portfolio risk analysis project report

7/29/2019 Portfolio Risk Analysis Project Report

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CONTENTS

1. PREFACE.

2. INTRODUCTION.

3. AIM .

4. OBJECTIVES.

5. PORTFOLIO MANAGEMENT.

6. RISK ANALYSIS.

7. PORTFOLIO ANALYSIS.

7.1 FIXED DEPOSITS.

7.2 PUBLIC PROVIDENT FUND.7.3 GOI SECURITIES.

7.4 NATIONAL SAVING CERTFICATES.

7.5 POST OFFICE.

7.6 INSURANCE.

7.7 MUTUAL FUNDS.

7.8 STOCK MARKET.

8. RESEARCH MEHODOLOGY.

9. THE SURVEY.

9.1 FINDINGS.

10. ANALYSIS AND RECOMMNEDATIONS.

11. LIMITATIONS.

12. CONCLUSION.

13. APPENDIX.

14. BIBLIOGRAPHY.

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PREFACE.

Investment is a long-term concept. An investment is a

commitment of funds made in expectation of some positive return.The main motive of investment is to earn returns. It is the basic

motivating factor behind all investments and the desire is to earn

better returns. When investment is done in one single security it

bears the risk and return features of that particular security only.

When it is done in a number of securities it forms a portfolio and

thereby it bears the aggregate risk and return features of the

various components of the portfolio. A general perception is that

risk in a portfolio is less as compared to that in an individual

security. Also the returns in a portfolio are comparatively high and

stable. In the present day the investor finds a large number of

avenues where he may invest hence the decisions regarding

portfolio are of great importance. This leads to the need for an

intensive analysis of various opportunities of investment and then

find out where to invest, when to invest, how much to invest and

for what duration to invest.

This project mainly aims to study all the available for an investor

and drawing a basic comparison among them and thereby deriving

results that would be useful to plan an ideal portfolio.

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INTRODUCTION

A portfolio is a collection of investments all owned by the same

individual or organization. These investments often include stocks,

which are investments in individual businesses; bonds, which are

investments in debt that are designed to earn interest; and mutual

funds, which are essentially pools of money from many investors that

are invested by professionals or according to indices.

But the basic question is why should an investor maintain an

investment portfolio and that why should the individual not keep

himself limited to a single security?

And the answer to this question is that an investor has different types

of needs and one single form of investment shall be unable to meet all

his requirements. Also maintaining the whole amount in a single entity

shall be very risky.

So the key to investment success is the proper diversification of assets.

Diversification means more than just having different types of

investments. It means having a mix of investments across sectors,

time horizons, markets, and instruments. When one diversifies, the

money is spread among many different securities, thereby avoiding the

risk that the portfolio will be badly affected because a single security or

a particular market sector turns sour. Diversification is the key to abalanced investment portfolio. By diversifying across assets, the

investor can reduce the risk without necessarily having to reduce the

returns. The golden rule is that if there is a diversified portfolio the

overall portfolio risk will be lower.

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A good portfolio will have stocks, bonds, mutual funds, money market

funds etc. of different companies from different sectors. But

diversification needs to be done carefully and with adequate prudence.

There are basically three steps to diversification. And in order to make

diversification all these steps need to be followed properly.

The first step is that of analysis of Liquidity Considerations. The

investor should establish how much of the portfolio will need to be

invested in relatively liquid assets that can be quickly converted to

cash when needed. Generally investment managers advise thatkeeping 10% to 15% of the portfolio in these types of investments is an

adequate amount for most people.

The second step is to establish the investment goals and objectives. If

one is looking for long-term results, he will have to concentrate on

growth investments-real estate or growth stocks. However, the aim of

investing is to develop a source of yearly income, concentration on

income-generating investments such as high-dividend stocks or bonds

will be needed.

The third and the final step is to select the specific investments. Here

the investor needs to consider the tax consequences of various

instruments. To maintain appropriate diversification, regular evaluation

of the investment strategy shall also be needed and a further analysis

how the investments are performing and whether or not the

investment goals of the individual has changed.

So a close and continuous monitoring of the various components of the

portfolio is needed. And thus arises the concept of portfolio

management.

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AIM

The aim of the study is to mainly analyze the risk associated with

investment in various securities, and thereby find out that how an ideal

portfolio should be planned such that the investor gets the maximum

return out of the investment made and fulfilling his liquidity

requirement simultaneously.

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OBJECTIVES

The aim of the project being an exhaustive analysis of portfolio

decisions of an investor the study would be carried out keeping thefollowing objectives in mind.

To study the concept of risk why does it arise and the various

types of risks that are associated with investment.

An intensive study of the various avenues of investment thoseare available to an investor.

To study the different types of risk and return factors that are

associated with each type of investment and thereby find out

the role that each type of security plays in an investors

portfolio.

To find out how individuals actually plan their portfolio, their

preferences about different types of investment opportunities

based on the collection of primary data.

Lastly, to analyze and find out that how an ideal portfolio can

be planned for an individual that would give him adequate

return without any hindrance to his liquidity requirements.

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PORTFOLIO MANAGEMENT.

The way to manage the composition of the investment portfolio is

known as portfolio management. The processes, practices and specific

activities to perform continuous and consistent evaluation,

prioritization, budgeting, and finally selection of investments that

provides the greatest value to the investor. Through portfolio

management, the investor can explicitly assess the tradeoffs among

competing investment opportunities in terms of their benefit, costs,

and risks. Investment decisions can then be made based on a better

understanding of what will be gained or lost through the inclusion or

exclusion of certain investments.

The aim of Portfolio Management is to achieve the maximum return

from a portfolio that the investor has. The investor has to balance the

parameters which define a good investment i.e. security, liquidity

and return. The goal is to obtain the highest return out of the

investment made. It is the way of diversifying a portfolio of

investments that takes into account risk and return considerations.

Each investor has different kinds of needs and should keep in mind all

his needs before any investment decision is taken. The various needs

that an investor has are mainly of four types:

LONG TERM PROFIT: Investment is a long-term concept. When anyinvestor makes an investment he aims to acquire a good return in the

long run. This means that the investors have a desire for capital

appreciation in their investment. Any investment made should give

good yield in the long run. Such investors do not worry much about the

current earnings. They want the investment to grow in the long-term.

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Such investors do not take a very high degree of risk. And their desire

for return is also not very high. This category of investors prefers

investing in the securities that have a fixed return and keep the capital

also safe. These types of investments are like debt based mutual

funds, bank and corporate fixed deposits.

TAX SAVING: Another investment aim that people have is that to save

tax. The income tax gives certain leverages in the payment of tax in

case certain amount of investment is made in certain specific kinds of

securities. These securities are mostly those that relate to the

infrastructure developments in the country. We find a very large

category of investors who invest only for the sole purpose to save tax.

Their investments are again very fixed. They are generally made in the

infrastructure bonds. Others include NSCs and treasury bills. But now

the taxation system has changed. All the leverages under Section80

(ccc), Section 88 and Section 80(l) have been clubbed under Section 80

c. and now there is a common limit of Rs. I00000/- so now the concept

of rebate in tax has been eliminated. But in case the withdrawals begin

to be taxed this would dampen the spirit of investment in these

securities.

INSURANCE: Insurance is also a motive of investment. The reason is

that each individual has certain amount of insurance needs. Life

insurance is also taken as a method of investment. It serves both

purposes that are of insurance as well as investment. Also we have a

large number of ULIPs that are attracting the investment from the

individuals. These ULIPs serve the dual benefit to the investor it fulfills

the investment needs as well as the insurance needs as well. Also with

the tax regime being changed these now stand in direct competition

with the ordinary mutual funds. But now the investor has to select fro

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himself that what are his primary needs and what are of a secondary

nature.

