheet the funds sends you or from its internet site.
You can send an email, a letter or go to their offices.
34.2 REGULATOR
If your problem is not being resolved or youd like clarification on a certain

issue pertaining to your scheme SEBI, the regulator is the entity you can
approach. SEBI has a presence in the four zones and is headquartered in
Mumbai.
West Zone Plot No. C4-A, G Block Bandra Kurla Tel.: 26449000
Complex Bandra (East), Email: sebi@sebi.gov.in
Mumbai-400051
North Zone The Regional Manager, 5th Floor, Tel.: 23724001-05

Bank of Baroda Building, 16 Sansad Email:
Marg, sebinro@sebi.gov.in
New Delhi-1100001
South Zone The Regional Manager, 3rd Floor, Tel.:

DMonte Building, 32D DMonte 24995676/5225/7385
Colony, Email: sebisro@sebi.gov.in
TTK Road, Alwarpet, Chennai-600018
East Zone The Regional Manager, 3rd Floor, Tel.: 22402435/22406104

L&T Chambers, 16 Camac Street, Email:
Kolkata-700017 sebiero@sebi.gov.in
A written complaint or letter seeking clarification can be sent to one of the

zonal offices of SEBI detailing the issues (the complaint or the matter you
are seeking clarification on). This can also be filed online on the SEBI site
(www.sebi.gov.in). On getting onto the site you can click on investor
guidance and then onto a complaint form (if you have a complaint). On
receiving the complaint SEBI will give a reference number which should be
quoted in all future communications. SEBI will follow up with the fund
house. If the complaint is not resolved you should inform SEBI.
! !229
34.3 INVESTMENT ASSOCIATIONS
There are several investor associations who can be approached to help you
resolve concerns that you may have. While many are free, some do charge
a small fee to cover their expenses.
34.4 CONSUMER FORUMS
Consumer Forums and Courts
In recent times, investors are increasingly going to consumer forums and

courts to resolve issues of contention. These are quicker than civil courts
and are usually consumer friendly.
34.5 COURTS
If the problem persists, the courts could be authority to approach to

resolve the issue. This does take time though.
1. Whom should an investor approach first in case of complaint?
2. Can a complaint be filed online with SEBI?
! !230
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !231
PART - III
EXOTIC INVESTMENTS
! !232
ANTIQUES
Chapter 35
ANTIQUES
Learning Objective:
This chapter throws light on how antiques are a good choice for
investment.
Structure:
35.1 Purchase of an Antique

35.2 Factors that Affect the Price of Antiques
35.3 Rules to Follow When Buys an Antique
35.1 PURCHASE OF AN ANTIQUE
The investing public in India is becoming increasingly aware of antiques

especially the nouveau riche. Unfortunately in the first thirty years of
independence hordes of foreigners (especially Americans) have swooped
down upon India and taken away the real genuine masterpieces for the
proverbial song. Today, it is difficult to procure the real thing and when
one does, one does have to pay a fortune as dealers and others are aware
of its real worth.
An antique is anything that is of historic interest or has been declared by

the government to be an antique. These could be sculptures, coins,
paintings, objects or manuscripts.
Every person who does own an antique (genuine) is required to register

with a registering officer of the Archaeological Society of that area within
15 days of his coming to possess it. The Registering Authority would
examine it and when satisfied with its authenticity would issue a Certificate
of Registration. The owner when he sells the article must inform the
Registering Authority and have the transfer of ownership transferred. The
government has the authority to acquire an antique if it is felt that it must
be preserved or acquired for a museum for the general good.
! !233
ANTIQUES
The government is now aware of the number of antiques that have been
acquired by foreigners and taken away from India. To preserve that which
is left it is now illegal to export or take out of this country antiques.
Exceptions are sometimes made by the issue of permits to export antiques.
The Director General of the Archaeological Society of India is the only one
allowed to issue these permits.
Prior to the purchase of an antique one must ascertain whether the piece
has been registered. If it is not:
It could be a stolen piece
It may not be an antique at all. There is a large and thriving market of

new antiques which are chemically treated and made to look old. The
prices are very affordable. Traders however have tried to make gullible
buyers believe that they are genuine. Frankly if one is not hung up on
the genuine article these are nice decoration pieces and affordable and in
view of the work involved in making them are likely to go up in price.
Where does one get antique? Antiques are freely available in most Indian
cities and towns if one takes the time to search for them. The best areas or
rather the most easily accessible areas are the Chor Bazar (thieves
bazaar) in Mumbai, Old Delhi, Mullick Market in Kolkata and Burma Bazaar
in Chennai. It is usually difficult to differentiate between the real antique
and the new antiques and one has to often trust the integrity of the seller.
It is possible (and this has happened) to purchase a genuine antique for a
very minuscule price purely because the seller is not aware of its real price.
The chances of this are good especially in the towns and villages of India.
The cities have been, to a great extent, swept clean by hordes of
foreigners and the nouveau riche.
Often antiques have special distinctive marks marks made by the maker
to differentiate them from others. They are more common in Europe than
in India. Books on antiques (and there are several) often describe these
and if you are lucky you may across one. A person I know purchased a
silver milk tureen by chance in New Delhis Chandni Chowk for ` 1,000. It
was in the shape of a cow. It attracted a lot of discussion at home. Her
husband managed to get a book on antiques to ascertain whether it could
be an antique. To his and everyone elses surprise it was one of a few
tureens made in the 17th Century and was extremely valuable. This was,
! !234
ANTIQUES
of course, fate or more appropriately a stroke of luck. And it can happen to
you. It was mentioned recently that a painting a person had in Europe was
a genuine Leonardo Da Vinci. His father had purchased it twenty one years
earlier at $200. It was now estimated to be worth over $15 million.
If one is seeking to purchase a genuine antique then a certificate of

registration should be insisted upon. It should also be ensured that the
antique is not stolen. The fakes produced today look so authentic that one
could be very easily fooled. And of course the prices quoted are exorbitant.
In order to guard oneself from paying more than the antique is worth, the
investor would be advised to call upon the local branch of the
Archaeological Society or meet the curator of a museum to establish the
price and genuineness of an antique.
The investment per antique can be high. A person may of course begin by
collecting old coins. This as an investment has not really taken off but it
will. Presently no one really values old coins much and they can be
purchased at street corners and the like for a pittance. Furthermore, they
need not be registered with a Registering Authority.
Investment in antiques have several tax advantages too. Antiques are

exempt from wealth tax and the profit on the sale of antiques is not
taxable (under capital gains tax). One can make, if one is careful and
innovative, a fair amount of tax-free income by selling antiques to
museums and collectors.
Antiques can give an investor something no other investment can do- a

sense of satisfaction of owning a thing of beauty (and most antiques are
wondrous works made with skill, patience and with an eye for detail). This
in itself is often the reason for purchasing an antique-to possess a part of
history and to exhibit it (part ofmans acquisitive nature). As a
consequence antiques are usually not purchased for just pure gain.
35.2 FACTORS THAT AFFECT THE PRICE OF ANTIQUES
Antique do gain in value but it is not possible to, like gold or diamonds or
real estate, graphically portray its growth in value. There are many kinds of
antiques ranging from small copper coins to large statues and the prices
have increased based on four factors.
! !235
ANTIQUES
Scarcity of the items
Demand
Antiquity
Nature (kind i.e. who made it)
These vary so much.
Investment in antiques is hazardous to the extent that it is difficult to know

for certain what the real price is or for what one can sell it at a future date.
The value is truly in the eyes of the beholder and the depth of the desire to
possess it. A few years ago an acquaintance bought an old Parsi marble
topped glass-paned table from a junk heap for a mere ` 50. He cleaned it
up and took it with him a year later to New Delhi (when he was transferred
to that city). There he was offered ` 4,500 by a dealer in old furniture. He
did not part with it. On the other hand another person I know purchased a
very nice temple door for ` 750. A few months later he found that he could
have purchased a similar one for ` 450. In the first instance it was a
bargain and in the latter, more was paid for the article. But at the time of
purchase one seldom knows. And this is the name of the game. If you truly
appreciate an antique-be it a trinket, a piece of furniture or a work of art-
purchase it at a price you think is reasonable. Even if you have paid a little
more never fear because if the item you have purchased is old and rare, it
will only appreciate as time marches on.
If you are serious about buying antiques you should seek expert advice.
Also go through books on antiques and get as much information as you
can. Money can be made if you are astute. It should also be remembered
that just because something is old, it does not mean it is valuable and one
must have a keen eye and knowledge to pick the difference. The assistance
of a reputable, trustworthy dealer is invaluable. A good dealer can help you
in the acquisitions also.
35.3 RULES TO FOLLOW WHEN BUYS AN ANTIQUE
The rules that should be followed are:
Buy the best you can afford.
Look for items with provenance (a paper trail that proves a pieces
origins)
! !236
ANTIQUES
Buy signed objects
Dont buy damaged items no matter how much you love them
Look after your purchases
Do not slavishly follow fashions because antiques are long term

investments.
Noel Whittaker, a financial analyst once said, Like art, gemstones and
stamps, antiques are an investment for people who really know what
theyre doing.
Dawn Davis, the President of the Victorian Chapter of the Australian

Antique and Art Dealers Association says, It is a tricky market in many
respects. If a piece will give you pleasure and youll enjoy it, the money
angle is secondary. Buy something you love, that has some connection for
you, either emotion or aesthetic and youll never feel ripped off.
With regard to antiques, many are undervalued because the owners do not
know its real value. Therefore there is considerable opportunity for growth.
According to Deepak Natesan, a director in Natesan Antiquarts, most
antiques sell in India for a third of its international price. Exceptions are
Tanjore and Mysore paintings which sell at a higher price in India.
Mr. Natesan believes that a boom is likely to take place because good
pieces or very old pieces are scarce. First is the fact that they are not made
anymore. The hands that made the antiques are no longer alive resulting in
zero additional supply. Additionally, the best of antiques were bought
decades ago by wealthy collectors and museums who purchased antiques
not as an investment but because they liked the piece they bought.
Consequently these pieces are unavailable in the market.
Antiques should not be bought or heavily invested in if ones aim is regular

income or short term gain. The value of antiques grow on a daily/yearly
basis and it is in inverse proportion and so the longer one keeps it the
greater the appreciation. But for those who really like antiques it is not the
gain that they think of-it is the sheer joy of possessing a beautiful object
that drives them to buy more and yet more antiques. As John Keats once
said, A thing of beauty is a joy forever.
! !237
ANTIQUES
1. How does one purchase of an antique?
2. What are the factors that affect the price of antiques?
3. What are the rules that one should follow when buying an antique?
! !238
ANTIQUES
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !239
ART
Chapter 36
ART
Learning Objective:
This chapter explains how art is becoming a popular choice for investment.
Structure:
36.1 Various Artists and their works

36.2 What makes Art a Worthwhile Investment apart from its Emerging
Popularity?
36.3 Points to Keep in Mind when Deciding about Buying a Piece of Art
A picture is worth more than a thousand words.
36.1 VARIOUS ARTISTS AND THEIR WORKS
Art is extremely big business today. Every other day we read of Husains,
Sousas, Picassos and Rembrandts being sold for millions of dollars. Prices
double and treble in a few years and world demand for good art is growing
at an incredible rate. Indian art is being recognized and auctioned around
the world as a consequence of which good art is appreciating impressively.
Investors buy art for two reasons for the love of art and from an
investment angle. A submission is made that art should be purchased for
its aesthetic value. It is argued that if art is treated as an investment, it
becomes a good investment only if it is good to start with. Prices rise
because of the popularity and the history of the artist. Unless an artist is
able to sustain the quality over a period of time, the value of his works
tends to stagnate. Vazirani, a director of online auction portal saffron art
says, The market perception of the artist, the quality of his works and
even the number of exhibitions done, can have a bearing on the price.
A phenomenon is that the price of art never comes down. If a talent is

sourced early the appreciation can be phenomenal.
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ART
Earlier, it was considered an illiquid asset. No longer. With the increase in
interest and the numerous auctions held, art is liquid the extent of
liquidity would depend, of course, on the artist. .
In India, art is emerging as one of the more profitable instruments of

investment today and a new breed of collectors have emerged who do not
purchase art solely for its aesthetic charm. In 1986, when Christies
conducted the first every auction of art in New Delhi it was badly attended
and many paintings did fall under the hammer for the proverbial song.
But the Sothebys auction in March 1989 held abroad the training ship
Jawahar was a tremendous success. At that auction Husains Death of
Hashmi was purchased by Arun Kumar Mehta, a diamond merchant for `
10 lakhs. Other paintings also fetched impressive amounts. Mr. Mehta and
others personified the new investor in art urban nouveau riche who
purchase art in bulk with the intention of selling then when the price is
right.
On September 17, 1990, Mumbai toasted one of its favourite sons M. F.

Husain. His birthday was celebrated extravagantly and the highlight of the
evening was the auction of his self portrait. And Mumbai did him proud.
Parmeshwar Godrej purchased it for a ` 12.50 lakhs thereby making it (at
the time) the highest price paid for a painting by an Indian, in India. The
price paid by Mrs. Godrej represented an appreciation of 20 per cent on
Husains tribute to Hashmi. But then if one considers that the Death of
Hashmi measured 318 cms by 167 cms whereas Husains self portrait is
approximately 210 cms by 150 cms, then the appreciation per centimeter
is in excess of 100 per cent. An incredible amount at the time. What is
more surprising is that this is not the exception that breaks the rule. This is
in fact the rule. Paintings by Anjolie Ela Menon, Bikash Bhattacharjee,
Ganesh Pyne, Krishen Khanna and Akbar Padamsee (to name but a few)
are appreciating at a phenomenal 40- 65 per cent per annum. And newly
discovered young artists are demanding and getting their price. The
impoverished, parasitic, attic dwelling artist has been replaced by confident
men and women who know their work and demand their rights. Young
artists setting up shop for the first time are demanding prices as high as `
30,000 and getting it. This would have been wishful thinking several years
ago.
In 1987, the auction conducted by Christies fetched ` 17lakhs. The

auctions conducted by Asprey in 1991 and 1993 collected ` 27 lakhs and `
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ART
37 lakhs respectively. Today, single paintings in auctions are commanding
prices in excess of ` 5 crores. Such is the growing demand. A person I
know sold a Padamsee he had purchased twenty years ago and purchased
an apartment in West London. Today the price of Indian art is shooting
north in the global market because of increased consciousness about it,
say experts. According to these experts this has been brought about by
greater visibility of art and artists from the country and easy access to
relevant information about Indian art from the internet.
Indian art is becoming a part of international consciousness, why is why

we have seen a spectacular growth in this field, says Yamini Mehta,
director of modern and contemporary Indian art at the London-based
Christies. Boundaries are becoming more fluid. We are seeing more Indian
artists being represented in international museum exhibitions and art fairs.
The exposure is helping create newer collectors who actively seek out
works by the best of Indian artists to add to their collections, Mehta said.
Maqbool Fida Husain sold 125 of his works for at least ` 100 crore (` 1
billion). The buyer: the Mumbai-based Swarup Group of Industries with an
annual turnover of ` 500 crore (` 5 billion. The deal was signed after Guru
Swarup Srivastava, the chairman of the Swarup Group, met Husain in
Mumbai. Shortly afterwards while addressing a press conference at New
Delhis Vadehra Art Gallery Husain said he had already received ` 25 crore
(` 250 million) for the first 25 paintings. Most of the work was to be 4 ft by
6 ft acrylic on canvas. While Srivastava is not a collector, both of us share
similar concerns about Indian art being greatly undervalued and that it
deserves to be treated in the same platform as western art, said Husain.
Srivastava said art was a great investment. Srivastava is said to have
snapped up 40-odd paintings of largely Mumbai-based painters like Nikhil
Chaganlal and Minollie, purely for investment. Its also a very noble
business, though unlike trading you have to invest and build a market for
art. While Srivastava had no plans to hold a public viewing of the
paintings, he said he would prepare an audio-visual show based on the
paintings to gauge their value.
On June 11, 2008 a painting by F.N. Souza, an Indian artist who spent the
better part of his life in New York, sold for $2.5 million, while an untitled
painting by Tyeb Mehta (Figure in a Rickshaw) fetched 982,050 setting
new price records at the Christies auction in London. Five of contemporary
artist Subodh Guptas works were also sold in the same auction at record
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ART
prices. Guptas Bucket, an abstract canvas with the symbolic motif of his
trademark bucket, was sold for 121,250 while his Magic Wands and
Cotton Wicks were sold for 169,250 and 150,000 respectively. Twelve
artists set new records in terms of prices at the auction in London.
According to experts, Indian art in general had a higher price profile in
almost every international art show in 2008. A New Delhi-based dealer,
Nature Morte, sold a set of three sculptures by Gupta for nearly $1 million,
while a painting by rising star T.V. Santosh went out to a British collector
for $170,000 at the prestigious Art Basel, the largest fair of modern and
contemporary art in Switzerland. Guptas seven-metre wide Triptych sold
for $1 million in the same fair. In March 2008, M.F. Husains Battle of
Ganga and Jamuna sold for $1.6 million in New York.
Auction houses and dealers attribute the boom to growing consciousness

and appreciation of Indian art internationally.
According to Mehta, the new breed of collectors, who are armed with more
money, are incredibly well informed. They usually look for a combination of
three factors in an art work - lineage, the artist and its freshness. For
instance, the The Birth by F.N. Souza which sold for a record-breaking
price of $2.5 million, had the combination of all the three: it was a large
museum quality masterpiece by one of the giants in Indian art and
completely fresh to the market, Mehta said. The freshness of the artwork,
experts claimed, was instrumental in pushing up its price.
Peter Nagy, director of Nature Morte Gallery in Delhi, which sold almost all
its works at the Basel fair, says the increase in price is directly related to
the demand for the works and the increased attention that the
international art world is paying to contemporary art works coming out of
India today. He said, This increased attention increases the demand and
hence the prices go up, Citing Basel as an example, Nagy said the
audience in Switzerland wanted unique Indian works and were not
interested in works and prints by Indian artists. However, the prices of the
works were dictated by the prices set in India.
Another factor that determines the price tag is the stiff neck-on-neck bids,
especially at auctions, and the wide client base. The competition among
bidders triggers an artificial increase in prices. The phenomenon is also
gradually becoming applicable to Indian art, especially in international
sales. Describing the nature of the Christies London auction of Asian art,
Mehta said the auction hall was packed right from the beginning with
clients from across the globe. There was also spirited bidding on
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ART
telephones and through Christies LIVE, which is a new platform for our
clients to watch the live auction in real time and bid online from the
comfort of home or office, Mehta said.
According to an estimate by the Christies, the market for Indian art

gathered steam over the last decade, totaling an impressive $42 million in
2006 from just $656,000 in a sale in 2000. Before that, price milestones
were generally one-time. In 2005, Tyeb Mehtas Mahisasura sold for a
record $1,584,000.
It is not only Indians that are buying. There is international interest in

