MODULE - II 14 Hrs Investment options: Investment options: company shares, company shares, debentures, bonds, debentures, bonds, convertible securities, convertible securities, hybrid securities, hybrid securities, Fixed deposits, Fixed deposits, Gilt- edged securities, Gilt- edged securities, Post office schemes, Company and public provident funds, Post office schemes, Company and public provident funds, Unit trust of India, Unit trust of India, LIC, and insurance schemes LIC, and insurance schemes Real estate, Real estate, Investments attributes: Investments attributes: Various investments means available in India, Various investments means available in India, characteristics features of financial instruments, characteristics features of financial instruments, Types of financial assets and instruments, Types of financial assets and instruments, Risk, return, security, maturity, and optional features. Risk, return, security, maturity, and optional features. Finance vs. investments- interactive decision elements. Finance vs. investments- interactive decision elements.

THE SPECTRUM OF INVESTMENTS: INVESTMENT OPPORTUNITIES IN INDIA BANK DEPOSITS\ COMMERCIAL PAPERS \DEPOSITS\ DEBENTURES \BONDS LIFE INSURANCE\ POST OFFICE SAVINGS \ OTHER TAX SAVINGS REAL ESTATE\ PRECIOUS OBJECTS\ PRIVATE LENDINGS MUTUAL FUNDS\ FINANCIAL DERIVATIVESEQUITY PREFERENCE SHARES \

What are the investment options available? There are several investment instruments available, There are several investment instruments available, some of which are - Fixed Income securities, Mutual Funds, Direct Equity, Equity through IPOs, Equity through Derivatives, Gold, etc. some of which are - Fixed Income securities, Mutual Funds, Direct Equity, Equity through IPOs, Equity through Derivatives, Gold, etc. Depending up on your financial goal, age, awareness about each instrument and risk appetite, Depending up on your financial goal, age, awareness about each instrument and risk appetite, you could choose the right mix. you could choose the right mix. Fixed Income Instruments Fixed Income InstrumentsFixed Income InstrumentsFixed Income Instruments Mutual Fund Mutual FundMutual FundMutual Fund Direct Equity Direct EquityDirect EquityDirect Equity Equity through IPOs Equity through IPOsEquity through IPOsEquity through IPOs Equity through Derivatives Equity through DerivativesEquity through DerivativesEquity through Derivatives Gold GoldGold

Fixed Income Instruments Introduction Introduction Fixed Income Securities – Risk free – A Myth Fixed Income Securities – Risk free – A Myth Introduction Fixed Income Securities – Risk free – A Myth

Characteristics of fixed income instruments Characteristics of fixed income instruments Popular Fixed Income Instruments Popular Fixed Income Instruments Bank depositsBank depositsBank depositsBank deposits Company depositsCompany depositsCompany depositsCompany deposits RBI BondsRBI BondsRBI BondsRBI Bonds Small saving schemesSmall saving schemesSmall saving schemesSmall saving schemes

INTRODUCTION If you will ask a cross-section of the investor community, one characteristic which an investment should offer, safety will top the list. If you will ask a cross-section of the investor community, one characteristic which an investment should offer, safety will top the list. By and large, investors are willing to settle for fixed and resultantly lower returns as long as their invested capital is safe. By and large, investors are willing to settle for fixed and resultantly lower returns as long as their invested capital is safe. Fixed income investments attempt to address this need of the investors. Fixed income investments attempt to address this need of the investors.

INTRODUCTION Before the year 2000, fixed income instruments used to carry high interest rates (in excess of 10 per cent) mainly due to scarcity of capital and high inflation rates prevailing in India. Before the year 2000, fixed income instruments used to carry high interest rates (in excess of 10 per cent) mainly due to scarcity of capital and high inflation rates prevailing in India. With the opening up of the Indian economy, flow of foreign funds in India, consistently high savings of Indian investors, declining inflation and several other economic factors. With the opening up of the Indian economy, flow of foreign funds in India, consistently high savings of Indian investors, declining inflation and several other economic factors. Interest rates started declining from the year 2000 onwards from a high of approximately 12 per cent in late 1990s they came down to approximately 6 per cent in 2005! Interest rates started declining from the year 2000 onwards from a high of approximately 12 per cent in late 1990s they came down to approximately 6 per cent in 2005!