SHORT TERM EARNINGS: Some of the investors aim for just short t

term earnings. These investors have a desire for high current earnings.

Hence they play in the stock market and trade actively in the securities

so that they may make short-term profits. These investors study the

market very closely as most of their investments are linked to the

market. This kind of investment is very short term in nature and here

the main aim is to gain high by due to the fluctuations in the market in

the short run. Only only those investors who have a high-risk appetite

do this type of investment. Also these types of investors do not prefer

any lock in period of their investments made. They have a high

preference for liquidity.

Now in any investors portfolio there can be large number of

combinations of securities. Each security has certain features

regarding the returns that it would pay and the risk that it has. So for

this purpose an analysis of all possible avenues of investment has been

made in the following chapters.

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RISK ANALYSIS.

RISK IS A PART OF GODs GAME, ALIKE FOR MEN AND

NATIONS.

-George Woodberry.

Risk is the possibility of losing or of not gaining in value. It is the

measure of a particular investment's volatility and of the possibility

that it will cause an investor some degree of financial loss. It is the

difference between what should happen and what actually happens.

This can be in form of either in form of happening of some unexpected

negative event or the non-occurrence of an expected positive event. Inthe course of investment an investor faces a large number of risks and

some of them can be controlled and some of them are out of control of

an individual. Before any investment decision is taken it is necessary

for an individual to analyze all the possible risks associated to the

investment being made. An individual faces variety of risks that include

risk of loss of capital, risk of getting inadequate returns, unexpected

change in the government policies, any risk of loss that takes places to

fluctuations in the market. These are only some of the preliminary risks

that investors face but when an intensive analysis is made we find a

large number of risks that we generally ignore as an investor.

The two basic types of investment risks are:

BUSINESS RISK:

Business risk is, the most familiar risk that the investor generally

considers and easily understands. It is the potential for loss of value

through competition, mismanagement, and financial insolvency. It is

an unsystematic risk that is specific to the company in which the

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investment is made. It arises due to the possibility that a company

may not be able to meet ongoing operating expenditures. There are

certain industries that are very vulnerable to this type of risk. So

before an investor invests his money in a company he is supposed to

carefully analyze the operational aspects of the company. This is a risk

that an investor can avoid by intensive study of the past performance

of the company. This type of a risk is more in investments made in the

equity market as well as mutual funds. The reason is that returns in

equity are directly related to the operations of the company and in

case of mutual funds on the efficiency of the fund manager and his

way to manage the portfolio of the fund.

VALUATION RISK

This risk is associated with the risk in the value at which the security is

available in the market. The value should be adequate and should give

the true position of the security. This type of risk mainly arises when a

security is directly purchased from the market. In case of equity shares

an investor who applies in an IPO should consider that at what price

the share is available in the open market and then bid accordingly. It

applies in case of mutual funds as well. When the purchase is NAV

based an investor should be careful about the return that the investor

shall get back from the investment in form of capital appreciation and

recurring return in form of dividends.

Now an investor has to understand that risk has got certain features

and before he takes any investment decision he should consider these

features of risk.

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Risk can be quantified. As it has been defined as a negative event or

a positive event not occurring various methods have been developed

that help to quantify the risk that can be associated with the

investment being made. This feature creates an inbuilt feature of it

being mitigated. So now since risk can be quantified it can be

managed and controlled. This would help the investor to earn

returns like that prevailing in the market and maximize the return that

he earns in the course of investment.

Here a lot depends upon the risk bearing capacity of the investor.

It depends upon the investor that what is the amount of risk that he

wishes to take. Different investors have different risk appetite that

depends upon a variety of other factors. These include liquidity

preference of the investor, stage of a persons life, earning

requirements of the person and many other financial as well as

psychological factors.

During the course of study it was found that generally investors ignore

certain basic facts about risks involved in investment. Though risks are

pervasive and inherent to any financial decision but a common investorfails to understand them.

For any investor the risk is not same in all stages of his life. People in

the later stages of their life have a lower risk bearing capacity the

reason is that their earning capacity is lower and they have limited

savings. Hence people in this stage of their life need to carefully

examine all the risks associated with the investment being made by

them. Another factor that works in the later stages of the life are

liquidity is more desired due to causes like emergency medical needs

and the individuals do not have a regular recurring source of income.

Also people in the mid stage of their life cycle also have less risk

bearing capacity due to various responsibilities that they have. Hence

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these investors need to keep their money safe such that they do not

face any problem in future. They not only have to generate enough

recurring income but also keep in mind the long term capital aspect in

mind while they take any investment decision. So the conclusion is that

age of a person has an inverse relationship with the age of the

investor.

Another factor of risk for the investors need to pay a lot of attention to

is that of inflation. It is considered as a tax on everyone. It destroys

value and creates recessions. Although it is believed inflation is under

control, the cure of higher interest rates may at some point be as bad

as the problem. Inflation can have very drastic effects on theinvestment made. It corrodes the real value of money.

Investors historically have retreated to hard assets such as real

estate and precious metals, especially gold, in times of inflation.

Inflation hurts investors on fixed incomes the most, since it

erodes the value of their income stream. But in normal course the

fails to understand that his fact. People who invest in fixed incomebearing sources of investment feel that they are able to earn a fixed

amount and do not realize the fact their real income is actually falling.

Stocks are the best protection against inflation since companies have

the ability to adjust prices to the rate of inflation.

So as a guard against the factor of inflation even the investors in the

later stage of their life maintain some of their assets in stocks. This

would help them to maintain a pace in their income.

Some investors fear from making investments in the equity market due

to the inherent risk that prevails in this form of investment. But the

investor should always try to get maximum out of the investment that

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he makes and hence take advantage of the high returns in the equity

market. Equity and equity related instruments have been the only

option of investment that has beaten the effect of inflation. Nowadays

if an investor has a low risk capacity he can enter the equity market

with the help of mutual funds especially for the investors in the later

stages of the life. Here they would enjoy a large number of benefits

that have been stated later under the chapter of mutual funds.

So it is proved that assured returns are not always the best as they are

always lower than what an investment actually should earn. Hence it is

recommended for the investors to not be lured by the assured returns

they should try to make their money work hard for them so that the

yields are optimum. Not taking any risk is one of the biggest risks that

an investor might have to face.

Another risk is related to the trends in the market. One should neither

have an over optimistic view nor an over pessimistic view about the

market. Both the conditions may prove harmful for an investor. An

investor should not enter the market when it is on a rising trend under

the impression that it would further rise in future because the marketmay behave in just an opposite manner. Rather it would be a better

option to exit the market when it is high that would help the investor to

get good return on the initial investment made. Being too bullish can

prove harmful so the investors should keep a close watch of the

changes in the market. The same thing applies for a pessimistic

approach towards the market. Generally when the market is falling it is

the right time to enter the market. But if the fall is over estimated then

the investors would refrain from entering the market. And any profit

from future rise would not be available to the investor. So by carefully

studying the trends in the market an investor should adopt an

effective investment strategy so that the risk due wrong estimation

of the market trends can be reduced.

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Only a close study of the market is also not sufficient decisions

regarding the selling and buying in the market also need to be taken

promptly. The reason is that suppose the market is high and an

investor plans to sell his security but by the time he finally decides to

sell it the prices may have reduced so the gap between the time of the

idea generation and the final action may be a cause of loss for the

investor. Even the buying decisions need to be taken promptly

as delay in actual purchase may lead to paying of high price by

the investor.

All macro factors need to be taken care of while deciding the portfolio

of an investor. The major risk that investors have is that of irrationality.