Indian art. Japanese tycoon Fukuoka has over a 1000 Indian paintings
while the Late American oilman Chester Herwitz had over 1200 works of
art
Prices are rising to the extent that a new phenomenon has emerged art
by the square inch. This again vindicates the trend of purchasing art as an
investment and not for its own sake.
In 2004 the Economic Times began an Art Index aggregating prices for
works by 51 top artists. In mid 2008, the Economic Times Art Index
showed impressive gains in Art. Even though the overall index had fallen
by 8 per cent (during this period equity shares had fallen by 40 per cent).
Art Index Jan 2008 May 2008 % Change
Artist 2838.8 2614.37 -7.9
Avinash Chandra 681.04 2,557.00 275
Paritosh Sen 680.50 1,632.66 140
Bikash Bhattacharjee 3,099.70 7,357.49 137
KK Hebbar 2,282.70 4,696.76 106
Bhupen Khakhar 2,861.86 5,764.63 101
Manjit Bawa 2,974.97 5,764.85 94
Akbar Padamsee 9,308.51 17,773.68 91
Anjolie Ela Menon 2,166.81 4,101.56 89
Rate is per square inch
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ART
36.2 WHAT MAKES ART A WORTHWHILE INVESTMENT

APART FROM ITS EMERGING POPULARITY?
It is tremendous hedge against inflation. Its rate of appreciation has

been in some cases as high as 50 per cent-100 per cent per annum.
Indian art is extremely under-priced. Paintings of comparable European

or American artists are about eight times as much. This is changing
rapidly though.
As paintings by Indian artists are relatively cheap there is a growing

interest in Indian art abroad.
One may argue that the collection of paintings is not for the average
investor the middle class salaried employee. The prices are beyond him.
To an extent that is true. He could not possibly pay tens of lakhs of rupees
to purchase an M.F. Husain. But then in the not too distant past persons
have been known to have purchased Husain paintings for as little as ` 250.
The message I am trying to convey is that all painters were not always
well-known and famous nor did their work command enormous prices. At
one time they were relatively unknown painters struggling to get their
efforts recognized. And often they were prepared to sell their paintings for
a pittance an amount that would cover the cost of the canvas and a few
meals. These are within the reach of the middle class investor and this is
what he should aim to buy.
Indians are an artistic people and the cities abound with galleries where
young and budding artists exhibit their work. It would be good to go to
these and see them. After a number of visits to such galleries and
exhibitions one is likely to begin forming impressions and to an extent will
be able to discern between a good painting and one that is not so good.
This is the time when one is ready to begin.
There is an art in buying art. The first step is to know as much about the
subject as possible. Apart from regular research from books, magazines
and the internet, exhibitions should be visited to appreciate the nuances of
art appreciation and to know about the artist. If possible the investor
should try and talk to the artist and find out about the horizons and period
of painting.
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ART
An art investor must be clear about the horizons and gestation time in
purchasing art. The quality of painting, provenance, condition and period of
painting are important considerations. Additionally buy art only if you like
the quality of work not just the artist. Take care. It must be remembered
that a work of art can never be replicated. With regard to the artist the
information that should be sought are:
How long has the artist been painting or sketching?

How many exhibitions has he/she held?
How well does his/her work sell?
Has he/she picked up awards at any level?
The key is to pick up a painting early before the artist acquires fame. As
was mentioned earlier Husains were bought at ` 250 half a century ago.
You must try to identify tomorrows dark horse. Caution is advised though.
Buying a new artist is like a speculative investment where the gains can be
mind boggling but the risks are also high. If you are risk averse it is better
to play safe.
While looking at an artist look for the 3 cs content, continuity and

consistency.
If you are an investor, diversifying the portfolio by buying paintings across

a number of artists is wise. Even if one or two chosen become popular a lot
of money can be made.
Art should not be sold very quickly. The investment needs time to mature.
The longer a painting adorns your walls, the greater its chances of growing
in value. On an average one should keep a painting between three and ten
years.
As an investor try and understand market trends, track new artists and try
and spot winners early.
If you are a new buyer, it would be an idea to walk into a gallery and
understand paintings. Ask advice. Get a feel of the market.
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ART
36.3 POINTS TO KEEP IN MIND WHEN DECIDING ABOUT

BUYING A PIECE OF ART
A few pointers that should be remembered are:
Spread the risk among low priced but promising painters.
Purchase paintings by painters who do not paint many canvasses

(scarcity value).
Buy art from galleries that promote new artists as the price will be low.
Art can never be a very short-term investment.
Choose paintings you like. The reason for this is that the period it takes
for your chosen artist to become an exceedingly famous man may be
many years. In the meantime, it would have to hang at your house (in
your drawing room, perhaps). It will be better to have something you
like.
Look for maturity of strokes in the painting. A good painter will clearly
convey colour in its natural way. Not in a sharp manner. Colour should be
soothing not disturbing.
Look for originality. It is very common for painters to copy the old
masters or the horses of Husain. A copy is only a pale imperfect replica
of the real thing and a copy can never be as highly regarded (however
good it may be) as an original.
Look for spontaneity that certain balance of colour.
Paintings have doubled and trebled overnight. In some cases they have
remained constant in value for a few years and then started to rise in
value. But nearly all paintings have increased dramatically in price and it
will be really worthwhile for an investor to begin slowly to purchase art.
Art, like antiques, are not required to be considered as an asset for wealth
tax purposes.
Of course the gain one makes on a work of an art is dependent on the

persons ability to discern and distinguish a painting/artist with potential
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ART
and that most elusive factor luck. And this is what makes it so interesting
and exciting. A challenge, if one is right the rewards are great and if not
it does not really matter. The capital outlay would not have been much and
one has a painting that one likes adorning the wall of his drawing room. In
short you cant lose.
It is important to remember that buying art is not to create a big

collection. It is simply to buy an item of beauty which could give pleasure
and also increase in value.
An interesting statement made was today people arent buying art out of
conviction or pleasure but because they see money in it.
A young investment banker sums it up, You cant avoid the art market
these days if you are a sensible investor.
What is the benchmark? It is suggested that if you are an investor you

should have a net worth of atleast ` 1 crore. Additionally as the art market
is unregulated, investors should place no more than 3 per cent to 5 per
cent of their net worth in art. Investors should make a minimum entry
level investment of between ` 3 lakhs to ` 5 lakhs.
1. What makes art an interesting and profitable way of investing?
2. What should one keep in mind before investing in art?
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ART
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !249
BOOKS
Chapter 37
BOOKS
Learning Objective:
This chapter talks of books being a choice of investment for many.
Structure:
37.1 Various Books that have Turned out to be of High Value

37.2 How does one Start Looking for the Right Book to Invest in?
37.1 VARIOUS BOOKS THAT HAVE TURNED OUT TO BE OF

HIGH VALUE
Mussolini, in the 1930s, offered Mumbais Asiatic Library $1,000,000 for

one of Dantes illustrated books. The Asiatic did not part with it. This book
is priceless today. So are many of the books at the Asiatic-books that were
gifted or simply sent to the library there to lie unread and unwanted. Many
have been reduced to dust. Many are crumbling their value incalculable.
It is only now that the world is realizing the worth of these treasures and is
taking steps to maintain and preserve them.
Kolkatas College Street is a veritable treasure house of old books. On both

sides of the street stalls jostle each other flooded with books of every
description. It is possible here, if one is patient and has a sharp eye to pick
up a first edition or a book autographed by a great man. As the books are
literally dumped there with no order or care, they are in great disarray and
often in not too good a condition. And the crowning point is that as the
store owners are not aware of the value of their wares one can literally
pure gold at the price of a nickel. Jaidev Das was one of these lucky
persons. On a visit to his native Kolkata he went along with a friend to
College Street, out of sheer curiosity. There, among the heaps of books
piled high he saw a copy of Adolf Hitlers Mein Kampf which was published
in 1939 just before the Second World War. As a souvenir to remind him of
! !250
BOOKS
this visit he purchased it for a mere ` 30 and took it back with him to New
York where he lives and works. A friend of his who is a collector told him
the particular book that he had was worth, at the least, $ 3000.
In Mumbais Kalbadevi as in Old Delhi there are numerous shops that have
thousands of books that are old, unread and unwanted. And they are an Ali
Babas cave. The disinterest owners have in them is typified by the
statement made by Mr. Madanlal, an owner, No one reads books these
days. Everyone watches T.V. and DVDs. The books lie gathering dust and
often are reduced to dust. Once in a way a book is purchased but the
purpose is not for collection of reading it is more often for an
examination.
All is not lost, however. There is now a growing awareness of books as an

investment. And this is an investment anyone today can begin with very
little capital. It is also an investment that is unknown and not very popular
and consequently the possibility of making enormous profits in the future
cannot be discounted. While hordes of foreigners have combed the bazaars
and streets of India for antiques, the mushrooming of antique and pseudo
antique shops in every town and city in the country has driven the price of
antiques literally sky high, books as a collectors item and as an investment
is relatively unknown. Consequently it is available and it is affordable. How
does one start and what should one look for?
37.2 HOW DOES ONE START LOOKING FOR THE RIGHT

BOOK TO INVEST IN?
1. It is imperative that one has a lot of patience and time in hand. Old and
valuable books are not displayed prominently for one to grab. On the
contrary, they are often below a hundred books or behind a shelf. One
must be prepared to spend time searching.
2. The things you should look at when you are purchasing a book as an
investment can be listed as follows:
(a) Is it a first edition? First editions, especially if they are old are
extremely valuable. They are limited in number and consequently
are a rarity. A first edition of a famous book autographed by its
author is literally worth its weight in gold.
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BOOKS
(b) Even though a book may not be a first edition, an early numbered
edition is again valuable as it is identified.
(c) Purchasers of books are notoriously conceited and often sign their
name on the books along with the date of purchase. If that
purchaser had been a well-known personality, the signature alone
on the book would be very valuable.
(d) Old books even though they may not be first or even fifty editions
are worth considering as investments. There would not be many
left. Ashish Sharma a collector in Mumbai estimates that any
English book printed fifty years ago would be worth about ` 5000 at
the very least to a collector. A book printed before the First World
War would cost at least ` 10000.
(e) While purchasing or examining a book it is important to determining

its conditions. Missing and torn pages, torn binding and ripped
covers reduce the value of books.
(f) And one must bargain. As supply far exceeds demand one can buy a
book for the proverbial song. A friend of mine was able to beat a
dealer down from ` 400 to ` 100 for a 1913 edition of The Cloister
and the Hearth. A veritable bargain. One need hardly say what it is
worth in the collectors market.
Books as investments are steadily gaining in popularity. During the last few
years organizations have been formed in New York, San Francisco, Chicago
and Washington intended to create an opportunity for investors and
collectors of books to meet, to compare, to buy or to sell. It is estimated
that the price of old books are increasing in the Western World, at
approximately 20 per cent and this is growing rapidly as more and more
individuals are beginning to collect.
In India, the collection of books as an investment is relatively unknown.

There are very few serious collectors. And very little demand. It would be
extremely shortsighted not to take advantage of this situation. The chance
of, with patience and luck, finding a valuable book is enormous. The added
bonuses are that you may even enjoy it, improve your mind and enhance
your knowledge.
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BOOKS
1. How does one start looking for the right book to invest in?
2. What makes books a good choice for investment?
! !253
BOOKS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !254
CLOCKS AND WATCHES
Chapter 38
CLOCKS AND WATCHES
Learning Objective:
This chapter shows that clocks and watches have been a choice of
investment for many.
Structure:
38.1 Watches and Clocks of High Value in and Outside the Country
38.2 How does one Start Looking for the Right Watch/Clock to Invest in?
38.1 WATCHES AND CLOCKS OF HIGH VALUE IN AND

OUTSIDE THE COUNTRY
Vijay Prabhu while rummaging through a cupboard in his grand fathers

house came across an old Longines wrist watch. It was not working. It was
very interesting and unusual and he brought it back with him to Mumbai. A
colleague introduced him to a Parsee watch repairer in Nana Chowk who
specialized in the repair of old clocks and watches. Vijay took the watch to
him and in time the watch was repaired. He began to wear it occasionally
more as a conversation piece than anything else. One day he read an
advertisement offering owners of antique clocks and watches incredible
prices. Being naturally curious Vijay went and met the European gentleman
and was taken aback when he was offered ` 250,000 for the wristwatch.
He did not part with it. Similarly Jyotirmoy Basu of Kolkata was offered `
7,00,000 for a Patek Philippe. He sold it and used the money as a nest egg
to start a business in old watches. Jyotirmoy believes that the market for
old watches is still in its in fancy. Its real potential has not yet been
realized and consequently it is untapped. People are not really aware of its
value and so they can still be purchased very cheaply.
This is to a great extent true. Mumbais Chor Bazaar is a veritable treasure-

house of old clocks and watches. There are dozens of shops overflowing
! !255
CLOCKS AND WATCHES
with clocks and watches of every description and make discarded for
diverse reasons by their owners. Many are incredibly beautiful with dancing
nymphs or warriors or chariots. They are stacked in no particular order,
unloved, unwanted and available.
Old watches and clocks are beginning to attract growing interest in Europe
and America and that tribe of locusts that came to India in the years after
independence and stripped us of our more valuable and beautiful antiques
are back to take way our beautiful clocks and watches, offering what
appears to be incredible prices. But are they? A recent study reveals that
watches and clocks being purchased in India are sold at profits of up to
400 percent in America. And prices in America are growing at an incredible
30 percent whereas in India, as demand is practically nonexistent, there is
no appreciation to talk of. A comparison of prices in June 2008 reveals the
disparities.
PRICES
In India (`) Abroad ($)
Watches
Longines 1926 2,75,000 30,000
Patek Phillipe (pre 1930) 7,00,000 70,000
Favre Leube (pre 1930) 5,50,000 54,700
Rolex (50 years old) 4,00,000 50,000
Clocks
Maute Original 10,50,000 1,00,000
Favre Leuba 7,25,000 80,000
Note:The prices are approximate and would vary depending on the

condition of the watch/clock.
! !256
CLOCKS AND WATCHES
38.2 HOW DOES ONE START LOOKING FOR THE RIGHT