FIXED INCOME INSTRUMENTS RISK FREE – A MYTH Though, fixed income instrument do offer an element of safety and stability of returns, they are not risk free. Though, fixed income instrument do offer an element of safety and stability of returns, they are not risk free. The two primary risks associated with fixed income investing are: The two primary risks associated with fixed income investing are: Interest rate risk Interest rate risk Credit Risk Credit Risk

Interest Rate Risk: When interest rates rise, fixed income investments lose value. When interest rates rise, fixed income investments lose value. This is because the investor will continue to earn the same (lower) interest rate until the investment matures while market interest rates have already gone up. This is because the investor will continue to earn the same (lower) interest rate until the investment matures while market interest rates have already gone up. In order to compensate for a lower interest rate compared to the market rate, the fixed income investment will thus have to be priced at a lower rate. In order to compensate for a lower interest rate compared to the market rate, the fixed income investment will thus have to be priced at a lower rate.

For example, if a Rs 100 bond is fetching 7 per cent interest and market rates have moved to 9 per cent, the bond will now be worth 77.8 per cent of its face value (coupon rate of 7 per cent divided by market rate of 9 per cent multiplied by 100), i.e. Rs 77.8 (77.8 per cent of the face value of Rs 100). For example, if a Rs 100 bond is fetching 7 per cent interest and market rates have moved to 9 per cent, the bond will now be worth 77.8 per cent of its face value (coupon rate of 7 per cent divided by market rate of 9 per cent multiplied by 100), i.e. Rs 77.8 (77.8 per cent of the face value of Rs 100). Thus, if the bond is sold at this price, the new investor will earn 9 per cent from this bond. Thus, if the bond is sold at this price, the new investor will earn 9 per cent from this bond.

Credit Risk: This risk herein is that the borrower may default on interest and/or principal repayment. This risk herein is that the borrower may default on interest and/or principal repayment. For example, a company borrowing fixed deposits from investors may default on servicing its obligations (interest and/or principal repayment) in case it is going through a bad patch. For example, a company borrowing fixed deposits from investors may default on servicing its obligations (interest and/or principal repayment) in case it is going through a bad patch.

Characteristics of fixed income instruments Some of the characteristics which fixed income instruments offer are: Fixed interest rate: Fixed interest rate: Fixed income instruments offer a pre-determined rate of return which is applicable for the term of the investment. Fixed term: Fixed term: Fixed income instruments come with a fixed investment term. Depending on the instrument you may have the facility of undertaking a pre-mature withdrawal. Normally there is a directly proportional relationship between interest rate and tenure, longer the tenure higher the interest rate.

COMPOUNDING: COMPOUNDING: Simply put, in compounding, the interest that you earn on the fixed income gets re-invested and earns interest. In other words interest earns interest. In other words interest earns interest. A cumulative fixed deposit is a perfect example of compounding at work. A cumulative fixed deposit is a perfect example of compounding at work. As and when the interest accrues on the deposit, it gets re- invested to earn further interest. As and when the interest accrues on the deposit, it gets re- invested to earn further interest.

POPULAR FIXED INCOME INSTRUMENTS Fixed income instruments mainly include Fixed income instruments mainly include Bank Fixed Deposits,Bank Fixed Deposits, Company Fixed Deposits,Company Fixed Deposits, RBI Bonds AndRBI Bonds And Post Office Small Savings Scheme (POSS).Post Office Small Savings Scheme (POSS).

Bank Deposits These are by far one of the core fixed income opportunities available for the retail investor. These are by far one of the core fixed income opportunities available for the retail investor. Investment term: Investment term: Bank deposits can be placed for flexible time periods. The minimum and maximum tenure of these deposits varies from bank to bank. Generally, the minimum term of such deposits is 7 days and maximum is 10 years Generally, the minimum term of such deposits is 7 days and maximum is 10 years

Bank Deposits Returns: Returns: Normally, interest rates on deposits differ from bank to bank and are dependent upon the investment tenure of the deposit. (6-10%) Bank deposits are mainly of two types Bank deposits are mainly of two types – Non-cumulative and cumulative deposits.– Non-cumulative and cumulative deposits. Under the former, interest accumulated on the deposit is paid out to the deposit holder after specified intervals Under the former, interest accumulated on the deposit is paid out to the deposit holder after specified intervals whereas in the case of the latter, interest accrued on the deposit is re-invested in the deposit at the pre-determined rate of interest. whereas in the case of the latter, interest accrued on the deposit is re-invested in the deposit at the pre-determined rate of interest. The interest is then made available to the deposit holder at the end of the term. The interest is then made available to the deposit holder at the end of the term.