Most of the time we see that the investors tend to follow the crowd

instead of analyzing that what shall be a better option for them. The

information upon which the investment decision needs to be based

should be authentic.

But the final verdict is that risks cannot be eliminated they can

however be managed effectively if the investors are prepared to walk

an extra mile. Awareness about risk and knowledge regarding theramifications of the same is the first step to risk management. Risks

need to be treated as by-products of any investment exercise.

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A PORTFOLIO MAY

INCLUDE:

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FIXED DEPOSITS.

Fixed deposits remain the most popular instrument for financial

savings in India. They are the middle path investments with adequatereturns and sufficient liquidity. There are mainly two avenues for

parking savings in the form of fixed deposits. The most common are

bank deposits. For nationalized banks, the yield is generally low with a

maximum interest of 5%-5.5% per annum for a period of three years or

more. As opposed to that, NBFCs and company deposits are more

attractive.

The idea is to select the right company to minimize the risk. Company

deposits as a saving instrument have declined in popularity over the

last three years. The major reason being the slowdown in economy

resulting in default by some companies.

All that is likely to change for the better. Corporate performance is

likely to improve and stricter control by RBI should improve NBFCs

record. But still the investor needs to be selective and careful while he

makes a selection of the fixed deposit.

The term "fixed" in fixed deposits denotes the period of maturity or

tenor. Fixed Deposits, therefore, presupposes a certain length of time

for which the depositor decides to keep the money with the bank and

the rate of interest payable to the depositor is decided by this tenor.

The rate of interest differs from bank to bank and is generally higher

for private sector and foreign banks. This, however, does not mean

that the depositor loses all his rights over the money for the duration of

the tenor decided. The deposits can be withdrawn before the period is

over. However, the amount of interest payable to the depositor, in such

cases goes down which is charged as a penalty for premature

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withdrawal made by the investor. Moreover, as per RBI regulations no

interest is paid for any premature withdrawals for the period 15 days to

29 or 15 to 45 days as the case may be.

So the main problem with the fixed deposits is that of liquidity andwithdrawal in case of need by the investor. But again the investor can

be quite sure about the returns that he would get from the investment

in the fixed deposits. So fixed deposit remains the choice of the

conservative investors who do not have much of liquidity

requirements.

Presently we see a lot of fall in the interest rates offered by the banks

but the Indian investor is not that enterprising and so a lot of investors

still prefer to invest in bank FDs rather than any other form of

investment.

The current rates that are being offered by the banks vary from 3.25%

to 6.25% that is much less than what is paid by the other areas of

investment. So the banks have started offering various schemes

related to fixed deposits.

The banks offer regular income scheme under the fixed deposits.

Under these schemes the interest is credited regularly to the investors

account and the investor can thereby withdraw the amount as per his

requirement. So the fixed deposits offer certain amount recurring

income to the investor. Certain banks also offer loans against these

deposits as well.

To state a few Punjab National Bank has large number of fixed deposit

schemes and hence the investor is offered a wide choice to select the

scheme according to his need. Like Anupam Account Scheme, Multi

Benefit Fixed Deposit Scheme. Canara Bank offers loan against

deposits and also allows part withdrawal from the deposit as and when

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needed. Union Bank of India also a large number of deposit schemes

under fixed as well as recurring deposits. Hence the banks are making

efforts to attract the investors money and have been successful to

large extent.

There is only slight variation in the interest rates offered by the banks

on these deposits. Some of them, which were a part of study during its

course, have been stated below.

Rates offered by Union Bank of India are differentiated on the amount

of deposits. The rates are as follows:

FIXED DEPOSIT RATES OFFERED BY UNION BANK OF INDIA

Amount of Deposit (% p.a.)

PERIODLess than Rs. 15Lacs

Rs. 15 Lacs &above

Rs. 1 crore &above

07 - 14 days 3.50 4.00 4.00

15 - 45 days 4.25 4.25 4.25

46 - 90 days 4.50 4.50 4.50

91 - 179 days 4.75 4.75 4.75

180 days < 1year 5.00 5.00 5.00

1 year < 2years

5.25 5.25 5.25

2 years < 3years

5.50 5.50 5.50

3 years < 5years

5.75 5.75 5.75

5 years andabove

6.25 6.25 6.25

Canara Bank has an absolutely same rates list. But there a clear

distinction has not been made in the amount of deposit. Rates are

same for all amounts of deposit.

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State Bank of India has a bit different rates being offered and some

additional benefits as well.

FIXED DEPOSIT RATES OFFERED BY STATE BANK OF INDIA

PERIOD %p.a.7 days to 14 days 3.0015 days to 45 days 4.0046 days up to 179 days 4.50180 days to less than one

year 5.001 year to less than 3 years 5.503 years to less than 5

years 5.755 years and above 6.25

The rate of interest on deposits of Senior Citizen under Senior Citizen

Deposit Scheme under Domestic pay additional Interest of 0.50% p.a.

for maturity periods of 1 year and above upto 5 years and 0.25%for

maturity period of 5 years and above.

RISK ANALYSIS OF FIXED DEPOSITS.

As far as the risk involved in investing in fixed deposits is concerned

there is hardly any risk involved. Neither there is risk of loss of capital

nor there is risk regarding the current earnings. But this safety is

limited to bank fixed deposits only. Corporate fixed deposits carry a

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certain degree of risk. A lot depends upon the performance of the

company. If an investors desires to have a corporate fixed deposit then

it is necessary to work on the principle of adequate diversification over

a number of companies as well as industries. Also in case of corporate

fixed deposits the investor should not keep his money locked in for a

longer duration this ensures the safety of the principal money.

An investor needs to analyze the cash flows in the company. The

companies that offer higher rates of interest should be avoided as

most of the times they fail to pay so. Even companies with poor cash

flows are an alarm for the investors. So the risk level automatically

rises. But in India not many companies issue public deposits.

The return on these deposits is also certain to large extent. The

interest shall be paid at the end of the period if the withdrawal is not

made in midst of the duration for which the deposit has been made.

FIXED DEPOSIT TRENDS

Banks investments have grown faster than their loans. As a result,

banks investment-deposit ratio has moved up sharply from 38.0

percent to 42.4 per cent. Over the same period, banks credit-deposit

ratio has moved up from 53.6 per cent to 55.9 per cent, largely due to

the pick up in credit growth during the last year.

The preference of banks for government securities has been influenced

by several factors, of which the following are important:

High level of Statutory Liquidity Ratio (SLR): Banks are

statutorily required to invest 25 per cent of their net demand and

time liabilities in government and other approved securities. This

reflects the governments need to have access to bank funds to

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finance its deficit. However, in a market driven regime, such

restrictions should be done away with and the SLR should be

brought down gradually.

Uniform risk-weights on all commercial lending: RBI

guidelines for capital adequacy require banks to assign 100%

risk weight to its loan portfolio while its investments in

government securities attract a risk weight of only 2.5% to cover

market risk. This skewness in risk-weights is unrealistic, as all

commercial loans do not bear the same level of risk. The new

Basel Capital Accord or Basel 2 recommends a continuum of risk

weights that reflects the borrowers credit rating. If such a riskweight structure were implemented in India, it would discourage

banks tendency to misallocate resources in favor of government

securities.

Inadequate laws to tackle NPA recovery: Till recently,

foreclosure laws in India favored borrowers, so that banks and

financial institutions found it extremely difficult to recover non-

performing assets. This further reinforced bankers aversion

towards medium to high-risk commercial debt. The Securitisation

Act, 2002 aims to rectify this problem by allowing lenders to

dispose of a defaulting borrowers asset within 60 days of having

sent a notice.

.

Banks investments have delivered good returns, but a large proportion

of banks investment portfolio is illiquid

Over the last few years, the sharp decline in interest rates has helped

banks make substantial gains from the sale of investments in

securities.