WATCH/CLOCK TO INVEST IN?
How does one go about acquiring old watches and clocks?
1. The first thing one should do is to acquire a book on clocks and watches
and there are several available in the market. These detail the really
valuable ones and will also inform you of the special details of particular
pieces. Several watchmakers initial their pieces with unique
identification marks which are meaningless to the uninitiated. It is these
marks that make the piece more valuable and these books will tell you
all about them.
2. The next thing one should do is to try and identify someone who can
repair these old gems. It is nice to have beautiful clocks. It is nicer to
have them working. In all the large cities there are several repairers
who specialize in old clocks more out of love for them than for money.
3. The greatest treasure trove for old good watches and clocks is ones
own ancestral home. A friend of mine, in the attic of his family home
came across an old clock. Its glass was broken and it was in a pitiable
state. He had the glass replaced and cleaned it and took it to a repairer
who was able to get it working once more. When restored it was quite
impressive and he placed it in a prominent place in his drawing room.
Months later it attracted the attention of a colleague of his and after
some research they discovered that it was a clock made in Germany
during the last decade of the last century and quite valuable.
4. One must also have time and patience on ones hand. The place to
procure old watches and clocks are Mumbais Chor Bazaar, Kolkatas
Mullick Market or the streets of Old Delhi. It involves going in and out of
shops, browsing and getting dirty. Many of the watches/clocks that one
would see are in sad straits they may have been plagiarized and many
parts may have been taken out etc. One must be careful to ensure that
the watch one is attempting to purchase is complete. Otherwise, it may
be very difficult to get the parts to make it actually work. I know
someone who purchased a clock at the Chor Bazaar. He was told that a
part was missing and even after a year and several visits neither he nor
his repairer were able to get the correct part. The clock remains on his
mantelpiece silent.
! !257
CLOCKS AND WATCHES
5. Many do not know the great value of a watch or clock and would quote
the first price that comes to their head. It would therefore be prudent to
bargain. One would be surprised at how cheaply one would be able to
get an antique piece. Amritlal Gandhi purchased a jacquard reversible
watch from a shop, after considerable bargaining for, ` 1,000. The
watch was worth, in the market, about ` 90,000.
This is an untapped market a market that will without a doubt blossom in

this decade and it will be more than worth ones while to watch out for old
watches and clocks.
1. Why are clocks and watches a good choice for investment?
2. How does one looking for the right clocks and watches to invest in?
! !258
CLOCKS AND WATCHES
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !259
DIAMONDS
Chapter 39
DIAMONDS
Learning Objective:
This chapter explains why diamonds are popular among investors and
women.
Structure:
39.1 Popularity of Diamonds

39.2 What to Look for in a Diamond Before Buying It?
39.3 Know It all Before Investing in Diamonds
39.1 POPULARITY OF DIAMONDS
Harry Winston, the famous jeweler from New York bought, a 155 carat
rough diamond and after cutting it into a magnificent 62 carat pear-shaped
jewel sold it to King Saud of Saudi Arabia. A year later King Saud returned
it, Incredulous, Mr. Winston wondered why. It was one of the most
beautiful stones he had ever seen, in a career spent among beautiful
stones. The king explained: I have four wives and if I give this stone to
one wife, my life wont be worth a moments peace unless of course you
have three others like it.
Such is the charm of diamonds and the desire to possess it. Its brilliance,
its glow and its mystery has fascinated man from the dawn of civilization. A
thousand years before the birth of Christ, diamonds were worn as magical
charms to protect the wearer and to give him courage. It was believed that
it could tame beasts, cure lunacy and give the wearer magical powers.
Kings and warriors had them set on their helmets, swords and turbans.
And many are the tales of intrigue and adventure, the subject of which
were diamonds.
The romance continues to this very day. The desire to own, to have and to
hold a diamond persists. It is the ultimate possession-the gift to woo and
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DIAMONDS
the gift to cement a relationship. Approximately 83 per cent of all
engagements in Western Europe are sealed with diamond rings.
Diamonds are the most concentrated store of value that exists. They are
tangible, portable and liquid. Investors can use diamonds without
decreasing their value but it must be remembered that the value is based
on rarity which can fluctuate with the discovery of new sources and the
exhaustion of old mines.
The word diamond comes from the Greek word adamas which means
unconquerable and indestructible. Diamonds have been treasured as
gemstones since their use as religious icons in India for at least 2500
years. Its popularity has risen because of successful advertising, increased
supply, improved cutting and polishing techniques and growth in the world
economy.
Approximately 20 per cent of mined diamonds are used in jewellery and

the remaining 80 per cent are used for industrial purposes (laser, drill parts
and surgical equipment). Chemical vapor deposition is being used to
produce cultured diamonds which, unlike diamond stimulants require very
close inspection to distinguish them from natural diamonds.
Historically, the wholesale diamond price has been controlled by De Beers

Group which has an estimated 35 per cent to 40 per cent of the market.
Botswana is presently the largest producer of diamonds with mines opened
by Debswana, a joint venture between De Beers and the Botswana
Government. Other producers have developed, in the last several years,
mines in Russia, Canada and Australia. The United States is the biggest
consumer of diamonds in the world accounting for 35 per cent of the
diamonds sold. The United States is followed by Hong Kong (26 per cent),
Belgium (15 per cent), Japan (6 per cent) and Israel (4 per cent).
39.2 WHAT TO LOOK FOR IN A DIAMOND BEFORE BUYING

IT?
Diamonds are unquestionably beautiful and this can place the buyer of
diamonds in a dilemma as he is often not aware of what he should look for
in a diamond and what its value could be. Although it is impossible to
educate a novice purchaser in diamonds, the characteristics one must be
aware of are:
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DIAMONDS
(a) Colour: The colour of a diamond is extremely important as the
greater the colour or brilliance, the greater its ability to retract.
Most diamonds range in colour from a clear icy white to pearly
shades of yellow and are graded by jewelers from D for the whitest
through the alphabet to Z. The best is classified brilliant white (B/
W). Many good diamonds have within them a blue flame. A totally
colourless diamond is extremely rare. Jewelers normally grade them
as pink, red, blue, green or brown. The pink stone is the most
prized. A maharaja once told me. My palaces are now hotels. I no
longer rent a villa on the Riviera. I have sold several of my horses. I
can live with that. I could not had I parted with my pink diamonds.

Colourwise go for D or E or F colour. D is the best. Alternatively go
for the other end of the spectrum. Canary yellow diamonds,
naturally colored diamonds with strong enough colours may be rarer
and thus more valuable than the white ones.
(b) Carat: Carat is the term used to denote the weight and to an extent
the size of a diamond. This is a measure adopted from early pearl
traders who used dried carob seeds to weigh pearls as they
discovered that dried seeds had a uniform weight irrespective of
how old the tree was or which part of the pod the seed comes from.
The weight of one carat was standardized in 1907 when the
International Committee on Weights and Measures determined that
the metric carat should weigh 200 mg. or 0.2 gms exactly. A large
diamond which is over 500 carats is the Cullinan. The Kohinoor was
said to have weighed over 800 carats originally while the Great
Mogul, a huge rose cut stone was 793 carats. Other famous large
diamonds are the 200 carats Orloff, the 410 carats Regent and the
112 carats the Hope.
(c) Clarity: Clarity classifies diamonds and how clear they are when
one views them and identifies natural birthmarks or inclusions which
are found in them. It is rare or unusual to find a pure diamond-a
diamond with no impurities at all. There is, more often not, some
impurity which is trapped in the crystal as it grows and this gives
the diamond its tinge of colour or opacity. An iron impurity results in
a yellow tinge. A transparent or pastel shaded diamond is
considered practically flawless and consequently highly priced.
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DIAMONDS
The classification made is as follows:
(i) IF Internally Flawless.
(ii) VVS Very Very Small inclusions or flaws (this is usually invisible to
the naked eye).
(iii) VS Very Small inclusion.
(iv) SI Small Inclusion (visible to the naked eye at certain angles)
(v) F Flawed. There are degrees of flaws but in these cases they can be
easily seen.
(d) Cut: The fire in a diamond determines its quality-its importance.

The fire refers to the dispersal of light which occurs by skillful and
artistic faceting. It is the cut that determines the shape and brings
out the colour of diamond. It can also utterly destroy a diamond.
Cutting is an extremely skilled art. Diamonds are cut on the basis of their
contours and this is really where the skill comes in. One must judge-seeing
a rough diamond-the shape that would show it to the best advantage. Prior
to cutting the diamond, a master cutter studies the diamonds internal
structure. He then marks the point at which he believes the diamond will
break or fracture evenly if hit properly. A kerf or thin ridge is then grooved
by another diamond or laser beam into the stones surface and a cleaving
knife is inserted. If the calculations are correct the diamond cleaves
perfectly. If not, it would shatter into a thousand tiny pieces.
Diamonds are so hard that Pliny the Elder wrote in his Natural History in
the First Century after the Birth of Christ: When laid on the anvil it gives
the blow back with such force as to shatter hammer and anvil to pieces.
Its superiority over iron and fire is subdued by goats blood in which it
must be soaked when the blood is fresh and warm. Then only when the
hammer is wielded with such force so to break both it and the anvil will the
diamond yield. When it yields, if falls into such small pieces that they can
scarcely be seen.
A famous story regarding cleaving is that of the 725 carats Jonker diamond
which was found in 1934. This diamond was purchased by Harry Winston
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DIAMONDS
who asked the expert Belgian cutter Lazare Kaplan to cut it. Kaplan studied
the stone for a whole year and was able to cleave it successfully inspite of
the fact that while doing so he came across a slight crack which threw his
calculations into total disarray. At 125.54 carats the largest stone which is
known as the Jonker diamond is the worlds largest emerald cut to date.
Prior to cleaving it Lloyds was approached to insure the cutting and they
refused. This is reputed to be the only case where Lloyds refused to insure
something. It is said that Lazare Kaplan fainted after cleaving The Jonker.
This was due to intense concentration, study and tension. While Joseph
Ascher cleaved the Cullinan, the largest diamond every found, he had a
doctor and two nurses nearby. After he cleaved it successfully he collapsed
into a chair with a sigh of relief. He was, for three months, treated for
nervous breakdown.
Diamond cleaving and polishing originated in India over 2000 years ago.
Nearly 50 per cent of the global production of diamonds are cleaved and
made into jewellery. India is emerging as a big centre for the cleaving and
polishing of diamonds. Nearly a million people are engaged in cutting and
polishing diamonds. The shapes that one normally comes across are
rectangles, ovals and rounds. The more popular are the round cuts which
may have upto 60 facets or cuts. These facets are the cuts that result in
the diamond being able to retract to an array of colours.
Although diamonds are usually associated with the rich and the famous-as
a girls best friend-their industrial uses are much more. This is because the
diamond is extremely hard, does not wear and tear like other substances
and cuts other materials very well. It is used as contact points on precision
measuring gauges in engineering workshops. Diamonds are used in lathe
cutting tools to cut very hard materials. Diamond saws are used to cut
hard stones, ceramics and even decorative blocks and tombstones.
Diamonds are expensive and one must be careful. They should only be
purchased from reputed dealers. This is because the average investor/
purchaser is not an expert and he would be unaware whether there is a
flaw or not. Established dealers have a reputation to protect and they will
guarantee their products. Should anything go wrong they will take the
stone back. It is always preferable to have a diamond appraised to know its
real market value and for insurance. It is possible especially for a large
purchase, to insist on a certificate from a gemnological institute. This is to
establish the authenticity and real value of the stones. These institutes
! !264
DIAMONDS
have created a strict scale of values defining what is important in a
diamond. Any diamond taken to the gemnological institute or its agents is
thoroughly examined and given a report that clearly indicates each
important feature of the stone and how it ranks. In addition to grading
colour and clarity, fingerprinting the stone in this way makes identification
easy, giving the buyer the benefit of expert judgment and information.
Sometimes flawed diamonds are subjected to laser beams to burn out the
flaws or treated to enhance colour. An institute report will say whether the
diamond has been treated or whether its colour is natural.
Superstitions abound and diamonds are reputed to have tremendous

powers of evil and of good. The Kohinoor was considered to have ill luck
and it was reduced from over 800 carats in 1862 to 109 carats. The
daughter of a friend of mine developed acute appendicitis soon after the
purchase of a diamond. As she had a rare blood defect that delayed
clotting she could not be operated upon and the family feared the worst.
By some remarkable retrospection the diamond was returned and by a
miracle the appendix subsided. Today, a number of years later she still has
not had the appendage removed. Whether this is a coincidence or not is
beside the point. People believe diamonds can bring good or bad luck.
The question does arise whether diamonds should be purchased as an

investment. While diamonds of good quality do grow in value, the increase
in value is not always comparable with other available investments.
Saloman Brothers, the New York brokerage and investment banking firm,
found in 1987 that over a 15 year period diamonds had appreciated by
only 4.1 per cent a year. In comparison with other forms of investment, the
return is not very attractive.
A certain care is necessary. In the 1970s, telemarketers from Scottsdale,

Arizona pushed loose diamonds as purportedly wholesale diamonds to
prospects who had just closed brokerage accounts. They claimed these to
be from De Beers. These diamonds were in sealed packets and the buyers
were told that the diamonds were guaranteed for resale only if they were
kept in that sealed packet, unopened. It was a huge scam. Never buy
diamonds until you see it and evaluate it or get it evaluated. If you buy
loose diamonds, you should be allowed to examine them out of their
package and return them within a guaranteed period if they are not up to
par. Diamonds once cut do lose a certain value. This is because of the cut
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DIAMONDS
essentially and the size. Until it is cut many things can be done. After it is,
nothing much can be.
A deterring factor regarding investing in diamonds is, like gold and silver, it
too does not earn any regular income or interest. More often than not it is
bought in the form of jewellery and is a white elephant. It is rarely sold.
Hence the market to sell (especially set stones) is not really there and if
sold to jewellers rarely fetch, in the short-term, its realistic price. One must
be aware of this. Still it remains the most desired, the most cherished and
the most beautiful of possessions. And so it is likely to stay.
39.3 KNOW IT ALL BEFORE INVESTING IN DIAMONDS
If you are intending to invest in diamonds, it should be done in an orderly

manner:
Learn about diamonds. You must know a lot about gemstones to be a

successful diamond investor. Start by learning the 4 Cs cut, colour,
clarity and carat. Each of these influences the value of a diamond.
Plan your diamond investments. Start by budgeting how much money

you can invest. Then decide what quality you can afford.
Determine if you want to buy loose diamonds or diamond jewellery.

