1 RES EA RC H METH OD OL OGY

OBJECTIVE OF THE STUDY:

To know the investment option available in the india and also the

return and risk associate with it.

To analyze the pattern of investment objectives.

To identify the factors influencing in the individual investment

decisions.

To study the consumer preference for the investment scheme

selection.

To analyse the factor this should be affect in selection of

investment plans and evaluate suitable alternative available for

solving through other investment options.

To knowledge of the Valsad city investors, how many are

interested in investment and what is the investment portfolio of the

investors?

To comparative study of the equity, debt and hybrid sector

investment.

Research design: -

For study of factor influencing the investment decision making of investors, a

primary survey was undertaken so as to know as to which factor should be

affect while selecting the investment option for financial requirement, how

much knowledge do they have about investment schemes. For this purpose,

a questionnaire was designed and analyzed on the basis of the responses

given by the investors of Valsad. Further, to complete the other objectives

data was provided by Marwadi group in form of personal portfolios of various

investors of Valsad and their potential customer.

1

Data Collection: -

For the purpose of the research, data has been collected from following two

ways:

Primary data: - for studying perceptions of financial investors, a primary

survey was undertaken so as to know as to which factor should be affect

while selecting the investment option for financial requirement, how much

knowledge do they have about investment schemes. For the purpose, a

questionnaire was designed and analyzed on the basis of the responses

given by about 100 potential investors of Valsad. A detailed discussion about

the primary research done and data collected has been under the heading

“STUDY OF FACTOR INFLUENCING THE INVESTMENT DECISION

MAKING OF INVESTORS”.

Secondary data: - The secondary data was collected from the various

books, magazines, investment plan brochure and various financial

investment websites. The secondary data was collected to know the

theoretical aspect of the investment options and also for the performance

evaluation of return and risk associate with the investment options.

Sampling frame: -

Universe: all the citizens in the city of Valsad of Valsad District.

Population: all the 10,000 (approx) citizens of Valsad city of Valsad district

interested in planning for financial requirements.

Sampling unit: citizen of Valsad city

Types of sampling: Non – random convenience sampling.

Sample size: 100

2

Scope of the study: -

Investment is the sources of savings. Now a day’s, the investment

proportion will be increase in the financial market. The primary objective

of the project is to gain detailed insight into the investment industry.

I have tried to systematically and objectively look into all – important

aspects. A combination of primary and secondary data has been used.

The former, through limited, has helped us give first hand information on

company and investor sentiments. The latter has been used to

understand the theoretical aspects.

Strategic importance has been given to both current and past trends and

we have tried to correlate both in a manner to gain maximum insight.

This document has been designed to serve a two-fold purpose. The first,

which is also the main objective of the project, is to reflect our

understanding of this industry. The second is to provide the reader similar

detailed knowledge.

The prime objective of the research was to determine the perception of

the Indian investor towards mutual funds and this is demonstrated in the

later part of this report.

3

Limitations of the study: -

The study focuses only on the investors associated with the Valsad

city.

In the survey may people not responding proper manner.

The data is collected which sample size is limited only 100 samples.

The Valsad city survey data has been not represent the whole country

or metro – city.

Most of the data about the companies and investment options are

collected from the concerned company’s website or directly through

the concerned companies, which can be manipulated or exaggerated

by the company.

4

2 INDU STR Y PR OF IL E

Broking industry: -Introduction

Stock markets refer to a market place where investors can buy and sell

stocks. The price at which each buying and selling transaction takes is

determined by the market forces (i.e. demand and supply for a particular

stock).

Let us take an example for a better understanding of how market forces

determine stock prices. ABC Co. Ltd. enjoys high investor confidence and

there is an anticipation of an upward movement in its stock price. More and

more people would want to buy this stock (i.e. high demand) and very few

people will want to sell this stock at current market price (i.e. less supply).

Therefore, buyers will have to bid a higher price for this stock to match the

ask price from the seller which will increase the stock price of ABC Co. Ltd.

On the contrary, if there are more sellers than buyers (i.e. high supply and

low demand) for the stock of ABC Co. Ltd. in the market, its price will fall

down.

History of the Indian Stock Market - The Origin

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200

years old history.

18th

Century

East India Company was the dominant institution and by end of the

century, business in its loan securities gained full momentum

1830's Business on corporate stocks and shares in Bank and Cotton

presses started in Bombay. Trading list by the end of 1839 got

broader

1840's Recognition from banks and merchants to about half a dozen

brokers

1850's Rapid development of commercial enterprise saw brokerage

business attracting more people into the business

1860's The number of brokers increased to 60

5

1860-61 The American Civil War broke out which caused a stoppage of

cotton supply from United States of America; marking the beginning

of the "Share Mania" in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as

an example, Bank of Bombay Share which had touched Rs. 2850

could only be sold at Rs. 87)

Pre-Independence Scenario - Establishment of Different Stock Exchanges

1874 With the rapidly developing share trading business, brokers used to

gather at a street (now well known as "Dalal Street") for the purpose

of transacting business.

1875 "The Native Share and Stock Brokers' Association" (also known as

"The Bombay Stock Exchange") was established in Bombay

1880's Development of cotton mills industry and set up of many others

1894 Establishment of "The Ahmedabad Share and Stock Brokers'

Association"

1880 - 90's Sharp increase in share prices of jute industries in 1870's was

followed by a boom in tea stocks and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock

Exchange" was transacted with 100 brokers.

1923 When recession followed, number of brokers came down to 3 and

the Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock

Exchange

1937 Re-organization and set up of the Madras Stock Exchange Limited

(Pvt.) Limited led by improvement in stock market activities in South

India with establishment of new textile mills and plantation

companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange

Limited was established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

6

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi

Stocks and Shares Exchange Limited" were established and later on

merged into "The Delhi Stock Exchange Association Limited"

Post Independence Scenario:

The depression witnessed after the Independence led to closure of a lot of

exchanges in the country. Lahore E-stock Exchange was closed down after the

partition of India, and later on merged with the Delhi Stock Exchange. Bangalore

Stock Exchange Limited was registered in 1957 and got recognition only by

1963. Most of the other Exchanges were in a miserable state till 1957 when they

applied for recognition under Securities Contracts (Regulations) Act, 1956. The

Exchanges that were recognized under the Act were:

1. Bombay

2. Calcutta

3. Madras

4. Ahmedabad

5. Delhi

6. Hyderabad

7. Bangalore

8. Indore

Many more stock exchanges were established during 1980's, namely:

1. Cochin Stock Exchange (1980)

2. Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)

3. Pune Stock Exchange Limited (1982)

4. Ludhiana Stock Exchange Association Limited (1983)

5. Gauhati Stock Exchange Limited (1984)

6. Kanara Stock Exchange Limited (at Mangalore, 1985)

7. Magadh Stock Exchange Association (at Patna, 1986)

8. Jaipur Stock Exchange Limited (1989)

9. Bhubaneswar Stock Exchange Association Limited (1989)

10. Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)

11. Vadodara Stock Exchange Limited (at Baroda, 1990)

7

12. Coimbatore Stock Exchange

13. Meerut Stock Exchange

Mutual fund industry: -

Current scenario of MF industry

The Indian Mutual fund industry has witnessed considerable growth since its

inception in 1963. The assets under management (AUM) have surged to Rs

4,173 billion in Mar-09 from just Rs 250 million in Mar-65. In a span of 10 years

(from 1999 to 2009), the industry has registered a CAGR of 22.3%, albeit

encompassing some shortfalls in AUM due to business cycles.

The impressive growth in the Indian Mutual fund industry in recent years can

largely be attributed to various factors such as rising household savings,

comprehensive regulatory framework, favourable tax policies, and introduction of

several new products, investor education campaign and role of distributors.

In the last few years, household’s income levels have grown significantly, leading

to commensurate increase in household’s savings. Household financial savings

(at current prices) registered growth rate of around 17.4% on an average during

the period FY04-FY08 as against 11.8% on an average during the period FY99-

FY03. The considerable rise in household’s financial savings, point towards the

huge market potential of the Mutual fund industry in India.

Besides, SEBI has introduced various regulatory measures in order to protect

the interest of small investors that augurs well for the long term growth of the

industry. The tax benefits allowed on mutual fund schemes (for example

investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax

deductions under section 80C of the Income Tax Act) also have helped mutual

funds to evolve as the preferred form of investment among the salaried income

earners.

Besides, the Indian Mutual fund industry that started with traditional products like

equity fund, debt fund and balanced fund has significantly expanded its product

portfolio. Today, the industry has introduced an array of products such as

8

liquid/money market funds, sector-specific funds, index funds, gilt funds, capital

protection oriented schemes, special category funds, insurance linked funds,

exchange traded funds, etc. It also has introduced Gold ETF fund in 2007 with

an aim to allow mutual funds to invest in gold or gold related instruments.

Further, the industry has launched special schemes to invest in foreign

securities. The wide variety of schemes offered by the Indian Mutual fund

industry provides multiple options of investment to common man.

With a strong growth in the AUM of domestic Mutual fund industry, the ratio of

AUM to GDP increased gradually from 4.7% in 2001 to 8.5% in 2009. The share

of mutual funds in households’ financial savings also witnessed a substantial

increase to 7.7% in 2008 as against 1.3% in 2001.

9

Banking industry: -

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it

should be able to meet new challenges posed by the technology and any other

external and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking

system has reached even to the remote corners of the country. This is one of the

main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich

dividends with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone

are days when the most efficient bank transferred money from one branch to

other in two days. Now it is simple as instant messaging or dials a pizza. Money

has become the order of the day.

10

The first bank in India, though conservative, was established in 1786. From 1786

till today, the journey of Indian Banking System can be segregated into three

distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase

II and Phase III.

Phase I:

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of

Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as

independent units and called it Presidency Banks. These three banks were

amalgamated in 1920 and Imperial Bank of India was established which started

as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,

Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,

Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of

India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100

banks, mostly small. To streamline the functioning and activities of commercial

banks, the Government of India came up with The Banking Companies Act,

1949 which was later changed to Banking Regulation Act 1949 as per amending

Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with

extensive powers for the supervision of banking in india as the Central Banking

11

Authority.

During those day’s public has lesser confidence in the banks. As an aftermath

deposit mobilization was slow. Abreast of it the savings bank facility provided by

the Postal department was comparatively safer. Moreover, funds were largely

given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive

banking facilities on a large scale specially in rural and semi-urban areas. It

formed State Bank of India to act as the principal agent of RBI and to handle

banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960

on 19th July, 1969, major process of nationalization was carried out. It was the

effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major

commercial banks in the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out

in 1980 with seven more banks. This step brought 80% of the banking segment

in India under Government ownership.

The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country:

1949 Enactment of Banking Regulation Act.

1955 Nationalization of State Bank of India.

1959 Nationalization of SBI subsidiaries.

1961 Insurance cover extended to deposits.

1969 Nationalization of 14 major banks.

1971 Creation of credit guarantee corporation.

1975 Creation of regional rural banks.

12

1980 Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank

India rose to approximately 800% in deposits and advances took a huge

jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit

faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking

sector in its reforms measure. In 1991, under the chairmanship of M

Narasimham, a committee was set up by his name which worked for the

liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are

being put to give a satisfactory service to customers. Phone banking and net

banking is introduced. The entire system became more convenient and swift.

Time is given more importance than money.