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PUBLIC PROVIDENT FUND.

A provident fund is a fund that pays benefits to the company

employees who are fund members upon the termination of theiremployment. Contributions paid into the fund by both the employees

and the employers are invested in accordance with the pre-determined

condition of amount and risks. Now a public provident fund is one that

is taken to be a savings cum a tax saving instrument. It is like a

account in which a certain amount has to deposited on an yearly basis

and a certain amount of interest is paid on the amount deposited.

FEATURES OF PPF

A PPF account can be opened by an individual in his own name or

on behalf of a minor of whom he is the guardian or by the Karta

of Hindu undivided family of which he is a member or behalf of

an association of persons or a body of individuals consisting only

husband and wife governed by the system of community of

property in force .

An individual on his own behalf can open only one PPF account.

However, an additional account can be opened on behalf of a

minor of whom he is the guardian or a Hindu undivided family by

the Karta of which he is a member or on behalf of an association

of persons or a body of individuals.

A person having a GPF account can open a PPF account

The account can be opened in the Head Post Office or in the

branches of SBI or its subsidiaries or in the Nationalized Banks.

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The account can be transferred at the request of the subscriber

from one Post office to another, including Bank to Post Office and

vice-versa.

Minimum Amount Rs.500/- in a year (financial year i.e. from 1st

April to 31st March) Maximum Amount in a year in Rs.70, 000/-.

If contributions in excess of Rs.70, 000/- are made during a year

Excess amount will be treated as Irregular subscription and

will neither carry any interest nor this excess amount will be

eligible for rebate under section 88 of I.T. Act. This excess

amount will be refunded without any interest.

PPF account can be revived paying a fee of Rs.50 along with

arrear of minimum subscription for each year of default before

maturity .The default Fee must be credited to Govt. Account

under the Sub Head 0049.

Where a deposit is made by means of an outstation cheque or

instrument, collection charges at the prescribed rate shall be

payable along with the deposit and the date of realization of the

amount shall be the date of deposit.

The subscriber can extend the account beyond 15 years for one

or more block(s) of 5 years without any loss of benefits.

Subscriber can continue to make deposit during this period

Withdrawal can be made any time after expiry of 5 years from

the end of the year in which the initial subscription was made.

The amount of withdrawal should not exceed 50% of the balance

at the end of 4th year immediately preceding the year in which

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the amount is withdrawn or at the end of the preceding year

whichever is lower. Only one withdrawal is permissible in a year.

The first loan can be taken in the third financial year from the

financial year in which the account was opened up to 25% of the

amount at credit at the end of the first financial year.

Subsequent loan can be taken when the earlier loan with interest

has been fully repaid.

The loan is repayment either in lump sum or in convenient

installments numbering not more then 36. Interest at the rate of

1% above would be charged if loan is repaid in 36 month. Suchinterest should be paid in not more than 2 monthly installments

.If the amount of loan is not repaid within 3 month, interest on

outstanding amount of loan would be charged at 6%. Calculation

of interest from 1st day of the month following the month in

which the loan is drawn up to the last day of the month in which

the last installment of the loan is repaid

A subscriber may nominate one or more person to receive the

amount standing to his credit in the event of his death. No

nomination can, however, be made in respect of an account

opened on behalf of a minor. Nomination may also be made in

respect of an account on behalf of a Hindu undivided family.

Nomination may be cancelled or varied by a fresh nomination.

In the event of the death of the subscriber, the amount standing

to his credit can be repaid to his nominee or legal heir, as the

case may be, even before the expiry of fifteen years. Legal heirs

can claim the amount up to Rs. One lac without production of the

succession certificate after observing certain formalities

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Subscription to the PPF qualify for deduction from the taxable

income of the subscriber for income tax purpose within the limits

laid down under section 80-C of the income tax act.

The interest credited to the funds is not counted as income for

the purpose of income tax. The amount including the interest

standing in the credit of the subscriber in the fund is also totally

exempt from the wealth tax.

PPF account is not transferable from one person to another. In

case of death of the subscriber, the nominee cannot continue theaccount of the deceased subscriber

A female subscriber can change her name in the PPF account in

the event of her marriage.

So all these make PPF a very popular investment option among the

investors. We find a lot of investors who select PPF as major

component of their portfolio. There are various reasons that lure the

investors money towards this form of investment.

Generally the risk perception towards PPF is very liberal. There is

hardly any type of risk in investing in PPF. Both the recurring return as

well as the capital of the investor is safe. Other than the factor of

safety other factors that attract investors are:

Fixed Return: This type of investment pays a fixed amount of

return @8% per annum. This leads to sense of security to the

investor as he is assured the return. Generally the investors who

have a conservative attitude prefer this type of investment. The

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reason is that they do not want to take nay risk and desire some

amount of income of investment.

Small Investors Choice: The minimum amount of investment

needed in case of PPF is very small. Hence even the small

investors have the chance to take the opportunity to invest. The

minimum annual amount is only Rs.500/- which is an affordable

amount for even the small investors. So PPF is one of the most

attractive options of investment for the small investors.

Loan Facility: One has an added facility in case he holds a PPF

account that is the loan facility. One can take a loan in case of

need of money. The investor can take a loan after one year of

opening of the PPF account. But here there are some restrictions

regarding the re-payment of the loan. The principal has to be

paid within 3 years. But still in case of need an investor can use

this option. So this ensures some amount of liquidity in the fund.

Tax Benefits: The main advantage of PPF is of tax benefits. All

interest received under the fund are tax-free. And even

investment up to Rs. 70000/- helps to get a rebate in

income tax. So the main motive of most of PPF account holders is

to enjoy the tax benefit.

So all the factors make PPF a competitive area for investment. It is

advisable for the people in the later stage of the life cycle to

maintain a PPF account, as this would keep their principal safe and

give them small & regular returns. The only problem with PPF is that

of liquidity. Withdrawals are allowed only after the fifth year of

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opening of the account and that too only 50% of the amount at the

credit of the account at the fourth year of the drawl.

GOI SECURITIES.

These securities are a part of the money market and have a high

degree of liquidity. The two basic features that these bonds have is

that they are totally risk free and that have a very high degree of

liquidity. They include the bonds that are issued by the Government of

India from time to time and the treasury bills.

GOI Bonds are sovereign i.e. credit risk-free coupon bearing

instruments which are issued by the Government of India. The

investors who have a conservative attitude generally go in for this form

of investment. The reason is that the investor is completely assured of

the returns as well as the liquidity of the investment being made. The

basic features of these bonds are:

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These securities have a fixed coupon that is paid on specific

dates on half-yearly basis.

Securities are available in wide range of maturity dates, from

short dated (less than one year) to long dated (upto twenty

years).

Securities are available in primary and secondary market.

High liquidity-securities can be sold in the secondary market at

prevailing rates

Available in physical form or in demat -maintained in

Constituents Subsidiary General Ledger (CSGL) a/c with any bank

Securities held in CSGL a/c will have the convenience of

automatic credit of half yearly interest and the redemption

proceeds on due date

Reasonably good returns

Treasury Bills are discounted instruments issued by the Central

Government. These are also one of the most preferred forms of

investment that the conservative investors select as a part of their

portfolio.

The basic features of these bills are as follows:

Sovereign zero risk instruments. Hence there is no risk at all

of any kind involved in this form of investment.

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They are generally short term, discounted Instruments with a

maximum tenor of 364 days.

Available in primary and secondary market. This makes them

more popular among the different forms of investment. They

are available by way of auction every week and also in the

secondary markets as per availability. The Reserve Bank of

India auctions 91 day T-Bills every week and 364 day T-Bill

every alternate week.