Bank Deposits Risk: Risk: Since these deposits are provided by banks, they entail a minimum level of risk. Moreover, these deposits are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC) for Rs 1 lakh per deposit which further enhances the safety of these instruments. Moreover, these deposits are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC) for Rs 1 lakh per deposit which further enhances the safety of these instruments.

Bank Deposits Liquidity: Liquidity: Bank deposits allow a great deal of liquidity since you can undertake premature withdrawals. In case of a premature withdrawal, you will receive interest at the rate applicable for the term for which the deposit is maintained. In case of a premature withdrawal, you will receive interest at the rate applicable for the term for which the deposit is maintained.

Bank Deposits Tax implications: Tax implications: For interest income exceeding Rs 5000 in a year on deposits, banks deduct tax at source (TDS) at 10.2 per cent (10 per cent tax plus 2 per cent surcharge). Further investments in these deposits, offer a tax rebate under section 80 C of the Income Tax Act up to a maximum of Rs 1 lakh. Further investments in these deposits, offer a tax rebate under section 80 C of the Income Tax Act up to a maximum of Rs 1 lakh. For claiming the tax benefit, you need to fulfill two conditions – the deposit is to be kept with a scheduled bank and the term of this deposit should be greater than or equal to 5 years. For claiming the tax benefit, you need to fulfill two conditions – the deposit is to be kept with a scheduled bank and the term of this deposit should be greater than or equal to 5 years.

Company Deposits Certain government companies, manufacturing companies and Non-banking Finance Companies (NBFCs) are authorised by the RBI to issue fixed deposits to the public. Certain government companies, manufacturing companies and Non-banking Finance Companies (NBFCs) are authorised by the RBI to issue fixed deposits to the public. These deposits are raised by the companies in order to fund their business activities, expansion plans, to provide for capital expenditure etc. These deposits are raised by the companies in order to fund their business activities, expansion plans, to provide for capital expenditure etc. Like bank deposits, even these deposits can be placed for a fixed tenure and at a pre-determined rate of interest. Like bank deposits, even these deposits can be placed for a fixed tenure and at a pre-determined rate of interest.

Company Deposits Investment tenure: Investment tenure: Company deposits can be placed for a period ranging from 6 months to 5 years. Returns: Returns: Interest rates on these deposits are based on two factors – the term of the deposit and the credit rating given to the deposit scheme. This rating summarizes the companys ability to repay the principal and interest amounts of the deposit upon maturity to the deposit holder. This rating summarizes the companys ability to repay the principal and interest amounts of the deposit upon maturity to the deposit holder.

Company Deposits On the basis of safety and credit quality of these deposit programs, the rating agency assigns either of the following grades: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, C and D wherein AAA signifies utmost safety and low risk; whereas grades below BB entail greater degrees of risk and are prone to default. On the basis of safety and credit quality of these deposit programs, the rating agency assigns either of the following grades: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, C and D wherein AAA signifies utmost safety and low risk; whereas grades below BB entail greater degrees of risk and are prone to default. Higher the rating, lower will be the interest rate. Higher the rating, lower will be the interest rate. The deposit term, credit rating and type of company are determinants of the interest rate on these deposits. The deposit term, credit rating and type of company are determinants of the interest rate on these deposits.

Company Deposits Risk: Risk: Though these deposits offer higher returns as compared to bank deposits, they are unsecured in nature. In case of a default on the part of the company, the deposit holder has no way of recovering his money back. The only recourse available is to approach the requisite grievance redressal agencies.

Company Deposits Liquidity: Liquidity: Most companies do not permit premature withdrawal from these deposits and hence these instruments are highly illiquid. However, some banks extend loan facilities against these deposits.

Company Deposits Tax implications: Tax implications: Income earned on company deposits attract tax at personal income tax rate applicable to you.

RBI Bonds RBI Relief Bonds are issued by the Reserve Bank of India and are a popular tax-saving tool. RBI Relief Bonds are issued by the Reserve Bank of India and are a popular tax-saving tool. These bonds are currently available under two options – an 8 per cent bond which is taxable and a 6.5 per cent tax-free bond. These bonds are currently available under two options – an 8 per cent bond which is taxable and a 6.5 per cent tax-free bond. A number of banks such as the UTI, SBI etc. undertake the distribution of such bonds on behalf of the RBI. A number of banks such as the UTI, SBI etc. undertake the distribution of such bonds on behalf of the RBI.

