Investment: A Study On The Alternatives in India
Investment: A Study On The Alternatives in India
Investment: A Study On The Alternatives in India
Investment
Alternatives
In India
Page of Contents
1. Introduction
2. Investment Alternatives
Bank Deposits
Post Office Saving Schemes
Gold & Silver
Equity Shares & Debentures
Mutual Funds
Life Insurance
Introduction
Investment is the commitment of money or capital to purchase financial
instruments or other assets in order to gain profitable returns in the form
of interest, income, or appreciation of the value of the instrument.
Investment is related to saving or deferring consumption.
Meaning of Investment:
An investment involves the choice by an individual or an organization
such as a pension fund, after some analysis or thought, to place or lend
money in a vehicle, instrument or asset, such as property,
commodity, stock, bond, financial derivatives (e.g. futures or options), or
the foreign asset denominated in foreign currency, that has certain level
of risk and provides the possibility of generating returns over a period of
time.
When an asset is bought or a given amount of money is invested in
the bank, there is anticipation that some return will be received from the
investment in the future.
Meaning of Investment from different Perspectives:
Investment is a term frequently used in the fields of economics, business
management and finance. It can mean savings alone, or savings made
through delayed consumption. Investment can be divided into different
types according to various theories and principles.
While dealing with the various options of investment, the defining terms of
investment need to be kept in mind.
Investment Definition in terms of Economics:
According to economic theories, investment is defined as the per-unit
production of goods, which have not been consumed, but will however, be
used for the purpose of future production.
Examples of this type of investment are tangible goods like construction
of a factory or bridge and intangible goods like 6 months of on-the-job
training.
In terms of national production and income, Gross Domestic Product (GDP)
has an essential constituent, known as gross investment.
Investment Definition in terms of Business Management:
According to business management theories, investment refers to
tangible assets like machinery and equipments and buildings and
intangible assets like copyrights or patents and goodwill. The decision for
investment is also known as capital budgeting decision, which is regarded
as one of the key decisions.
Financial security:
Your financial security depends on how much you invest and how
efficiently you do so. Investments can help you build a corpus so that you
can generate a large cash reserve. A large cash reserve means no anxiety
about your financial security and more empowerment. Investing regularly
in equity-oriented ULIPs over the long term has the potential to help you
build a sizeable corpus to fulfil this purpose.
Wealth creation:
In order to create wealth you need investment options that add an
element of growth to your money. Equity-oriented ULIPs have the potential
to help you build your wealth kitty over an investment horizon of 7-10
years and beyond.
Fighting inflation:
Inflation eats away at your savings. With each passing year, prices keep
rising. Investments help you protect your capital against price rise. A good
way to beat inflation is to park your money in investments that offer
returns that are higher than the rate of inflation. Equity-oriented and
balanced ULIPs come to the rescue here. Historically, equity investments
have given returns that are higher than the inflation rate thereby
providing investors real returns (real returns = investment
returns minus inflation rate).
Saving for Retirement
Depending solely on social security benefits as your source of retirement
income probably won't cut it unless you plan to subsist on a diet of rice
and water. Unless your company offers a sizable pension plan, you will
probably need to start an investment program as early as possible to
ensure a comfortable retirement.
Conclusion:
Whether it is planning for your childrens needs or for your own, investing
is essential for your future.
Investment Alternatives
As we have seen above that investment is very important for every
human to prosper. But there are a variety of investment opportunities
available in the world today. Some suit middle class salaried individuals
and some suit richer people. Investments vary depending on the risk.
Hence it should be chosen carefully.
The alternatives are:
1.
2.
3.
4.
5.
6.
Bank Deposits
Post Office Saving Schemes
Gold & Silver
Equity Shares & Debentures
Mutual Funds
Life Insurance
The above alternatives will be explained in detail below.
Bank Deposits
Traditionally banks in India have four types of deposit accounts, namely
Current Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed
Deposits.
some banks have introduced new products, which combine the features of
above two or more types of deposit accounts.
Current Account
Current Accounts are basically meant for businessmen and are never used
for the purpose of investment or savings. These deposits are the most
liquid deposits and there are no limits for number of transactions or the
amount of transactions in a day. Most of the current account are opened
in the names of firm / company accounts.
provided and the account holder can deposit all types of the cheques and
drafts in their name or endorsed in their favour by third parties. No
interest is paid by banks on these accounts. On the other hand, banks
charges certain service charges, on such accounts.
Features of Current Accounts:
(a) The main objective of Current Account holders in opening these
account is to enable them (mostly businessmen) to conduct their business
transactions smoothly.
(b) There are no restrictions on the number of times deposit in cash /
cheque can be made or the amount of such deposits;
(c) Usually banks do not have any interest on such current accounts.
