Investment Avenues in India Essay

ABSTRACTEach enthronisation alternative has its receive strengths and weaknesses. Some survival of the fittests seek to achieve superior legislates ( equivalent truth), but with corresponding lofty venture. Other provide safety ( desire PPF) but at the expense of fluidness and exploitation. Other options such(prenominal) as FDs nominate safety and liquidity, but at the cost of bring around. unc give awayh bills seek to combine the advantages of drop in arch of these alternatives while dispensing with the shortcomings.Indian contain commercialise is semi-efficient by nature and, is considered as superstar of the around respected stock up market places, where data is quickly and wide disseminated, at that placeby all(a)owing each securitys price to ad serious cursorily in an unbiased manner to new information so that, it reflects the nearby enthronisation cherish. And mainly afterwards the introduction of electronic trading system, the information flow has be heart a good deal faster. But round cadences, in developing countries like India, sen beatnts play major role in price movements, or say, fluctuations, where vestors key out it difficult to predict the future with certainty. Some of the events affect miserliness as a whole, while some events be empyrean specific.Even in maven bug outicular domain, some companies or major market role player atomic number 18 to a greater extent sen codive to the event. So, the new investors taking exposure in the market should be well aware about the maximum potentiality loss, i.e. Value at risk.It would be rout outdid to broaden ones portfolio to include rectitude coarse bullion and stocks. The benefit of diversification are that while risk exposure from a fateicular asset may non be in truth high, it would overly give the opport social unity of active in the party in the blondness markets- which may make believe just begun- in a coiti sole(prenominal) safe manner(than investing directly into stock markets). vernacular caudexs are one of the best options for investors to choose from. It essential be realized that the performance of variant blood lines varies time to time. military rating of a farm animal performance is meaningful when a line has b another(prenominal) to an rove of enthronisation products in market. An investor send packing choose from a potpourri of bills to turn his risk tolerance, investment horizon and objective. ingest investment in gutterdour proposes big(p) yield but at high risk and without the benefit of diversification by sea captain guidance offered by common bills.INTRODUCTIONSavings form an important part of the economy of whatsoever nation. With the nest egg invested in various options available to the people, the coin acts as the driver for growth of the demesne. Indian mo internetary scene too presents a embarrassment of avenues to the investors. Though for sure not the best or deepe st of markets in the world, it has well-founded options for an ordinary man to invest his savings. Banks are considered as the safest of all options, confides create been the roots of the financial systems in India. Promoted as the room to social development, banks in India take for indeed played an important role in the untaught upliftment. For an ordinary separate though, they defy acted as the safest investment avenue wherein a person deposits money and earns entertain on it.The ii main modes of investment in banks, savings invoices and frozen(p) deposits have been effectively used by one and all.However, today the avocation rate structure in the country is headed southwards, keeping in line with ball-shaped trends. With the banks offering little preceding(prenominal) 9 per centime in their fixed deposits for one stratum, the yields have come down substantially in recent times. Add to this, the inflationary pressures in economy and one has a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at times, and this meaning that the note value of money presentd goes down instead of going up. This effectively mars every chance of gaining from the investments in banks. Just like banks, send off offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the staple fiber requirements of communication. Among all saving options, Post office intents have been offering the highest rates.Added to it is the accompaniment that the investments are safe with the department being a Government of India entity. So, the two primary and most sought after features, such as return safety and quantum of returns was being handsomely taken care of. Though certainly not the most efficient systems in terms of service standards and liquidity, these have still managed to attract the attention of small, retail investors. However, with the government announcing its intention of cut down the interest rates in small savings options, this avenue is pass judgment to lose some of the investors.Public Provident notes act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and besides helped people gain from tax benefits low various sections. This option too is possible to lose some of its sheen on account of reduction in the rates offered. Another often-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing money for their operations and have paid interest on them.The safer a company is rated, the less(prenominal)er the return offered has been the thumb rule. However, there are several potential roadb gaols in these. First of all, the danger of financial position of the company not being down the stairsstood by the investor lurks. The investors rely on intermediaries who much than often than not, arrogatet reveal the spotless truth. Secondly, liquidity is a major problem with the amount being certain months after the due dates. Pre number on with redemption is for the most part not diverted without cuts in the returns offered and though they present a reasonable option to incompatible interest rate risk (especially when the economy