RBI Bonds Investment tenure: Investment tenure: Maturity period of the 8 per cent RBI Bond is 6 years and for the 6.5 per cent RBI Bond is 5 years Returns: Returns: As the name suggests, the 8 per cent RBI Bonds carry an 8 per cent per annum rate of interest and the 6.5 percent bonds provide a 6.5 per cent annual interest rate. Interest on such bonds is compounded half-yearly. Risk: Risk: RBI is the central governing bank of our country and therefore these bonds carry zero risk since they are issued by the government.

RBI Bonds Liquidity: Liquidity: The 8 per cent bonds cannot be encashed prior to their maturity.The 8 per cent bonds cannot be encashed prior to their maturity. However, the 6.5 percent tax-free savings bond can be redeemed after a minimum lock-in period of 3 years from the date of issue.However, the 6.5 percent tax-free savings bond can be redeemed after a minimum lock-in period of 3 years from the date of issue. Also, these are non-tradable securities and therefore cannot be sold on the debt market.Also, these are non-tradable securities and therefore cannot be sold on the debt market. Tax implications: Tax implications: For the 6.5 per cent bond, interest received is completely exempt from income tax. But, for the 8 percent RBI relief bond, interest is taxable according to the personal income tax rate applicable to you.

Small saving schemes The Post Office Savings Schemes (POSS) are a popular savings destination as they offer guaranteed returns and are risk-free as they are backed by the government. The Post Office Savings Schemes (POSS) are a popular savings destination as they offer guaranteed returns and are risk-free as they are backed by the government.

Name of the Sche me Tenure Rate of Return per annum Liquidity*Tax applicable National Saving Certificates 6 years8.16%Low Benefits of Section 80 C applicable. Kisan Vikas Patras8 years 7 months8.40%Low Returns added to your income and taxed accordingly. Post Office Time1 Year6.25% toLow Returns Deposit 2 years, 3 years or 5 years 7.5% depending on the duration of the deposit Returns added to your income and taxed accordingly. Post Office Recurring Deposit 5 Year7.45%Low Returns added to your income and taxed accordingly. Post Office Monthly Income Plan 6 Year8%Low Returns added to your income and taxed accordingly.

Mutual Fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. A 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 manager in different types of securities depending upon the objective of the scheme. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. These could range from shares to debentures to money market instruments.

The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them.

Mutual Fund Process

Mutual Funds More specifically, NAV = (Market value of the fund's investments + Current assets + Accrued income) - Current Liabilities - Accrued Expenses / (Total Number of units outstanding) More specifically, NAV = (Market value of the fund's investments + Current assets + Accrued income) - Current Liabilities - Accrued Expenses / (Total Number of units outstanding) Investors who wish to purchase or sell units of a mutual fund after the scheme is fully functional must do so at a price that is linked to the NAV. Investors who wish to purchase or sell units of a mutual fund after the scheme is fully functional must do so at a price that is linked to the NAV.

Mutual Funds FORMATION OF A MUTUAL FUND: FORMATION OF A MUTUAL FUND: The domestic mutual fund industry is governed by the Securities and Exchange Board of India, Mutual Fund regulations and the Indian Trusts Act, A mutual fund is constituted as a public trust created under the Indian Trusts Act, 1882 and has a three tier structure, in order to prevent potential conflicts of interest. A mutual fund is constituted as a public trust created under the Indian Trusts Act, 1882 and has a three tier structure, in order to prevent potential conflicts of interest. The three main entities are the Sponsor, the Board of Trustees and the Asset Management Company (AMC). The three main entities are the Sponsor, the Board of Trustees and the Asset Management Company (AMC).

The Sponsor The Sponsor The sponsor of a mutual fund is the promoter who establishes a mutual fund and gets it registered with SEBI. The sponsor also forms a trust and appoints a Board of Trustees to ensure that the mutual fund adheres to all the rules and regulation framed by the regulator.

Mutual Funds The Trustees The Trustees The Board of Trustees is responsible for protecting investors interests and ensuring that the fund operates within the regulatory framework. The trustees appoint bankers, custodians and depositories, transfer agents and lastly, and most importantly, the AMC (if authorized by the Trust Deed) that plays a very critical role when it comes to achieving the objectives of the mutual fund. The trustees appoint bankers, custodians and depositories, transfer agents and lastly, and most importantly, the AMC (if authorized by the Trust Deed) that plays a very critical role when it comes to achieving the objectives of the mutual fund. The trustees are responsible for ensuirng that the AMC has proper systems and procedures in place and has appointed key personnel including Fund Managers and Compliance Officer. The trustees are responsible for ensuirng that the AMC has proper systems and procedures in place and has appointed key personnel including Fund Managers and Compliance Officer.