However, in recent times some banks have introduced special current
accounts where interest (as per banks' own guidelines) is paid
(d) The current accounts do not have any fixed maturity as these are on
continuous basis accounts
are also required to open no frill accounts (this term is used for accounts
which do not have any minimum balance requirements). Although Public
Sector Banks still pay only 4% rate of interest, some private banks like
Kotak Bank and Yes Bank pay between 6% and 7% on such deposits. From
the FY 2012-13, interest earned up to 10,000 in a financial year on Saving
Bank accounts is exempted from tax.
Recurring Deposit
These are popularly known as RD accounts and are special kind of Term
Deposits and are suitable for people who do not have lump sum amount of
savings, but are ready to save a small amount every month.
Normally,
will be reduced and some nominal penalty charged for default in regular
payments. Premature withdrawal of accumulated amount permitted is
usually
allowed
(however,
penalty
may
be
imposed
for
early
withdrawals).
The RD interest rates paid by banks in India are usually the same as
payable on Fixed Deposits, except when specific rates on FDs are paid for
particular number of days e.g. 500 days, 555 days, 1111 days etc i.e.
these are not ending in a quarter.
Fixed Deposit or Term Deposits
All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank, ICICI Bank,
Yes Bank etc.) offer fixed deposits schemes with a wide range of tenures
for periods from 7 days to 10 years.
FD accounts.
interest
fixed
deposits.
The
(Some banks
rate
of
interest
introduced
on
such
deposits keeps on varying with the prevalent market rates i.e. it will go up
if market interest rates goes and it will come down if the market rates fall.
However, such type of fixed deposits have not been popular till date).
The rate of interest for Fixed Deposits differs from bank to bank (unlike
earlier when the same were regulated by RBI and all banks used to have
Post Office has long served as the backbone of communication and small
deposits. For more than 150 years the department of Posts has played a
pivotal role in facilitating communication throughout the nation thereby
aiding in socio-economic development of the country.
Post Offices offer varied services. Their work is not just restricted to
delivering mails. They accept deposits, provide retail services like sale of
forms, bill collection etc, provide savings schemes, life insurance cover
etc.
With a network of more than 1.5 lakh post offices across the country, India
Post offers various Post Office Saving Schemes. These are risk free
investment options that are safe and secured and provide you with capital
gains without Tax Deduction at Source (No TDS).
These savings schemes come at attractive rates with nomination facility
and are transferable to any Post Office across India. Let us have a quick
glance at various post office savings schemes.
Post Office Savings Schemes in India
Post Office One Time Deposit Scheme In this scheme the interest is
calculated quarterly but it is paid to you annually. Following are other
highlights
Minimum amount of deposit is Rs 200/- and in multiples of Rs 200/thereafter. There is no limit on maximum amount being invested.
One Year
8.2%
Two Years
8.3%
Five Years
8.5%
The time span for which the scheme operates is for 15 years.
You may opt for this scheme with a Minimum deposit of Rs 500/- per
annum and it may range to a Maximum deposit of Rs. 1,00,000/- per
annum.
3rd financial year would bring Loan facility to you in the scheme up
to 5th financial year. The rate of interest charged on loan taken by the
subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a.
However, the rate of interest of 1% p.a. shall continue to be charged on
the loans already taken or taken up to 30.11.2011.
Your Age should be 60 years or more, and 55 years or more but less
than 60 years for those who have retired under a Voluntary Retirement
Scheme or a Special Voluntary Retirement Scheme on the date of opening
of the account within three months from the date of retirement.
If your savings account is also held in the same post office then you
may get your interest amount automatically credited to the savings
account.
NSC IX Issue (10 years) - Interest rate of 8.9% per annum w.e.f.
01.04.2012
NSC VIII Issue (5 years) Interest rate of 8.6% per annum w.e.f.
01.04.2012
Income Tax Rebate under NSC - section 80C of IT Act for Investment
up to Rs 100,000/- per annum can be earned.
You can avail secured loans from banks and financial institutions
against these certificates.
NSC - section 80C of IT Act also allows interest accruing annually but
deemed to be reinvested for deduction.
Post Office Savings Account Following are the highlights of the savings
account in post office
What are all the benefits of investing in gold? There are 2 primary reasons
why you need to invest in gold. Investing money in gold is worth because
it is a hedge against inflation. Over a period of time, the return on gold
investment is in line with the rate of inflation. It is worth investing in gold
for a one more very valid reason. That is gold is negatively correlated to
equity investments. Say for example 2007 onwards, the equity markets
started performing poorly whereas the gold has performed well. So having
gold as an investment option in your portfolio mix will help you reduce the
overall volatility of your portfolio. The above 2 points could have given
some answers to your question Is buying gold a good investment?
Return on gold investment Is it profitable to invest in gold? This
investment proved remarkable from 2006 to 2011.During that time span
Gold has given average return of 29% per annum which was any day
better than other investment options.