13

3 C OMPAN Y PR OF IL E

"Marwadi is a Gujarat based financial service group dealing in equities /

commodities broking and portfolio management services. In the last 17 years we

have grown into a network of more than 73 branches with a 1000+ committed

professional people and 750+ channel partners across India. We've kept the

faith of over 3.10 +lakhs investors and it's growing. After establishing supremacy

in Gujarat, we now expanding nationwide and to fuel our growth plans raised

capital from UK-based investment companies."

Our values VISION & MISSION:

"To be a world-class financial services provider by arranging all conceivable

financial services under one-roof at affordable costs through cost effective

delivery systems, and achieve organic growth in business by adding newer lines

of business."

Our Core Competency: -

Building Business Partnerships:

we believe in building long-term relationships. Lasting association is directly

proportional to client satisfaction rate. We listen, we lead and we communicate

with honesty and integrity.

Broad Reach:

We have an extended web of experts from various domains like law, marketing,

economics which we draw upon from time-to-time, in order to effectively meet

the specific requirements of clients' assignments.

Our broad and varied clientele spans several industries:

Some of them are in the Fortune 500 list. Our rich experience, in diversified

industries, helps us offer our clients practical solutions for their specific business

needs.

Organized Approach:

The working of the entire firm is webbed through efficient communication,

14

documentation, written systems and procedures along with a yearly calendar of

meetings and training schedules.

History of Marwadi group: -

Marwadi Group was incorporated in 1992 with the vision of providing superior

standards of Financial Services focusing on professionalism, speed and ethics to

a wider Corporate Services in India and proposed to start its operations in the

subcontinent & overseas. The foundation is on "Value" Systems - "Value"

addition to Corporate, Retails and HNI Individuals through superior Wealth

Creation Practices. All actions are based on stringent "Values" - integrity,

confidentiality & commitment. "True Value" for money through a holistic business

practice. Finally, "Value" for client satisfaction, predominates our relationship

criteria.

"The company is 5th Leading retail broking house.*(D&B “India’s Leading equity

Broking Houses 2008” Report). Ranked amongst top 10 performers in BSE in

the equity segments during the year 2007-08. In 17 years, the company has

emerged as one of India’s fastest growing retail broking houses with retail

market share at 2.73%. The company has 73 branches and over 750+ channel

partners operating over 7000+ trading terminals spread across 184 cities and

servicing more than 3000+ pin codes in India.

The company is having a new state of the art with world class infrastructure

corporate office of 90,000 square feet located in the prime location of the Rajkot,

Gujarat.

The company is rated at P2+ and BBB+/stable by Crisil ratings for the bank

facilities for 200 crores. The company has 1000+ employees strength is very

talented, young and dynamic to take on any challenges in future."

The company crossed the following milestones to reach its present position as

the leading retail broking house in India.

1992 Marwadi Shares And Finance Pvt. Ltd. was incorporated by first

generation Entrepreneurs Shri Ketan Marwadi, Shri Deven Marwadi and Shri

Sandeep Marwadi.

1996 Became a corporate member of National Stock Exchange of India - (NSE)

15

1998 Became a member of Saurashtra Kutch Stock Exchange (SKSE)

1999 Launched Depository services of Depository Participant under National

Depository Security Ltd. (NSDL)

2000 Commenced Derivative Trading after obtaining registration as Clearing

and Trading Member in NSE.

2003 Marwadi commodity broker pvt ltd became a corporate member of the

National Commodity and Derivatives Exchange of India Ltd. (NCDEX)

2003 Marwadi Commodity broker pvt ltd became a corporate member of The

Multi Commodity Exchange of India Ltd. (MCX)

2004 Became a corporate member of Bombay Stock Exchange Ltd. (BSE)

2004 Launched Depository Services of Depository Participant under Central

Depository Services (India) Ltd.

2005 Launched Portfolio Management Services

2006 MSFPL converted to Limited co. (Marwadi Shares And Finance Limited)

The Company raised private equity from ICGU Limited, a wholly owned

subsidiary of India Capital Growth Fund.

2007 Attracted Private Equity Investment from Reputed Investors Caledonia &

ICGI

2008 Adjudged the 5th Largest Broking House by Dun & Bradstreet

2009 Growing Institutional Business

2009 Moves in to 90000 Square Feet State of Art Infrastructure

At Marwadi Group we consider your reputation, confidentiality and our esteemed

status of paramount importance. This is why we design and deliver our services

on a foundation of best-in-class compliance procedures and established

internationally recognized jurisdictional regulation.

Founded on the belief that fiduciary services are not simply a product, but rather

a unique opportunity to work with our clients and build long-term relationships,

we, the companies which collectively form the MARWADI GROUP of

Companies, understand the qualities our clients are looking for in their fiduciary

service provider. And it is on our commitment to those qualities that our business

now stands. Marwadi Group is a forward looking company and encourages

associations with efficacious people. Accordingly, it invites entrepreneurs who

16

have a positive approach and attitude to culminate success. Marwadi Group

offers you a gamut of products, services and support to help you meet client

needs, shape a more profitable business and execute your goals.

This is what a business needs to be successful! At Marwadi Group, your success

matters. When you team with Marwadi Group, you team with the best - the best

offerings, the best skills and knowledge to help you win, and the best partners to

help you with full range of skills, expertise, applications and services required to

manage their funds.

But the best loses its significance if it doesn’t comply with your values -

innovation that matters; client success; trust and personal responsibility. These

are the core values that drive Marwadi Group - and the values we share with

Marwadi Group stake holders.

Marwadi Group focuses on customer orientation aiming and maintaining returns

to our various stakeholders. Our Range of Products and Services offering

Includes:

Trading in Equities, Commodities & Currency Derivatives Trading with Marwadi

Group truly empowers you for your investment needs. Provide hassle free and

broking parentage of Trading and Services of Equity, Commodity and Currency

Derivatives through Participation in the domestic exchanges like NSE, BSE,

MCX, NCDEX, NMCE, MCX-SX, NSE-FX, BSE- CDS, and NATIONAL SPOT

EXCHANGES ETC…. We ensure you have a superlative trading experience

through - A highly process driven, diligent approach Powerful Research &

Analytics and One of the "best-in-class" dealing rooms.

17

Product & Services:

Equities & Derivatives

Commodity

Internet Trading

Depository Participant

IPO

Mutual Funds

PMS

Research Insurance

New Pension Scheme

Client Attention

18

REGISTERED & CORPORATE OFFICE Marwadi Financial Plaza,

Nana Mava Main Road,

Off 150 Feet Ring Road,

Rajkot-360005,

Gujarat(India)

Ph: 0281-3011000,2332001

Email:

bu s i ness . h e l pdes k @mar w a d i o n li n e . ne t ,

p i y ush . mar w a d i @ma r w ad i on l i ne . net

Valsad Branch:

Marwadi shares and Finance Limited

209/210, royal corner, 2nd floor,

Opp. Doctor House, halar road, Valsad – 396 001

(Gujarat) India.

Phone: 02632 – 222079

E-mail: gj.valsad . m a i n@ma r w ad i on l i ne . net

19

20

4 F A CT O R I NF L UNC I N G TH E I N V EST M E T D E C I S IO N

MAK IN G OF INV EST OR S

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.

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.

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.

21

Investment 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 investments 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 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.

Investment in Terms of Finance:

In finance, investment refers to the purchasing of securities or other financial

assets from the capital market. It also means buying money market or real

properties with high market liquidity. Some examples are gold, silver, real

properties, and precious items.

Financial investments are in stocks, bonds, and other types of security

investments. Indirect financial investments can also be done with the help of

mediators or third parties, such as pension funds, mutual funds, commercial

banks, and insurance companies.

Person al Finan ce:

According to personal finance theories, an investment is the implementation of

money for buying shares, mutual funds or assets with capital risk.

22

Personal finance and the steps involved

Financial planning is a key component of personal finance which is a dynamic

process and requires regular monitoring, reviewing and reevaluation. It normally

has five steps:

1. Assessment:

A person's financial situation can be assessed through the financial balance

sheets and income statements. A personal balance sheet lists down the

values of all the personal assets such as stocks, car, house, clothes, or bank

account along with the personal liabilities like mortgage, credit card debt, and

bank loan. The personal income statement lists personal income as well as

expenses.

2. Setting goals:

One can have several financial goals. These can be short term e.g. buying a

house in a few months and some long term goals like planning for children's

education and marriage or even planning for one's retirement. Setting

financial goals helps a great deal in direct financial planning process.

3. Formulating a plan:

Once the goals have been listed, the next step is to create a financial plan

which details how to accomplish these goals. It may include, for example,

increasing one's income, curtailing unnecessary expenses, or may be

investing in the stock market.

4. Execution:

The next step is execution of one's personal financial plan that needs

discipline and perseverance. For this purpose, lots of people rely on the

assistance from professionals like financial planners, investment advisers,

accountants, and lawyers.

23

5. Monitoring & reassessment:

Over a period of time, it is necessary to monitor one's personal financial plan

for possible adjustments and/or reassessments.

Key areas of Personal Finance Planning

The 6 key areas of personal financial planning, as recommended by the

Financial Planning Standards Board, are as follows:

1. Financial Position:

It is concerned with understanding the available personal resources by

investigating net worth and the household cash flow. Net worth is nothing but

a person's balance sheet that is calculated by adding together all assets of a

person, and subtracting all liabilities of the household, at one point in time.

The household cash flow adds up all the expected income sources within a

year, minus all the expected expenses within the same year. Through this

analysis, a financial planner can determine the degree and time required to

accomplish the personal goals.

2. Adequate Protection:

This analysis is done in order to understand how to protect a household from

all unforeseen risks. These risks include liability, death, property, disability,

health as well as long term care. Some risks may be self-insurable, while

others may require the acquisition of an insurance contract. As insurance

enjoys some tax benefits, investing in insurance may be an important area of

the overall investment planning.

3. Tax Planning:

Income tax is generally the single largest expense of a household. Managing

taxes when and how much tax should an individual pay. Government

provides many incentives in the form of tax deductions & credits that can be

used to reduce the lifetime tax burden. Most of the modern governments use

24

a progressive tax; meaning that as income grows, you need to pay a greater

marginal rate of tax. Tax planning if understood and planned properly can

make a significant impact upon your success in the financial planning

process.

4. Investment and Accumulation Goals:

Some of the main reasons to accumulate assets is for purchasing a house,

buying a car, starting a business, paying for education expenses,

accumulating money for retirement, to create a stream of income in order to

cover one’s lifestyle expenses. A major risk to the household in achieving

these accumulation goals is the rate of price increase over time, or inflation.

In order to deal with the inflation, one needs to have a financial planner who

can manage the portfolio taking into consideration the net present value and

proper asset allocation, so as to diversify the investment risk and generate

maximum returns over a period of time.

5. Retirement Planning:

Retirement planning is the process of allocation of finances for retirement while

understanding how much it will cost to live at retirement. This generally means

setting aside of money and/or other assets in order to obtain a steady income at

retirement. The objective of retirement planning is to achieve financial

independence and arriving at a plan to distribute assets so as to meet any

shortfall in income.

6. Estate Planning:

Estate planning is a process by which an individual makes arrangement for

the transfer of assets to legal heirs incase of death or disability of the

individual. This includes the distribution of real as well as personal property of

an individual to the legal heirs. Protecting the needs of loved ones during

lifetime and even after death can be achieved through estate planning by

distribution of assets among the beneficiaries.