Issued at a discount to face value i.e., investors will buy the T-

bill at discount to face value of Rs.100 and on maturity theinvestor receives the face value of Rs.100.

No Tax Deduction at Source (TDS). This ensures some amount

of tax benefit as well.

Convenience of CSGL a/c as in case of Central Govt securities

such as automatic credit of redemption money.

The degree of liquidity is very high and returns are very

attractive. This leads to its increasing popularity among the

investors.

These days transactions in these forms of securities have been made

quite simple as well as paperless. The most convenient mode of

transacting in GOI Securities or Treasury Bills is by opening Constituent

SGL account with a Bank or NSDL. A Constituent SGL account is very

much like a depository account by means of which a person can

engage in paperless transaction in GOI Securities and Treasury Bills.

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The investor can easily know the present value of the investment.

Rates on debt instruments can be obtained from banks that are active

in trading these instruments. Brokers who deal in debt instruments can

also provide these rates. But the rates are not very accurate as the

trading is not very regular.

The security bought can be held to maturity giving interest inflows on

the respective interest payment dates and redemption proceeds on

maturity. The interest accruals and Redemption proceeds for Gsecs

and T-Bills will be credited directly to the savings / current account of

the SGL account holder.

NATIONAL SAVING CETIFICATES.

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National Saving Certificates, or NSCs, as they are more popularly

known, are a time-tested tax-saving instrument that combines

adequate returns with high safety. To main motive that the investors

have behind investing in NSCs is to save tax. The reason is that the

degree of liquidity is very less in case of NSC.

A lump sum payment has to be made at the time of investment. The

certificates are issued in the denomination of Rs.100, Rs.500, Rs.1,000,

Rs.5,000, Rs.10,000 and other denominations as may be notified by

the Central Government. The minimum amount of investment to be

made is of Rs. 100 and for the maximum there is no limit.

The interest is compounded half yearly @ 8%. And the maturity periodis six years. So the interest paid on a Rs. 1000/- certificate for the

various periods of time would be:

PERIOD INTERESTFirst Year 81.60Second Year 88.30Third Year 95.50

Fourth Year 103.30Fifth Year 111.70Sixth Year 120.80

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BENEFITS TO THE INVESTOR

Tax Rebate: Deduction in income upto an amount of

Rs.100000/- is allowed on the investment made in national

saving certificates. So the investor can enjoy a deduction in the

gross income on which he is suppose to pay tax. This is the real

motive that attracts the investors towards making investment in

NSCs. There is no TDS applicable on the interest paid on NSC.

Loan Facility: The banks provide loans to the investors against

the certificates. But during that duration the certificates cannot

be encashed. This helps the investors to enjoy certain amount of

liquidity. So here it becomes quite similar to the public provident

fund.

Easy to Invest: The eligibility criterion for investing in an NSC is

quite simple. An individual can purchase it singly or jointly, by a

minor, a registered charitable trust and also a Hindu undivided

family. Also these certificates are available at post offices and

they can be paid for either in cash or by local cheque. So not

much of legal formalities are needed to purchase an NSC.

Easy Transferability: A NSC held in the name of one person

can be easily transferred in the name of another person and also

from one post office to another on payment of the prescribed

fees. But this facility can be availed only after the completion ofone year from the date of purchase of the NSC.

Negligible Risk: The degree of risk involved in investing in NSC

is absolutely nil. The return is completely risk free and so is the

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principal amount. Only loss may take place in case of premature

encashment of the certificate.

TRENDS IN NSC INVESTMENTS

There has been a lot of change in the tax act as result NSC

investments have been affected to a large extent. As per the act

earlier the NSC investments were eligible for a rebate in income tax

upto an amount of Rs.70000/- u/s 88 of the Income Tax Act. But now all

the items that came under this section and section 80 (ccc) have been

consolidated under a single section 80 c. the difference here is that

now there is no tax rebate rather a deduction in the gross income

allowed upto an extent of Rs. 100000/-. Also the rate of interest has

been sustained at 8%. So all this has helped to boom up the

investment in these types of securities. The only dampener in this

regard is the declared intention of the Government to migrate to an

EET regime, that is, exempt the contributions from tax; and exempt

accumulations from tax and tax the withdrawals. This will mean that

investors may be taxed when they withdraw the amounts from these

schemes, in case this regime comes into effect.

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POST OFFICE.

Post offices have been one of the major areas where we find a large

number of investors in India. Post offices offer a variety of schemes

and hence an investor has a large number of choices to invest. As a

part of the study only two schemes have been considered.

Monthly Income Scheme.

Kisan Vikas Patra.

The rest of the schemes have been left, as they are quite similar to the

schemes in the banks. The time deposit schemes as well as the

recurring deposit schemes are quite similar to what are available with

the banks.

MONTHLY INCOME SCHEME(MIS).

A monthly income scheme (MIS) provides for monthly payment of

interest income to investors. Here a lump sum amount has to invest

initially and then the interest is paid on a monthly basis. A single

individual can open the account or it can be a joint account. The

account can also be on the behalf of a minor.

Interest is paid at the rate of 8% p.a. plus a bonus of 10% bonus on thematurity after 6 years. But the interest can be withdrawn every month.

This gives the advantage of current earnings to the investors.

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The minimum amount of deposit is of Rs. 1000/- while the maximum

amount is Rs.300000/- in case of single deposit and it is Rs.600000/- in

case of a joint deposit. The interest that is paid can either be

withdrawn on monthly basis or it can be directly credited to ones

savings account directly.

Premature encashment is allowed after one year after deduction of

3.5% of the principal. No such deduction is made if account if the

account is closed after 3 years but no bonus is paid in case of

premature closure if the account.

This scheme is taken to be a boon for the retired persons because itgives the benefits of a regular income; as well the principal amount is

totally safe. Also in the post maturity period the interest paid is that

according to the savings bank interest rate upto a period of two years

for the completed month.

RISK ANALYSIS OF MIS

The degree of risk involved in a MIS is nil. There is hardly any specific

risk that is there in form of investment. The only risk that is there

includes the market risk. Generally this type of investment is

considered to be risk free by the investors.

KISAN VIKAS PATRA.

These are also certificates that are purchased by the investors that are

available in different denominations. The Kisan Vikas Patra provides

interest income similar to bonds and provides better liquidity by virtue

of the exit option after two and half years from the date of allotment.

The instrument suits those looking for a safe investment without the

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need for a regular income. Unlike many of the other PO scheme, the

Kisan Vikas Patra does not provide any tax relief to the investor.

This is a good option of investment for the retired people since they do

not have a taxable income and neither have very high liquidity needs.

Under this scheme the principal doubles in 8yrs and 7 months. And the

interest rate is 8.5% that is compounded annually.

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INSURANCE.

Insurance is protection against loss or damage in which a number of

individuals agree to transfer risk by paying specified amounts of

money, called premiums. These premiums create a pool of money that

guarantees the individuals will be compensated for losses caused by

occurrences such as fire, accident, illness, or death. In case of life

insurance the subject matter of insurance is life.

Life insurance is also considered as one of the avenues of investment.

The reason is that in case of life insurance the claim is paid on death or

maturity whichever is earlier. Also certain tax leverages are also givenon the premium paid for such policies that are taken by the investors.

But now what is more popular amongst the investors is ULIP (Unit

Linked insurance Plan). In case of ULIP the premium that is paid by the

investor is used to purchase the unit of a mutual fund. So the investor

has the benefit of a mutual fund as well as insurance. Here for the first

few years the investor is suppose to pay an amount as premium. This

premium is used to purchase the units of a mutual fund. It also gives

an assurance of life during the period that has been decided. And the

life cover is given for the period. If during the period of the contract

there is no death then the entire amount is paid based upon the NAV of

the fund.