However, the long term average return on gold investment is less
than 10% p.a. As one can say technically or ironically but history always
repeats itself. Therefore, we may once again observe the similar less than
10% appreciation pattern in gold prices in near future. Still, if you want to
invest in Gold and cannot resist yourself from the temptation then these
are few tips on how to invest in gold correctly! 1) Jewellery buying Our
age-old and traditional way of investment is jewellery buying where one
can buy gold ornaments, bars or coins. However, it has its own
disadvantages, total buying cost involves heavy making charges (it can be
10 to 20% of total cost).However, when you try to sell the same piece to
same jeweler, he will buy it below market rates and deduct those making
charges from the total price of your jewel. 2) Investment in Gold coins and
bars Investment in gold coins and bars is also a better option over jewel
buying. You need to decide on Where to buy gold coins or bars?. You
should buy gold bars and coins only from jeweler. Banks also sell gold
coins or bars. Then why do we advocate for buying god bars and coins
from jewelers? To answer this question you ask yourself How to sell gold
coins or bars? or Where to sell gold coins in India? Banks sell gold coins
and bars, but they cannot buy it back. Whereas, the jewelers can buy back
the gold coins from you. How to invest in Physical Gold? The point 1) and
2) could have proved that it is better to invest in the physical gold by way
of gold coins or bars sold by the jewelers. In the next points 3) and 4) we
will discuss about the paper gold investment options in India. 3) Gold ETF :
What is Gold Exchange Traded Fund? Gold exchange traded fund is a type
of mutual fund which in turn invests in gold and the units of this mutual
fund scheme is listed in the stock exchange. How to invest in Gold ETFs in
India? You need to buy Gold ETFs from the stock exchange by way of
opening a demat account and trading account. You have to pay brokerage
fee (which is generally between 0.25% to 0.5%) for buying and selling of
these Gold ETFs. You will have to further pay 0.5 to 1 % charges as fund
management charges. 4) Gold Fund of Funds: What is Gold Fund? Gold
fund is a Fund of Fund which will invest in Gold ETFs on behalf of you. Best
part here is that you do not require holding any demat a/c here. Then how
to invest in Gold Mutual Funds? Just like investing in other mutual fund
schemes. As this is like any other mutual fund scheme, SIP investment in
gold is possible through these gold funds. Still buying Gold fund of fund is
little expensive option, as you have to pay 1) Annual management
charges for the underlying Gold ETF 2) Annual management charges of
Gold FOF Scheme. Gold ETFs Vs Gold Mutual Funds with Gold ETFs, you
need to open demat account and pay broking charges. With Gold Mutual
Funds, you need to bear the additional charges charged by the Gold Fund
of Fund. If you are buying in less quantity then gold mutual funds may be
suitable. If you are buying in more quantity then you can negotiate for the
lesser brokerage charges from your stock broker, hence gold ETF may be
suitable. 5) Equity based Gold Funds: Here these funds are directly not
investing in Gold but investing in the companies, which are related to the
mining, extracting and marketing of the Gold. Besides, its performance is
purely dependent upon the performance of the fund house and the
equities they are investing. In the other 4 options, your investment
performance will be directly linked to the price movement in gold.
However, investment in these funds is suitable for investors with high-risk
appetite. As these are equity-based funds, equity risk is there. There are
no listed companies in India associated with Gold. Therefore, these funds
trade in international market and quiet susceptible to currency-risk apart
from gold-risk and equity based risk. Therefore after assessing or weighing
pros and cons of each gold investment option, one can conclude that Gold
ETFs and Gold Funds are safest, profitable and most preferred options
among the various alternatives. How much to invest in Gold? 5% to 10%
of your over assets can be invested in gold. If you invest more in gold,
remember in the long term return on gold investment is less than 10%
p.a. Is it right time to invest in gold? Many times I have faced questions
similar to When to invest in gold? or Should I invest in gold now?
There is no right or wrong time to invest in gold. You need to invest in gold
for long term (5+yrs). It is better to stagger your investments over a
period of time to average out the cost of purchase. How to start investing
in Gold online? You can start investing in gold online either by investing in
gold ETF or by investing in gold funds. Gold funds can also be bought
online just like investing in other mutual funds online.
Silver:
In recent years, gold has lost its sheen over stocks and other investment
assets. It is trading at its lowest price in the last six years. Its close cousin,
silver, has seen an even sharper drop in prices. A few years ago, silver
was the hottest commodity, with famous trader Jim Rogers betting big on
it.
Today, silver, just like gold, has lost its attractiveness as an alternative
investment. The contrarian view, however, is that it could be the right
time to invest since it is available at a very low price. In this article, we will
discuss the different ways to invest in silver.