25

Factors Involved in Investment Decision: -

The motive behind our investments is to make money and increase our

monetary wealth. With so many factors involved, investment decision is a

complex one. Small investors often go with their gut feelings when trying to

choose among numerous alternatives to invest. Big investors use various

analyzing techniques. Globalization and the growth of internet have introduced

many new opportunities and threats to ponder upon. When investing, you are

committing your assets for some time that is why you need to cover all aspects

before making an investment decision.

Expected Return:

The most basic investment decisions revolve around the comparison of expected

return and risk involved. No investor will take on higher risk if there is no chance

of equally higher returns. Investors strive to reach on the best trade-off point

between risk and return which go well with their financial requirements. These

expected returns are not always equal to what an investor actually gets after

some time. The possibility that actual return will not be the same what they

expect is called risk.

Risk Factor:

There is hardly some form of investment which doesn't involve risk. Government

securities come close to be called risk free; but even they have some risks

attached to them. Risk actually is the balancing factor of the financial markets.

Various types of investment risk exist, such as financial risk, currency risk,

inflation risk or capital risk are the most common one. Different investors react

differently to these risks. While majority of the investors are risk averse, there are

some investors who are seeking more risky ones with expectations of higher

yields.

Investor's Hunch:

Every investor will finish off with a different conclusion although the market,

economy and all statistical facts and figures are same for everyone. This

26

difference comes from the investor's intuition. Some will start from research; by

collecting lots of information and then analyzing to decide, others start from

defining their objectives and then going for opportunities that suit their needs.

Globalization Factor:

Investors have slowly started to realize the advantages of international

investments. Some emerging markets present better returns while other stable

markets provide lesser risks. Investors have often conquered risk by

diversification, and an international market provides more opportunities to

achieve portfolio diversification as compared to a local market. Ignoring global

markets for investment is turning your back on a whole new world of

opportunities.

Sources of financial investments: -

1. Mutual funds

2. Fixed deposit

3. Insurance (ULIPs)

4. Post office saving

5. PPF

Choosing the Right Investment Options:-

27

4.1 MU TUA L F UN D

4.1.1 INTRODUCTION:

Mutual Funds over the years have gained immensely in their popularity Apart

from the many advantages that investing in mutual funds provide like diversification,

professional management, the ease of investment process has proved to be a major

enabling factor. However, with the introduction of innovative products, the world of

mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse

options, investors needs to choose a mutual fund that meets his risk acceptance and his

risk capacity levels and has similar investment objectives as the investor.

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 then invested in capital

market instruments such as shares, debentures and other securities. The income

earned through these investments and the capital appreciation realized is shared by its

unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is

the most suitable investment for the common man as it offers an opportunity to invest in

a diversified, professionally managed basket of securities at a relatively low cost. The

flow chart below describes broadly the working of a mutual fund:

Definition- 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 then invested in capital

28

market instruments such as shares, debentures and other securities. The income

earned through these investments and the

Capital appreciation realized is shared by its unit holders in proportion to the number of

units owned by them. Thus a Mutual Fund is the most suitable investment for the

common man as it offers an opportunity to invest in a diversified, professionally

managed basket of securities at a relatively low cost. The flow chart below describes

broadly the working of a mutual fund:

4.1.2 Type of

Mutual Fund

In the investment market, one can find a variety of investors with different needs,

objective and risk taking capacities. The types of mutual fund as follow:

On the Basis of Execution and Operation

Close Ended Funds

Open Ended Funds

On the Basis of Yield and Investment Pattern

Income Fund

Growth Fund

Balance Fund

Specialized Mutual Fund

Money Market

Taxation Fund

(A) Close-ended Funds

Under this scheme, the corpus of the fund and its, duration are prefixed. In other words,

the corpus of the fund and the number of units are determined in advance. Once the

subscription reaches the pre-determined level, the entry of investors is closed. After the

expiry of the fixed period, the entire corpus is disinvested and the proceeds are

distributed to the various unit holders in proportion to their holding. Thus, the fund

29

ceases to be a fund, after the final distribution. Features: The main features of the close-

ended funds are:

(i) The period and/or the target amount of the fund are definite and fixed

beforehand.

(ii) Once the period is over and/or the target is reached, the door is closed

for the investors. They cannot purchase any more units.

(iii) These units are publicly traded through stock exchange and generally,

there is no repurchase facility by the fund.

(iv) The main objective of this fund is capital appreciation.

(v) If the market condition is not favorable, it may also affect the investor

since he may not get the full benefit of capital appreciation in the value of the

investment.

(vi) Generally, the prices of closed-end scheme units are quoted at a

discount of up to 40 per cent below their Net Asset Value (NAV).

(B) Open-ended Funds: -

It is just the opposite of close-ended funds. Under this scheme, the size of the fund

and/or the period of the fund are not pre-determined. Te investors are free to buy and

sell any number of units at any point of time. For instance, the unit scheme (1964) of the

Unit Trust of India is an open ended one, both in terms of period and target amount.

Anybody can buy this unit at any time and sell it also at any time at his discretion. The

Main Features of the Open-Ended Funds are:

(i) There is complete flexibility with regard to one’s investment or disinvestment.

In other words, there is free entry and exit of investors in an open-ended fund.

There is no time limit. The investor can join in and come out from the Fund as

and when he desires.

(ii) These units are not publicly traded but, the Fund is ready to repurchase

them and resell them at any time.

(iii) The investor is offered instant liquidity in the sense that the units can be sold

on any working day to the Fund. In fact, the Fund operates just like & bank

account wherein one can get cash across the counter for any number of units

sold.

(iv) The main objective of this fund is income generation.

30

On the Basis of Income: -

(A) Income Funds:

As the very name suggests, this Fund aims at generating and distributing regular

income to the members on a periodical basis. It concentrates more on the distribution of

regular income and it also sees that the average return is higher than that of the income

from bank deposits. The main features of the Income Funds are:

(i) The investor is assured of regular income at periodic intervals, say half-

yearly or yearly and so on.

(ii) The main objective of this type of Fund is to declare regular dividends and

not capital appreciation.

(iii) The pattern of investment is oriented towards high and fixed income yielding

securities like debentures, bonds etc.

(iv) It concerns itself with short run gains only.

(B) Pure Growth Funds (Growth Oriented Funds):

Unlike the income funds, Growth Funds concentrate mainly on long run gains i.e.,

capital appreciation. They do not offer regular income and they aim at capital

appreciation in the long run. Hence, they have been described as “Nest Eggs”

investments. The Main features of the Growth Funds are:

(i) The growth oriented Fund aims at meeting the investors’ need for capital

appreciation.

(ii) The investment strategy therefore, conforms to the Fund. Objective by investing the

funds predominantly on equities with high growth potential.

(iii) The Fund tries to get capital appreciation by taking much risks and investing on

risk bearing equities and high growth equity shares.

(v) The fund may declare dividend, but its principal objective is only capita]

appreciation.

(C) Balanced Funds:

This is otherwise called “income-cum-growth” fund. It is nothing but a combination of

both income and growth funds. It aims at distributing regular income as well as capital

31

appreciation. This is achieved by balancing the investments between the high growth

equity shares and also the fixed income earning securities.

(D) Specialized Funds:

Besides the above, a large number of specialized funds are in existence abroad. They

offer special schemes so as to meet the specific needs of specific categories of people

like pensioners, widows etc. There are also funds for investments in securities of

specified areas. For instance, Japan Fund, South Korea fund etc. In fact, these funds

open the door for foreign investors to invest on the domestic securities of these

countries.

(E) Money-Market Mutual Funds (Mommas):

These funds are basically open ended mutual Funds and as such they have all the

features of the Open ended Fund. But, they invest in highly liquid and safe securities

like commercial paper, banker’s acceptances, certificates of deposits, Treasury bills etc.

These instruments are called money market instruments. They take the place of shares,

debentures and bonds in a capital market. They pay money market rates of interest.

These funds are called ‘money funds’ in the U.S.A. and they have been functioning

since 1972. Investors generally use it as a “parking place” stop gap arrangement” for

their cash resources till they finally decide about the proper avenue for their investment

i.e., long term financial assets like bonds and stocks.

(F) Taxation Funds:

A taxation fund is basically a growth oriented fund. But, it offers tax rebates to the

investors either in the domestic or foreign capital market. It is suitable to salaried people

who want enjoy tax rebates particularly during the month of February and March. In

India, at present the law relating to tax rebates is covered under Sec.88 of the Income

Tax Act, 1961. An investor is entitled to get 20% rebate in Income Tax for investments

made under this fund subject to a maximum investment of Rs.10,000/- per annum. The

Tax Saving Magnum of SBI Capital Market Limited is the best example for the domestic

type. UTI’s US $60 million India Fund, based in the USA, an example for the foreign

type.

4.1.3 How to Invest In Mutual Fund?

Step one - Identify your Investment needs: -

Your financial goals will vary, based on your age, lifestyle, financial

32

independence, family commitments, and level of income and expenses

among many other factors. Therefore, the first step is to assess your

needs. You can begin by defining your investment objectives and needs

which could be regular income, buying a home or finance a wedding or

educate your children or a combination of all these needs, the quantum of

risk you are willing to take and your cash flow requirements.

Step Two - Choose the right Mutual Fund: -

The important thing is to choose the right mutual fund scheme which suits

your requirements. The offer document of the scheme tells you its

objectives and provides supplementary details like the track record of

other schemes managed by the same Fund Manager. Some factors to

evaluate before choosing a particular Mutual Fund are the track record of

the performance of the fund over the last few years in relation to the

appropriate yardstick and similar funds in the same category. Other

factors could be the portfolio allocation, the dividend yield and the degree

of transparency as reflected in the frequency and quality of their

communications. For selecting the right scheme as per your specific

requirements.

Step Three - Select the ideal mix of Schemes: -

Investing in just one Mutual Fund scheme may not meet all your

investment needs. You may consider investing in a combination of

schemes to achieve your specific goals.

Step Four - Invest regularly: -

The best approach is to invest a fixed amount at specific intervals, say

every month. By investing a fixed sum each month, you buy fewer units

when the price is higher and more units when the price is low, thus

bringing down your average cost per unit. This is called rupee cost

33

averaging and is a disciplined investment strategy followed by investors

all over the world. You can also avail the systematic investment plan

facility offered by many open end funds.

Step Five- Start early: -

It is desirable to start investing early and stick to a regular investment

plan. If you start now, you will make more than if you wait and invest later.

The power of compounding lets you earn income on income and your

money multiplies at a compounded rate of return.

Step Six - The final step: -

You may reap the rewards in the years to come. Mutual Funds are

suitable for every kind of investor - whether starting a career or retiring,

conservative or risk taking, growth oriented or income seeking.

4.1.4 Advantages of Investing Mutual Funds:

1. Professional Management : -

The basic advantage of funds is that, they are professional managed, by well qualified

professional. Investors purchase funds because they do not have the time or the

expertise to manage their own portfolio. A mutual fund is considered to be relatively less

expensive way to make and monitor their investments. The professional fund managers

34

who supervise fund’s portfolio take desirable decisions viz., what scripts are to be

bought, what investments are to be sold and more appropriate decisions

2. Diversification of Risk: -

Purchasing units in a mutual fund instead of buying individual stocks or bonds, the

investors risk is spread out and minimized up to certain extent. The idea behind

diversification is to invest in a large number of assets so that a loss in any particular

investment is minimized by gains in others.

