introduction to investing - for young adults

Introduction to Investing

Education to children

Copyright - Abhijit Pal - 2013

Agenda

1. What is investing1. What is investing

2. Why Investing2. Why Investing

3. How Investing3. How Investing

4. When Investing4. When Investing

3b. Variable Return3b. Variable Return

3a. Fixed Return3a. Fixed Return


What is Investing

• Putting your money to work for you– Earn additional profit– Beat the inflation

• Investment is not– Gambling

• Gambling is risking money towards uncertain outcome

• Investment is based on– Analysis


Why Investing

• Financial Stability During Retirement• Hedge against inflation and beat it• Plan for targeted goal• Maximizes one’s earning potential


How Investing

FixedDeposits

StocksMutualFunds

RealEstate

Gold

Earn More Money

Earn More Money


Types of Investment

Investment Avenues

Fixed Return

Fixed Deposit

Banks

Term Deposit

Recurring Deposit

Company

Government Schemes

Post Office Schemes

PPF

RBI Bonds

Infrastructure Bonds

Variable Return

Stocks

Equity Debenture

Convertible

Non-Convertible

Mutual Fund

Equity

Large Cap

Mid/ Small Cap

Sectoral

Debt

Govt Bond

Liquid Fund

Fixed Maturity Fund

Balanced

Others

Govt Pension Scheme (NPS)

Mix

Pure Debt

Real Estate Commodity/ Metal

Material

ETF


Advantage• The returns here are fixed

and guaranteed• The returns generally

based on market rate – but may not be volatile

• In most cases – principal is guaranteed (banks and Govt) – provides high degree of safety

Disadvantage• As returns are fixed – no

chance of increasing it• Return need to adjusted

vis-à-vis tax rates• Lock-in period

Fixed return


Fixed Return

•Easy availability, easy operatibility

•Variable term – from 15 days to 15 years

•Systematic Investment – Recurring Deposit

•High Retail participation

Banks

(Public sector/ Pvt sector)

•Higher rate of interest

•Less ease of operation – in flexible

•CRISIL rating to be observed regarding credit worthiness

•No systematic investment

Company Fixed Deposit

FIXED DEPOSIT


Fixed Return

•Savings / Recurring Deposit / Monthly Income Scheme (MIS) / Kisan – Indira Vikas Patra / Sr Citizen

•High rural penetration

•Relatively difficult to operate – due to low computerization

•High rate of return – Federal Guarantee

Post Office•Rate fixed by Govt

•15 years – can be extended – medium flexibility as loans

•Regular investment (Max Rs 70,000 pa)

•Tax Credit

Public Provident Fund

•Rate fixed by Govt

•6 years•Highest security – least flexibility – no tax credit

•Demat possible

RBI Bonds

•Issued by Govt Organization

•State Govt / Railway/ Highway Authority

•Special Tax Credit

•Low rate of interest

•Low Flexibility

Infrastructure Bond

Government Schemes


Advantage• The returns are based on

market• There is no limit – both

upwards or downwards• No lock – in, highly

tradable

Disadvantage• No fixed return• No guarantee on return of

principal• Requires broker and

demat account

Variable Return


Variable Return

• Equity is ownership– Earn profit

• And share the loss– Publicly traded in exchanges (NSE, BSE)

• Valuation of share depends on various parameters of company (microeconomics), as well as macroeconomic factors

– Investors make money through• Fluctuations in valuation – reflected in price per share – in terms of

capital gain• Dividends

– Ability to make profit (with inherent risk)– High liquidity– Demat account – transaction through broker (offline or online)

Company sells shares to raise capital – in order to:1. Fund new product

manufacture or research2. Funding expansion3. Pay off existing debts etc.

Stocks


Variable Return

• Dividend– Debt instrument – used by companies to raise money

• With certain coupon rate – payable at certain frequency

– Publicly traded in exchanges (NSE, BSE)– Reasonable liquidity– Demat account – transaction through broker (offline or online)

ConvertibleDebenture

Non-ConvertibleDebenture

• Converted into equity shares of the issuing company after a predetermined period of time

• Generally the rate of interest is lower than NCDs

• Convertibility is unique attraction

• Regular debenture – with fixed coupon rate

• Generally the rate of interest is higher

Debenture


Variable Return Mutual Funds• A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. It is essentially a diversified portfolio of financial instruments - these could be equities, debentures/bonds or money market instruments.

• Investor can make money by– Distributed earnings – say dividends or bonus– Fund makes capital gains – unit price increases – investor sells at higher price– Fund gains valuation – unit price increases – investor sells at higher price


Types of Mutual Funds

By Structure

By Investment Objectives

Other Schemes

Special Schemes

•Open Ended Schemes•Close Ended Schemes•Interval Scheme

•Growth Schemes•Income Schemes•Balance Schemes•Money Market Schemes

•Tax Saving Schemes

•Index Schemes•Sector Specific Schemes

Liquid funds

ST debt

funds

Gilt funds

Debt Funds

Balanced funds

Risk

Index funds

Return

Equity funds

Sectoral funds


Equity Mutual Fund

Equity (Invested in stocks. The ratio depends on the fund objective,

but generally 80 – 100%)

Large Cap (Invest in big companies, with large market cap. The large caps may have limited fluctuations and time-

tested)

Mid/ Small cap (Invest is smaller companies with

relatively less market capitaization. Over period the mid/small caps may become

large cap companies. The key is to identify the winner. This is

riskier than large caps.)

Sectoral (Invest in specific sectors – say Infrastructure,

Auto, Finance, IT etc. Though the return may be large – it is

the riskiest – follows the industry trends)

Risk Factor Increases


Debt Mutual Fund

Debt (Invested in bonds. It can be Government Bond, Corporate

Bond, Fixed Deposit etc)

Liquid/ Money

Market (Invest invest in highly liquid money

market instruments and

provide easy liquidity.– for corporates)

Ultra Short Term (Invest very short term debt securities

with a small portion in longer

term debt securities.

Generall less than 1 yr.)

Floating rate (Invest in

floating rate debt securities, where the interest paid changes in line

with the changing interest rate

scenario)

Medium/ Long Term

(Invest in floating rate debt

securities, the interest paid

changes in line with the changing

interest rate scenario)

FMP (Close-ended – defined

duration. Equivalent to

Fixed Deposits)

Various Types – also includes GILT (Govt Bonds)


Other Avenues

•High Investment – High return

•Less liquid

•Relatively non-transparent

Real Estate•Traditi

onal – as ornament

•As Gold Traded Fund (paper gold)

Gold

•Traded in exchanges

•Mainly for trading purpose

Commodities

•Issued by Govt Organization

•New investment avenue

•For Retirement only

National Pension Fund

introduction to investing - for young adults

Economy & Finance