So these policies are not as risky as mutual funds rather they cover

some amount of the investors risk.

But due to the recent changes in the tax regime now these mutual

funds are in direct combat with these unit linked insurance plans.

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MUTUAL FUNDS Vs. UNIT LINKED INSURANCE PLANS.

Mutual funds are better as the money withdrawal is allowed at any

point of time. Mutual funds look good in the short run even the money

withdrawal quick. Only the tax saving mutual funds has a lock in period

of three years. But in case of ULIPs the lock in can be of more than

three years also. So the mutual funds are more effective in the short

run while the ULIPs have an upper hand in the long term. In case ofULIPs part of the premium goes into risk cover for insurance and the

rest into investments. But the problem lies that in the initial stages the

cost insurance companies incur to get business is as high as 20% -

30% of the premium paid in the first year. But once these charges are

recovered the management expense amounts to only 1%. While

mutual funds have a regulation that their charges cannot be cannot

exceed 2.5% for the equity plans and 2.25% for the debt plans. And

this cost structure is maintained throughout the period of investment.

So all this makes ULIPs a better option in the long run. These linked

insurance plans also have a certain degree of flexibility they offer the

alteration in the distribution of premium between risk cover and

investment.

The price of life cover in ULIP is higher as compared to that in

conventional insurance. And in order to get a good benefit out of the

ULIP one has to maintain the investment in the same for a longer

duration. But still we find that most of the investors do not prefer

investing through ULIP

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MUTUAL FUNDS

When any investment is made the investor desires returns to be

adequate. But in order to earn high returns he needs to take a lot of

risk and also adequately diversify his portfolio. In reality an individual is

not capable of analyzing all the risk factors and make wise investment

decision. So now we have a lot of mutual fund companies that are

entering the market and they are channelising the small investments

into the stock market and hence help even the small investors to enjoy

the returns of the stock market.

A mutual fund is an investment that pools the money from an

unlimited number of other investors. In return, the investors each own

shares of the fund. The fund's assets are invested according to an

investment objective into the fund's portfolio of investments. And then

the returns of the fund are accordingly shared among the investors.

So the mutual funds work in the following way:

41

INVESTORS POOL IN MONEY

IN FORM OF PURCHASE OF

ITS OF THE MUTUAL FUND

THE FUND MANAGER DECIDES

UPON THE PORTFOLIO OF THE

INVETSMENT IS MADE IN

THE PORTFOLIO AND

RETURNS ARE GENERATED

RETURNS ARE DISTRIBUTED

AMONG THE INVESTORS.


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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 are 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.

If we analyze the advantages that a mutual fund offers the investors it

can be stated as follows:

Diversification: By owning shares in a mutual fund instead of

owning individual stocks or bonds, the risk is spread out. 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. Higher the number of securities in which the

investment is made lower is the amount of risk. Large mutual

funds typically own hundreds of different stocks in many

different industries. It wouldn't be possible for an investor to

build this kind of a portfolio with a small amount of money. The

best mutual funds design their portfolios so individual

investments will react differently to the same economic

conditions. For example, economic conditions like a rise in

interest rates may cause certain securities in a diversified

portfolio to decrease in value. Other securities in the portfolio will

respond to the same economic conditions by increasing in value.

When a portfolio is balanced in this way, the value of the overall

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portfolio should gradually increase over time, even if some

securities lose value. One rule of investing that both large and

small investors should follow is asset diversification. Used to

manage risk, diversification involves the mixing of investments

within a portfolio. For example, by choosing to buy stocks in the

retail sector and offsetting them with stocks in the industrial

sector, the impact of the performance of any one security in the

portfolio can be reduced. To achieve a truly diversified portfolio,

an individual may have to buy stocks with different

capitalizations from different industries and bonds having

varying maturities from different issuers. And for an individual

investor this can be quite costly and difficult.

By purchasing mutual funds, investors are provided with the

immediate benefit of instant diversification and asset allocation

without the large amounts of cash needed to create individual

portfolios. But simply purchasing one mutual fund might not give

adequate diversification it should be seen that whether the

fund is sector or industry specific. For example, an oil and energy

mutual fund has a portfolio that includes investments made in

the oil and energy sector, but if energy prices fall, the portfolio

shall suffer. Here we have the example of Reliance Mutual Fund

that has a number of funds like the Banking Sector Fund, Power

Sector Fund.

Professional Management: When investment is made in a

mutual fund, investors get the benefit of a professional money

manager looking after their money. This manager will use the

money to buy and sell stocks that he or she has carefully

researched. So now the investor does not have to bother about

what to sell and what to buy this shall be done by a mutual

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fund's money manager. Most mutual funds pay topflight

professionals to manage their investments. These managers

decide what securities the fund will buy and sell.

Divisibility: Many investors don't have the exact sums of money

to buy round lots of securities. They have small amounts

available with them that are not enough to buy shares in the

open market. So, instead of waiting until one has enough money

to buy higher-cost investments, one can enter the market with

the aid of mutual funds. Investments in mutual funds are made

generally in small amounts that range from Rs.500/- to Rs.5000/-.So it is not necessary to have huge sums of money to invest.

Low Costs: The cost of investment in mutual funds is

comparatively low as compared to what is incurred in

investments made directly into the market. Here the investor

enjoys economies of sale purchase and sale of securities. If only

one security is bought at a time, the transaction fees will be

relatively large. Mutual fund expenses are often no more than

1.5 percent of the investment. Expenses for Index Funds are less

than that, because index funds are not actively managed.

Instead, they automatically buy stock in companies that are

listed on a specific index. Other than this entry load and exit load

is also nominal. In most of the cases either of them is nil. At the

time of mutual fund IPOs and in case of SIPs the entry load is

always nil.

Mutual funds are able to take advantage of their buying and

selling size and thereby reduce transaction costs for investors. In

reality when a mutual fund is bought, the diversification takes

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place without the numerous commission charges. This prevents

the commission charges from eating up a good chunk of the

savings. Also the investor does not have to pay if he changes his

portfolio composition. Mutual funds are able to make

transactions on a much larger scale that makes them cheaper.

Liquidity: Another advantage of mutual funds is the ability to

get in and out with relative ease. The investor can sell mutual

funds at any time, as they are as liquid as regular stocks. Both

the liquidity and smaller denominations of mutual funds provide

mutual fund investors the ability to make periodic investments

through monthly purchase plans while taking advantage of

money-cost averaging. It is very easy to exit from a mutual fund

one has to simply apply for redemption.

Return Potential: The return potential is very high in case of

mutual funds due to the diversification of the investment that ismade. The company shall pay at least some dividend to the

investor because the fund shall earn some amount of profit and

even if dividend is not paid the asset value appreciation shall add

to the capital of the investor. So the investor has dual benefit of

both recurring returns and capital earnings as well.

Transparency: Mutual fund companies maintain a lot of

transparency. They give a complete list of the portfolio in which

they shall invest. The dividend history and the returns that are

earned are also clearly stated in the fact sheets of the mutual

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funds. So an investor is made well aware about where his money

is being invested and the real value of his investment.

Other Benefits: Mutual funds offer a large amount of flexibility

to the investors. An investor can easily switch from one option to

the other depending upon the changing requirements of the

investor. Also generally mutual fund companies have a number

of schemes running an investor can easily choose out of the

schemes of his choice. These schemes vary from sector specific

schemes to simply diversified portfolio. And these have varying

return prospects and an investor can select the schemeaccording to his requirement and risk appetite. Also these mutual

funds are well regulated by a lot of government regulations and

efforts are being made to formulate more regulations to protect

the interest of the investors.