3. Economies of Scale: -

Mutual fund buy and sell large amounts of securities at a time, thus help to reducing

transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity: -

Just like an individual stock, mutual fund also allows investors to liquidate their holdings

as and when they want. Mutual funds units can either be sold in the share market as

SEBI has made it obligatory for closed-ended schemes to list themselves on stock

exchanges. For open-ended schemes investors can always approach the fund for

repurchase at net asset value (NAV) of the scheme. Such repurchase price and NAV is

advertised in newspaper for the convenience of investors as to timings of such buy and

sell. They have extensive research facilities at their disposal, can spend full time to

investigate and can give the fund a constant supervision.

5. Simplicity: -

Investments in mutual fund are considered to be easy, compare to other available

instruments in the market, and the minimum investment is small. Most AMC also have

automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50

per month basis.

6 Safety of Investments: -

Besides depending on the expert supervision of fund managers, the legislation in a

country (like SEBI in India) also provides for the safety of investments. Mutual funds

have to broadly follow the laid down provisions for their regulations, SEBI acts as a

watchdog and attempts whole heatedly to safeguard investor’s interests.

7 Tax Shelter: -

35

Depending on the scheme of mutual funds, tax shelter is also available. As per the

Union Budget-2003, income earned through dividends from mutual funds is 100% tax-

free at the hands of the investors. Close ended schemes ELSS schemes with a

minimum of 3 years lock in period also provide tax exemption to the investor. Long term

Capital gains are also exempted from tax for equity funds.

8 The concept of Systematic Investment plan and Rupee cost

Averaging: -

Unlike other equity linked product and shares or stocks Mutual funds provide the added

benefit of Systematic Investment plan. Here the money may be invested over a longer

horizon of time in equal installments. Our natural instinct might be to stop investing if the

price starts to drop—but history suggests that the best time to invest may be when you

are getting good value. Rupee-cost averaging can be an effective strategy with funds or

stocks that can have sharp ups and downs, because it gives you more opportunities to

purchase shares less expensively. The benefit of this approach is that, over time, you

may reduce the risk of having bought shares when their cost was highest.

4.1.5 Disadvantages of Investing Mutual Funds:

1. Professional Management: -

Some funds don’t perform as their management is not dynamic enough to explore the

available opportunity in the market, thus many investors debate over whether or not the

so-called professionals are any better than mutual fund or investor himself, for picking

up stocks.

2. Costs: -

The biggest source of AMC income is generally from the entry & exit load which they

charge from investors, at the time of purchase. The mutual fund industries are thus

charging extra cost under layers of jargon.

3. Dilution: -

Because funds have small holdings across different companies, high returns from a few

investments often don't make much difference on the overall return. Dilution is also the

result of a successful fund getting too big. When money pours into funds that have had

strong success, the manager often has trouble finding a good investment for all the new

money.

36

4. Taxes: -

When making decisions, fund managers don't consider investor’s personal tax situation.

For example, when a fund manager sells a security, a capital-gain tax is triggered,

which affects how profitable the individual is from the sale. It might have been more

advantageous for the individual to defer the capital gains liability.

37

4.2 F IXE D DEP OS IT

4.2.1 Definition: -

Depository institution (such as a bank, credit union, or a finance or insurance

company) account that pays higher than savings account interest rates but

imposes conditions on the amount, frequency, and/or period of

withdrawals. A certificate of deposit (CD) is normally issued only for time

deposits. Also called fixed deposit. Variant of time deposit.

A fixed deposit is a bank deposit that a customer makes for a predetermined

period of time at a given interest rate. There is likely to be a penalty

involved if you withdraw your money before the expiry of the deposit term.

The term fixed deposit is used in India, and this is similar to a certificate of

deposit in the United States.

4.2.2 Basic features of a fixed deposit: -

There are several features of a fixed deposit that set it apart from various other

investment options present in the market. These features determine the nature

of the entire investment and how it will behave under different circumstances.

Here are the important features that need attention:

1. Debt investment:

A fixed deposit is a debt investment. This means the amount is invested with the

feature considering that this will be returned to the investor once the specified

time period is over. This is different from an equity investment where there is a

chance of a risk with regard to the amount invested because the investor

becomes the owner of the company. In case of a fixed deposit, the investor is

only lending the money to the bank or the institution.

2. Lender:

The investor who buys a fixed deposit takes on the role of a lender in the entire

transaction. In this case, the bank or financial institution taking the money is the

38

borrower. Once the position of the lender is established, it means that the bank

has to pay back the amount that has been borrowed from the investor. In that

sense there is a responsibility of the bank to return the money to the investor.

This also impacts the feature of the investment, which underlines that there is

meant to be safety of the capital invested unlike an equity investment where

even this might be lost.

3. Specified interest:

There is a return that is earned by the investor when he/she gives a fixed deposit

to the bank. The return here is measured by using the term ‘interest’. Interest is

nothing but the amount calculated at a specified rate of return on the amount

invested. There is an element of surety for the investor because the person

knows the interest rate at the time of making the deposit itself and due to this

reason he/she also knows the amount of money that will be earned from the

investment. The important thing is that even if economic conditions are very

good or very bad the investor will keep earning the same rate of interest, so this

becomes like a fixed figure that is earned by the investor.

4. Time of repayment:

Another important feature of the fixed deposit is that the investment is for a

specified period of time that is already known to the investor at the time of

making the investment. At the end of the specified period, the investment will

come to an end and the amount will be returned to the investor. This means that

the investor knows the return for the specified time and hence he/she is able to

know precisely what he/she is earning and also how the cash flow will be present

in the future.

All types of entities can make FDs and the minimum amount of deposits

specified by various banks varies from Rs. 1000 to Rs. 10000 with additional

deposits in multiples as stipulated in that particular scheme.

Banks are supposed to deduct tax from the interest paid on FDs if the amount of

interest paid to a customer at any branch exceeds Rs. 10000 in a financial year.

This is applicable to both interests payable or reinvested per customer / per

branch.

39

4.2.3 Types of Fixed Deposits: -

A fixed deposit, as its name implies, is a fixed sum of money that is held in a

savings account for a pre-decided period of time--earning a fixed rate of interest.

The time period for a fixed deposit varies from 15 days to 1,095 days (three

years) and its interest rate varies between 3 percent and 7.5 percent. A fixed

deposit account typically yields a greater interest rate than a regular account,

owing to its fixed time period. Fixed deposits are also called time or term

deposits.

Certificate of Deposit

A certificate of deposit (CD) is a type of fixed deposit account that can be

purchased in varying amounts from a credit union, traditional bank or other

depository institution. A CD is a commercial paper that confirms the monetary

value of the deposit made its maturity date and the interest applicable on the

amount loaned. Certificates of deposit mature in one month, three months, six

months, 12 months (one year), 36 months (three years) and 60 months (five

years). Interest rates accrued on certificates of deposit are quoted on a yearly

(annual) basis.

Revolving Bank Term Deposit

A revolving term deposit renews itself automatically for another term of an equal

length after its loan period expires. Depositors can put money in a revolving term

account through a cashless transfer from an existing account or by direct

transfer. The terms on revolving fixed deposits range between 1 week to 12

months.

40

Unchanging Term Deposit: -

An unchanging term deposit, also called a single term deposit, does not

renew automatically after its maturity date. An unchanging fixed term

deposit can be opened from one month, three months, six months, 12

months, 24 months and 36 months.

Factors in Investing Fixed Deposits: -

Dividing your investment assets into different categories is a good way to grow

your wealth without taking undue risk. Fixed deposit investments are a good

choice if you expect to need the money within the next five years, since

those fixed deposit investments can keep your money safe and ensure it will

be there when you need it.

Interest Rate: -

No matter how much or how little you have to invest, you want to get the best

possible return on your money. Always shop for the best interest rate when

seeking out a new fixed deposit, since even a small increase in the interest

rate can boost your earnings over time. If you are looking for a CD,

consider shopping not only at local banks but credit unions as well. You

can also look to Internet banks, which can often provide a higher rate of

interest due to their lower administrative and overhead costs.

Length of Term: -

Whether you choose a CD, a bond or another type of fixed deposit investment,

you are essentially loaning your money to the institution you are investing in. The

length of that loan term will vary, and if you are willing to tie your money up for a

longer period, you might be able to get a higher interest rate. For instance, the

interest rate on a five-year CD is generally higher than the interest rate on a one-

year CD. The tradeoff, of course, is that the five-year CD requires you to tie your

money up for a longer period.

41

Safety of Principal: -

The return on your money is important, but the return of your money is even

more critical. Consider the safety of the investment before putting any money

into a fixed deposit. If absolute safety is your main goal, investments like

certificates of deposit and government bonds can give you a secure return on

your money with no risk of loss. If you are comfortable with a bit more risk,

corporate and municipal bonds can give you a higher return, albeit with more risk

as well. Even with high-grade corporate and municipal bonds, there is always a

small risk that something will go wrong and the bond issuer will not be able to

pay back your investment.

Minimum Deposit: -

The best fixed deposit investment in the world will do you no good if you cannot

meet the minimum balance requirements. Always check the minimum

balance requirements for any CD, bond fund or government bond you plan

to invest in. Knowing how much you have to invest will help you find the best

investment for your needs.

Security: -

If you have money in a fixed deposit, it is more likely to be securing than money

in riskier investments such as stocks, bonds and mutual funds. These

deposits provide a lower return than riskier investments, but you do get

additional safety of your money. Compared with less riskier savings

accounts, these deposits offer a higher return since you are tying up your

money for a specific period in a fixed deposit. In a period of economic

uncertainty, there is more likely to be a preference for fixed deposits

because of the security they provide.

42

Liquidity

If you have money in a savings account, you can withdraw it whenever you want.

If it is in a fixed deposit account, you can withdraw it before the expiry of

the deposit term but you will likely pay a penalty to do so. The higher the

penalty a bank imposes for premature withdrawals on fixed deposits, the

less attractive the option will be to you.

43

4.3 IN SU RA NC E

4.3.1 Introduction: -

Insurance is a form of risk management that is primarily used to hedge the risk of

a contingent loss. Insurance is defined as the equitable transfer of the risk of a

loss, from one entity to another, in exchange for a premium, and can be thought

of as a guaranteed and known small loss to prevent a large, possibly devastating

loss.

An insurer is a company that sells insurance; insured or the policyholder is a

person or entity buying the insurance. The insurance rate is a factor that is used

to determine the amount which is to be charged for a certain amount of

insurance coverage, and is called the premium

Insurance in India

Insurance has been a federal subject in India. The insurance sector has gone

through many phases and changes. Since 1999, when the government started

with the insurance sector by allowing private companies to solicit insurance &

also allowing FDI up to 26%, the insurance sector has been observed to be a

booming market. However, the largest life-insurance company in India is still

very much owned by the government.

4.3.2 History of Insurance

44

In 1818, Anita Bhavsar started the Oriental Life Insurance Company in Kolkata to

cater to the needs of the European community. The pre-independent era in India

was seen to have discrimination among the life of foreigners (English) and that of

Indians with higher premiums being charged for the Indians. In 1870, the

Bombay Mutual Life Assurance Society became the first Indian insurance

company that covered Indian lives at normal rates.

At the dawn of the 20th century, large numbers of insurance companies were

founded. In 1912, two acts were passed to regulate the insurance business - the

Life Insurance Companies Act and the Provident Fund Act. As per the Life

Insurance Companies Act, 1912 the premium-rate tables as well as periodical

valuations of companies had to be certified by an actuary. However, the

discrimination still existed between Indian and foreign companies.