Loose diamonds are more liquid because if you want to sell one, you
wont need to find someone who likes the setting. Diamond jewellery
can, however be worn without diminishing its value.
Contact jewellers and diamond dealers. Get information about the

diamonds that are available. If you have a special request, a diamond
dealer can find the quality stone that you want.
Purchase the diamonds of your choice. Hold them for years until they
appreciate in value.
Buy shares in diamond mining companies for another approach to

investing in diamonds.
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DIAMONDS
Choose diamonds that you can resell. For that reason round cut brilliant
diamonds are better as they are the easiest to sell. Other cuts that are
in fashion might not be in fashion when you are trying to sell.
Steer clear from inferior diamonds. They may look good on jewellery but
they are difficult to sell.
The rarer the diamond, the better the investment.
It is important to remember that one should invest in diamonds that are

at least 75 points or at worst 50 points (half a carat). One point equals
0.01 carats. They should be flawless or internally flawless stones. The
larger the stone the better.
Colourwise buy D or E or F colour. D is the best. Either that or buy at the

other end of the spectrum. Canary yellow diamonds, naturally colored
diamonds with strong enough colours may be rarer and hence more
valuable than the white ones.
Only buy loose diamonds that are certified by the countrys Gemological
society. A gemnological institute certificate guarantees the quality of the
diamond after having had it examined in a diamond grading laboratory.
Purchasers other than established jewellers pay retail for a stone but
when they sell can only get wholesale price if they sell to a jeweler.
A problem in the sale of diamonds is the lack of a terminal market.
If an investment grade diamond is bought always insist on a written

promise to re buy the diamond at or near the purchase price within a
specified period.
There are a few funds investing in diamonds. These funds purchase unique
diamonds (very large in size or colour). Each stone is checked by experts
and negotiated till the fund decides to buy it. In 2007, the price of
diamonds in the top range went up by 50 per cent.
A good diamond never falls in price especially the larger ones. Therefore
apart being an investment, it can give you a great amount of pleasure.
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DIAMONDS
1. Why are diamonds popular among investors and women?
2. What should one look out for before investing in diamonds?
3. What should an investor interested in investing in diamonds do prior to

his investment?
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DIAMONDS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !269
GOLD
Chapter 40
GOLD
Learning Objective:
This chapter proves that gold has been an all-time favourite as a choice for
investment.
Structure:
40.1 History of Gold as Investment from Days of Civilization to the

Present Day
40.2 Factors that Affect the Price of Gold
40.3 Increase in Demand of Gold
40.4 Gold Jewellery
40.5 Gold Consumption
40.6 Reasons for Investing in Gold
40.7 Purchase of Gold
40.1 HISTORY OF GOLD AS INVESTMENT FROM DAYS OF

CIVILIZATION TO THE PRESENT DAY
Christopher Columbus was prepared to sail through uncharted seas to find

a sea route to secure for his king the gold of Ind. Midas dearest wish was
that all that he touches turn to gold. Mahmud of Ghazni wept on his
deathbed as he could not take the gold that he had looted in his several
raids into India with him to paradise. California, a state that was sparsely
populated with farms and small villages changed overnight when gold was
discovered. Such has been the lure of gold and the desire to possess it that
men have waged wars, toppled empires, killed and endured unimaginable
hardships and misery. It has always been the worlds most popular, most
desired and therefore its premier metal. It has been at the core of the
monetary systems since the beginning of recorded history and most
currencies were upto the early part of the twentieth century based on gold.
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GOLD
Gold has been coveted for its beauty, malleability and resistance to rust
and corrosion.
One of the oldest civilisations known to man, the Sumerians of

Mesopotamia, who lived in what is modern-day Iran and Iraq, first used
gold as sacred, ornamental, and decorative instruments in the fifth
millennium B.C. Around the same period, the early Egyptians the richest
gold-producing civilisation of the ancient world began the art of gold
refining. Like the Sumerians, the Egyptians used gold primarily for personal
adornment, rather than for monetary purposes, although the kings of the
fourth to sixth dynasties (c. 2700 - 2270 B.C.) did issue some gold coins.
The first large-scale, private issuance of pure gold coins was under King
Croesus (560-546 B.C.), the ruler of ancient Lydia (modern-day western
Turkey). Stamped with his royal emblem of the facing heads of a lion and a
bull, these first known coins eventually became the standard of exchange
for worldwide trade and commerce.
Gold is traditionally weighed in troy ounces (31.1035 gram). It has a

specific gravity of 19.3 meaning that it is 19.3 times heavier than water. In
other words gold weighs 19.3 kilograms per litre. With the density of gold
at 19.32 g/Cm3, a troy ounce of gold would have a volume of 1.64 Cm3. A
tonne of gold would therefore have a volume of 51, 760 Cm3, which would
be equivalent to a cube of side 37.27cm (Approx. 1' 3'). At the end of
2003, Gold Field Mineral Services (GFMS) estimated that above-ground
stocks represented a total volume of approximately 150,500 tonnes, of
which 61 per cent had been mined since 1950. All the gold ever mined
would form a cube measuring only 19m on each side. This cube would, for
example, easily fit under the Eiffel Tower in Paris.
The proportion of gold in jewellery is measured on the carat (or karat)

scale. The word carat comes from the carob seed, which was originally
used to balance scales in Oriental bazaars. Pure gold is designated 24
carat, which compares with the fineness by which bar gold is defined.
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GOLD
Cartage Fineness % Gold
24 1000 100
22 916.7 91.67
PURE GOLD ALLOYS 18 750 75
14 583.3 58.3
10 416.7 41.67
9 375 37.5
The most widely used alloys for jewellery in Europe are 18 and 14 carat,
although 9 carat is popular in the UK. Portugal has a unique designation of
19.2 carats. In the United States 14 carat predominates, with some 10
carat. In the Middle East, India and South East Asia, jewellery is
traditionally 22 carat (sometimes even 23 carat). In China, Hong Kong and
some other parts of Asia, chuk kam or pure gold jewellery of 990
fineness (almost 24 carat) is popular.
The gold standard was adopted in England after the Napoleonic wars in the
early part of the 19th century. In the second half of that century, a number
of nations in Europe followed suit, though some for a time based their
currencies on a bimetallic gold/silver standard. The United States adopted
the gold standard de facto in 1879, by making the greenbacks that the
government had issued during the Civil War period convertible into gold.
The United States then formally adopted the gold standard by legislation in
1900. By 1914, the gold standard had been accepted by a large number of
countries, although it was certainly not universal.
The gold specie standard called for fixed exchange rates, with parities set
for participating currencies in terms of gold, and provided that any paper
currency could on demand be exchanged for gold specie at the central
bank of issue. The system was designed to bring automatic adjustment in
case of external deficits or surpluses in transactions between countries,
that is, balance of payments imbalances. The underlying concept was that
any deficit country would have to surrender gold to cover its deficit, with
the result that the volume of its money would be reduced, leading to lower
prices, while the influx of that gold into the surplus country would expand
the volume of that countrys money and lead to higher prices.
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GOLD
In the foreign exchange market, under the gold standard, exchange rates
could, in principle, fluctuate only within very narrow limits determined by
the costs of shipping and insuring gold. Thus, if United States (U.S.)
residents accumulated pounds sterling as a result of exporting more goods
and services to Britain than they imported and being paid in pounds for the
excess, the U.S. holders of sterling had the option of converting pounds
into gold at par value at the Bank of England and shipping the gold back to
New York. During the 1880-1914 period, the mint parity between the
U.S. dollar and sterling was approximately $4.87, based on a U.S. official
gold price of $20.67 per ounce and a U.K. official gold price of 4.24 per
ounce. The sterling/dollar exchange rate would not fluctuate beyond the
gold points about three cents above and below the mint parity which
represented the cost of shipping and insuring gold, since at any exchange
rate outside the gold points it would be possible to gain an arbitrage profit
by converting currency into gold and shipping the gold to the other centre.
While some gold transfers actually took place under this system, such
shipments frequently were avoided by monetary policy moves. In the
example above, the U.K. might raise interest rates to attract capital inflows
i.e., increase the demand for sterling and counterbalance the financial
impact of the import excess. Higher interest rates also would have a
deflationary effect in the deficit country.
This automatic operation of the balance of payments adjustment process

under the gold standard required, in theory, that in their financial policies,
participating countries give an absolute priority to external adjustment
over domestic objectives. This meant that in any periods of conflict
between domestic and external objectives, policy tools might not be
available to be used for domestic problems of recession, unemployment, or
inflation. But the philosophy widely held in those pre-Keynesian times was
that economies would tend naturally toward reasonably high levels of
employment and reasonable price stability without such government policy
actions.
For a forty-year period there were no changes in the exchange rates of the
United States, UK, Germany, and France (though the same did not hold for
a number of other countries). There were few barriers to gold shipments
and few capital controls in the major countries. Capital flows generally
seem to have played a stabilising, rather than destabilising, role. After the
outbreak of the First World War, one combatant country after another
suspended gold convertibility and floating exchange rates prevailed. The
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GOLD
United States, which entered the war late, maintained gold convertibility,
but the dollar effectively floated against the other currencies, which were
no longer convertible into dollars. After the ware, and in the early and mid-
twenties, many exchange rates fluctuated sharply. Most currencies
experienced substantial devaluations against the dollar; the U.S. currency
had greatly improved its competitive strength over European currencies
during the war, in line with the strengthening of the relative position of the
U.S. economy.
In Europe, especially in the UK, there was a widespread desire to return to

the stability of the gold standard, and a worry about the growing
attractiveness of the dollar which was convertible into gold and of
dollar-denominated assets. Following a disastrous five years back on the
gold standard, the UK abandoned it in 1931, and others followed over the
next few years. In 1933, US President Franklin Roosevelt imposed a ban on
U.S. citizens buying, selling, or owning gold. While the U.S. Government
continued to sell gold to foreign central banks and government institutions,
the ban prevented hoarders from profiting after Congress devalued the
dollar (in terms of gold) in January 1934. This action raised the official
price of gold by more than 65 percent (from $20.67 to $35 per troy
ounce). Gold coins and certificates considered collectors items were
exempt from the prohibition, and artistic and industrial users of gold were
permitted to deal in the metal under a special Treasury license. Gold at $35
set off a mining boom. US output rose from 2.6 m.oz in 1933 to 4.4 m.oz
in 1936, and peaked at 6.0 m.oz in 1940 (not equalled until 1988). Canada
hit 5.5 m.oz in 1941 (best until 1991). World output up from 20 m.oz to
38.6 m.oz by 1940.
In 1971 President Richard Nixon ended US dollar convertibility to gold and

the central role of gold in world currency systems ended. The dollar and
gold floated and in January 1980 the gold price hit a record of $850 per
ounce against a background of an international crisis arising from the
Soviet invasion of Afghanistan and the Islamic Revolution in Iran. This
barrier was broken in January 2008, though in inflation adjusted terms, the
price would have to be at least $2200.
For many years various pundits propagated that gold is the ideal
investment, an integral part of a diversified portfolio for the wealthy and
this it is good protection against deterioration in currency values due to
inflation. The eighties have proved that the price of gold like any other
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GOLD
commodity is affected by the forces of supply and demand and that it is
this that determines its price. This view is supported by Horace W. Brack of
the Princeton University, USA who claims that it is the investment and
speculative demand for gold and not the demand from actual users
(industries such as electronics, jewelers, etc.) which determines the price
of gold internationally. According to him there are five critical
determinants:
The level of political tension. This is also defined as worldly anxiety

element.
Real economic growth rate especially in the US, Europe, Japan and South
East Asia.
The rate of inflation in non-communist industrialized countries.
Real rates of interest.
The relative strength of the US dollar.
HISTORICAL GOLD PRICES 1800-2008
Date High Low Close
12/31/1800 19.3939 19.3939 19.3939

12/31/1801 19.3939 19.3939 19.3939
12/31/1802 19.3939 19.3939 19.3939

12/31/1803 19.3939 19.3939 19.3939
12/31/1804 19.3939 19.3939 19.3939

12/31/1805 19.3939 19.3939 19.3939
12/31/1806 19.3939 19.3939 19.3939

12/31/1807 19.3939 19.3939 19.3939
12/31/1808 19.3939 19.3939 19.3939

12/31/1809 19.3939 19.3939 19.3939
12/31/1810 19.3939 19.3939 19.3939

12/31/1811 19.3939 19.3939 19.3939
! !275
GOLD
12/31/1812 19.3939 19.3939 19.3939

12/31/1813 19.3939 19.3939 19.3939
12/31/1814 21.79 19.3939 21.79

12/31/1815 23.07 19.78 22.16
12/31/1816 22.16 19.74 19.84

12/31/1817 19.89 19.3939 19.3939
12/31/1818 19.3939 19.3939 19.3939

12/31/1819 19.3939 19.3939 19.3939
12/31/1820 19.3939 19.3939 19.3939

12/31/1821 19.3939 19.3939 19.3939
12/31/1822 19.3939 19.3939 19.3939

12/31/1823 19.3939 19.3939 19.3939
12/31/1824 19.3939 19.3939 19.3939

12/31/1825 19.3939 19.3939 19.3939
12/31/1826 19.3939 19.3939 19.3939

12/31/1827 19.3939 19.3939 19.3939
12/31/1828 19.3939 19.3939 19.3939

12/31/1829 19.3939 19.3939 19.3939
12/31/1830 19.3939 19.3939 19.3939

12/31/1831 19.3939 19.3939 19.3939
12/31/1832 19.3939 19.3939 19.3939

12/31/1833 19.3939 19.3939 19.3939
12/31/1834 20.69 19.3939 20.69

12/31/1835 20.69 20.69 20.69
12/31/1836 20.69 20.69 20.69

12/31/1837 22.7 20.67 21.6
12/31/1838 21.52 20.69 20.73
! !276
GOLD
12/31/1839 20.73 20.73 20.73

12/31/1840 20.73 20.73 20.73
12/31/1841 20.73 20.6718 20.6718

12/31/1842 20.73 20.6718 20.69
12/31/1843 20.71 20.67 20.6718

12/31/1844 20.6718 20.6718 20.6718
12/31/1845 20.6718 20.6718 20.6718

12/31/1846 20.6718 20.6718 20.6718
12/31/1847 20.6718 20.6718 20.6718

12/31/1848 20.6718 20.6718 20.6718
12/31/1849 20.6718 20.6718 20.6718

12/31/1850 20.6718 20.6718 20.6718
12/31/1851 20.6718 20.6718 20.6718

12/31/1852 20.6718 20.6718 20.6718
12/31/1853 20.6718 20.6718 20.6718

12/31/1854 20.6718 20.6718 20.6718
12/31/1855 20.6718 20.6718 20.6718

12/31/1856 20.6718 20.6718 20.6718
12/31/1857 20.81 20.6718 20.71

12/31/1858 20.6718 20.6718 20.6718
12/31/1859 20.6718 20.6718 20.6718

12/31/1860 20.6718 20.6718 20.6718
12/31/1861 20.6718 20.6718 20.6718

12/31/1862 27.542 20.774 27.542
12/31/1863 35.448 25.244 31.394

12/31/1864 57.052 31.313 46.356
12/31/1865 48.014 26.585 29.896
! !277
GOLD
12/31/1866 32.191 25.838 27.49

12/31/1867 30.1 27.284 27.593
12/31/1868 30.695 27.309 27.827

12/31/1869 29.298 24.701 24.728
12/31/1870 25.217 22.737 22.893

12/31/1871 23.718 22.402 22.531
12/31/1872 23.849 22.426 23.149

12/31/1873 24.493 21.936 22.789
12/31/1874 23.537 22.531 23.123

12/31/1875 24.235 23.098 23.332
12/31/1876 23.693 22.116 22.116

12/31/1877 22.142 21.187 21.239
12/31/1878 21.239 20.67 20.67

12/31/1879 20.67 20.67 20.67
12/31/1880 20.67 20.67 20.67

12/31/1881 20.67 20.67 20.67
12/31/1882 20.67 20.67 20.67

12/31/1883 20.67 20.67 20.67
12/31/1884 20.67 20.67 20.67

12/31/1885 20.67 20.67 20.67
12/31/1886 20.67 20.67 20.67

12/31/1887 20.67 20.67 20.67
12/31/1888 20.67 20.67 20.67

12/31/1889 20.67 20.67 20.67
12/31/1890 20.67 20.67 20.67

12/31/1891 20.67 20.67 20.67
12/31/1892 20.67 20.67 20.67
! !278
GOLD
12/31/1893 20.67 20.67 20.67

12/31/1894 20.67 20.67 20.67
12/31/1895 20.67 20.67 20.67

12/31/1896 20.67 20.67 20.67
12/31/1897 20.67 20.67 20.67

12/31/1898 20.67 20.67 20.67
12/31/1899 20.67 20.67 20.67

12/31/1900 20.67 20.67 20.67
12/31/1901 20.67 20.67 20.67

12/31/1902 20.67 20.67 20.67
12/31/1903 20.67 20.67 20.67

12/31/1904 20.67 20.67 20.67
12/31/1905 20.67 20.67 20.67

12/31/1906 20.67 20.67 20.67
12/31/1907 20.67 20.67 20.67

12/31/1908 20.67 20.67 20.67
12/31/1909 20.67 20.67 20.67

12/31/1910 20.67 20.67 20.67
12/31/1911 20.67 20.67 20.67

12/31/1912 20.67 20.67 20.67
12/31/1913 20.67 20.67 20.67

12/31/1914 20.67 20.67 20.67
12/31/1915 20.67 20.67 20.67

12/31/1916 20.67 20.67 20.67
12/31/1917 20.67 20.67 20.67

12/31/1918 20.67 20.67 20.67
12/31/1919 20.67 20.67 20.67
! !279
GOLD
12/31/1920 20.67 20.67 20.67

12/31/1921 20.67 20.67 20.67
12/31/1922 20.67 20.67 20.67

12/31/1923 20.67 20.67 20.67
12/31/1924 20.67 20.67 20.67

12/31/1925 20.67 20.67 20.67
12/31/1926 20.67 20.67 20.67

12/31/1927 20.67 20.67 20.67
12/31/1928 20.67 20.67 20.67

12/31/1929 20.67 20.67 20.67
12/31/1930 20.67 20.67 20.67

12/31/1931 20.67 20.67 20.67
12/31/1932 20.67 20.67 20.67

12/31/1933 34.06 20.67 32.32
12/31/1934 35 34.06 35
12/31/1935 35 35 35
12/31/1936 35 35 35
12/31/1937 35 35 35
12/31/1938 35 35 35
12/31/1939 35 35 35
12/31/1940 34.75 34.1 34.5

12/31/1941 35.5 34.25 35.5
12/31/1942 36.25 35 35.5

12/31/1943 36.5 35.5 36.5
12/31/1944 36.75 36 36.25

12/31/1945 38.25 36.25 37.25
12/31/1946 39.5 37.75 38.25
! !280
GOLD
12/31/1947 43.25 37.5 43

12/31/1948 43.25 41.5 42
12/31/1949 42.5 40.5 40.5

12/31/1950 41.5 36.5 40.25
12/31/1951 44 40 40
12/31/1952 40.75 38.15 38.7
12/31/1953 39.25 35.25 35.5