A brief note on silver prices
Silver had a dream run from 2007 to 2012, when it peaked at about Rs
55,000 per kg. Since then, its prices have plummeted to about Rs 34,000
per kg. In fact, todays price is equal to the price in the latter half of 2010.
This fall is explained by a general slowdown in commodity prices because
of slow growth in the world economy.
Investing options in silver
There are different grades of silver for investment. Sterling grade and
above are considered good for investment. Sterling grade is also called
grade 925. It contains 92.5 per cent silver, while the rest 7.5 per cent is
other metals, usually copper.
Traditional ways: The traditional ways to invest in silver are buying
silver coins and silver bars. Investors can buy from banks, bullion traders
such as Metals and Minerals Trading Corporation of India (MMTC) or from
open market transactions. The advantage of investing in silver is its
affordable price. Unlike gold, where you have to invest in thousands, silver
coins can be bought with a few hundred rupees. Investors can buy a 10
gram coin at a price of about Rs 340 only.
The problem with investing in physical silver coins and bars is storage.
Usually, the volume is more than that of gold, hence, storage is a big
problem with physical silver. Unfortunately, fund houses or exchanges do
not offer silver fund or silver ETF unlike Gold fund or Gold ETF. But
investors can go through National Spot Exchange Limited (NSEL). Lets
look at what options NSEL provides.
Investing through NSEL: NSEL is an electronic spot exchange for
commodities where investors can trade in e-Gold, e-Silver, e-Copper and
many other commodities. These are called e-Series products. For trading
in NSEL, investors have to open a separate demat account with any of the
depositories. The name of the depositories is can be found on the NSEL
website (http://www.nationalspotexchange.com/eseries.htm?m=16). Key
in your state and city, find the depository, and open an account.
Once you open your demat account, you can buy silver (or any commodity
such as gold or copper) in dematerialised form online. Unlike trading hours
of NSE, here the trading hours are from 10 AM to 11:30 PM. The unit of eseries varies with the type of commodity. For gold, 1 unit is 1 gm, while it
is 100 gm for silver and a kg for copper. Like any trading, there will be
commission for each transaction. Investors can check with their
depository on this.
The advantage of trading on NSEL is that investors can convert their eSilver into physical silver or simply get the cash by trading. NSEL has
designated few centres across the main cities in India to facilitate it.
Hence, if you want to convert your e-Silver into physical form, contact any
of the designated centres. This too can be found on the NSEL website.
Important points to keep in mind
First, despite the low prices, commodities are risky investments. The price
fluctuation in commodities can be even more volatile than stocks. Hence,
investors should be aware of the risk associated with commodity
investing.
Second, do not compare silver investing with that of gold. Gold, despite
the price fluctuations, is still a stable investment. If you look at the
deviation of prices from its peak, gold has depreciated by about 20 per
cent, while for silver, it is as much as 35 per cent. Even though there is
correlation between these two, the variation in silver is higher, making it
riskier.
Third, if you want to invest in silver via traditional ways, look for sellers
who are reliable. It is very difficult to a layman investor to assess the
quality and grade of silver. Hence, buy only from reliable jewellers. There
is no problem if you buy from banks though.
Once new securities have been sold in the primary market, these shares
are traded in the secondary market. This is to offer a chance for investors
to exit an investment and sell the shares. Secondary market transactions
are referred to trades where one investor buys shares from another
investor at the prevailing market price or at whatever price the two
parties agree upon.
Normally, investors conduct such transactions using an intermediary such
as a broker, who facilitates the process.
HOW TO BUY SHARES?
First, you need to open a trading account and a demat account. This
trading and demat account will be linked to your savings account to
facilitate smooth transfer of money and shares.
We offer various trading tools to buy and sell shares that caters to our
diversified set of traders and investors :
Online trading: Want to take charge of your stock investing decisions?
Our robust online trading system will help buy shares online with sheer
ease and convenience. To buy shares, log in to your trading account using
your User ID, Password and Security Key/Access code.
KEAT PRO X: A jet speed online trading software to buy and sell shares
online and real time
Kotak Stock Trader: Just tap and buy stocks on the go using your
smartphone.
Dealer assisted trading: Looking for some guidance to buy a stock?
This is an assisted trading service which will help you make an informed
investment decision.
Call and Trade: Dont have access to your laptop or computer. You can
call us and buy shares over the phone.
Fastlane: A light and fast Java based trading platform that makes share
trading easy even on slow and age old computers
Xtralite: An extra light and a superfast trading website thats works best
even if you have a slow internet connection.
WHAT ARE THE FINANCIAL INSTRUMENTS TRADED IN A STOCK MARKET?
Now that we have understood what a stock market is, let us understand
the four key financial instruments that are traded:
Bonds:
Companies need money to undertake projects. They then pay back using
the money earned through the project. One way of raising funds is
through bonds. When a company borrows from the bank in exchange for
regular interest payments, it is called a loan. Similarly, when a company
borrows from multiple investors in exchange for timely payments of
interest, it is called a bond.