National Insurance Company Ltd is the oldest existing insurance company in

India which was founded in 1906. It is still in business. Before that, the industry

consisted of only 2 state insurers: Life Insurers [Life Insurance Corporation of

India, LIC] and General Insurers [General Insurance Corporation of India, GIC].

GIC had 4 subsidiary companies which became de-linked from the parent

company from December 2000 & were set up as independent insurance

companies. These are United India Insurance Company Limited, Oriental

Insurance Company Limited, and National Insurance Company & New India

Assurance Company Limited.

Insurance and tax

1. U/s 10(10A) (iii) of the Income Tax Act, any payment received by way of

commutations of pension is exempt from tax

2. U/s 10(10D), any sum received under a Life Insurance policy (not being a

Key Man policy) is also exempt from taxation. But it is wise to remember

that Pensions received from Annuity plans are not exempted from Income

Tax.

3. U/s 10(13), following are exempt from tax. Payments received from an

approved Annuation Fund made

45

On death of a beneficiary

To an employee in lieu of an annuity on his retirement or after a

specified age

In form of refund of contributions on the death of a beneficiary, etc

4. Section 80 CCC gives a deduction of up to Rs.10, 000/- to any individual

assesses for any amount paid to effect or keeping in force any annuity

plan of LIC for receiving pension.

4.3.3 Principles of Insurance

Insurance - Definition

The contract of Insurance is a promise of compensation for certain potential

future losses in exchange for a periodic payment [known as premium]. Insurance

is intended to protect the financial well-being of an individual or a company or

any other entity in case of unexpected loss. An agreement to the terms of an

insurance policy creates a contract between the insured and the insurer. In

exchange for the premiums paid by the insured, the insurer agrees to pay the

policy holder a certain sum of money upon the occurrence of a specific event or

on maturity. In most cases, the policy holder pays part of the loss (called the

deductible), while the insurer pays the rest. Examples include health insurance,

car insurance, life insurance, disability insurance, and business insurance.

Main principles of Insurance:

Utmost good faith

Indemnity

Subrogation

Contribution

Insurable Interest

Proximate Cause

Utmost Good Faith

46

It is the duty of the client to disclose all material facts relating to the risk being

covered. A material fact is a fact that would influence the mind of a prudent

underwriter while deciding whether or not to accept a risk for insurance and on

what terms. This duty to disclose operates at the time of inception, at renewal as

well as at any point mid-term.

Indemnity

When the event that is insured against occurs, the Insured will be placed in the

same monetary position that he/she occupied immediately before the happening

of the event.

In the event of a claim the insured must:

Prove that the event occurred

Prove that a monetary loss has also occurred

Transfer any rights that he/she may be having for the recovery from

another source to the Insurer, if he/she is fully indemnified.

Subrogation

With regards to insurance, subrogation is a feature of principle of indemnity and

therefore only applies to contracts of indemnity and hence does not apply to life

assurance or personal accident policies. It aims to prevent an insured to recover

more than the indemnity that he receives under his insurance (where that

represents the full amount of his loss) and enables the insurer to recover or

reduce the loss.

Contribution

The right of an insurer to call on other insurers similarly, but not necessarily

equally, liable to the same insured to share the loss of an indemnity payment i.e.

a travel policy might have an overlapping cover with the contents section of a

47

household policy. The principle of contribution permits the insured to make a

claim against one insurer. The insurer then has the right to call on any other

insurers liable for the loss in order to share the claim settlement

Insurable Interest

If an insured wants to enforce an insurance contract before the Courts he must

have an insurable interest in the subject matter of the insurance, which means

that he benefits from its preservation and suffers from its loss. In case of non-

marine insurances, it is necessary for the insured to have insurable interest

when the policy is taken out and also at the date of loss giving rise to a claim

under the policy.

Proximate Cause

An insurer is liable to pay a claim under an insurance contract only if the loss

that gave rise to the claim was proximately caused by an insured peril. This

means that the loss should be directly credited to an insured peril without any

break in the chain of causation.

4.3.4 What is Life Insurance?

Life Insurance is a contract for payment of a sum of money to the person

assured (or failing him/her, to the person entitled to receive the same) on the

happening of the event insured against. Usually the contract provides for the

payment of an amount on the date of maturity or at specified dates at periodic

intervals or at unfortunate death, if it occurs earlier. Among other things, the

contract also provides for the payment of premium periodically to the Corporation

by the assured. Life insurance is universally acknowledged to be an institution

which eliminates 'risk', substituting certainty for uncertainty and comes to the

timely aid of the family in the unfortunate event of death of the breadwinner. By

and large, life insurance is civilization’s partial solution to the problems caused

by death. Life insurance, in short, is concerned with two hazards that stand

across the life-path of every person: that of dying prematurely leaving a

dependent family to fend for itself and that of living to old age without visible

means of support.

48

Life Insurance in India

Life insurance made its debut in India well over 100 years ago. Its salient

features are not as widely understood in our country as they ought to be. What

follows is an attempt to acquaint readers with some of the concepts of life

insurance, with special reference to life insurance. It should, however, be clearly

understood that the following narration is by no means an exhaustive description

of the terms and conditions of a life insurance policy or its benefits or privileges.

For more details, please contact our Branch or Divisional Office. Any life

insurance Agent will be glad to help you choose the life insurance plan to meet

your needs and render policy servicing.

Life Insurance sector is the fastest growing sector in India since 2000 when the

Government allowed Private players and FDI [Foreign Direct Investment] up to

26%. Life Insurance in India was nationalized by incorporating Life Insurance

Corporation (LIC) in 1956. All private life insurance companies at that time were

taken over by LIC.

In 2000, the legislation amending the Insurance Act of 1938 and legislating the

Insurance Regulatory and Development Authority Act of 2000 was passed,

where in the newly appointed insurance regulator - Insurance Regulatory and

Development Authority [IRDA] started to issue licenses to private life insurers.

4.3.5 Superior to other forms of Savings: -

Protection: -

Savings through life insurance guarantee full protection against risk of

death of the saver. In life insurance, on death, the full sum assured is payable

(with bonuses wherever applicable) whereas in other savings schemes, only the

amount saved (with interest) is payable.

Aid to Thrift: -

Life insurance encourages 'thrift'. Long term saving can be made in a

relatively 'painless' manner because of the 'easy installment' facility built into the

49

scheme (method of paying premium either monthly, quarterly, half yearly or

yearly). Take, for example, our Salary Saving Scheme popularly known as SSS.

This scheme provides a convenient method of paying premium each month by

deduction from one's salary. The deducted premium is remitted by the employer

to the LIC. The Salary Saving Scheme can be introduced in an institution or

establishment subject to specified terms and conditions.

Liquidity: -

Loans can be raised on the sole security of a policy which has acquired

loan value. Besides, a life insurance policy is also generally accepted as security

for even a commercial loan.

Tax Relief: -

Tax relief in Income Tax and Wealth Tax is available for amounts paid by

way of premium for life insurance subject to Income Tax rates in force.

Assessees can avail themselves of provisions in the law for tax relief. In such

cases the assured in effect pays a lower premium for his insurance than he

would have to pay otherwise.

Money When You Need It: -

A suitable insurance plan or a combination of different plans can be taken

out to meet specific needs that are likely to arise in future, such as children's

education, start-in-life or marriage provision or even periodical needs for cash

over a stretch of time. Alternatively, policy moneys can be so arranged to be

made available at the time of one's retirement from service to be used for any

specific purpose, such as for the purchase of a house or for other investments.

Subject to certain conditions, loans are granted to policyholders for house

building or for purchase of flats.

4.3.6 ULIPs- (Systematic Insurance cum Investment Plan)

50

A ULIP is nothing but a market-linked insurance plan. There is a difference

between a ULIP and other insurance plans viz the way in which the premium

money is invested. Premium from traditional insurance plan or an endowment

plan is invested mainly in risk-free instruments like government securities (G-

secs) and AAA rated corporate paper, while in case of ULIP, the premiums can

be invested in stock markets in addition to corporate bonds and/or G-secs. This

option makes ULIPs an attractive investment for an individual. The following few

reasons make ULIPs irresistible as an investment option -

Transparency

ULIPs provide a transparent option to customers for planning their various life

stage needs through market-led investments as compared to the traditional

investment plans.

Insurance cover plus savings

ULIPs serve 2 main purposes - of providing life insurance along with savings at

market-linked returns. Hence, ULIPs can be termed as a two-in-one plan in

terms of offering an individual the twin benefits of life insurance plus savings.

This option is not available in comparable instruments such as mutual fund for

instance, that does not offer a life cover.

ULIPs offer a variety of investment options unlike traditional life insurance plans.

ULIPs generally come in 3 broad variants:

Aggressive ULIPs (invest 80%-100% in equities and the balance in debt)

Balanced ULIPs (invest about 40%-60% in equities)

Conservative ULIPs (invest up to 20% in equities)

Such allocation of debt/equity varies according to insurance companies. An

investor also has the option of choosing various options/funds available

according to his risk appetite and return expectation.

Flexibility

51

Individuals may switch between the ULIP fund options in order to capitalize on

investment opportunities across the debt and equity markets. Some insurance

companies also allow a certain number of free switches. This is an extremely

important feature which allows the investor to benefit from the vagaries of

stock/debt markets. Switching also helps individuals as they can shift from an

aggressive to a balanced or conservative ULIP as they are approaching

retirement based on their risk appetite.

Works like a SIP

Rupee cost-averaging is an important benefit associated with ULIPs. The mutual

fund industry offer SIP options to investors where in individuals invest their

monies regularly over a period of time and in intervals of a month/quarter and

don't need to be worried about `timing' the stock markets. It is important to note

that these benefits are not peculiar to mutual funds only. Not many realize that

ULIPs also tend to work in the same manner, albeit on a quarterly or half-yearly

basis.

4.3.7 ULIP- Important considerations

When buying a ULIP, one must select the plan that best suits your needs. The

important thing is to look for and understand the nuances that can considerably

alter the manner in which the product works for you. Consider the following:

Charges: -

A complete charge structure includes the initial charges, fixed administrative

charges, fund management charges, mortality charges and spreads, and that

too, not only in the first year but throughout the term of the policy.

Fund Options and Management: -

One need to understand the various fund options available and the fund

management objectives of the scheme. Facts like who manages the funds,

52

how much experience do they have, are there sufficient controls need to be

taken into consideration.

Features: -

Most ULIPs are 4really good in providing features such as allowing one to

top-up and/or switch between funds, increase or decrease the protection

level, or also premium holidays. The conditions and charges associated for

such features should be understood. For instance, is there any minimum

amount that must be switched? Are there any charges on the same?

Company: -

Another important consideration is the brand that you are insuring with. The

company must be trustworthy and should be in a position to honor its

commitments as per your needs.

4.3.8 Charges, fees and deductions in a ULIP: -

ULIPs offered by different insurers have varying charge structures. Broadly, the

different types of fees and charges are given below. However it may be noted

that insurers have the right to revise fees and charges over a period of time.

Premium Allocation Charge

This is a percentage of the premium appropriated towards charges before

allocating the units under the policy. This charge normally includes initial and

renewal expenses apart from commission expenses.

Mortality Charges

These are charges to provide for the cost of insurance coverage under the plan.

Mortality charges depend on number of factors such as age, amount of

coverage, state of health etc

Fund Management Fees

53

These are fees levied for management of the fund(s) and are deducted before

arriving at the Net Asset Value (NAV).

Policy/ Administration Charges

These are the fees for administration of the plan and levied by cancellation of

units. This could be flat throughout the policy term or vary at a pre-determined

rate.