12/31/1954 35.5 35.25 35.25
12/31/1955 35.25 35.15 35.15

12/31/1956 35.2 35.15 35.2
12/31/1957 35.25 35.15 35.25

12/31/1958 35.25 35.25 35.25
12/31/1959 35.25 35.25 35.25

12/31/1960 36.5 35.2 36.5
12/31/1961 36.5 35.15 35.5

12/31/1962 35.5 35.2 35.35
12/31/1963 35.42 35.25 35.35

12/31/1964 35.35 35.25 35.35
12/31/1965 35.5 35.25 35.5

12/31/1966 35.5 35.3 35.4
12/31/1967 35.5 35.27 35.5

12/31/1968 43.5 35.85 43.5
12/31/1969 43.5 35.2 35.4

12/31/1970 39.9 34.9 37.6
12/31/1971 44.2 37.7 43.8

12/31/1972 70.3 44.3 65.2
12/31/1973 126.3 64.2 114.5
! !281
GOLD
12/31/1974 195.5 116.8 195.2

12/31/1975 199.1 138.5 150.8
12/31/1976 151 109.5 145.1

12/31/1977 180.7 136.5 179.2
12/31/1978 264.2 178.9 244.9

12/31/1979 578.7 233.8 578.7
12/31/1980 850.0 495.2 641.2

12/31/1981 647.1 415.5 430.8
12/31/1982 522.8 318.7 484.5

12/31/1983 545.6 398.5 415
12/31/1984 435.7 328.7 331.3

12/31/1985 364.1 301.6 354.2
12/31/1986 471.8 351.8 435.2

12/31/1987 531.7 419.4 522.9
12/31/1988 522.2 421.9 441

12/31/1989 448.5 383 433.4
12/31/1990 451.8 370.9 423.8

12/31/1991 432.7 369.1 379.9
12/31/1992 384.6 353.1 356.3

12/31/1993 435.3 349.7 419.2
12/31/1994 425.8 396.4 409.8

12/31/1995 422.9 385.2 385.6
12/31/1996 401.3 367.8 367.8

12/31/1997 365.2 282.5 288.8
12/31/1998 313.8 274.1 288

12/31/1999 326 252.3 287.5
12/31/2000 316.45 264 272.15
! !282
GOLD
12/31/2001 294.8 255.3 278.7

12/31/2002 349.25 278.2 346.7
12/31/2003 416.00 322.75 414.8

12/31/2004 455.75 373.50 438.10
12/31/2005 540.90 410.40 517.20

12/29/2006 730.00 516.75 636.30
12/31/2007 845.40 601.70 833.20

01/14/2008 914.00 833.30 904.80
Source: Global Financial Data
40.2 FACTORS THAT AFFECT THE PRICE OF GOLD
There are two other factors to be considered:
Growth in demand for jewellery.

Increase in demand for exchange-traded paper backed products.
The Wall Street Journal actually attempted to track the anxiety element of
gold and proved that it did have an effect. On the rumour of a Soviet
invasion of Iran in January 1980 the price of gold improved by US dollars
87. The price of gold fell by US dollars 34 when pessimistic reports were
received on the Iranian hostages.
In India the demand for gold is constant and growing. It is an inevitable

part of marriage. No Indian woman would wed without the required
number of gold ornaments. Ladies buy gold ornaments constantly. And
gold is a way by which unaccounted wealth is stored. Additionally demand
has also increased on account of factors such as:
Large scale government spending in rural areas. This has created a

demand for gold.
Better agriculture prices. The ordinary farmer seldom has or is aware of

other forms of investment.
Mass seizure of smuggled gold.
! !283
GOLD
Hoarding.
The belief that it is a safe investment and a hedge against inflation.
Escalation of international prices.
The weak position of the US dollar.
India mines about 50 tonnes of gold per annum. Recycled gold is stagnant
at about 200 tonnes per annum. However, the demand is increasing.
Consumption rose in India from 526 tonnes in 2006 to 588 tonnes in 2007.
Price of Gold
In US $
12/31/1947 43.25 37.5 43

12/31/1957 35.25 35.15 35.25
12/31/1967 35.5 35.27 35.5

12/31/1977 180.7 136.5 179.2
12/31/1987 531.7 419.4 522.9

12/31/1997 365.2 282.5 288.8
12/31/1998 313.8 274.1 288

12/31/1999 326 252.3 287.5
12/31/2000 316.45 264 272.15

12/31/2001 294.8 255.3 278.7
12/31/2002 349.25 278.2 346.7

12/31/2003 416 322.75 414.8
12/31/2004 455.75 373.5 438.1

12/31/2005 540.9 410.4 517.2
12/29/2006 730 516.75 636.3

12/31/2007 845.4 601.7 833.2
01/14/2008 914 833.3 904.8
Source: Global Financial Data
! !284
GOLD
Gold Prices in India
As on 31st Mar Gold price per As on 31st mar Gold price per
10 gm 10 gm
1975 540 2000 4395
1980 1330 2001 4410

1985 2130 2002 5030
1990 3200 2003 5260

1995 4658 2004 6005
1996 5713 2005 6165

1997 4750 2006 8210
1998 4050 2007 9500

1999 4220 (27-6-2008) 12568
These figures are enough to instill confidence in investors to invest in gold.
A few years ago the Finance Act, with the intention of reducing the inflow
of smuggled gold, was amended to permit non-residents to bring in gold
every six months upto 5 kg on payment of duty of ` 225 per 10 grams in
foreign currency. When this was announced prices fell but then stabilized
40.3 INCREASE IN DEMAND OF GOLD
Gold prices are not subject to the volatility of the stock market and will
always be, for jewellery and as a hedge against inflation in great demand
in India. Additionally, gold is being held by those who have accounted
money. The demand will therefore only increase and as prices in India will
be lower then abroad in the foreseeable future smuggling in large
quantities will continue. The rewards make the risks worthwhile.
When one purchases gold ornaments, one should remember the following:
The lower the carat purity, the stronger it is and the better the
ornaments will be.
! !285
GOLD
One should avoid buying elaborately designed jewelry (filigree, etc.) as
although they may look beautiful they may be brittle.
If the gold has been soldered it should be with cadmium as it would be

much stronger.
There is a loss which could be as much as 10 per cent when gold

ornaments are sold. This is because gold is usually bought back at a
discount of 1 gramme for over 10 grammes.
Gold ornaments earn no income. They are just kept and admired.
Gold attracts wealth tax.
Furthermore, no value is placed on the making charges, for workmanship

and the making of the ornaments.
40.4 GOLD JEWELLERY
It is best to keep gold in bars. If it is in the form of jewellery you tends to

lose 10% of the value plus the making charges. Gold jewellery is not as
good an investment as gold bars as it is not liquid.
Since equity markets have fallen sharply, leading to significant losses,

investors have now shifted their attention to gold which has appreciated
sharply over the last few months. Investors rationale for investing in gold
is far from what it should be. Rather than viewing it from an asset
allocation perspective, gold to them appears as the most profitable
investment proposition at present.
! !286
GOLD
Indian Gold Consumption (tonnes per year)
Source: Virtual Metals. Fortis Yellow Book
40.5 GOLD CONSUMPTION
Between 2000 and 2007, gold jewellery sold in India accounted for one
ounce-in-nine sold worldwide. One ounce in every five wound up as an
Indian import (its domestic mines produce less than six tons per year),
ready to be hung off young brides as 24-carat dowries or worked into
bracelets and necklaces for the international market.
The single-largest gold bullion consumer, Indias own final demand

outweighed the next largest market China by almost 57 per cent.
But Chinese gold buyers have now caught up in 2008. Or so says the latest
data from the World Gold Council. The switch isnt only due to surging
Chinese demand (up by 15 per cent year-on-year between Jan. and April).
It comes because Indian gold sales have collapsed down 65 per cent in
the first six months of 2008 from 07 according to the Bombay Bullion
Association as consumers balk at record high prices:
With regard to the question why should investors buy gold it is stated, No
other commodity enjoys as much universal acceptability and marketability
! !287
GOLD
as gold. Commenting on the importance of gold in an overall portfolio, Ajit
Dayal, Director of Quantum Asset Management Company Private Limited,
said, Investors should consider investing in gold as insurance. We all buy
life insurance in case something goes wrong so that our families are not
affected by our personal absence. Gold is the insurance for your overall
portfolio. Gold is a hedge, insurance, in one sense because it addresses the
basic question: what if there is a global crisis and leaders are unable to
handle it? I encourage investors to invest anywhere between 5 per cent
and 10 per cent of their total portfolio in gold. This does not mean that we
dislike the Indian equity markets. On the contrary, we continue to be
optimistic and invest in the Indian stock markets. A person buying
insurance does not stop living buying gold does not mean you have to
sell shares.
In the periods when stock markets declined, gold could have limited your
overall losses
Year BSE Sensex Returns Gold in Rupees
1982 4% 21%
1986 -1% 29%

1987 -16% 22%
1995 -21% 13%

1998 -16% 8%
2000 -21% 1%
2001 -18% 6%
2002 4% 24%
2008* -18% 7%
Indeed, If you had invested 10,000 Rupees in the sensex or the nifty
[stock index] one year back, write Gaurav Pai & Ashish Rukhaiyar in the
Economic Times, your investment would have shrunk to about ` 8,800.
However a similar amount invested in gold would have grown to over
` 15,000. Its the uncertainty in the financial markets that is propelling
gold upwards, as Devendra Nevgi, head of the Quantum Gold Fund says
from Mumbai. Indian and Western investors alike might want to keep that
! !288
GOLD
in mind. Because, whatever the aesthetic or festive attractions of owning
gold bullion, its role as the No.1 safe-haven asset remains.
40.6 REASONS FOR INVESTING IN GOLD
Let us look at some of the reasons for investing in gold.
Hedge against inflation: Before I venture into how gold can be a hedge
against inflation, let us first understand what inflation means. Inflation
could be explained as the general rise in prices. This has a corresponding
impact a decline in the value of the currency as you start to pay more
for the same product/service. So, if you were paying ` 40 per litre of
petrol, you start to pay ` 50 for the same quantity. This erosion in the
value of the currency (i.e. the Rupee) is something investors should ideally
guard themselves against. One way of guarding your wealth is to hold it in
an avenue that preserves its worth. Gold, as an asset class, has historically
proved to be a good hedge against inflation.
Adds stability to the portfolio: Gold can have a stabilising effect on your
portfolio. This flows from the previous point. As we have seen, gold
behaves differently than other assets. When equities are volatile, gold can
play the role of an anchor in your portfolio. Most investors suffer heavily
during stock market volatility because they are over-invested in equities.
During a stock market rally it is easy to get carried away by a sense of
feel-good. Not only are existing equity portfolios bloated, fresh monies are
also earmarked for equities. When markets collapse, investors are left
stranded without a anchor; an asset like gold can play this role well
provided investors were prudent enough to have invested in it before the
crash (and not after).
Liquidity: Any time, gold can be converted in to cash and hence it is a

highly liquid asset.
High Value: It is a precious metal of high value just next to diamond and
platinum with 10 grams of gold costing around rupees 12,500.
Convertability: Ornaments can be converted in to gold coins or bars and

vice versa.
! !289
GOLD
Easy to Store: Gold in any physical form needs hardly any space for
storage and gold worth millions of rupees can be safely stored in a small
bank locker.
Indestructibility: Gold does not rust or decay on storage.
Status Symbol: Gold has an intrinsic value. It is highly desired by

everybody all over the world since ages. For ladies, especially in India,
possessing gold ornaments is a status symbol.
Good Security: One can easily get loan from banks since banks easily
accept gold as security and offer loans.
Benefit of diversification: Investor should always follow the principle of

Not putting all the eggs in to the same basket in order to maximize the
return and minimize the risk. Investment in gold helps one to achieve
efficient portfolio.
There are several factors you should consider or know before investment is
made in gold.
Although prudence demands that you invest a portion of your assets in

gold, dont go overboard. While there are several benefits of investing in
gold, some points are noteworthy:
Unlike other assets, such as debentures, gold does not provide regular
income.
Investing in gold does not provide any tax benefit. On the contrary, sale
of gold results in a tax liability.
Purity of the metal is always a worry. There is a good chance that you
might not get the purity that was promised. At the time of selling the
substandard gold, you will have to settle for a lower price. To avoid this
problem, at the time of buying, always insist on a certificate
authenticating the purity of gold.
There is an extra cost involved in preserving gold. If you have physical

gold, you may need to invest in a bank locker. If you buy gold over the
! !290
GOLD
stock exchange (i.e. gold exchange-traded fund), then you will need to
maintain a demat account.
How much gold should you own? That will depend a lot on your risk
appetite and long-term investment objectives. Having said that, I believe
most investors should have no more than 5 per cent of their assets in
gold. This may sound like a tame number in these times when gold is on
a high, but over the long-term being over-invested in gold can pull down
your over-all portfolio.
40.7 PURCHASE OF GOLD
How should one purchase gold? Gold comes in different forms. You can
either buy it in physical form like gold bars, biscuits, coins, ornaments or
even in a dematerialized form.
1. Ornaments - For many Indians purchasing gold means buying

ornaments. Indian women have craze for gold. Nicholas Boileau has
aptly quoted Gold gives an appearance of beauty even to ugliness. But
from the investment point of view this is not profitable since you lose
what you have paid as making charges (25% to 40% depending on the
design).
2. Gold Bars, Gold Coins & Biscuits - These are the ideal forms of
physical gold to invest. They are priced at market value and can easily
be exchanged for cash at market price with nominal service charge.
3. Investment in Gold Bonds or Certificates - The other option is to

invest in gold bonds or certificates issued by commercial banks. These
bonds generally carry low interest rates and a lock-in period varying
from three years to seven years. On maturity, depositors can take the
delivery of gold or amount equivalent depending on their options.
4. Gold ETFs - Gold exchange traded funds (ETFs) are nothing but open-
ended mutual funds that invest the money collected from the investors
in standard gold bullion (0.995 purity). The units of these funds can be
traded on stock exchange. By investing in these funds, investor can own
gold in dematerialized form. The major advantage is that carrying and
storage cost and risk of theft can be totally eliminated.
! !291
GOLD
The idea of a gold ETF was first officially conceptualised by Benchmark
Asset Management Company in India when they filed a proposal with the
SEBI in May 2002. However it did not receive regulatory approval and was
only launched later in March 2007. Gold exchange-traded funds (GETFs)
are special types of ETFs benchmarked against the price of gold. In India,
these have been available from 19 March 2007, when Benchmark Asset
Management Company, launched Gold BeES on the National Stock
Exchange of India.
Subsequently, UTI Mutual Fund listed a GETF on the National Stock

Exchange of India. The objective of UTI Gold Exchange Traded Fund was to
provide returns that, before expenses, closely track the performance and
yield of gold. Every unit of UTI Gold Exchange Traded Fund approximately
represents one gram of pure gold. Units allotted under the scheme are
credited to investors demat accounts. Several other financial institutions
including State Bank of India, followed suit.
Typically a commission of 0.4 per cent is charged for trading in gold ETFs
and an annual storage fee is charged. The annual expenses of the fund
such as storage, insurance, and management fees are charged by selling a
small amountof gold represented by each certificate, so the amount of gold
in each certificate will gradually decline over time. In some countries, gold
ETFs represent a way to avoid the sales tax or the VAT which would apply
to physical gold coins and bars. Some of the other popular mutual fund
houses who have launched GETFs are Kotak Mutual Fund, Reliance Mutual
Fund and Quantum Mutual fund.
GETFs are traded on the exchange just like a listed share of a company.
During market trading hours, investors can submit buy or sell orders,
which are executed by market makers. If investors require cash, they can
redeem their ETF units, though they have to incur some cost for
redemption.
Investing in gold through the ETF route comes with a number of

advantages over holding physical gold for investment. Apart from the cost
advantage of ETFs, there is also the risk of safely holding physical gold and
the issues relating to the purity of the yellow metal when bought from the
market. In addition, gold ETFs enjoy some advantages from the taxation
point of view.
! !292
GOLD
Gold ETFs have emerged as one of the most cost-effective ways. Not only
do they provide ease of trade, the high profit margins of jewellers and
banks are easily done away with since they are traded at near-market
values. Globally, investors choose gold ETFs for being a good hedge against
stock market volatility. Not to mention, the depreciation of the dollar. With
regard to the quantum that one can invest, I believe one can safely invest
5-10% of their total savings in gold.
If you are buying ornaments, buy from reputed jewelers. It is better to buy
gold coins and gold bars from commercial banks. Some of the banks which
sell 24 carat gold coins & bars are HDFC Bank, State Bank of Mysore, Bank
of Baroda, Canara Bank, Corporation bank, ICICI Bank, etc. Pure gold coins
can also be purchased from private houses like Tanishq (Tata enterprise) &
Reliance jewel.
You can buy gold whenever you like. And at any time you have funds to
invest. But one can avoid festival seasons as prices are likely to be higher
at that time. If we look at the past, almost since 1998, the trend in the
prices is upward. Indians are the biggest buyers of gold in the world. Since
there is no regular income from investment in gold, there is no question of
income tax. One thing is sure. You will rarely lose money if you invest in
gold. Gold continues to be one asset that appreciates steadily.
1. Write a short note on the history of gold as an investment?
2. What are the factors that determine the price of gold?
3. State the reasons why is it wise to invest in gold.
4. What are the different forms in which gold can be invested in?
5. What should one know before buying gold?