For example, imagine you want to start a project that will start earning
money in two years. To undertake the project, you will need an initial
amount to get started. So, you acquire the requisite funds from a friend
and write down a receipt of this loan saying 'I owe you Rs 1 lakh and will
repay you the principal loan amount by five years, and will pay a 5%
interest every year until then'. When your friend holds this receipt, it
means he has just bought a bond by lending money to your company. You
promise to make the 5% interest payment at the end of every year, and
pay the principal amount of Rs 1 lakh at the end of the fifth year.
Thus, a bond is a means of investing money by lending to others. This is
why it is called a debt instrument. When you invest in bonds, it will show
the face value the amount of money being borrowed, the coupon rate or
yield the interest rate that the borrower has to pay, the coupon or
interest payments, and the deadline for paying the money back called as
the maturity date.
Secondary Market:
The share market is another place for raising money. In exchange for the
money, companies issue shares. Owning a share is akin to holding a
portion of the company. These shares are then traded in the share market.
Consider the previous example; your project is successful and so, you
want to expand it.
Now, you sell half of your company to your brother for Rs 50,000. You put
this transaction in writing my new company will issue 100 shares of
stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has
just bought 50% of the shares of stock of your company. He is now a
shareholder. Suppose your brother immediately needs Rs 50,000. He can
sell the share in the secondary market and get the money. This may be
more or less than Rs 50,000. For this reason, it is considered a riskier
instrument.
Shares are thus, a certificate of ownership of a corporation. Thus, as a
stockholder, you share a portion of the profit the company may make as
well as a portion of the loss a company may take. As the company keeps
doing better, your stocks will increase in value.
Mutual Funds:
These are investment vehicles that allow you to indirectly invest in stocks
or bonds. It pools money from a collection of investors, and then invests
that sum in financial instruments. This is handled by a professional fund
manager.
Every mutual fund scheme issues units, which have a certain value just
like a share. When you invest, you thus become a unit-holder. When the
instruments that the MF scheme invests in make money, as a unit-holder,
you get money.
This is either through a rise in the value of the units or through the
distribution of dividends money to all unit-holders.
Derivatives:
The value of financial instruments like shares keeps fluctuating. So, it is
difficult to fix a particular price. Derivatives instruments come handy here.
These are instruments that help you trade in the future at a price that you
fix today. Simply put, you enter into an agreement to either buy or sell a
share or other instrument at a certain fixed price.
WHAT DOES THE SEBI DO?
Stock markets are risky. Hence, they need to be regulated to protect
investors. The Security and Exchange Board of India (SEBI) is mandated to
oversee the secondary and primary markets in India since 1988 when the
Government of India established it as the regulatory body of stock
markets. Within a short period of time, SEBI became an autonomous body
through the SEBI Act of 1992.
SEBI has the responsibility of both development and regulation of the
market. It regularly comes out with comprehensive regulatory measures
aimed at ensuring that end investors benefit from safe and transparent
dealings in securities.
Its basic objectives are:
Different companies issue varied amounts of shares when they get listed.
The value of one share also differs from that of another companys stock.
Market capitalization smoothens out these differences. It is the market
stock price multiplied by the total number of shares held by the public. It,
thus, reflects the total market value of a stock taking into consideration
both the size and the price of the stock. For example, if a stock is priced at
Rs. 50 per share, and there are 1,00,000 shares in the hands of public
investors, then its market capitalization stands at Rs. 50,00,000.
Market capitalization matters when stacking stocks into different indices.
It also decides the weightage of a stock in the index. This means, bigger
the companys market value, the more its price fluctuations affect the
value of the index.
WHAT ARE ROLLING SETTLEMENTS?
Supposing your friend agrees to buy a book for you from a bookshop, you
will have to pay him for it eventually. Similarly, after you have bought or
sold shares through your broker, the trade has to be settled. Meaning, the
buyer has to receive his shares and the seller has to receive his money.
Settlement is the process whereby payment is made by the buyers, and
shares are delivered by the sellers.
A rolling settlement implies that all trades have to be settled by the end of
the day. Hence, the entire transaction where the buyer pays for
securities purchased and seller delivers the shares sold have to be
completed in a day.
In India, we have adopted the T+2 settlements cycle. This means that a
transaction conducted on Day 1 has to be settled on the Day 1 + 2
working days. This is when funds are paid and securities are transferred.
Thus, 'T+2' here, refers to Today + 2 working days. Saturdays and
Sundays are not considered as working days. So, if you enter into a
The top-down approach first takes into consideration the macroeconomy. You understand the trends and outlook for the overall economy.