Surrender Charges

A surrender charge may be deducted for premature partial or full encashment of

units wherever applicable, as mentioned in the policy conditions.

Fund Switching Charge

Generally a limited number of fund switches may be allowed each year without

charge, with subsequent switches, subject to a charge.

Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk

portion of the premium.

54

4.3.9 Advantages and disadvantages of the ULIPS

Advantages DisadvantagesFlexibility – you can choose your term,

insurance cover, pay premiums for a

limited period

Flexibility – this can act a disadvantage

since the person may use the

withdrawal and may not end up

building a huge corpusTransparency – you know what is the

amount you are paying for the various

benefits

Initially heavy costs – You pay around

15-20% for the first year and then

around 5%for the next two yearsTax free returns – 100% tax free since

they are received from insurance and it

is a contract

No control on costs

Switch between various options One may try to time the market and

may make errorsTax benefits when investing under Sec

80C

4.3.10 ULIPs or Mutual Funds: -

Mutual funds and Unit Linked Insurance Policies [ULIPs] are quite similar in

terms of their structure and functioning. In both the cases, investors are allotted

units and a net asset value (NAV) is declared for the same on a daily basis.

Just as in the case of mutual funds, ULIP investors have the option of investing

across various schemes such as diversified equity funds or balanced funds or

55

debt funds to name a few. Hence we can say that ULIPs are mutual fund

schemes having an insurance component.

Comparison of ULIPs and Mutual Funds

1. Mode of investment & investment amounts

In case of mutual funds, investors have 2 options - either to make a lump

sum investment or take a systematic investment plan (SIP).The fund house

lays down the minimum investment amounts.

In ULIPs also investors have the option of investing in a lump sum (single

premium) or make periodic payments using different modes of premium

payment such as annual, half-yearly, quarterly or monthly basis. In ULIPs,

calculating the premium to be paid is often the starting point for the

investment activity.

ULIP investors have the flexibility to alter the premium amounts during the

policy's tenure. This freedom to modify premium payments as per one's

needs definitely gives ULIP investors an edge over their mutual fund

counterparts.

2. Expenses

Mutual fund investments are subject to pre-determined upper limits for

expenses charged for different activities such as administration, fund

management, sales and marketing among others. These are prescribed by

the Securities and Exchange Board of India [SEBI]

56

For example in case of equity-oriented funds investors are charged a

maximum of 2.5% per annum on a recurring basis for all their expenses. Any

expense above this prescribed limit is borne by the fund house and not the

investors.

Mutual funds also charge investors entry and exit loads (in most cases, either

is applicable) which are charged at the timing of making an investment and at

the time of sale respectively.

However in ULIP products insurance companies can levy expenses on

investors with no upper limits being prescribed by the insurance regulator, i.e.

the Insurance Regulatory and Development Authority [IRDA]. This explains

the complex and at times a very high expense structures on ULIP products.

Expenses can have far-reaching consequences on investors as higher

expenses translate into lower amounts being actually invested and therefore

a smaller corpus being accumulated.

3. Portfolio disclosure

Incase of Mutual funds, the mutual fund houses that actually require to

statutorily declare portfolios on a quarterly basis, do so on a monthly basis;

and hence investors can study their portfolios to see where their monies are

being invested and how they have been managed by the fund house/fund

manager.

In case of ULIPs, there is lack of consensus on whether they are required to

disclose their portfolios. Some insurers believe that disclosing portfolios on a

quarterly basis is mandatory while others hold the opinion that there is no

legal obligation to do so unless it is demanded by the investor.

4. Flexibility in altering the asset allocation

Offerings available in both the mutual funds segment and ULIPs segment are

quite similar. For instance diversified equity funds (plans that invest their

entire corpus in equities), balanced funds (60:40 allotment in equity and debt

57

instruments) and debt funds (plans investing only in debt instruments) are

found both in ULIPs as well as mutual funds.

In case of mutual funds, if the investor wants to shift his corpus from a

diversified equity fund to a debt from the same fund house, he will have to

bear an exit load and/or entry load.

Where as in the case of ULIPs, most insurance companies permit investors

to shift investments across various plans or asset classes either at a very

nominal fee or no cost (generally, a couple of switches are allowed free of

charge every year. Cost has to be borne only for additional switches).

5. Tax benefits

Under Section 80C of the Income Tax Act, ULIP investments qualify for

certain deductions irrespective of the nature of the plan chosen by the

investor. In case of mutual funds, only investments made in tax-saving funds

(also referred to as equity-linked savings schemes or ELSS) are eligible for

tax benefits as per Section 80C.

In case of ULIPs, the maturity proceeds are tax free. In case of equity-

oriented funds (such as diversified equity funds or balanced funds), if the

investments are held for a period more than 12 months, the gains are tax

free; conversely investments that are sold within a 12-months attract short-

term capital gains tax @ 10%.

Similarly, debt-oriented funds also attract a long-term capital gains tax @

10%, and short-term capital gain is taxed at the investor's marginal tax rate.

So we can see that in spite of having seemingly similar structures, both

mutual funds and ULIPs have a unique set of advantages to offer. Hence, it is

vital for investors to be aware of the benefits and nuances in both offerings

before making any investment decisions.

58

ULIPs vs. Mutual Funds

ULIPs Mutual Funds

Investment

amounts

Determined by the

investor and can be

modified as well

Minimum investment amounts are

determined by the fund house

Expenses

No upper limits,

expenses

determined by the

insurance company

Upper limits for expenses

chargeable to investors have been

set by the regulator

Portfolio

disclosureIs Not mandatory

Quarterly disclosures are

mandatory

Modifying

asset

allocation

Generally permitted

for free or at a

nominal cost

Entry/exit loads have to be borne

by the investor

Tax

benefits

Under Section 80C

benefits are

available on all ULIP

investments

Section 80C benefits are available

only on investments in tax-saving

funds

59

4.4 PU BL IC PR OV IDE NT FU ND S (PPF )

The Public Provident Fund Scheme is a statutory scheme of the Central

Government of India.

4.4.1 Features: -

The Scheme is for 15 years.

The rate of interest is 8% compounded annually.

The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial

year.

One deposit with a minimum amount of Rs.500/- is mandatory in each

financial year.

The deposit can be in lumpsum or in convenient installments, not more

than 12 Installments in a year or two installments in a month subject to total

deposit of Rs.70,000/-.

It is not necessary to make a deposit in every month of the year. The

amount of deposit can be varied to suit the convenience of the account

holders.

The account in which deposits are not made for any reasons is treated as

discontinued account and such account cannot be closed before maturity.

The discontinued account can be activated by payment of minimum

deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.

Account can be opened by an individual or a minor through the guardian.

Joint account is not permissible.

Those who are contributing to GPF Fund or EDF account can also open a

PPF account.

A Power of attorney holder can either open or operate a PPF account.

The grandfather/mother cannot open a PPF behalf of their minor

grand son/daughter.

The deposits shall be in multiple of Rs.5/- subject to minimum amount of

Rs.500/-.

The deposit in a minor account is clubbed with the deposit of the account

of the Guardian for the limit of Rs.70, 000/-.

60

No age is prescribed for opening a PPF account.

Interest is not contractual but rate is notified by Ministry of Finance, Govt.

of India, at the end of each year.

The facility of first withdrawal in the 7th year of the account subject to a

limit of 50% of the amount at credit preceding three year balance. Thereafter

one Withdrawal in every year is permissible.

Pre-mature closure of a PPF Account is not permissible except in case of

death.

Nominee/legal heir of PPF Account holder on death of the account holder

cannot continue the account, but account had to be closed.

The account holder has an option to extend the PPF account for any

period in a block of 5 years on each time.

The account holder can retain the account after maturity for any period

without making any further deposits. The balance in the account will continue

to earn interest at normal rate as admissible on PPF account till the account

is closed.

One withdrawal in each financial year is also admissible in such account.

The PPF scheme is operated through Post Office and Nationalized banks.

PPF account can be opened either in Post Office or in a Bank.

Account is transferable from one Post office to another and from Post

office to Bank and from Bank to Post office.

Account is transferable from one Bank to another bank as well as within

the bank to any branch.

Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.

The interest on deposits is totally tax free.

Deposits are exempt from wealth tax.

The balance amount in PPF in PPF account is not subject to attachment

under any order or decree of court in respect of any debt or liability.

Nomination facility available.

Best for long term investment.

61

4.4.2 Public Provident Fund (PPF) Advantages & Disadvantages: -

Public provident fund scheme is normally of 15 years but can be extended

for 1 or more terms of 5 years while the individual holds the rights to

terminate the PPF funds at any time.

PPF or Public Provident Fund is a public growth scheme under which

people can contribute a part of their income and claim a income tax rebate.

PPF scheme was introduced by the Government of India in 1968 with the

aim to include more and more individuals to the scheme and get profit.

62

4.5 P OS T OFF IC E SAV IN G

4.5.1 Post office saving attracts toward investment for following

attributes:

Safe, secure and risk-free investment options.

No Tax Deduction at Source (TDS).

Nomination facility is available.

Nomination can be changed at any time

The instruments are transferable to any Post Office anywhere in India.

Attractive rates of interest.

4.5.2 Post Office Savings Schemes in India

The main financial services offered by the Department of Posts are the Post

Office Savings Bank. It is the largest and oldest banking service institution in the

country. The Department of Posts operates the Post Office Savings Scheme

function on behalf of the Ministry of Finance, Government of India. Under this

scheme, more than 20.50 crores savings account are operated. These accounts

are operated through more than 1,54,000 post offices across the country.

The Post offices provide a number of savings schemes like the Savings Account

Schemes, Recurring Deposit Schemes, Time Deposit Schemes, Public

Provident Fund Schemes, Monthly Income Schemes, National Savings

Certificates, Kisan Vikas Patras, and Senior Citizens Savings Scheme. A brief of

the various schemes is as follows:

SchemeInterest

RatesTenure

Investment

Denominations

and limits

Salient

FeaturesTax rebate

63

Post

Office

Savings

Account

3.5% p.a. On

individual

and joint

account

No

specific

or fix

tenure

Min: Rs. 50

Max: Rs. 1 Lakh

for individual

and 2 lakhs for

joint account

Cheque facility

available

Interest is

tax-free u/s

80L

5-Year

Post

Office

Recurring

Deposit

Account

7.5%

compounded

quarterly

5 years.

Can be

renewed

for

another

5 years

Min: Rs. 10 per

month or

multiples of Rs.

5 Max: No limit

One withdrawal

up to 50% of

the balance is

allowed after

one year. Full

maturity value

allowed on R.D.

6 & 12 months

advance

deposits earn

rebate.

No tax

rebate

Post

Office

Time

Deposit

Account

6.25% 1 year

Min: Rs. 200

and its multiple

thereof Max: No

limit

Long-term

accounts could

be closed after

1 year for

discounted

interest.

Accounts could

be closed after

6 months but

before a year

for no interest.

Interest is

calculated

quarterly but

payable yearly.

Investment

qualifies

for

deduction

u/s 80C.

Interest is

tax-free u/s

80L

6.50% 2 years

7.25% 3 years

7.50% 5 years

Post

Office

8% p.a. 6 years Min: Rs. 1500

per month or

Account if

closed after 1

Interest is

tax-free u/s

64

Monthly

Income

Account

multiples of it.

Max: Rs. 4.5

lakhs for

individual

account and Rs.

9 lakhs for joint

account

year but before

3 years will

suffer a

deduction of 2%

of the deposit.