The AMC The AMC Under the broad supervision and direction of the trustees the Asset Management Company (AMC) acts as the investment manager of the trust. The AMC charges a fee for the services that it renders. The trustees delegate the task of floating schemes and managing corpuses to AMCs, who are investment experts.

MUTUAL FUND PROCESS

ADVANTAGES OF MUTUAL FUNDS Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Category : Equity - Tax Planning Scheme NameAssets Size 3 Mnths1 Yr Rs. CroreDateRtn. (%) Magnum Tax Gain Scheme (D)2406.7Aug Magnum Tax Gain Scheme (G)2406.7Aug Reliance Tax Saver (ELSS) Fund - (G)1858.4Aug HDFC Tax Saver Fund (G) Aug Fidelity Tax Advantage Fund (G)907.86Jul HDFC Long Term Advantage Fund (G)780.76Aug ICICI Pru Tax Plan - (G)708.97Aug Franklin India Taxshield - (G)469.18Aug Birla Sun Life Tax Relief ' Aug UTI-Equity Tax Savings Plan (G)333.7Aug Kotak ELSS (G)281.43Aug Sundaram BNP Paribas Tax Saver (G)234.89Aug HSBC Tax Saver Equity Fund (G)219.28Aug Principal Tax Saving Fund218.15Aug DSP ML Tax Saver Fund (G)174.53Aug ABN AMRO Tax Advantage Plan (ELSS) (G)167.68Aug Tata Tax Saving Fund149.85Aug Birla Equity Plan (G)139.45Aug Principal Personal Tax saver Fund - (G)76.53Aug Lotus India Tax Plan (G)57.82Aug

ATTRIBUTES BANK DEPOSITS SHARESBONDS AND DEBENTURES MUTUAL FUNDSINSUREN CE PROVIDENT FUND POST OFFICE SAVINGS REAL ESTATE RATE OF RETURN LOWHIGHMODERATE LOW HIGH RISKLOWHIGH MODERATELOWNIL HIGH SAFETYHIGHLOW HIGH MODERA TE MARKETABILIT Y NILHIGH MODERATENIL HIGH TAX SHELTERLOWNIL SIGNIFICAN T HIGH NIL LIQUIDITYHIGH MODERATE HIGHMODERA TE CONVINIENCEHIGHLOW MODERATEHIGH LOW

Company Name (3yr )OpenCloseChange% Returns A B B B H E L Bharti Airtel Larsen & Toubro Sterlite Inds Siemens Reliance Inds ACC S A I L H D F C St Bk of India HDFC Bank ICICI Bank M & M Ambuja Cem Grasim Inds Tata Power Co Tata Steel Maruti Suzuki V S N L

TAX BENEFITS AND IMPLICATIONS OF INVESTING IN MUTUAL FUNDS The dividend distributed by both debt funds and equity funds is tax-free in your hands. The dividend distributed by both debt funds and equity funds is tax-free in your hands. In case of equity funds, no dividend distribution tax is payable by the mutual fund. In case of equity funds, no dividend distribution tax is payable by the mutual fund. However, in the case of debt funds, the mutual fund has to pay a Dividend Distribution Tax (DDT) of per cent (12.5 per cent tax + 2 per cent education cess + 10 per cent surcharge) on the amount of dividend distributed to individuals. However, in the case of debt funds, the mutual fund has to pay a Dividend Distribution Tax (DDT) of per cent (12.5 per cent tax + 2 per cent education cess + 10 per cent surcharge) on the amount of dividend distributed to individuals.

Direct Equity Why Equities? Why Equities? Investing Risks involved Investing Risks involved Valuation approaches for picking stocks Valuation approaches for picking stocks Top-down and bottom-up approaches The P/E yardstick Discounted cash flow (DCF) analysis Economic value added (EVA)-based investing Top-down and bottom-up approaches The P/E yardstick Discounted cash flow (DCF) analysis Economic value added (EVA)-based investing Why monitor and review your direct equity investments? Why monitor and review your direct equity investments? Monitoring methodologies that can be adopted… Monitoring methodologies that can be adopted…

Why Equities? To earn higher returns To earn higher returns