Using this, you choose a one or more industries that are expected to do
well in the near future. This is because every industry reacts to overall
economic conditions like inflation, interest rates, consumer demand and
so on, in a different way. Select one amongst the industries after in-depth
analysis. Next, you understand the workings of the industry, the players
and competitors and other factors that affect the sector. Based on this,
you select one of the companies in the industry.
The bottom-up approach is just the opposite. You do not look at the
economy or select an industry first, but concentrate on company
fundamentals. You first understand what your priorities are high growth
or steady income through high dividends. Using appropriate ratios like the
Price-to-Earnings ratio or the Dividend-yield, you select a bunch of stocks.
Next, analyze each of these companies; find answers for questions like
what factors drive profits? Is the company management efficient? Is the
company heavily indebted? What is the future outlook? And so on. Based
on the results, select the company that best fits your requirements.
Analysts put out price targets and stop-loss measures, which let you know
how long you should hold a stock. A price target indicates that the price of
share is unlikely to climb above the level. So, once the share price touches
the target, you may look to sell it and pocket your profits. A stop loss,
meanwhile, acts as a target on the lower end. It lets you know when to sell
before the stock falls further and worsens your loss.
Debentures:
What is a Debenture?
Debenture is a type of Debt instrument which offers a fixed rate of
interest for a specified tenure. Companies or governments use debentures
to borrow money. Debentures are simply loans taken by the companies
and do not provide the ownership in the company.
Bonds and Debentures have lot of similarities, both offer fixed interest
rate and they have fixed tenure. But, bonds can be more secured than
debentures. For this reason bond holders receive a lower rate of interest
when compared to Debentures coupon rates. Bonds (Ex Tax Free
Bonds) are mostly issued by Government firms / entities.
An 11-12% fixed return to investors is a very tempting offer to resist
when equities are not doing well. Not many fixed income instruments are
able to deliver such high returns. But in last few years companies have
raised good money through Non-Convertible Debentures (NCDs) . The
main attraction was high return to investors in comparison to other fixed
income instruments like bank deposits. Let us take a look how NCDs work
and what should be the criteria to judge the right one: What are NCDs
Whenever a company wants to raise money from the public it issues a
debt paper for a specified tenure where it pays a fixed interest on the
investment. This paper is known as a debenture. Some of the debentures
are termed as convertible debentures since they can be converted into
equity share on maturity. A Non - Convertible debenture or NCD do not
have the option of conversion into shares and on maturity the principal
amount along with accumulated interest is paid to the holder of the
instrument. There are two types of NCDs-secured and unsecured. A
secured NCD is backed by the assets of the company and if it fails to pay
the obligation, the investor holding the debenture can claim it through
liquidation of these assets. Contrary to this there is no backing in
unsecured NCDs if company defaults. However, any company seeking to
raise money through NCD has to get its issue rated by agencies such as
CRISIL, ICRA, CARE and Fitch Ratings. A higher ratings (e.g. CRISIL AAA or
AA-Stable) means the issuer has the ability to service its debt on time and
carries lower default risk. A lower rating signifies a higher credit risk.
Check out the latest issues of NCDs Interest Rates in NCDs In high interest
rate scenario, NCDs offer high rates to investors. The average rates in last
few years have been 11-12%. Most of these were secured NCDs. Also,
companies which carry higher risk give more than others to lure investors
for investment. There can be various options for interest payout such as
monthly, quarterly, half yearly or annually. However, most NCDs offer
annual and cumulative payout. Investors wish to earn higher returns opt
for cumulative option where the interest is reinvested and paid at
maturity. Capital Gains NCDs get listed on stock exchanges where
investors can sell it before maturity. Any gain earned through selling in
secondary market is termed as capital gains. What gains an investor will
make depends on the interest rate scenario. If interest rates are higher
than offered by NCD then the returns will be lower if sold through
secondary markets and there might be negative return for investors in
some cases. However, if there is fall in interest rates after buying NCD
then selling on stock market may prove beneficial as the NCD will demand
a premium. Taxability The interest earned on NCD is clubbed with income
of the bond holder and is taxed at individual marginal income tax rate.
The capital gains have different taxability. Short term capital gains which
arises by selling NCD before one year is taxed as per the income slab of
individual holding the instrument. Any gains which arises by selling NCD
after one year and before maturity is taxable as long term capital gains.
The applicable tax rate is 10.30% without indexation since cost indexation
benefit is not available in case of bonds and debentures. Risk Involved
NCDs have some inherent risk associated which an investor has to take
into consideration before making any investment decision. The biggest
risk is the credit risk. The company can default on the future payment and
if it is unsecured NCD, an investor does not have any recourse. Most
companies get rating through agencies like CRISIL or CARE based on
various parameters which investors can check for credibility. A rating of
AAA by CRISIL is considered to be highest on safety. The second risk is the
liquidity risk. Even if NCD get listed, low volumes (case of low rated NCDs)
can deprive investors of any opportunity in exiting prematurely. Check List
Investor should pre-check certain factors before selecting any NCD for
investment. Look at the companys financial health and end uses of funds.