Account if

closed after 3

years will suffer

a deduction of

1% of the

deposit. On

maturity, bonus

of 5% on

principal

amount is

admissible

80L

15-year

Public

Provident

Fund

Account

8% p.a.

compounded

yearly

15 years

tenure

Min: Rs. 500 in

1 year Max: Rs.

70000 in 1 year

Deposits can be

made in lump-

sum or 12

installments

Withdrawal can

be made every

year after the

7th financial

year. From the

3rd financial

year, loan can

be availed

against PPF.

No attachment

under court

decree order.

Investment

qualifies

for

deduction

u/s 80C.

Interest is

tax-free u/s

80L

Kisan

Vikas

Patra

8.4%

compounded

yearly.

Money

doubles in 8

--- No limits.

Investment

denominations

available are of

Rs. 100, Rs.

A single holder

certificate can

be purchased

by an adult. A

certificate can

No tax

benefits

65

years and 7

months

500, Rs. 1000,

Rs. 5000, Rs.

10,000, in all

Post Offices

and Rs. 50,000

in all Head Post

Offices.

also be

purchased

jointly by two

adults.

National

Savings

Certificate

(VIII

issue)

8% p.a.

compounded

half-yearly

but payable

after maturity

6 years

Min: Rs. 100.

Also available in

denominations

of Rs. 100/-,

500/-, 1000/-,

5000 & Rs.

10,000/-. Max:

no limit

A single holder

certificate can

be purchased

by an adult.

Investment

as well as

the interest

deemed to

be re-

invested

qualifies

for

deduction

u/s 80C.

Senior

Citizens

Savings

Scheme

9% p.a. 5 years Only 1 deposit

allowed in

multiple of Rs.

1000. Max is

Rs. 15 lakhs

Age should be

above 60 years

or 55 years

above if retired

under

superannuation.

Account if

closed after 1

year will suffer a

deduction of

1.5% interest

and after 2

years will suffer

a deduction of

1% interest.

TDS is made on

Investment

qualifies

for

deduction

u/s 80C

66

interest if it

exceeds Rs.

10000 p.a.

4.5.3 Kisan Vikas Patra: -

Minimum Investment Rs. 500/- No maximum limit.

Rate of interest 8.40% compounded annually.

Money doubles in 8 years and 7 months.

Two adults, Individuals and minor through guardian can purchase.

Companies, Trusts, Societies and any other Institution not eligible to

purchase.

Non-Resident Indian/HUF are not eligible to purchase.

Facility of encashment from 2 ½ years.

Maturity proceeds not drawn are eligible to Post office Savings account

interest for a maximum period of two years.

Facility of reinvestment on maturity.

Patras can be pledged as security against a loan to Banks/Govt.

Institutions.

Patras is encashable at any Post office before maturity by way of transfer

to desired Post office.

Patras is transferable to any Post office in India.

Patras are transferable from one person to another person before maturity

Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced

Patras.

Nomination facility available.

Facility of purchase/payment of Kisan Vikas Patras to the holder of Power

of attorney.

Rebate under section 80 C not admissible.

Interest income taxable but no TDS

Deposits are exempt from Wealth tax.

4.5.4 Senior Citizen's Saving Scheme - 2004

Objective of the scheme

67

We are all well aware that interest rate on Small Saving Scheme has been

reduced to 5% in the last four years. The decline in interest rate was initiated

from 1t January 2000. The interest rate on 31-12-1999 in Monthly Income

Scheme was 13% which has come down to 8% with effect from 1.3.2003. The

decrease in the interest rate has negative impact on the life of Senior Citizens.

The dwindling interest income was cause of concern and hardship for them on

the living conditions of the Senior Citizens. The interest income is a life time

benefit for the senior citizens. The Budget for 2004-2005 presented in

Parliament had two beneficiary aspects, as for as small Saving Schemes are

concerned. The first one is that rats of interest on small savings which were

unlikely to be expected to be reduced have been kept stable with no change in

rate of interest in any Post Office scheme. The second beneficiary aspect was

the introduction of Senior Citizen Saving Scheme-2004 with a higher rate of

interest to any other small savings scheme which has come into operation from

2nd August 2004. The main objective of the scheme is to provide a relief to the

senior citizens and to check the further decline in their interest income.

4.5.5 POST OFFICE SAVINGS BANK

Minimum amount Rs20/- in case of non- cheque account, Rs.500/- in

case of cheque account.

Minimum balance of Rs.500/- is to be maintained for a cheque account.

Account is opened with cash only.

Maximum balance permissible Rs. 1, 00,000/- in a single account and

2,00, 000/- in Joint account.

Two/Three adults, individuals, minor through guardian.

A Minor having 10 years of age can also open an account directly.

One individual account and one joint account can only be opened at a

post office.

4.5.6 National Savings Certificate

Minimum investment Rs. 500/- No maximum limit.

Rate of interest 8% compounded half yearly.

Rs. 1000/- grow to Rs. 1601/- in six years.

68

Two adults, Individuals, and minor through guardian can purchase.

Companies, Trusts, Societies and any other Institutions not eligible to

purchase.

Non-resident Indian/HUF cannot purchase.

No pre-mature encashment.

Annual interest earned is deemed to be reinvested and qualifies for tax

rebate for first 5 years under section 80 C of Income Tax Act.

Maturity proceeds not drawn are eligible to Post Office Savings account

interest for a maximum period of two years.

Facility of reinvestment on maturity.

Certificate can be pledged as security against a loan to banks/ Govt.

Institutions.

Facility of encashment of certificates through banks.

Certificates are encashable any Post office in India before maturity by way

of transfer to desired post office.

Certificates are transferable from one Post office to any Post office.

Certificates are transferable from one person to another person before

maturity.

Duplicate Certificate can be issued for lost, stolen, destroyed, mutilated or

defaced certificate.

Nomination facility available.

Facility of purchase/payment to the holder of Power of attorney.

Tax Saving instrument - Rebate admissible under section 80 C of Income

Tax Act.

Interest income is taxable but no TDS

Deposits are exempt from Wealth tax.

4.5.7 Post Office Monthly Income Scheme

Interest rate of 8% per annum payable monthly.

Maturity period is 6 years.

Minimum investment amount is Rs.1000/- or in multiple thereof.

Maximum amount is Rs. 3 lakhs in single account and Rs. 6 lakhs in a

joint account.

69

Account can be opened by an individual, two/three adults jointly and a

minor through a guardian.

A minor having attained 10 years of age can open an account in his/her

own name directly.

Non-Resident Indian / HUF cannot open the Account.

Minor has a separate limit of investment of Rs. 3 lakhs and the same is

not clubbed with the limit of guardian.

A separate account is opened for each deposit.

Any number of accounts can be opened subject to the maximum

prescribed limit.

Facility of automatic credit of monthly interest to saving account if

accounts are at the same post office.

Facility of premature closure of account after one year @ 3.50% discount.

No deduction of 3.5% if account is closed on completion of three years.

Facility of reinvestment on maturity of an account.

Interest not with-drawn does not carry any interest.

Maturity proceeds not drawn are eligible to saving account interest rate for

a maximum period of two years.

Account is transferable from one post office to any Post office in India free

of cost.

Nomination facility available.

Rebate under section 80 C not admissible.

Interest income is taxable, but no TDS

Only scheme in Post office where monthly interest is payable.

Most suitable scheme for senior citizens and for those who need regular

monthly income.

Deposits are exempt from Wealth Tax

5 DA TA AN ALYS IS

Investment proportion in gender: -

70

Gender Percentage

Male 86

Female 14

Percentage

Female14%

Male

Female

Male86%

Interpretation: -

Here analysis of survey the investment portion in gender males are

investing 86 percent and females are investing 14 percent.

71

Proportion of age: -

Age (Year) Percentage

20 – 30 28

30 – 40 35

40 – 50 17

Above 50 20

Percentage

Above 5020%

40 – 5017%

20 – 3028%

30 – 4035%

20 – 30

30 – 40

40 – 50

Above 50

Interpretation: -

In this analysis of survey the age proportion of investors are investing age

criteria of 20 – 30 years, 30 – 40 years, 40 – 50 years, and above 50 years are

respectively 28 percentages, 35 percentages, 17 percentages, 20 percentages.

In that age 30 – 40 years are more investing the money because they are

responsible for family so they more invest for future.

72

Proportion of occupation: -

Occupation Percentage

Job 55

Business 28

Student 7

Others 10

Percentage

others10%

Student7%

Business28%

Job55%

Job

Business

Student

others

Interpretation: -

The above pie chart gives the picture of investors proportion in occupation job,

Business, students, others are respectively 55 percentage, 28 percentage, 7

percentage, 10 percentage. In that more investors are occupation in job because

these investors are more conscious about tax benefits and savings.

73

Inv

esto

r

1. What is the way of your investment?

Age DurationMonthly Quarterly Yearly

20 – 30 26 3 230 – 40 27 4 240 – 50 10 1 5Above 50 17 1 2

way of investment

30

25

20

15

10

5

0

20 – 30 30 – 40 40 – 50 Above 50

age

Duration Monthly

Duration Quarterly

Duration Yearly

Interpretation: -

In the first factors investors way monthly, quarterly and yearly. In that most of

investors invest in monthly because the most of the investors are salaried

persons. So it gives the result that the age criteria is not affect but only

occupation criteria is affect in way of investment.

74

2. Do you take tax benefits into consideration while

investing?

Tax benefit PercentageYes 87No 13

P e rc e nt a g

N o13 %

Y e s

N o

Y e s8 7%

Interpretation: -

75

Here, 87% of investors are considering the tax benefit while investing and 13%

are not considering tax benefit.

3. What is your total annual investment?

Annual

investment

Occupation

Job Business Student othersLess than 15000 29 10 4 615000 – 40000 22 8 1 340000 – 60000 4 8 - 1More than 60000 2 2 - -Total 57 28 5 10

76

Inv

esto

rs

Annual investment

30

25

20

15

10

5

0

Job Business Student others

Occupation

Less than 15000

15000 – 40000

40000 – 60000

More than 60000

Interpretation: -

Here the total annual investment of occupation wise in job, business, student,

others are respectively investing 57, 28, 5, and 10.

The investors have lower annual compensation of investors have

low annual investment in job and vice versa

The business occupation investor is dependent on his scale of

business. The low scale of businessman is invested in low proportion of

annual investment.

4. What is the purpose behind the financial investment?

Purpose of

investment

Gender

Male Female

Safety 42 9

Liquidity 11 3

77

Higher return 33 2

purpose of investment

45

40

35

30

25

20

15

10

5

0

Safety Liquidity Higher return

Male

Female

Interpretation: -

The above figure has been showing the results of the investor which have been invest in the different investment for the specific purpose. There is 55% investors are invest for the purpose of safety and 14% in liquidity and 35% in higher return.

Investor are most prefer the safety for the investment because of the they are only invest for the future and some return and take low risk on investment.

5. Since how long you have been investing in different

investment?

Time period

(Year)

Age

78

20 – 30 years 30 – 40 years 40 – 50 years More than 50

years

Less than 1 1 - - -

1 – 2 5 6 2 3

2 – 3 7 15 10 9

More than 3 14 11 5 8

16

14

12

10 Les s than

1 – 28

2 – 36 M ore than

4

2

0

20 – 30 y ears 30 – 40 y ears 40 – 50 y ears M ore t han 50 y ears

Interpretation: -

From the result there is maximum investors are more investing before 2 to 3

years ago but last 2 years investment proportion will be going down because of

last 2 years inflation was high and there saving was less and expense was high

so the investors investments was goes down.