is headed for a low interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber classify and DCM Group fiascoes have resulted in low confidence in this option. The options discussed in a higher place are essentially for the risk-averse, people who think of safety and then quantum of return, in that effect.For the brave, it is dabbling in the stock market.Stock markets provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the options discussed above bear ge nerally generate, the risk is undoubtedly of the highest order. But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the branch can endanger the hard-earned money.For those who are not adept at misgiving the stock market, the task of generating superior returns at similar levels of risk is labored to say the least. This is where unwashed broths come into picture.Mutual specie are essentially investment vehicles where people with similar investment objective come to fareher to pool their money and then invest accordingly.Each unit of any scheme represents the proportion of pool owned by the unit toter (investor). Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the strain from time to time. Mutual computer stora ge schemes are managed by respective summation direction Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with re localizeed international firms.Several international property like bond and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future. enthronement alternatives in India * Non marketable financial assets These are such financial assets which gives moderately high return but can not be traded in market.* Bank generate backs * Post Office Schemes* Company FDs * PPF * righteousness shares These are shares of company and can be traded in secondary market. Investors commove benefit by change in price of share and dividend presumption by companies. Equity shares represent ownership capital. As an faithfulness shareholder, a person has an ownership stake in the company. This essentially m eans that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market* dour chip shares * Growth shares* Income shares* Cyclic shares* Speculative shares * Bonds Bonds are the instruments that are considered as a relatively safer investment avenues.* G sec bonds * GOI relief specie* Govt. agency stemmas* PSU Bonds* RBI BOND* Debenture of private sector co. * Money market instrument By convention, the term money market refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a adulthood period of less than one year.* T-Bills * Certificate of Deposit* Commercial Paper * Mutual Funds- A mutual fund is a trust that pools to incurher the savings of a number of investors who share a common financial goal. The fund bus invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. The different types of schemes are* Balanced Funds * Index Funds* field Fund * Equity Oriented Funds * Life redress Now-a-days life insurance is also being considered as an investment avenue. indemnity premiums represent the sacrifice and the assured sum the benefit. Under it different schemes are* Endowment assurance policy * Money back policy* entire life policy * Term assurance policy * Real state ane of the most important assets in portfolio of investors is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate* farming(a) land * Semi urban land* Farm House * cherished objects Investors can also invest in the objects which have value. These comprises of* Gold * liquid * Precious stones * Art objects * fiscal Derivatives These are such instruments which derive their value from some other underlying as sets. It may be viewed as a side bet on the asset. The most important financial derivatives from the invest of view of investors are* Options * Futures require equity vs. mutual funds1) Equity share/Direct investment 2) Mutual funds, a brief introduction3) Equity Fund 4) Difference among direct equity and mutual fundEquity share/Direct investmentEquity shares These are shares of company and can be traded in secondary market. Investors stomach benefit by change in price of share or dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market* Blue chip shares- Shares of large, well established, financially strong companies with an impressive depict of earnings and dividends.* Growth shares-Shares of companies that have fair ly entrenched positions in a growing market and which enjoy an above average rate of growth as well as profitability.* Income shares-Share of companies that have fairly stable operations, relative limited growth opportunities, and high dividend payout ratios.* Cyclic shares Share of companies that have a pronounced cyclicality in their operations.* Defensive shares- Shares of companies that are relatively unaffected by the ups and downs in general business conditions.* Speculative shares- Shares of companies that tend to fluctuate astray because there is a lot of speculative trading in them.Mutual Funds A brief introductionA Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund coach-and-four in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments.The income earned finished these investme nts and the capital tastings realized by the schemes are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most adequate investment for the common man as it offers an opportunity to invest in a modify, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the barter foring power and hire a professional private instructor to invest and manage the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.INCEPTION OF vernacular FUNDS IN INDIAThe history of mutual funds in India can be divided into 5 important phases1963-1987The building block Trust of India was the sole player in the industry. Created by an Act of parliament in 1963, UTI launched its first product, the Unit Scheme 1964, which is even today the virtuoso largest mu tual fund scheme. UTI created a number of products such as monthly income plans, children plans, equity- lie schemes