Any diversion from core business can be a worry factor. Check rating of
companies which gives an idea of safety of your investment. A recent
report by CRISIL states that no single instrument with AAA rating has ever
defaulted while it has grown with lower rating bonds. Also, companies with
low ratings offer very high returns and its difficult to resist our
temptation. Avoid such situation and review overall financial health of
companies. Lastly, look at post tax returns as higher taxability reduces
returns from NCDs too and for 1% more than FDs, risk may not be worth
taking.
CAUTIONS
Yet, financial experts advise to be cautious with these instruments.
Reason: These carry higher risk than bank deposits and may not be meant
for all investors. Says certified financial planner Suresh Sadagopan,
"Therefore, I am willing to forgo a higher interest for the stability that a
bank's FD offers me.
Liquidity is another issue. In a rising interest rate regime, getting out of
a bank deposit may be easier than liquidating your NCD investment. Most
banks allow investors to shift to deposits offering higher rates without
charging any penalty for breaking the deposits midway.
NCDs are listed on stock exchanges and may have to be sold at a
discount if there aren't many trades happening on that counter. But,
Subhasri Sriram, executive director, Shriram City Union Finance, begs to
differ, "Sixty per cent is reserved for retail investors who can invest less
than Rs 5 lakh and trade in transaction lots as little as Rs 1,000.
Therefore, this is bound to improve the trading interest."
However, if you have a surplus and are willing to take a little more risk
for that additional one per cent return, you could invest in tranches. But,
hold till maturity. The rest could go in bank FDs or debt mutual funds.
Mutual Funds
When considering investment opportunities, the first challenge that
almost every investor faces is a plethora of options. From stocks, bonds,
shares, money market securities, to the right combination of two or more
of these, however, every option presents its own set of challenges and
benefits.
So why should investors consider mutual funds over others to achieve
their investment goals?
Mutual funds allow investors to pool in their money for a diversified
selection of securities, managed by a professional fund manager. It offers
an array of innovative products like fund of funds, exchange-traded funds,
Fixed Maturity Plans, Sectoral Funds and many more.
Whether the objective is financial gains or convenience,mutual funds offer
many benefits to its investors.
Beat Inflation
Mutual Funds help investors generate better inflation-adjusted returns,
without spending a lot of time and energy on it.While most people
consider letting their savings 'grow' in a bank, they don't consider that
inflation may be nibbling away its value.
Suppose you have Rs. 100 as savings in your bank today. These can buy
about 10 bottles of water. Your bank offers 5% interest per annum, so by
next year you will have Rs. 105 in your bank.
However, inflation that year rose by 10%. Therefore, one bottle of water
costs Rs. 11. By the end of the year, with Rs. 105, you will not be able to
afford 10 bottles of water anymore.
Mutual Funds provide an ideal investment option to place your savings for
a long-term inflation adjusted growth, so that the purchasing power of
your hard earned money does not plummet over the years.
Expert Managers
Backed by a dedicated research team, investors are provided with the
services of an experienced fund manager who handles the financial
Life Insurance
Life insurance is a protection against financial loss that would result from
the premature death of an insured. The named beneficiary receives the
proceeds and is thereby safeguarded from the financial impact of the
death of the insured. The death benefit is paid by a life insurer in
consideration for premium payments made by the insured.
A wide range of vehicles are available to fund future financial goals. These
could be low risk-low return instruments like bank deposits and small
savings, or higher risk products such as equity, which can offer potentially
higher returns. Insurance scores over other investment vehicles in a
number of aspects.
Certainty
Once a goal has been identified and a value for it has been crystallized, an
insurance policy is an excellent vehicle to fund the goal. This is because
one can be rest assured that even in the unfortunate event of death or
even critical illness, the sum assured will fund a future goal of the
policyholder.
Tax efficient
Maturity benefits of most insurance policies are tax free under Section 10
(10D) and the premium paid is eligible for deduction under Section 80C of
the Income Tax Act, 1961.
Flexibility
Insurance products, especially Unit Linked Plans, provide flexibility in
terms of asset allocation to suit specific risk appetites, policy durations,
premium payment terms and fund switching options.
Wider options
Depending on the time horizon of the goal, the return required and the
investor's risk appetite, a broad spectrum of asset allocations between
equity and debt is possible in a Unit Linked Plan. An investor may tailor his
policy to suit his requirement.
Liquidity
Most Insurance products offer good liquidity after the lock-in period to
take care of any emergency requirement of funds. But they do have
inherent deterrents in the form of charges to discourage unnecessary
encashment.
Earmarking
Very often an insurance policy is taken for a specific goal. This therefore
can become a deterrent against utilizing these funds for any other
purpose and also encourages continued contributions.