TAX CONSIDERATIONS IN MUTUAL FUNDS.

Tax treatment is different in case of equity funds and debt funds. As

far as the income from mutual funds is considered they are in two

parts:

First includes the income from dividends and the second is incomein form of capital appreciation of the investment made.

An equity-based mutual fund is that mutual fund in which more than

50%of the investment is made in the equity market. In case of

equity based mutual fund dividend in the hands of the investor is

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tax free and even the company is not liable to pay any dividend

distribution tax. The capital gains part is further taxed in two parts

long-term capital gains and short-term capital gains. Long-term

capital gains are those that are for more than one year. These types

of capital gains are now totally tax-free earlier it was 20%. While

short term capital gains are taxed to the extent of 10% of the gain.

This type of capital gain was earlier taxable to the extent of 30%of

the gain.

An example of the tax treatment is as follows:

Suppose an investment of Rs.10000/- in January 2005 and by

August 2005 the value of the investment rises to Rs.15000/-. The

amount of short-term gain would be Rs.5000/-.

Tax= 10%of 5000 and hence the net gain would be 5000-

500=Rs.4500.

A debt-based fund is one that invests the amount in debt and

government securities. These types of funds generally give an

assured to the investors. In case of debt based fund dividend

distribution tax has to be paid. This is a tax paid by the debt-

oriented funds before they distribute dividends to the unit holders.

Presently dividend distribution tax is 13.06%. Also in case of

taxation of capital gains in case of debt funds both long term and

short-term capital gains are taxable. Long-term capital gains tax is

that of 10% of the gain or 20% of the gain after taking benefit of

indexation. Short-term capital gains are taxable in the similar wayas they are in case of equity funds.

Systematic Investment Plan (SIP)

A systematic investment plan is just like a recurring deposit account

with a mutual fund. A monthly contribution is made in the mutual fund.

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Units are purchased on a given date every month. This helps to avoid

risk of timing the market wrongly since investments are spread over

time at various NAV levels. This helps as it buys less units when the

market moves up and more units when the market moves down.

Hence it averages the cost of investment. SIP is a valuable tool of

financial planning. Another advantage is that there is no entry load in

case of SIP so the entire money invested is used for purchasing the

units of the funds.

MONTHNAV ON THEDATE

INVESTMENT UNITS ALLOTED

AVERAGECOST

AVERAGEPRICE

1 13.33 1000 75.02 13.33 13.33

2 13.41 1000 74.57 13.37 13.37

3 12.72 1000 78.62 13.15 13.154 13.56 1000 73.75 13.25 13.265 13.98 1000 71.53 13.39 13.4

6 15.17 1000 65.92 13.65 13.77 17.74 1000 56.37 14.12 14.27

8 18.98 1000 52.69 14.59 14.869 21.57 1000 46.36 15.13 15.61

10 24.11 1000 41.48 16.72 16.46

11 25.46 1000 39.28 16.28 17.28

12 27.23 1000 36.72 16.85 18.11

The above table shows how the averaging factor works in case of

SIP. The calculations are made in the following way:

Average Cost= Total Money Invested/No. Of Units.

Average Price(NAV)= Sum of all the NAVs / No. Of Months.

So we see that the average cost is low in case an investor opts forSIP. This type of an investment keeps an investor from any

botherations of the fluctuations in the market.

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AVERAGING OF COST AND PRICE IN SIP

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12

MONTHS

VALU

NAV ON THE

DATEAVERAGE

COSTAVERAGE

Another option that is quite similar to SIP is that Systematic Withdrawal

Plan. Under this option an investor is allowed to withdraw a fixed

amount each month and the units are adjusted according to the

prevailing NAV on the date of the withdrawal. In case of SWP there is

no exit load, hence it is one of the good options for the people who

have a fixed income need. But the mutual fund companies do notgenerally offer this type of a scheme.

TRENDS IN MUTUAL FUNDS

Last six years have been the most turbulent as well as exiting ones for

the industry. New players have come in, while others have decided to

close shop by either selling off or merging with others. Product

innovation is now pass with the game shifting to performance delivery

in fund management as well as service. Those directly associated with

the fund management industry like distributors, registrars and transfer

agents, and even the regulators have become more mature and

responsible.

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The industry is also having a profound impact on financial markets.

While UTI has always been a dominant player on the bourses as well as

the debt markets, the new generation of private funds which have

gained substantial mass are now seen flexing their muscles. Fund

managers, by their selection criteria for stocks have forced corporate

governance on the industry. By rewarding honest and transparent

management with higher valuations, a system of risk-reward has been

created where the corporate sector is more transparent then before.

Presently the mutual fund companies are in the boom phase. Lot of

companies are entering the mutual fund market. A large number of

schemes are being launched to lure the investors. But the investors

need to very careful about their selection of the mutual funds. The

portfolio should be true to its label; investor should look for consistent

long-term results. A very high portfolio-churning ratio may also prove

harmful for the investor. An investor should understand his life cycle

and wealth management stage. Hence he should have a clear picture

of financial goals current wealth level future income and savings risk

appetite time horizon and tax situation.

It has been predicted that investors can expect 15% returns from

diversified equity mutual funds over next 10 years.

Mutual fund companies have been playing a major role in the stock

market in providing capital to the corporate. Nowadays most of the

mutual funds are equity based as returns are quite high in this area.

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Trends in Transactions on Stock Exchanges by Mutual Funds

Equity (Rs in Crores) Debt (Rs in Crores)

Gross

Purchase

GrossSales

Net

Purchase/ Sales

Gross

Purchase

GrossSales

Net

Purchase/ Sales

Jan 2000-March2000. 11070.54 11492.19 -421.65 2764.72 1864.29 900.43April 2000-March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 5023.49April 2001-March 2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 10959.22April 2002-March 2003 14520.89 16587.59 -2066.70 46663.83 34059.41 12604.42April 2003-March 2004 36663.58 35355.67 1307.91 63169.93 40469.18 22700.75April 2004-March 2005 45045.25 44597.23 448.02 62186.46 45199.17 16987.29

April 2005. 4347.95 2883.04 1464.91 9568.20 4533.42 5034.78

May 2005. 7000.72 3660.61 3340.11 10687.90 5982.47 4705.43

June 2005. 4567.84 6384.63 -1816.79 10686.86 7089.49 3597.37July 2005 (ason 13th) 1788.80 2648.88 -860.08 4417.38 2670.84 1746.54Total (April'05 - July '05) 17705.31

15577.16 2128.15 35360.34

20276.22 15084.12

The table above shows that how active the mutual funds have been in

transacting in the stock exchange. Hence it is advisable for the

investors to use this opportunity and earn better returns out of theinvestment they make.

ROLE OF MUTUAL FUNDS IN AN INVESTORS PORTFOLIO.

Mutual funds are in individual investors way to enter the equity

market. These help the investor to give an equity flavor to their

portfolio without actually investing directly in the equity market.

Mutual funds provide market-linked returns that help the investor to

build a large corpus that would be ideal for a retired life. If investment

is made carefully in funds that have given a good result then the

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investor is sure to benefit in the long run. It would be a better option

for the person to opt for SIP so that he can take the benefit of small

savings as well as enjoying the market returns. This option actually

averages the cost of investment. Even if the market is falling the

mutual fund holders have an advantage as at that point of time they

can purchase more units of the fund. Balancer funds are those funds

that invest partly in equity and partly in the debt so their return is also

moderate and quite beneficial.

With the inflation hovering around 5% - 6% poised for great heights

investing in avenues, which offer breakeven returns, exposes the

portfolio to inflation risk. Investment in equity either directly or throughthe mutual fund route provides an effective hedge mechanism against

such a potent threat.