! !293
GOLD
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !294
SILVER
Chapter 41
SILVER
Learning Objective:
This chapter explains why silver has been considered as good as gold for
investment for centuries.
Structure:
41.1 History of Uses of Silver

41.2 Comparative Prices of Silver and Gold
41.3 Factors that Affect the Price of Silver
41.4 Ways in which Silver can be Invested
41.1 HISTORY OF USES OF SILVER
Silver was initially coined to produce money in around 700 BC by the

Lydians. Later, silver was refined and coined in its pure form. Many nations
used silver as the basic unit of monetary value The words for silver and
money are the same in at least 14 languages. In the modern world, silver
bullion has the ISO currency code XAG.
The name of the United Kingdom monetary unit pound reflects the fact
that it originally represented the value of one troy pound of sterling silver.
In the 1800s, many nations, such as the United States and Great Britain,
switched from silver to a gold standard of monetary value and then in the
20th century to fiat currency.
Silver is currently about 1/50th the price of gold by mass and

approximately 70 times more valuable than copper. Silver traded at 1/6th
to 1/12th the price of gold, prior to the Age of Discovery and the discovery
of great silver deposits in the Americas most notably the vast Comstock
Lode in Virginia City, Nevada, USA.
! !295
SILVER
Over the last 100 years the price of silver and the gold/silver price ratio
have fluctuated greatly due to competing industrial and store-of-value
demands. In 1980 the silver price rose to an all-time high of US$49.45 per
troy ounce. By December 2001 the price had dropped to US$4.15 per
ounce, and in May 2006 it had risen back as high as US$15.21 per ounce.
As of 2006, silver prices (and most other metal prices) have been rather
volatile, dropping from the May high of US$15.21 per ounce to a June low
of US$9.60 per ounce before rising back above US$12.00 per ounce by
August. In March 2008 silver reached US$21.34 per ounce.
Silver, like other precious metals, may be purchased as an investment. For

more than four thousand years, silver has been regarded as a form of
money and store of value. The price of silver has been notoriously volatile
as it can fluctuate between industrial anre of value demands. At times this
can cause wide ranging valuations in the market, creating volatility.
Silver often tracks the gold price due to store of value demands, although
the ratio can vary. The gold/silver ratio is often analyzed by traders and
investors. Over most of the 19th century, the gold/silver ratio was fixed by
law in Europe and the United States at 1:15.5, which meant that one troy
ounce of gold would buy 15.5 ounces of silver. The average gold/silver ratio
during the 20th century, however, was 1:47.2.
! !296
SILVER
Annual average price of silver in US dollars. The large spike in 1980 was a
result of the Hunt brothers failure to corner the market and Silver
Thursday.
41.2 COMPARATIVE PRICES OF SILVER AND GOLD
Year(31st Silver price US$/oz Gold price US$/oz Gold/silver ratio

December)
1910 0.54 20.67 38.28
1920 0.54 20.67 38.28

1930 0.33 20.67 62.67
1940 0.35 34.5 98.57

1950 0.8 40.25 50.31
1960 0.91 36.5 40.11

1970 1.64 37.6 22.93
1980 15.65 641.2 40.97

1990 4.17 423.8 101.63
2000 4.6 272.15 59.16

2005 8.83 513 58.1
2006 12.62 628.2 49.78
From September 2005 onwards, the price of silver has risen fairly steeply,
being initially around $7 per troy ounce but reaching $14 per oz. for the
first time by late April of 2006. The monthly average price of silver was
$12.61 per ounce during April 2006, and the spot price was around $15.78
per ounce on November 6, 2007. As of March 2008, it has hovered around
$20 per troy ounce.
Silver has outperformed gold by generating a year-to-date return of 22.6

per cent, against 11.8% posted by the latter. So, the white metal is a
better investment for the long term.
Silver prices are currently ruling at a multi-year record high of $18 per troy
ounce in the US. The investment demand has been a major contributor to
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this rally. The sub prime crisis and the interest rates cut by the US Federal
Reserve Bank spurred buying interest in silver. The intermittent weakening
of the dollar also pushed up prices.
Silver is the cheapest among the currently traded precious metals, and has
been party to the commodity bull run since 2000. It shares a high
correlation with gold and largely moves in the tandem with it, albeit in a
more volatile manner. The correlation between gold and silver prices since
the beginning of 2005 till date has been 97.4 per cent.
On the supply side, mines production, sales by governments and scrap

sales are leading the supplies of silver. With mining of base metals gaining
ground across the world, silver production is bound to increase. Mine
production of silver has been steadily increasing due to higher mining
output in Latin America and China and the output in Australia. Total mining
production rose by 3.6 per cent in 2007 and is expected to register a
similar rise in 2008 and subsequent years.
Unlike gold, silver has varied fabric uses in the industry. Apart from having
store value, it is also used as a jewellery item. Silver is the best among
metals as a heat conductor. Hence it is used in electrical appliances,
particularly in conductors, switches, contacts and fuses. As a result,
industrial usage is the largest component of total silver demand which has
been growing at an annual rate of 5-7 per cent annually.
Silver is also used in photography, silverware, coins and medals. However

the quantity of silver used for these purposes has been steadily declining
over the years ever since 2004. The advent of digital photography has
reduced the demand for silver drastically over the years. Precious white
metals like platinum and palladium are gaining more popularity than silver
jewellery. The proportion of silver used traditionally in utensils and coins
has also reduced considerably.
From the perspective of fundamental supply and demand, the outlook for
silver does not appear to be very bullish. It is the burgeoning investors
demand, coupled with increasing industrial demand, which has pushed up
the prices of silver in the global market. Many international market
analysts believe that the current rally in silver has been triggered more by
covering of short positions, rather than by addition of long positions.
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SILVER
Due to the current uncertainty in the financial and currency markets, the
bull run in commodities has become more prominent and attractive for
investors. The launch of silver exchange-traded funds in 2006 offers an
easier route for investors to participate in the rally in silver. The estimated
increase in production is likely to be offset by fresh silver investment
demand via physical purchases.
Production de-hedging is another leading factor which is supporting the

current bullish sentiments in India. There has been little fresh hedging by
producers ever since prices have been rising steadily. Several producer
firms have unhedged their exposure by delivering silver in large future
positions. The steady rise in the industrial and investor demand will
continue to influence silver prices in future. The Silver Institute, based in
Washington, attributes its bullish trend to factors like increase in gold
prices,, continued weakness of the US Dollar, rising inflation, and a
substantial inflow of money into the commodity sector.
Moreover in the long term, the poor mans gold may be a better
investment bet than gold as silver is likely to continue outperforming gold.
Four year sago, an investor needed to sell 64 units of silver to buy one unit
of gold. Now only 52 units of silver are needed to trade for one unit of
gold. In trading parlance, this is called as the gold-silver ratio. This ratio
has been steadily narrowing down since 2004 and it is indicating a faster
spike in silver than in gold.
41.3 FACTORS THAT AFFECT THE PRICE OF SILVER
The main factors that affect silver prices are:
1. Private and institutional investors
From 1973 the Hunt brothers began cornering the market in silver,
helping to cause a spike in 1980 of $49.45 per ounce and a reduction
of the gold/ silver ratio down to 1:17.0 (gold also peaked in 1980, at
$850 per ounce) However, a combination of changed trading rules on
the New York Mercantile Exchange (NYMEX) and the intervention of the
Federal Reserve put an end to the game.
In 1997, Warren Buffett purchased 130 million ounces (4,000 metric

tons) of silver at $4.41 per ounce (total value $572 million). Similar to
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SILVER
gold, the silver price has more than doubled in value against the United
States dollar since December 2001. On May 6, 2006, Buffett
announced to shareholders that his company no longer held any silver.
In April 2006 iShares launched a silver exchange-traded fund, called
the iShares Silver Trust (NYSE: SLV), which as of April 2008 held 180
million ounces of silver as reserves.
2. The large concentrated short position
The weekly Commitment of Traders Report shows that the four largest
traders are holding 90% of all short silver contracts. This level of
concentration is unprecedented in any commodity . These four or
fewer traders are short a total of 245 million ounces (as of April 2007),
which is equivalent to 140 days of production.
3. Industrial demand
The use of silver in items such as electrical appliances and medical

products has increased since 2001. New applications for silver are
being explored in batteries, superconductors and microcircuits, which
may further increase non-investment demand. The expansion of the
middle classes in emerging economies aspiring to Western lifestyles
and products may also contribute to a long-term rise in industrial
usage. Even so, due to the advent of digital cameras the enormous
reduction in the use of silver halide-based photographic film has
tended to offset this.

Earlier the price of silver in India was less than the international price
and consequently there was not much demand internally and an
estimated 60 million ounces of silver were smuggled out of India. This
has since stopped as the price in India of silver is more than it is in
other countries. However, there is no large scale smuggling into the
country as the enterprising individuals who ply this trade prefer to
smuggle in gold which is easier to carry and for which the rewards are
greater. Additionally, it is difficult to bring large quantities of sliver by
air. Consequently there is a growing demand.
The growing demand is mainly for industrial consumption which is ever

increasing as more and more industries are using silver in processing
divisions for various applications such as X-ray and photographic film,
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SILVER
plating, electrical appliances, brazing alloys, jari thread and other uses.
Industrial consumption which was 355 million ounces in 2002 and 371
million ounces in 2003 grew to 380 million ounces in 2004, 400 million
ounces in 2005 420 million ounces in 2006 and 450 million tones in 2007.
The demand for silver has been accentuated by a tremendous fall too in
recycled silver. This is attributed to better agricultural crop prices and the
improved income of farmers and an improvement in the standard of living
in the rural areas. Silver is commanding investment demand which is
presently estimated at 100 tonnes. Restriction in gold holdings and
vigilance by tax authorities has shifted to a certain extent the investment
demand for silver.
Silver jewellery is becoming increasingly popular apart from silverware and

silver in the form of coins and medallions are being given as presentation
items. Stockists are also in numerous cases holding back their silver stocks
to create a demand which would result in increased prices. Consequently
the white metal is receiving speculative buying support.
These forces in tandem have worked together to keep the demand for
silver alive and it is estimated that both prices and demand would grow by
up to 12 per cent per annum.
The manner silver may be purchased are:
Bars: A traditional way of investing in silver is by buying actual bullion

bars. In some countries, like Switzerland and Liechtenstein, bullion bars
can be bought or sold over the counter at major banks. Physical silver,
such as bars or coins, may be stored in a home safe, a safe deposit box at
a bank, or placed in allocated (also known as non-fungible) or unallocated
(fungible or pooled) storage with a bank or dealer.
The sizes of silver bars are:
1000 oz troy bars These bars weigh about 68 pounds avoirdupois (31
kg) and vary about 10 per cent as to weight, as bars range from 900 oz
to about 1100 oz (28 to 34 kg). These are COMEX good delivery bars.
100 oz bars These bars weigh 6.8 pounds (3.11 kg) and are among
the most popular with retail investors. Popular brands are Engelhard,
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SILVER
Johnson Matthey, Northwest Territorial Mint, and Pan American Silver.
Those brands cost a bit more, usually about 40-80 cents per ounce above
the spot price, but that price may vary with market conditions.
Odd weight retail bars These bars cost less and generally have a wider
spread, due to the extra work it takes to calculate their value and the
extra risk due to the lack of a good brand name.
1 kilogram bars (32.15 oz)
10 oz bars and 1 oz bars (311 and 31.1 g)
Silver coin: Buying silver coins is another popular method of physically

holding silver. One example is the 99.99 per cent pure Canadian Silver
Maple Leaf. Coins may be minted as either fine silver or junk silver, the
latter being older coins with a smaller percentage of silver. U.S. pre-1965
half dollars, dimes, and quarters are 25 grams per dollar of face value and
90 per cent silver (22 g silver per dollar). (All 1965-1970 and one half of
the 1975-1976 Bicentennial San Francisco proof and mint set Kennedy half
dollars are clad in a silver alloy and contain just under one half of the
silver in the pre-1965 issues.)
Junk silver coins are also available as sterling silver coins, which were
officially minted until 1919 in the United Kingdom and Canada and 1945 in
Australia. These coins are 92.5 per cent silver and are in the form of (in
decreasing weight) Crowns, Half-crowns, Florins, Shillings, Sixpences, and
threepence. The tiny threepence weighs 1.41 grams, and the Crowns are
28.27 grams (1.54 grams heavier than a US $1). Canada produced silver
coins with 80 per cent silver content from 1920 to 1967.
Rounds: Some hard money enthusiasts use .999 fine silver rounds as a
store of value. A cross between bars and coins, silver rounds are produced
by a huge array of mints, generally contain an ounce of silver in the shape
of a coin, but have no status as legal tender. Rounds can be ordered with a
custom design stamped on the faces or in assorted batches.
Certificates: A certificate of ownership can be held by silver investors

instead of storing the actual silver bullion. Silver certificates allow investors
to buy and sell the security without the difficulties associated with the
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SILVER
transfer of actual physical silver. The Perth Mint Certificate Program (PMCP)
is the only government-guaranteed silver-certificate program in the world.
The U.S. dollar has been issued as silver certificates in the past, each one
represented one silver dollar payable to the bearer on demand. The notes
were issued in denominations of $10, $5, and $1 and can no longer be
redeemed for silver.
Accounts: Most Swiss banks offer silver accounts where silver can be
instantly bought or sold just like any foreign currency. Unlike physical
silver, the customer does not own the actual metal but rather has a claim
against the bank for a certain quantity of metal. Many digital gold currency
providers, such as e-gold and GoldMoney, offer silver as an alternative to
gold and work on a similar principle. Other electronic silver accounts
include the eLibertyDollar and Phoenix Silver. Silver accounts are backed
through unallocated or allocated silver storage.
41.4 WAYS IN WHICH SILVER CAN BE INVESTED
Exchange-traded funds: Exchange-traded funds (or ETFs) represent a

quick and easy way for an investor to gain exposure to the silver price,
without the inconvenience of storing physical bars. The silver ETFs are:
IShares Silver Trust (NYSE: SLV), launched in April 2006 by iShares.
Central Fund of Canada (TSX: CEF.NVA, NYSE: CEF), which has 45% of
its reserves held in silver with the remainder invested in gold.
In September 2006 ETF Securities launched ETFS Silver (LSE: SLVR),

which tracks the DJ-AIG Silver Sub-Index, and later in April 2007 ETFS
Physical Silver (LSE: PHAG), which is backed by allocated silver bullion.
Spread betting: Firms such as Cantor Index and IG Index, both from the
UK, offer the ability to take a bet on the price of silver through what is
known as a spread bet.
Derivatives Derivatives, such as silver futures and options, currently trade

on various exchanges around the world. In the U.S., silver futures are
primarily traded on COMEX (Commodity Exchange), which is a subsidiary
of the New York Mercantile Exchange. In November 2006, the National
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Commodity and Derivatives Exchange (NCDEX) in India introduced 5 kg
silver futures.
Mining companies: These do not represent silver at all, but rather are
shares in companies that mine silver. Companies rarely mine silver alone,
as normally silver is found within, or alongside, ore containing other
metals, such as tin, lead, zinc or copper. Therefore shares are also a base
metal investment, rather than solely a silver investment. As with all mining
shares, there are many other factors to take into account when evaluating
the share price, other than simply the commodity price. Instead of
personally selecting individual companies, some investors prefer spreading
their risk by investing in precious metal mining mutual funds.
1. Silver has outperformed gold by generating a year-to-date return.