Insurance for Financial Security
Insurance helps you to provide for contingent liabilities like hospitalization,
critical illness, debt redemption, etc. in a cost efficient manner.
Term insurance
Term insurance is the simplest and cheapest form of life cover, which pays
the sum assured on death. This is useful to simply provide for a family's
survival in the unfortunate event of demise of the bread winner. This can
also be used to cover repayment of any debt of a policy holder by simply
assigning the policy to the creditor. Upon maturity or claim on the policy,
the proceeds are paid to the creditor. Loan Cover policies are a variant
where the sum assured keeps reducing in line with the loan balance.
Health insurance
These policies provide cover against major health care expenses like
hospitalization, surgery, critical illness, etc. The benefits could be in the
form of fixed pay-outs on hospitalization or a lump sum on diagnosis
against some specified critical illnesses.
Accident benefit
This is usually an add-on cover over a basic policy and pays an additional
sum assured to the beneficiary in case of death due to accident. Since
accidental death is sudden and unforeseen, the family could be faced with
issues like relocation, debt servicing and other requirement for funds.
Retirement Planning
Indian life expectancy has improved dramatically over the years due to
availability of advanced medical facilities. However, a longer working life
may not really be possible due to occurrences of life-style induced illness
and high burn-out rate. The evolving demographic balance with plenty of
young talent becoming continuously available may also be a deterring
factor to a longer working life unless one is self-employed.
Consequently, our retirement life span could well be as long as our active
working life span. This means that we have to build a solid corpus during
our active life to maintain our life style for the long post retirement life if
we are to enjoy the true meaning of the word "retirement". Pension
Plans help us build up our savings during our earning years and provide us
a lump sum on retirement. This lump sum can then provide us a
retirement income by investing in an annuity.
Insurance products such as Unit Linked Plans help us combat the impact
of inflation on our financial goals by providing the option to invest in
equity, which is known to deliver one of the best returns from all asset
classes, over the long term. Ignoring inflation would result in our savings
falling short of the estimated value of future goals, especially over the
long term.
The first question that might cross your mind while purchasing an
insurance product would be about the return youre expecting. But is it
prudent to always expect return while buying insurance? Along with the
answer to this question, this article will also shed some light upon when
one should pick a term insurance over other return-offering insurance
products.
To begin with, insurance products fall into three key broad categories:
No investment product can provide the same level of benefit for a similar
level of premium.
These are insurance products in their purest form i.e. they are designed
and priced so that the policyholders, as a group, are effectively pooling
their premiums in order to pay a benefit for a relatively infrequent, but
significant event that might occur. This means that for each policyholder
the cost of providing the cover is relatively modest in comparison to the
benefit that would be provided if that event arises.
2.
Pure
Savings
Insurance
Products
Pure savings products are just the opposite of pure risk cover insurance
products. These policies are designed to help the individual accumulate a
fund or corpus that can be used at some later point. Various variants of
these contracts exist; for some policies such as unit-linked policies, the
selection of the type of investment, which is made, is in the hands of the
policyholder, whereas for others (e.g. traditional policies), the investments
are decided by the insurer.
When considering a pure savings product, the ultimate return is an
important consideration, but this must be balanced against the level of
risk associated with the investments. Risk is the potential variability in the
return ultimately achieved on the investments a high risk investment
may have the potential to deliver a very high return, but potentially it
could also deliver a negative return. However, a fund investing in shortterm fixed interest securities may have a relatively low return, but much
higher levels of predictability over the level of return that will be achieved.
Other important factors to consider for an investment product are:
ULIPs
Equityfunds
Mutual funds that invest in stockmarkets are a must-have for
long-term investors. They diversify across stocks and sectors to
ensure they make the most of emerging trends in stockmarkets.
Safety of capital
Return on capital
fixed
deposit
with
a
matching
tenure.
The interest on the deposit is added to income and taxed at the marginal
rate of taxation.
Liquid
funds
Investors can consider liquid funds to park money for a period as little as
one day to as much as 90 days or even higher. Liquid funds invest in
money market investments like call money among others. It is rare for
liquid funds to see a dip in their net asset values (NAV).
Investors can opt for the dividend option or the growth option. Dividend is
taxed at nearly 30%. Capital gains are added to income and taxed at
marginal rate of taxation. From a taxation point of view investors in the
lower tax brackets are better off opting for the growth option while
investors in the highest tax bracket can choose either option.
Short-term
mutual
funds
While liquid funds are suitable for investment tenures of a few days, shortterm mutual funds are ideal for tenures running into a few months. Like
liquid funds, short-term debt funds are managed conservatively with the
explicit aim of safeguarding capital and posting modest capital
appreciation.
From a tax perspective short-term mutual funds are at par with liquid
funds.