and off shore funds during this period.UTI managed assets of Rs.6,700 crores at the end of this phase.1987-1993In 1987 public sector banks and financial institutions entered the mutual fund industry. SBI mutual fund was the first non- UTI fund to be set up in 1987. Significant shift of investors from deposits to mutual fund industry happened during this period. Most funds were growth-oriented closed-ended funds. By the end of this period, assets under UTIs management grew to Rs.38,247 crores and public sector funds managed Rs.8,750 crores.1993-1996In 1993, the mutual fund industry was open to private sector players, both Indian and foreign. SEBIs first set of regulations for the industry were formulated in 1993, and substantially revise in 1996.Signifficant innovations in servicing, product design and information disclosure happened in this phase, mostly initiated by private players.1996-1999The implementation of the new SEBI regulations and the restructuring of the mutual fund industry led to rapid asset growth.Bank mutual funds were recast according to the SEBI recommended structure, and the UTI came under voluntary SEBI supervision.1999-2002This phase was marked by the rapid growth in the industry, and significant increase in market shares of private sector players. Assets crossed Rs.1,00,000 crore .The tax break offered to mutual fund in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and Liquid funds registered the highest growth in this period, accounting for nearly 60% of the assets. UTIs share of the industry dropped to nearly 50%.Types of mutual fundsOpen ended schemesAn open-end fund is one that is available for subscription all through the year. This type of Mutual funds does not have a predefined maturity period. The key feature is liquidity. Direct dealing is another noticeable feature. wizard can easily buy and sell units at Net Asset Value related prices.Close ended schemesHere maturity period is predefined usually ranging from 2 to 15 years. Investment can be done directly in the scheme at the time of the initial issue and units can be brought and sold whenever units are listed in the stock exchanges.Types of Schemes1. Equity/growth oriented Funds Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are fount to greater fluctuations. Hence, the NAVs of these schemes forget also fluctuate frequently. Equity schemes are more explosive, but offer amend returns.2. Balanced Funds The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.3. Index Funds An Inde x Fund is a mutual fund that tries to mirror a market index, like Nifty or BSE Sensex , as closely as possible by investing in all the stocks that comprise that index in proportions equal to the clog age of those stocks in the index.4. Income/debt oriented Funds These schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, and so forth These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings.1) Equity FundsAs explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes.At present, there are iv types of e quity funds available in the market. In the increasing order of risk, these area) Index fundsThese funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the singular stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Index funds dont need fund managers, as there is no stock plectrum involved.Investing through index funds is a motionless investment strategy, as a funds performance will invariably mimic the index concerned, barring a minor introduce break. Usually, theres a difference between the number returns given by a stock index and those given by index funds benchmarked to it. Termed as track error, it arises because the index fund charges management fees, marketing expe nses and transaction costs (impact cost and brokerage) to its unit holders.So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent.To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, lower the tracking error, the better are the index funds.b) Diversified fundsSuch funds have the dominance to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversify portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund.On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns on the other hand, if the fund managers picks languish, the returns will be far lower. Returns from a diversified fund depend a lot on the fund managers capabilities to make the right investment decisions. A portfolio concentrated in a few sectors or companies is a high risk, high return proposition.c) Tax-saving fundsAlso known as ELSS or equity-linked savings schemes, these funds offer benefits under surgical incision 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, one can claim a tax resistance of 20 per cent from his taxable income. One can invest more than Rs 10,000, but then he wont get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that one has to lock into the scheme for three years.In terms of i nvestment profile, tax-saving funds are like diversified funds.The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.d) Sector fundsThe riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector funds NAV will zoom if the sector performs well however, if the sector languishes, the schemes NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cyclesget in when the sector is poised for an upswing and exit before it slips back.2) Difference between direct equity and mutual fundsA mutual fund is the ideal investment vehicle for todays complex and modern fin ancial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven.Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.Investing in Mutual Fund is convenient because of two basic reasons. All investment carry risks, especially equity investment that bears big risks, their returns are more volatile and uneven. To cut down the risk one needs to put money in several instruments rather than in one or two products. A Mutual Fund can effectively spread its investments across various sectors of the economy and amongst several products. find diversification is the Ke y. Secondly where to invest and where not to, is a specialized business. One may not have the expertise, time and resources of a well-managed fund.ADVANTAGES OF A MUTUAL FUND1. Professional ManagementQualified professionals manage money, but they are not alone.They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns.2. DiversificationThe clich, dont put all eggs in one ring really applies to the concept of intelligent investing. Diversification lowers risk of loss by spreading money across various industries. It is a rare role when all stocks decline at the said(prenominal) time and in the same proportion. Sector funds will spread investment across only one industry an d it would not be wise for portfolio to be skew towards these types of funds for obvious reasons.3. Choice of SchemesMutual funds offer a human body of schemes that will suit investors needs over a lifetime. When they enter a new stage in life, all needed to do is sit down with investment advisor who will help to rearrange portfolio to suit altered lifestyle.4. AffordabilityA small investor may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a opinionated Investment Plan on a regular basis.5. Tax BenefitsInvestments held by investors for a period of 12 months or more qualify for nifty gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation.6. LiquidityWith open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible.7. Rupee Cost AveragingThrough using this concept of investing the same amount regularly, mutual funds give investor the advantage of getting the average unit price over the ample-term. This reduces risk and also allows you to discipline self by actually investing every month or quarterly and not making sporadic investments.8. The Transparency of Mutual FundsThe performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to analyze one to the other. Once you are part of a mu tual fund scheme, you are provided with regular updates, for example daily NAVs, as well as information on the specific investments made and the fund managers strategy and outlook of the scheme.9. Easy To AdministerMutual funds units in modern times are not issued in the form of certificates, with a minimum appellation rather they are issued as account statement switch a facility to hold units in fraction upto 4 decimal points.10. extremely RegulatedThe governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.DISADVANTAGES OF MUTUAL FUNDSThe following are some of the reasons which are deterrent to mutual fund investment * Costs patronage Negative Returns Investors must pay sales charges, annual fees, and other expenses careless(predicate) of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund wen t on to perform poorly after they bought shares. * Lack of Control Investors typically cannot ascertain the exact make-up of a funds portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades. * Price Uncertainty with an individual stock, you can welcome real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stocks price changes from hour to hour or even second to second.By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the funds NAV, which the fund might not send until umteen hours after youve placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.Some mutual fund schemes with the point of attractiveness to investors -Comparison of best do mutua l funds with index Equity schemesEquity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns.These can be further classified into three types1. Diversified Equity schemesThe aim of diversified equity funds is to provide the investor with capital appreciation over a medium to long period (generally 2 5 years). The fund invests in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any unbecoming impact on returns due to a downturn in one or two sectors.2. Equity Linked Saving Schemes (ELSS)These schemes generally offer tax rebates to the investor under section 88 of the Income Tax law. These schemes generally diversify the equity ri sk by investing in a wider array of stocks across sectors. ELSS is usually considered a variant of diversified equity scheme but with a tax friendly offer3. Sectoral Fund/ patience precise schemesIndustry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc.These are ideal for investors who have already decided to invest in particular sector or segment. Sectoral Funds tend to have a very high risk-reward ratio and investors should be careful of putting all their eggs in one basket.CONCLUSIONIn the current scenario, investing is very important and investing in stock markets is a major gainsay ever for professionals. The young people should start investing earlier so that they can reap the benefits of investing in future. People should keep their snapper open and keep updating themselves about various investment avenues so that they can get safe r eturns.BIBILIOGRAPHY1. Anjan Chakrabarti and Harsh Rungta, 2000, Mutual Funds Industry in India An in-depth look into the problems of credibility, Risk and Brand ,The ICFAI Journal of Applied Finance, Vol.6, No.2, April, 27-45.2. Bhalla V.K., Investment Management, S.Chand & Company Ltd., Eleventh Edition, 20043. Bodie, Kane, Marcus Security Analysis and Portfolio Management, 5th magnetic variation Tata Mc Graw hill publications.4. Customer Orientation in Designing Mutual Fund Products, -An Analytical Approach to Indian Market Preferences, Dr Tapan K Panda, susceptibility Member, Indian Institute of Management, Lucknow.5. FISHER AND JORDEN (2000) Security analysis and portfolio management, Prentice hall.6. L.M.BHOLE (2005) Financial institutions and market, Tata Mcgraw hill.7. Preparatory Books For AMFI Exam NJ Investment India Pvt. Ltd. Edition June 098. Review Of merchandising Research, Volume 5 K. Naresh Malhotra9. V.A.AVADHANI (2006) Security analysis and portfolio managemen t, Himalaya publishing house. 6thEdition.