Justify.
2. Does one purchase of an antique?
3. What are the factors that affect the price of silver?
4. What are various ways in which silver can be invested in?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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FARM HOUSES
Chapter 42
FARM HOUSES
Learning Objective:
This chapter explains how farm houses have been a good investment that
has appreciated in all these years.
Structure:
42.1 Farm Houses A Good Choice of Investment

42.2 Things that One should be Aware of before Investing in a Farm House
42.1 FARM HOUSES A GOOD CHOICE OF INVESTMENT
Vijay Kohli and his wife Rashida lured by advertisements of wide open
spaces, greenery and nature purchased an acre of land to build a retreat
20 kilometres from Lonavala, a hill station on the Mumbai-Pune road. So
did Archie and Valerie Carvalho. Others are buying acres of farmland in
Bangalore, in and around Gurgaon near New Delhi and in other metro
cities. It is boom time for developers who are pied pipering investors with
catch phrases like an invitation to return to nature, far from the madding
crowd, get away for as long as you like to your own private cabin in the
woods. These advertisements are proving irresistible to dwellers in the
overcrowded cities of India, many of whom are trapped in claustrophobic,
small, noisy apartments. The rush to these open spaces is really to get
away from it all for some peace and quiet. As an investment it is beginning
to make sense too. Land 80 kilometers and beyond of Mumbai is
appreciating at over 40 per cent per annum. As Gupta, a developer, said,
thats not land, its gold. In Bangalore, the appreciation is averaging 35 per
cent and farmlands in New Delhi is appreciating at around 34 per cent per
annum. And this appreciation is greater than land within cities.
The land being offered presently is between a radius of 20 kilometers to

100 kilometers from a city and is being offered at rates between ` 10 lakhs
and ` 2 crores an acre (the price depending on the city it is close to and its
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FARM HOUSES
proximity to that city) land that is fully developed with electricity and
water connections. Many of these developments are built as colonies and
have club houses and security guards. On this land one can build ones
dream house, have a garden, watch ones children run and play (a delight
impossible in crowded apartments) and breathe fresh air. It is for this that
hordes of investors and others are stomping to far off little known
villages to purchase their acre of heaven.
Apart from this and its appreciation potential what are the other
advantages of purchasing an acre or two of farmlands?
The purchase of land is hassle free if one is purchasing from a well-known

and well-reputed developer. The developer usually would undertake to
provide necessities such as electricity, water and access roads. Additional
attractions may include club houses, swimming pool, cable TV, parks and
even shopping centres. Some builders would at around ` 5000 per square
foot, build the farmhouse also.
Agricultural land holdings and farmhouses are exempt from wealth tax in
India. Further more, income from farms are exempt from Income Tax. The
appreciation of a farmhouse is free from heavy corporation taxes, property
tax and the like.
42.2 THINGS THAT ONE SHOULD BE AWARE OF BEFORE

INVESTING IN A FARM HOUSE
There are some other factors too one must be aware of:
It is important that it be verified that the seller/developer has a

marketable title. If not the possibility exists of years of litigation, the loss
of monies and considerable tension. It is advisable to have the title
checked by a solicitor.
There should be a source of water that is accessible near the plot (either
a river or a lake). If these are not there it should be ascertained whether
a well or a borewell exists and if it does, how deep it is and what is the
quality of the water. One should also ascertain the quantum of rainfall in
the area. If there is a river near by it would be wise to check whether it
is seasonal or perennial and whether it is susceptible to flooding.
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FARM HOUSES
There should be easy access to main roads and transport of some kind
should be available.
The property should not be, for reasons of health, near large chemical
plants or other highly polluted areas.
One should not buy land unseen and once bought it must be clearly
demarcated. Otherwise one may find that he has purchased a plot of land
that has no access to a main road or is barren.
It is important if one purchases a farmhouse that he maintains it and looks

after it. He should visit it regularly as otherwise he would not really enjoy
the benefit of a farmhouse.
A great fear that I do have is that in time these farmhouses may develop
into large colonies such as Vasant Vihar or Safdarjang Enclave in New
Delhi. If it does then the joy of owning and living in a farmhouse will be
lost especially if these colonies are built clustered together with houses
that do not blend with the surroundings. This is happening in
Mahabaleshwar and will happen in time in other resorts also.
Real estate will not depreciate in value-only appreciate and hence there will
be no erosion of capital.
Consequently an acre of land at todays prices is worth considering as an

investment.
1. Farm houses A good choice of investment. Justify.
2. What are the things that one should be aware of before investing in a
farmhouse?
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FARM HOUSES
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !309
PROPERTY
Chapter 43
PROPERTY
Learning Objective:
The following chapter explains why property has been a good way of
making investment reap good returns.
Structure:
43.1 Comparative Study of Residential Property Prices.

43.2 Reasons for Increase in the Price of Property.
43.3 Pointers that One should Keep in Mind before Buying a Property.
43.4 Deterrents in Investing in House Property.
43.1 COMPARATIVE STUDY OF RESIDENTIAL PROPERTY

PRICES
Mark Twain once stated: If you want to get rich buy land. They have
stopped making it now. This is extremely true. At a time when inflation has
been at around 1 per cent per annum and the return on investments have
seldom been more than 15 per cent (at best 30 per cent on equity shares),
the price of residential property has been appreciating at an average of at
least 50 per cent. In many areas they have been doubling every year
especially in the major metropolises.
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PROPERTY
Prices of residential property at selected cities
(` per sq. ft.)

2006 2007 2008
MUMBAI
Bandra (W) 6000-19000 6500-22000 13000-30000
Cuffe Parade 19,500 31000 21000 45000 22000 60000
Malabar Hill 14000 30000 14000 39000 22000 60000
Thane 950 2400 2800 4500 4500 8000
Vashi 2100 3500 2800 5500 3250 6000
KOLKATA
Ballygunge 3200 5500 3500 6000 7000 12500
Southern Avenue 2800 4000 3500 5200 6000 8000
New Alipore 2500 4000 3000 4000 4000 5000
Park Street 3800-5000 4500 6000 7500 10500
NEW DELHI
Defence Colony 7500 9500 11000 15000 19000 20000
Vasant Vihar 12000 14000 13000 19000 19500 32000
CHENNAI
Adyar 2500 3500 4500 6500 7000 10000
Alwarpet 3200 4000 8000 15000 9000 15000
Besant Nagar 3000 5000 6500 8000 7000 10500
Nungambakkam 3300 3500 7000 12000 8500 14000
The above prices are indicative of the approximate value of land in the
areas mentioned.
The movement in real estate prices in India began after the emergency
imposed by Mrs. Indira Gandhi in the seventies. During that period prices
were suppressed and when the emergency was lifted prices rose
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PROPERTY
dramatically. To avoid or reduce taxes the bulk of the price had to be given
in unaccounted or black money. This created huge difficulties for the
average salaried employee (who had no black money) and massive losses
to the exchequer. The government, in order to check black money,
introduced an amendment in the Income Tax Act which required that on
the sale of residential accommodation, the details of the sale be filed
(including the contracted price) with the competent authority (Inspecting
Assistant Commissioner of Taxes (Acquisition Range). The amendment
provided for the government to be able to acquire the property by offering
15 per cent above the contracted price if the sale was below the market
price by 25 per cent and it could be established that the sale was actually
for a price higher than the price as shown on the Deed of Sale (contracted
price). Although the requirement of the Act was difficult to prove, that is,
unaccounted or black money had actually changed hands, the amendment
had a chastening effect. Up to this time in the more affluent neighborhoods
transactions were purported to be taking place with the unaccounted or
black money being as much as 80 per cent. The result of the Amendment
was that speculators who had been instrumental for the surge in the
prices, fled the market, as did others who had large hoards of unaccounted
money. Many waited in the sidelines to observe. As a consequence very
few sales took place. Supply swiftly overtook real demand. The
unaccounted portion reduced to about 20 per cent and the contracted
value of properties rose. It became possible too for companies to purchase
land and apartments paying for them entirely by cheque.
Another amendment, a couple of years later, dispensed with the

requirement of having to register transactions upto ` 10 lakhs. It tried to
do away with the anomalies of earlier legislation and required that a
vendor of residential accommodation seek the approval of a competent
authority prior to sales valued at ` 10 lakhs and above. If, in the opinion of
the authority, the value was understated, the government would acquire
the property at the contracted price. The effect of this was:
(a) The prices of smaller properties and apartment in the suburbs which
were below ` 10 lakhs surged in value.
(b) There were fewer sales in the more affluent areas. In these areas
contracted prices were around the market price (because of the
very real fear of the property being acquired).
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PROPERTY
These amendments have since been repealed.
Prices that were at an alltime high in the early nineties fell rapidly in the
wake of the downturn in the economy in the late nineties. Prices then again
began to surge after 2004 due to the easy availability of loans prices
doubling and tripling in a year. In mid 2008, however, there has been a
slowdown following the fall in the value of shares and it is anticipated that
prices may fall or correct themselves. Even then, the correction is
estimated to be only about 15 per cent to 20 per cent.
43.2 REASONS FOR INCREASE IN THE PRICE OF PROPERTY
Why are prices rising? There are several reasons.
The movement of population to the major metropolises. Mumbai has an

estimated net inflow of 300 families per day. There has been a massive
migration into New Delhi from trouble-torn Punjab. Large scale
movement to southern cities such as Bangalore has been taking on
account of the attractions and incentives offered
The growth in population resulting in demand outstripping supply
Speculation in the metropolises of properties.
The easy availability of loans.
The growing affluence of the middle class.
A survey conducted recently concluded that:
Prices are appreciating most in Mumbai.

The main buyers are the lower and the middle class.
Chennai and Hyderabad are identified as the cities of the future.
The fastest growing city is Bangalore
In this scenario let us look at whether one should invest in property.
If one does not own property it is important, nay imperative, that an

investment be made as early as possible. Otherwise, the time may come
when properties may be beyond ones reach. A person I know was offered
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PROPERTY
an apartment in Parel in Central Mumbai at ` 47,00,000. He said hed
never stay there and wants one in the suburbs as he likes the suburbs. He
searched and did not get one that satisfied him. He was to get married and
then two years later, out of desperation, he bought one in distant Goregaon
at ` 98,00,000 the one in Parel at this time had appreciated to `
1,50,00,000. The irony was that by this time, he was working for a
company in Parel.
In another case a friend of mine returned from London in 1979. He had a

house there and on selling it realized. He in the vicinity of $20,000 (around
` 2,60,000 at that time). He was fortunate on being employed by a large
multinational soon after his arrival and was given residential
accommodation. He placed the money he received from the sale of his
house in a fixed deposit, enjoyed the interest on his fixed deposit (which
was around ` 2000 per month) and lived well. However, when the time
came for him fifteen years later to retire, he had to borrow from his father
in law to buy a small flat in a lower middle class area a flat a quarter the
size he had enjoyed earlier.
Another person I knew had a capital of ` 50,000 around the same time
(1979). He borrowed` 1 lakh from his father, his company and from the
Housing Development Finance Corporation and purchased a two-
bedroomed apartment in the Mumbai suburbs of Juhu for a total value of
` 1,48,000. The initial years were difficult for him but 16 years later this
property was worth ` 78 lakhs. He had repaid his loan. Most of all he had a
roof over his head, a roof he could call his own and considerable net worth
increase.
The above examples illustrate very real situations. Many companies and
the government give to their employees accommodation. As there are also
often transferable jobs they do not purchase their own properties. They
work for many years and at the height of their career just prior to
retirement live in large, well-furnished, often palatial accommodation. On
retirement they are forced to, if they wish to live in the city, purchase
cramped accommodation in the suburbs (a massive fall in the quality of
their life-style) or return to their ancestral home or to stay with a child of
theirs. Whichever way one looks at it one must own property.
The rent laws in India were fanatically pro tenant earlier. The amendments
made make it now possible to rent out property on leave and licence
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PROPERTY
agreements. Rents are rising as purchase for the average person is
sometimes beyond his reach. Letting out property will give an investor a
return ranging from 13 per cent to 15 per cent of his investment. The
capital appreciation is a bonus.
On account of the steep surge in the prices of property and the difficulty in
procuring residential accommodation on rent many companies are no
longer offering apartments or houses to their employees. Often, it is a
precondition of employment that the employee has or finds accommodation
in the city he is to work in. In cities such as Mumbai advertisements often
state candidates having their own accommodation would be preferred.
This has gone to the extent that matrimonial advertisements feature
accommodation as a recommended advantage. The advertisements run a
beautiful, wheat complexioned Bengali girl employed with a nationalized
bank having own flat in good suburb in Mumbai seeks an alliance with
Such advertisements are now commonplace and many a man, due to
necessity and a lack of wealth often seek alliances such as this only with
ladies who have their own accommodation.
Apart from the increase in ones own net worth (when one purchases
property) it is always preferable to purchase property. If one rented
property one would pay rent for years (which is really giving money away)
without any future benefit. Whereas, if one purchased property, he would
eventually end up owning the property which is infinitely superior. And the
loan payments would not normally be much higher than the rent being
paid.
Furthermore, an investment in property is, as is amply clear, a hedge

against inflation. The value of property rises at a rate at least twice as
much as that of inflation.
The value of house property does not really fall. It is steady and rises and
it does not have the buoyancy of the share market. It is a long-term
investment however and if one is looking for short-term gains one would
be wise not to invest heavily in house property.
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PROPERTY
43.3 POINTERS THAT ONE SHOULD KEEP IN MIND BEFORE

BUYING A PROPERTY
One should always try to purchase an apartment or house large than ones
present needs. Do not purchase a two bed-roomed apartment when by
stretching resources a three bed-roomed one can be purchased. There may
be initial servicing difficulties but as ones income grows repayments will be
easier. Additionally as children grow older the additional space would be
very useful. In 1975 Rajiv and Sunita got married. After the birth of their
daughter Nisha a year later they purchased a flat in Bandra. Flats were
affordable. They opted for a 1000 sq. ft. two bedroomed one. They
believed it to be adequate for them then but not any longer. Today they
have four children aged between eighteen and thirteen and Sunitas
mother staying with them. They are cramped. Three children sleep in the
living room. They need more space but cannot afford it. They should have
at the time they purchased the flat thought ahead of the size of the family
they hoped to have and invested in one that would have fulfilled the space
requirements.
There is of course the limiting factor of money. This is the normal

constraint. One should buy a flat as large as one can possibly purchase.
And it makes a sense to borrow as ones capacity to repay will increase as
one grows older in wisdom and experience. Convenience and comfort must
be one of the prime consideration when purchasing a flat. Krishna Kurup
was living in a flat in Cuffe Parade. His two children were at the Cathedral
and John Connon School. Mr. Kurup got an opportunity to purchase a four
bedroomed flat at Bandra and he bought it by selling his apartment in
Cuffe Parade. His children could no longer go into town for their education
and Krishna Kurup was unable to place them in a really good school. He
now spent three hours a day commuting to office and back. His wife was
extremely unhappy in new surroundings. All her friends were in town. In
short all of them were miserable. It was too late. The flat in Cuffe Parade
was already sold. If only they had thought awhile. Check these factors out-
proximity to school and work, to markets and shopping centres and to
buses and trains.
Another factor that one must ascertain is the type of people who occupy
the building. They must ideally be of the same class of society otherwise it
would be difficult to relate to them. Values would differ. Sudhir Mannadiar a
senior executive in a multinational, purchased a large flat in a lower middle
! !316
PROPERTY
class area. Most of the other flat owners were shopkeepers. He could not
converse with them. His children could not play with theirs. He felt isolated
and unhappy.
It is a good idea always to find out as much as one can about the area.
This can be done quite easily by speaking to residents of other apartments
or colleagues who live in that area.
Is the area safe at night. Are there robberies?
Is there any water problem. In a city like Mumbai this can cause
tremendous inconvenience.
Are there power cuts?
Is there anything else adverse of complimentary regarding the building

or locality that could influence your decision on whether to buy or not.
Buying an apartment or a house is a serious business and once if you it

identified one that meets your requirements there are several factors that
you must ascertain to safeguard your interests.
Primarily the seller must have a marketable title. The title should ideally be
certified by a solicitor or advocate who is authorized to issue such a
certificate. If you do not take this precaution you may find yourself
entrapped in years of litigation with the owners of the property. At
Mumbais posh Narayan Dabholkar Road there are several buildings in
different stages of completion which are under dispute. Several individuals
have entered into contracts to purchase flats in these buildings with
builders. Their monies are tied up indefinitely and whether theyd get a
flat/their monies back would depend on the outcome of the various cases.
This can be frightening, it could have been easily avoided by investigating
the title.
The promoter or builder of a block of flats is bound by law to make a full

and true disclosure of:
All encumbrances on the plot of land on which he intends to construct the

building including the claim of any third party to the land:
! !317
PROPERTY
The fixtures and fittings that are to be provided to each flat owner,
ideally there should be a separate list of all fittings provided and this
should be attached to the sale agreement. It is important that this be
perused carefully and if the fittings being contracted to be supplied are
inferior (aluminium wiring), it would be worth ones while to get it
changed or substituted:
It is important to check the number of floors or the FSI that the builder
may build. In Mumbais Breach Candy the builder built eight floors more
than he had permission for in the now famous building known as
Pratibha. After years of wrangling the courts ruled that the higher eight
floors must be torn down. It is conjecture whether those individuals who
purchased flats in the higher floors would get their money back and even
if they do whether they would be able to purchase a similar flat today (as
prices have gone up enormously in recent years);
Often unscrupulous builders may leave an open space arguing that they
are not bound to provide more than 1 or 2 lifts. These 1 to 2 may be low
quality and may not work. Lifts are very expensive and one must ensure
that multi-storied buildings have enough lifts.
It is always advisable to purchase flats from reputed builders. They have a

reputation to protect and will go out of their way to ensure the quality of
construction is acceptable, the fittings are reasonable and the time
schedules are met. This is why their buildings are usually priced 10 per
cent higher than other buildings in the same area. Ram Batra purchased a
flat form an unknown builder. First of all midway during the construction
there was a delay. After two years, in desperation Batra and the others
sharing his fate pooled their resources together and completed the
building. Three years later, they found that after a heavy monsoon the
building had sunk a little and on one side of the building there was a huge
crack. The foundation was weak. The owners had to spend a large amount
to strengthen the foundation. Theyve taken the builder to court but it is
unlikely whether they will be able to recoup their losses. The builder is
bankrupt. The streets of Mumbai are stewn with similar incidents. It pays
to be choosy.
The purchaser must ensure that the builder specifies in the contract for
sale the exact date possession would be handed over. If this is not
specified the purchaser could be in for a lot of trouble. There are so many
! !318
PROPERTY
buildings in various stages of completion. If the date is specified and if
possession is not given, the purchaser has recourse to law. Additionally:
The promoter/builder is, in most parts of India, under the Ownership