6. Which factor more attract towards investment?

Factors Gender

79

Male Female

High return 15 2

Low risk 27 8

Prestige of company 2 1

Market trend 39 -

Liquidity 3 3

45

40

35

30

25

20

15

10

5

0

High return Low ris k P res tige of c om pany

M ark et t rend Liquidity

M ale

Fem ale

Interpretation: -

In the above results mentions that indicate the investors attracting towards the

investment market trends and lower risk will be more attract. Market trends are

fluctuating so investors are diversified his or her investment portfolio.

7. In which sector you prefer to invest most?

80

Sector Occupation Total

Job Business Student Others

Equity 31 17 3 5 46

Debt 38 20 3 9 70

Hybrid 52 27 7 10 96

60

50

40E quity

30 Debt

Hy brid20

10

0

Job B us ines s S t udent Others

Oc c upation

Interpretation: -

For the investment sector, there is 96 investors prefer the hybrid sector, 70

prefer debt and 46 investors are prefer equity sector for the investment. Because

of, in hybrid sector there is moderate risk happen than the equity sector and

higher return compare to the debt sector bur not much than the equity sector.

81

8. In which trend would you like to invest (Equity sector)?

Market

trend

Age

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

Bullish 14 14 6 9

Bearish 2 5 4 3

16

14

12

10

B ullis h8

B earis h6

4

2

0

20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r

Interpretation: -

In equity sector, there is a higher proportion of the bullish trend investor

compare to the bearish trend in trend preference. Because of Investor’s

behaviour for the market trend is very conscious about the bull changes.

82

9. Which of the following do you invest (Debt sector)?

Investment option Gender

Male Female

Saving account 71 9

Fixed deposit 54 7

PPF 20 2

80

70

60

50

M ale40

Fem ale30

20

10

0

S aving ac c ount Fix ed depos it P P F

Interpretation: -

Here the debt factor affect in savings account male is 71 and female is 9, in fixed

deposits male have 54 and female have 7 and PPF male have 20 and female

have 2. In PPF the investors done the government job and they invest for tax

savings.

83

10. Which of the following would you select (Hybrid sector)?

Investment

option

Age Total

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

Mutual funds 12 19 9 9 49

Insurance

(ULIPs)

17 25 9 18 69

Direct equity 2 1 2 - 5

Others 1 1 - - 2

30

25

20 M ut ual funds

Ins uranc e (ULIP s15

Direc t equity

10 Others

5

0

20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r

Interpretation: -

There are the investors are investing more in insurance because investors safety

they invest in insurance. The investors are not aware of the mutual fund so the

mutual fund compare to the insurance proportion is low.

11. Which fund will you select (Mutual funds)?

84

Fund Age

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

Debt 2 - - 1

Growth 10 15 6 6

Balance 2 4 3 2

MIP 5 3 1 1

16

14

12

10 D ebt

G ro wt h8

B alanc e6 M IP

4

2

0

1 2 3 4

Interpretation: -

The above table given the mutual fund scheme in that the growth scheme is very

good because the growth fund have good return given and it takes a risk also.

That is the reason behind the proportion of age of 20 – 30, 30 -40 is very high

investors is investing in that.

12. What is mode of your investment in mutual funds?

Mode of investment Gender

85

Male Female

SIP 42 5

MIP 10 -

STP 3 -

BULK 20 2

45

40

35

30

25

20

15

10

5

0

S IP M IP S TP B ULK

M ale

F em ale

Interpretation: -

In that above table the mode of mutual fund proportion of SIP, MIP, STP,

BULK in male 42, 10, 3 ,and 20 respectively and in female 5, 0, 0, and 2 are

respectively.

13. Which AMC or Financial Institution you will prefer for

investment?

AMC or Financial Institution Investors

Marwadi 33

86

Religare 10

Angel Broking 8

Reliance 24

Share khan 22

LIC 26

Others 3

LIC21%

Others

2%

Investors

Marw adi27%

Share khan

17%

Reliance19%

Religare8%

Angel Broking

6%

Marw adi

Religare

Angel Broking

Reliance

Share khan

LIC

Others

Interpretation: -

The AMC or financial institution of the prefer for the investors are Marwadi,

Religare, Angle broking, Reliance, Share khan, LIC, and other are proportion 33,

10, 8, 24, 22, 26 and 3 are respectively.

14. Why you have selected the broker (AMC)?

Factors Gender

Male Female

87

Intra Limit 6 1

Delivery Limit 15 -

Low brokerage 35 1

Tips 49 6

Others 1 2

60

50

40

M ale30

Fem ale

20

10

0

Intra Lim it Delivery Lim it Low brok erage Tips Others

Interpretation: -

In the above table result shows Intra limit, Delivery limit, low brokerage and tips

factors are affect the AMC. In that mostly that 55 investors are select AMC on

the basis of tips, 36 investors are low brokerage and 15 investors are delivery

limit.

15. How do you select your investment proposal?

Medium Occupation

Job Business Student Others

By Advisor 25 12 - 6

By Relatives 4 5 6 2

88

By Own Opinion 14 7 1 2

By Market Trend 10 5 - -

30

25

20 B y A dvis or

B y Relatives15

B y Own Opinio

10 B y M ark et Tren

5

0

Job B us ines s S tudent Others

Interpretation: -

There is a 43 investors select the investment proposal by advisors. By relatives,

by own opinion, by market trend through select investment proposal by the

investor is respectively 17, 24 and 15 out of the 100 sample size.

16. What is your expected return on your investment?

Expected Return Age

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

3% - 10% 2 4 1 3

11% - 20% 19 14 12 14

21% - 40% 4 9 8 3

89

Above 40% - 4 3 -

20

18

16

14

12

10

8

6

4

2

0

20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r

3% - 10%

11% - 20%

21% - 40%

A bove

40%

Interpretation: -

From the result, the investors most probably expected returns are 11 – 20

percentage, I years 20 – 30, 30 – 40, 40 – 50, above 50 years investors

proportion are 19, 14, 12, 14 are respectively.

17. How much risk you are able to take?

Risk Age

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

1% - 5% 18 23 14 15

6% - 10% 8 6 2 5

11% - 15% - 4 5 -

Above 15% - - - -

90

25

20

1% - 5%15

6% - 10%

11% - 15%10

A bove 15%

5

0

20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r

Interpretation: -

From the above results investors are taking risk mostly 1 – 5 percentages.

Investors proportion are 18, 23, 14, 15 in related to years 20 – 30, 30 – 40, 40 –

50, above 50 are respectively.

18. What is time horizon your investment?

Time Horizon Age

20 – 30 yr 30 – 40 yr 40 – 50 yr Above 50 yr

Less than 1 yr - - - -

1 – 3 yr 3 2 2 4

3 - 5 yr 8 11 10 8

Above 5 yr 15 18 9 10

91

20

18

16

14

12

10

8

6

4

2

0

20 – 30 y r 30 – 40 y r 40 – 50 y r A bove 50 y r

Les s than 1 y

1 – 3 y r

3 - 5 y r

A bove 5 y r

Interpretation: -

From the survey, the most of the investors are willingness to investment more

than 5 years. Because of the market has been very volatile within a short time so

they cannot take any higher risk for the hybrid sector. In the debt sector investor

has to be select the investment time horizon is more than 5 years.

92

6 F IND IN GS

To know the investment option available in the India and also

the return and risk associate with it.

Many investment objectives available in India so investors are preferred high

risk; high return and some investors want safety so they are investing in

saving fund & insurance.

To analyze the pattern of investment objectives.

To surveyed investing the potential investors in savings account 29 percent,

fixed deposits 22 percentage, Mutual fund 14 percentage, PPF 8 percentage,

and Insurance (ULIPS) 25 percentage and Direct equity 2 percentage.

To identify the factors influencing in the individual investment

decisions.

Factors affect individual investment decision should be age,

occupation, and tax benefit and investment purpose.

To study the consumer preference for the investment scheme

selection.

Investor’s preference for the investment schemes are 17 investors preferred

higher return, 35 investor’s low risk. 3 investors prefer prestige of company,

39 investors preferred market trends, and 5 investors preferred only liquidity.

To knowledge of the Valsad city investors, how many are

interested in investment and what is the investment portfolio of the

investors?

From the survey, there is 86 percentage of male and 14 percentage of female

are interested in investment from Valsad city.

To comparative study of the equity, debt and hybrid sector

investment.

The investor’s comparative study of equity, debt and hybrid are 25

percentages, 32 percentages, and 43 percentages respectively.

93

7 SU GGEST ION S

Systematic Transfer Plan (STP) is one of the innovative products

launched by Assets Management Company (AMC) very recently in industry.

Though most of the prospects and potential investors are not aware about

the STP. There is a large scope for the company to tap the business man.

The Marwadi has not arranged for the investment awareness. So

they should arrange the program for the investors.

From the survey, In selection of investment proposal the advisor

not aware to the student for the selection. So they should advice them.

The female are not investing in Monthly Investment Plan (MIP). So

they influence or encourage for investing in MIP.

94

7 B IBL IOGRA PH Y

I.M.Pandey, Finance Management, 9th Edition, Vikas

Publication, New Delhi

www.amf ind ia.co m

www.g oog le.co m

www.marwad ion lin e.co m

95

8 APP END IX

A Study of Factor

Influencin g the Investment D ecision Making of Investor s

Name :

Age :

Gender :

Male

Female

Occupation :

Job

Student

Contact no :

1. Do you plan your financial requirement?

Yes

No

2. What is the way of investment?

Monthly

Quarterly

Yearly

Business

Others

3. Do you take tax benefits into consideration while investing?

Yes

96

No

4. What is your total annual investment?

Less then 15000

15000 – 40000

40000 – 60000

More than 60000

5. What is the purpose behind the financial investment?

Safety

Liquidity

Higher return

6. Since how long have you been investing in different investment?

Less than 1 year

1 to 2 year

2 to 3 year

More than 3 years

7. Which factor more attract towards investment?

High return

Low risk

Prestige of company

Market trend

Liquidity

8. In which sector you prefer to invest most?

Equity

Debt

Hybrid

If Equity,

9. In which trend would you like to invest?

97

Bullish

Bearish

If Debt,

10. Which of the following do you invest?

Saving account

Fixed deposit

If Hybrid,

PPF

11. Which of the following would you select?

Mutual funds

Insurance (ULIPs)

Direct equity

Others

If Mutual funds,

12. Which fund will you select?

Debt

Growth

Balance

MIP

13. What is mode of your investment in mutual funds?

SIP

MIP

STP

Bulk

14. Which AMC or Financial Institution you will prefer for investment?

Marwadi

98

Religare

Angel broking

Reliance

Share khan

Others, Please specify

15. Why you have selected the above broker?

Intra limit

Delivery limit

Low brokerage

Tips

Others

16. How do you select your investment proposal?

By advisor

By relatives

By own opinion

By market trend

17. What is your expected return on your investment?

3% - 10%

11% - 20%

21% - 40%

Above 40%

18. How much risk you are able to take?

1% - 5%

6% - 10%

11% - 15%

99

More than 15%

19. What is time horizon of your investment?

Less than 1 year

1 – 3 year

3 – 5 year

Above 5 years

20. Would you like to have advice from us based on your requirement?

Yes

No

21. Give your recommendation for selecting investment

plans a) -

b)

c)

100