INVESTMENT ALTERNATIVES Chapter 2

ALTERNATIVES IN INVESTMENTS Investment avenues are the outlets of funds. There are varieties of investment avenues or alternatives. The investors are free to select any one or more alternative avenues depending upon their needs. All categories of investors are equally interested in safety, liquidity, and reasonable return on the funds invested by them.

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

DIFFERENT TYPES OF DEPOSITS ACCOUNTS Savings Bank Account A Saving Bank account (SB Account) is meant to promote the habit of saving among the people. It also facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever required, without any condition. Hence a savings account is a safe, convenient and affordable way to save your money.

Fixed Deposits Account A fixed deposits is meant for those investors who want to deposit a lump sum of money for a fixed period, say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + Interest) at the maturity of the deposit.

Recurring Deposit Account The Recurring deposit in bank is meant for someone who wants to invest a specific sum of money on a monthly basis for a fixed rate of return. At the end, you will get the principal sum as well as the interest earned during that period. The scheme, a systematic way for long term savings, is one of the best investment option for the low income groups.

ADVANTAGES OF BANK DEPOSITS Investment is reasonably safe and secured with adequate liquidity. Banks offer reasonable rate of return on the investment made and that too in a regular manner. Banks offer loan facility against the investment made. Procedures and formalities involved in a bank investment are limited, simple and quick. Banks offer various services and facilities to their customers.

LIMITATIONS/DEMERITS OF BANK DEPOSITS The rate of return in the case of bank investment is low as compared to other avenues of investment. The return on the investment is not adequate even to protection against the present inflation rate in the country. Capital appreciation is not possible in bank investment.

MONEY MARKET INSTRUMENTS Money market is a market for borrowing and lending for short periods. It is one constituent of capital market. However, it is basically concerned with short-term investment. Money market securities are fixed income securities similar to gilt-edged securities, preference shares and debentures.

Institutional investors with huge surplus funds purchase money market securities for short term investments. A money market security is a debt instrument of short period maturity. Money market securities are as explained below: – Treasury bills – GILT – Edged securities – Commercial paper – Certificate of Deposits.

COMPANY DEPOSITS / PUBLIC DEPOSITS In order to meet temporary financial needs, companies accept deposits from the investors. Such deposits are called public deposits or company fixed deposits and are popular particularly among the middle class investors. At present along with private sector companies, even public sector companies and public utilities also accept such deposits in order to meet their working requirements. This source is popular and used extensively by the companies.

Advantages of Company Deposits / Public Deposits Public deposits are available easily and quickly, provided that company enjoys public confidence. This method of financing is simple and cheaper than obtaining loans from commercial banks. This makes public deposits attractive and agreeable to companies and also to depositors. Public deposits enable the companies to trade on equity and pay higher dividends on equity shares. The depositors receive interest in their deposits. This rate is higher than the interest rate offered by the banks. The interest rate is also paid regularly by reputed companies.

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

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