Flats Act, bound to disclose not only a list of purchasers of other flats in
the same building but also the prices charged to every such buyer.
The builder should also state in the contract for sale whether a
cooperative housing society is to be formed or not.
Until an occupation certificate has been received from the municipality or

local authority the purchaser should not take possession as the essentials
like water connections are given only after an occupation certificate and
NOC is issued. There are several occupied flats in Versova that do not
have running water as occupation certificates have not been issued. The
builder has no real interest as he has received payment in full.
Consequently the buyer suffers. Caveat emptor.
At the time of signing the agreement the buyer must ensure that the
builder annexes a copy of the plan with the agreement. In it the builder
annexes a copy of the plan with the agreement. In it the builder must
state the specifications of the building and of the approvals received. If
this is done the builder is stopped from making changes without the
approval of the buyer.
In order to seal an agreement a builder often insists that an advance be

given. Purchasers should be aware that no advance should be given
without a written agreement and that builders cannot insist on an advance
without one. Actually if he takes the advance without an agreement he can
be sued (Re. S.A. Bharseka & Others vs. State of Maharashtra).
Additionally the maximum advance that can be taken is upto 30 per cent of
the total sale price. Such an agreement must be stamped and sealed.
In regard to accounts the builder or promoter is required to maintain

proper books of account and until the property is actually conveyed to the
cooperative society he is responsible for all payments. In instances where
the society is yet to be formed and the builder defaults in payment-buyers
may make payments and recover these from the builder. Similarly, they
can recover amounts spent to correct defects in construction.
! !319
PROPERTY
These are effectively the rights as flat buyer has vis-a-vis the builder and
he should ensure that he takes adequate steps to protect his interests and
he must insist on his legal rights. Otherwise, (as some builders are apt to
do) he could be taken for a glorious ride, and he might end up with a flat
totally unrecognizable for what he thought he was buying or conversely
after five years he may still be waiting for its completion.
43.4 DETERRENTS IN INVESTING IN HOUSE PROPERTY
The big deterrents in investing in house property are:
1. The huge investment involved.
2. Rising interest rates. This can make it difficult to service loans.
3. House property is a long term investment-a sleeping white elephant. It

gives no regular return.
4. The purchase of house property is full of red tape and checking. One
needs lawyers, searches have to be done, registrations and the like.
This is time-consuming, bothersome and expensive.
It would be obvious therefore that it is, if one can, beneficial to purchase

property and one should, even if it means taking a loan because one
stands to gain in time. As Louis Glicksman once said: The best investment
on earth is earth.
Real estate above all means security-the security of a roof over ones head-
an asset to fall back on in times of need.
! !320
PROPERTY
1. State how residential property prices have gone up in the last few
decades?
2. What are the reasons for increase in the price of property?
3. What are a few things that one should keep in mind before buying a
property?
4. State a few deterrents in investing in house property.
! !321
PROPERTY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !322
HORSES
Chapter 44
HORSES
Learning Objective:
This chapter talks about how horses have been chosen for investment for
many centuries.
Structure:
44.1 Horses A Old Favorite Way of Investment

44.2 Valuation of a Good Horse
44.1 HORSES A OLD FAVORITE WAY OF INVESTMENT
Investing in horses has been till recently very alien to the average Indian
investor. This is to an extent on account of prudery and the linking of
horses with gambling something one does not particularly like to be
associated with. Increasingly people are beginning to become aware of the
potential of horses of the prize money they can earn and the money they
can accumulate by putting them out to stud.
Horses are mated between mid-February and mid-July. The period of

pregnancy is about 11 months. The foals are with their mother (mares) for
about six to seven months after which they are sold (usually at auctions).
These auctions are held at principal racing centers. Once these young
horses are bought they are placed in the hand of a trainer who trains them
with the aim of developing them into good race horses. Trainers charge
between ` 10,000 ` 15,000 per month. Horses begin to race between
the age of two years and are retired when they are around five years. At
that age they are either retained by the owner for breeding or sold to
breeders either privately or through agents.
! !323
HORSES
44.2 VALUATION OF A GOOD HORSE
What are the earnings on horses? On an average, horses earn about `

3,00,000 per annum. This is earned as prize money for competing in races
organized by race clubs. On an average a horse runs about eight races a
year. In addition subsidies are earned based on the amount of races they
run subject to a minimum number of runs. This is usually in the region of `
25,000 per annum. There is no maximum that depends on the race and
the horse. A horse named Squanderer signed by an imported stallion
Valoroso earned in one race alone ` 16.78 lakhs. Of course this is an
unusual sum but a good horse can earn its owner in excess of ` 7 lakhs
every year, the better ones earning over ` 10 lakhs per annum. Of these
earnings the trainer and jockey receive commissions of 10 per cent and 7.5
per cent respectively. The balance 82.5 per cent is the earnings of the
owner and this can be, especially if it is good horse, enormous.
It is however not the money that attracts. The returns are not equal to the
investment made by the really big horse owners like Vijay Mallya,
Ramaswamy or Deepak Khaitan, What spurs them on is the love of horses,
the sport of racing, the recognition and the desire to win. And as more and
more persons begin buying horses or purchase a stake in them and as
more and more persons go to the races it becomes a venue to be seen at
and one begins to view it also as a place to meet friends and make
contacts.
Apart from these gains, there can be sensational capital appreciation

especially for those horses that are about three years and have been
consistently winning races. The average prices of horses have been
increasing at an average price of around 30 per cent per annum. This is
apart from the earnings from races.
One must be careful when purchasing a horse and if a layman, one would
be wise to be guided by an expert. The earnings potential rests on
judgment, knowledge and luck. One will make money on a good horse and
lose money on a bad one. But considering the potential it may well be
worth trying especially if you are considering a long term investment and
have some surplus in hand.
! !324
HORSES
1. What makes horses a popular choice for investment?
2. What is the earning potential from horses?
! !325
HORSES
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !326
VINTAGE CARS
Chapter 45
VINTAGE CARS
Learning Objective:
This chapter talks of vintage cars being a way of bringing down memories
of the grand past that ancestors could afford in days when engineering was
a skill of very few and an affordability of the very rich.
Structure:
45.1 Introduction on Vintage Cars

45.2 What to Look At?
45.3 Investing in Vintage Cars
45.1 INTRODUCTION ON VINTAGE CARS
A group of Japanese businessmen paid a few years ago a record $ 15

million for a 1931 Buggatti Royale. Christies the London auctioneers were
hoping to sell a 1957 Ferrari 3155 for at least $ 12 million. In order to
show the machine to prospective Japanese buyers, Christies airfreighted it
to Tokyo and displayed it at a caviar reception as part of a tour that also
took in Hong Kong, New York, Paris and London. Antique cars have at long
last come into their own and are slowly but surely displacing French
impressionist art as status symbols in Japan.
Vintage cars transport one back to the grandeur of yesteryear, to the days
when the rich indulged their every fantasy; when kings vied with each
other to own the most opulent, the most fantastic or the most erotic
vehicle. The Indian maharajahs were, at that time, among the richest in
the world and they were undoubtedly the most imaginative. They had cars
built like riding carriages, like railway saloons, like chariots and like swans.
The seats were upholstered in tiger skins, in mink and in furs. They were
gold plated and often diamond encrusted.
! !327
VINTAGE CARS
As Colin Crabbe, Director of Christies auction houses says of a vintage car,
you have to think of it as a work of art. Many cars in those days were
handmade to individual specifications and individual eccentricities and they
were often one of a kind. The Lagondas, the Duesenbergs, the Packards,
the Rolls Royces and the Mercedes of the early days are mechanically
superb cars built to very, very exacting standards.
India had and still has one of the richest troves of vintage cars even
though large numbers were purchased by foreigners who transported them
to their countries. Fortunately the government banned the export of these
cars in 1972.
The maharajahs were great collectors of vintage cars-the most famous

being those of Mysore, Hyderabad, Rajasthan, Cochin and Gwalior.
However, with their changed fortunes several of these large collections
have been broken up. The most well-known collector in India today is the
industrialist Pranlal Bhogilal who maintains his numerous cars in his large
mansion at Walkeshwar, Mumbai Daskot and his estate in Billimora near
Vadodara. At the latter he has a two storeyed garage which houses 176
cars which include 36 Rolls Royces and several Bentleys. Most vintage cars
are with car lovers and in collections and they are not easily available. Most
sales that take place are private sales and the cars are expensive-ranging
from ` 5 lakhs to over ` 3 crores the price dependant on the make, the
model and the condition of the car.
Maintenance of these cars are very costly. Parts are often very difficult to
get. Many items have to be imported and often they are no longer
available. In such circumstances workshops have to be identified that have
the capability of exactly duplicating the parts and the parts have then to be
made. A tyre alone can cost over ` 50,000. Running costs are high. The
1926 Bentley owned by Mrs. Malathy Menon of Coonoor and used by David
Lean on location in Bangalore consumes a litre of petrol every two and half
kilometers. Mr. Pooviah who owns a vintage Duesenberg says, I no longer
taken the car out for long drives as it is becoming very expensive. Earlier,
we used to go at least once a fortnight on picnics in the Duesenberg. It
was fun and petrol was relatively inexpensive. We cannot do this anymore.
I have to be satisfied by driving it in our neighbourhood for about half an
hour every week. Another person who owns a 1933 car has not been able
to run it for 2 years as he does not have certain parts. On the other hand
the horse racing enthusiast and tycoon Poonawala has several Rolls
! !328
VINTAGE CARS
Royces, Bentleys and other vintage cars. He has a fulltime caretaker whose
job it is to ensure that with one turn of the key the car starts. As money is
no object, the mechanic frequently travels to London and Germany to get
original parts for these cars.
45.2 WHAT TO LOOK AT?
What should one look for when purchasing a vintage car?
1. The most important aspect is to determine its pedigree. Who is the

maker of the car? Which is the year of its make? How many owners has
the car had and who were they? This information is invaluable as it
gives one an insight into the kind of vehicle it is likely to be.
2. It is most important to ascertain the vehicles condition. Are the parts

within genuine parts or not? How many miles has the car run? Is the
owner a car lover who treated it with as much care and love as he would
a daughter? As most individuals may not be fully aware of what exactly
to look for and may not be proficient enough to be able to judge the
condition accurately it is recommended that a mechanic or a person who
is knowledgeable on cars be taken when one goes to inspect the car.
3. Are parts easily available? This is most important. If parts are not
available one could end up with a white elephant.
45.3 INVESTING IN VINTAGE CARS
As an investment the capital outlay is initially quite high. But this is one
shot cost. Vintage car prices have been appreciating at about 35 per cent
per annum according to a broker who deals in the purchase of vintage
cars. As cars are getting scarce and demand is growing for these cars this
is bound to happen. Praful Shah purchased 1938 De Soto in 1985 for ` 4.8
lakhs. In 1990 he was offered ` 18.2 lakhs. He did not part with it. Today
he has a buyer who is prepared to pay ` 1.5 crores.
Yet, vintage cars are not for every one. With the price of these cars being
so high it has to be a rich mans hobby a thing he buys with the surplus
he does not know what to do with. And it is only a rich man who can today
afford to maintain it. Spares, Insurance, tax everything is expensive.
! !329
VINTAGE CARS
The possession of one of these masterpieces of engineering is, if one can
afford it, worthwhile. Its value is increasing at a rate higher than most
other investments. It is liquid in that there is great demand for these
antiques. And there are few things more satisfying and dignified than
driving down in a superbly polished and elegant vintage car. One may even
be forgiven in saying if you do not have the money borrow some and buy
a vintage car. It will raise your status and the quality of your life.
1. Write a short note on why vintage cars are popular?
2. What are the factors that one should look for before purchasing a
vintage
! !330
VINTAGE CARS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !331

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INVESTMENT MANAGEMENT

Chapter No. Chapter Name Page No.

PART I Interest Bearing Investments

PART II Mutual Funds

23 Advantages of Mutual Fund Investment 170-176

PART III Exotic Investments

This chapter introduces the concept of investment, discusses the

1.1 Purpose of Investment

Money is an inextricable part of our lives. We toil to earn money to

1.1 PURPOSE OF INVESTMENT

The purpose of investment is to enable you to realize your needs, your

In order to successfully invest, one should have an investment plan and

It is these that will determine whether you will achieve objectives.

1.4 SETTING OF OBJECTIVES

It is important to know the objectives and then to adhere to them. It is

1.5 ACHIEVING GOALS

After having devised a strategy to achieve your objectives you should

To summarize after determining your objective, plan your strategy on

1.6 SELF ASSESSMENT QUESTIONS

1. What is the purpose of investment?

2. How important are objectives?

3. What should you do after arriving at a strategy?

The objective of this chapter is to explain the investment decision.

2.1 Determinants of the Investment Decision

These savings must be put to work must be invested in order for it to

2.1 DETERMINANTS OF THE INVESTMENT DECISION

The strategy will necessarily differ from individual to individual. Pratap is a

Primarily, an investment should be safe. An investor, if he cannot afford to

This term is used to determine the speed by which investments can be

2.2 HOW THE DECISION SHOULD BE ARRIVED AT?

The investment decision must thus be based on the ability of an individual

INVESTMENTS AND LEVELS OF RISK

Extent of risk Investments Usual returns

1. No real risk a) Savings Bank Accounts 3%

b) Rural Bonds and other 8%

c) National Savings Certificates 8%

d) Fixed Deposits with Banks Varies upon term

f) Real Estate Over 30% but not very

Stage Age Circumstances Investment strategy

Young adult 20s No dependents, low Pursue growth

Young family 30s Married, with young Continue aggressive

Mature family 40s Higher education of children Lower risk in investment

Empty nesters 50s Children independent, Divert new surpluses to

Retirement 60+ Creating regular cash flows Create adequate cash

2.3 SELF ASSESSMENT QUESTIONS

3. What would your risk appetite be if you are over 50?

This chapter explains the mathematics of interest

3.1 What is Interest?

3.1 WHAT IS INTEREST?

3.2 REAL RATE OF INTEREST

3.3 INFLATION AND RISK PREMIUM

In an inflationary world, the investor will not be satisfied if he is paid the

3.4 DEFAULT RISK AND INTEREST RATE RISK

3.5 SIMPLE AND COMPOUND INTEREST

It is also important to be aware of the manner interest is calculated. The

In the absence of a statement or affirmation bank pays simple interest

TABLE - 1 SIMPLE INTEREST

Deposit of ` 10,000 placed in a bank for five years at 10% per

Year Capital Accrued Interest Interest Paid

End of 5th year 5,000

Every year interest of ` 1,000 is accumulated and in the 5th year it is

TABLE 2. COMPOUND INTEREST