Investing in the mutual fund IPOs is though an option that attracts the

investors but here the investor needs to careful in studying the stocks

in which the fund shall be invested.

The dividend paid by the mutual funds is also not very regular but at

times it is quite high.

A recent example is that of SBI Contra Fund that paid a dividend of

102% when it had an NAV of near about Rs.19.

In context of mutual funds it is very important to understand that past

performance is not the only indicator for the future performance. The

performance of a fund is highly unpredictable rather random. Funds

that have occupied top slots in the past need not remain to be so in

the future as well. So it is necessary to understand the basics of the

fund before investment is made; these include the portfolio of the fund

the investment manager and the strategy of the fund. And the most

important thing is ones own financial requirements, risk return profile

and the financial goals that need to be achieved in the long run. Thus

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introspection of oneself and a close analysis of the fund are necessary

to build a winning portfolio and not exclusive reliance on the past.

STOCK MARKET.

Today the stock market is the most happening place in the Indian

economy. A sudden rise in the index has attracted a lot of investors in

to try their destiny in the stock market. This avenue of investment is

one of the most risky of all the options available. In this market an

investor may have to face extreme situations that is he may earn a

large amount in one go and may loose the same in another moment.

This depends a lot on the type of stocks that are held by the individual.

Some stocks are very aggressive; their response to the market

fluctuations is always greater than the change in the market.

Equities have the potential to increase in value over time and canprovide the portfolio with the growth necessary to reach long-term

investment goals. Equities are known to have outperformed all other

forms of investments in the long-term.

The rationale for investing in equity markets has never been clearer.

Investors must look to maximize their returns over the long term and

equity markets have traditionally been the best place to maximize

wealth over the long term. If the corporate governance practices

improve, then the interest of the entrepreneur and investor are aligned

which leads to long-term wealth creation.

SELECTING A STOCK.

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There are many theories and techniques about how to choose a

winner, how to separate the wheat from the chaff. There are three

basic factors to look for while picking a stock:

The company itself

Its external environment

The behaviour of its stock

What happens to the company affects the price of its shares on the

stock market and, hence, the investment. An investor should never

invest in the stock of the company whose business he does not

understand.

So, knowing about companies is the first essential step in investment.

One needs to know the business a company is in, and how is it doing

both in absolute terms and in comparison to other companies in the

same business. To do that, it is required to look at the financial

performance of companies and pick up the star performers. As

investors there always is a need to have hope of growth in future.

We also need to look at the performance of the entire sector. The

reason being that the entire sector performance also affects the

performance of an individual stock. Were putting our money in

companies and we can get to know them by looking at their

performance. And this monitoring of the performance of the stock has

to be done on a regular basis.

INITIAL PUBLIC OFFER.

There is a category of investors who invest only in the initial public

offers made by the companies. A corporate may raise capital in the

primary market by way of an initial public offer, rights issue or private

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placement. An Initial Public Offer (IPO) is the selling of securities to the

public in the primary market. It is the largest source of funds with long

or indefinite maturity for the company. This category of investors forms

a very small portion of the players in the stock market. As there has

been a large number of IPOs in the past few months under the book

building process of many companies. And most of these issues were

highly over subscribed. Some of the issues were that of Jindal Ploy

Films Limited, Provogue (India) Limited, Yes Bank Limited, SPL

Industries Limited, Syndicate Bank, Nectar Life Sciences Limited and

many more. Since the stock market is doing well these days a lot of

enthusiasm is seen amongst the investors to invest in shares and

stocks.Under the book building process the demand for the securities

proposed to be issued by a corporate body is elicited and built up and

the price for such securities is assessed for the determination of the

quantum of such securities to be issued by means of a notice, circular,

advertisement, document or information memoranda or offer

document. Price at which securities will be allotted is not known in case

of offer of shares through book building while in case of offer of shares

through normal public issue, price is known in advance to investor. In

case of Book Building, the demand can be known everyday as the book

is built. But in case of the public issue the demand is known at the

close of the issue.

DERIVATIVES MARKET.

Derivative is a product whose value is derived from the value of one or

more basic variables. The underlying product can be equity, forex,

commodity, or any other asset. A security derived from a debt

instrument, share, and loan whether secured or unsecured, risk

instrument or contract for difference or any other form of security is

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called a derivative. The most common types of derivatives are

forwards, futures and options. Forwards are customized contracts

between two entities, where settlement takes place on a specific date

in the future at todays price. A futures contract is an agreement

between two parties to buy or sell an asset at a certain time in the

future at a certain price. Futures contract are special types of forward

contracts in the sense that the former are standardized exchange-

traded contracts.

Options are of two types calls and puts. Calls give the buyer a right but

not the obligation to but a given quantity of the underlying asset at a

given price on or before a given future date. Puts give the buyer a right

but not the obligation to sell a given quantity of the underlying asset ata given price on or before a given date. So there a large number of

investors who trade in the market on the daily basis. Such type of

trading yields short-term earnings. Generally the investor aims at high

return in the short term. But even the regular traders need to have an

adequately diversified portfolio in the market. All the sectors need to

be properly analyzed.

The various sectors need to be studied and then adequate

diversification needs to be made in the various sectors. The IT sector

has been leading the rally in the stock market. These stocks have been

the best performing stocks in the market but investing completely in

these stocks can be a threat. Other than these the banks also have

been performing well. So now the investor has to decide that how does

he wish to have his portfolio diversified. Now this year a boom in the

banking stocks was expected and so we see the banking index rising to

a large extent. So an equity portfolio needs to be designed with

adequate prudence. An investor should maintain certain moderate

stocks in his portfolio so as to control the effect of fluctuations in the

market.

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If all the stocks in the portfolio are aggressive then any negative

change in the market can cause huge losses to the investor. One of the

best examples to quote here is the case of Reliance Industries Limited.

As soon as the there was a change in the structure of Reliance the

prices of its stocks boomed up.

TAX IMPLICATIONS OF INVESTING IN THE STOCK MARKET

There have been no changes on the dividend and capital gains

front.

The Securities Transaction Tax for day traders in the stock

market has been increased to 0.020 per cent against the existing0.015 per cent. The impact of this increment is going to be

minimal.

Trading in derivatives will no longer be treated as speculative

transactions for the purposes of income-tax. This will enable

more tax effective hedging of open positions.

Amendment to the Securities Contract Regulation Act to include

trading in securitised debt (including mortgage-backed debt).Considering the exponential growth of mortgages in the country

during the past two years, this move will lead to a lot of funds

being made available to housing finance institutions and enable

faster rollover of funds.

SEBI has been accorded the approval to set up the National

Institute of Securities Markets. It is hoped that this will lead to a

new breed of advisors which will ultimately be beneficial to the

investors. However, a holistic approach in advising incorporating

all types of financial products viz., insurance, mutual funds, and

so on, needs to be encouraged.

Withdrawal of tax benefit under Section 80 L. This will hasten the

migration of investors from bank accounts and fixed deposits to

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liquid funds and short-term funds as bank interest will be taxable

but not dividends from liquid funds.

A pragmatic approach on the fringe benefit tax is the need of the hour.

The imposition of the above tax will certainly be passed back to theindividuals as most of the establishments work on a cost-to-company

(CTC) concept.

Hence, all the tax benefits stated earlier stand collapsed on account of

this one provision.

RESEARCH METHODOLOGY.

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The aim of the study is to find out how an investor actually plans his

portfolio the various risks that are associated with investment and an

analysis of the risk perceptions of an investor. Hence in order to derive

certain substantial results from the study it is necessary to have direct

contact with the investor to that the actual position of and investors

mind can be derived.

Th

portfolio risk analysis project report

Documents