LOVELY SHOOL OF MANAGEMENT

Comparative analysis of
investment alternatives
Personal financial Planning

Submitted to : Nitika sehgal Submitted by : Alok Kumar

Roll No. : RS1901B33
Section : S1901
Reg. No. : 10905931

Comparative analysis of FDs, Mutual funds & Post-office schemes on the basis of their risk, return and
maturity together with the impact of Budget 2010 on these three alternatives and suggested
strategies for investment.

Need for Investment

Life is full of changes: some good, others bad; some planned and some unexpected. Developing
a long-term financial plan to accommodate life’s changes is essential to realize your
personal/family goals. 
In the current scenario of rising prices, analysts feel that there is a need to review your financial
plans and investment portfolio as expenses may increase, creating the need for additional funds.
Financial planning needs to be reviewed at two levels: 

 Spending
 Investments.

Here in this particular assignment we will analyze the Investment

Investment:
In times of Recession, certain investment categories are better than others. For long-term equity
and real estate, you can pick bargains during such periods. These investments are not for the
feeble-hearted. You need to hold them for a period of three to five years. For shorter term, gold
and commodities are the way to go.
When investing makes sure all your eggs are not in the same basket. Make your investment
between different asset classes (Cash, bonds, property & equities), you can spread the risk and
ensure that you benefits from favorable conditions in all markets.

As we have been provided three alternatives for investment, we should analyze each one on the
basis of risk, return and maturity. The alternatives available for our investment are FDs, mutual
funds and post-office schemes.

(A) Fixed Deposits. - A fixed deposit is an investment account comprising a single

deposit, for a fixed term at a guaranteed fixed rate of interest. It can be used for both
short and long term investment purposes. A fixed deposit account allows you to deposit
your money for a set period of time, thereby earning you a higher rate of interest in
return. Fixed deposits also give you a higher rate of interest than a savings bank account.

Risk in FDs

1) Company Fixed Deposits:

Company fixed deposits are not considered as safe as fixed deposits from leading banks
and financial institutions regulated by the RBI. So, if a company runs into losses or goes
bankrupt the money invested into its fixed deposit can be lost. To lure investors, such
companies offer a fixed deposit interest rate which is much higher than those offered by
banks. Before investing in any company fixed deposit it is advised to check the
credentials of the company
2) Premature ending of Fixed Deposits:
Banks will impose a penalty if you break your fixed deposit before the maturity period.
Make sure you get the facts right about this thing. How the bank calculates this penalty
and what’ll charge will it levy when you break a fixed deposit should be noted carefully.

Return in FDs

1). Safety:
FDs have conventionally been the premier choice for investors with a low risk appetite;
assured returns is the key factor which attracts investors towards deposits. Stick to FDs of the
highest credit rating i.e. those with a “AAA” rating even if their rates seem modest vis-à-vis
those offered by company deposits. The fixed deposits of reputed banks and financial
institutions regulated by RBI (Reserve Bank of India) the banking regulator in India is very
secure and considered as one of the safest investment methods.

2.) Regular Income:

Fixed deposits earn fixed interest rates for their entire tenure, which is usually compounded
quarterly. So, those who want an income on a regular basis can invest into fixed deposits and
use the interest rate as their income. This makes a fixed deposit very popular way of
investing money for retirees

3) Saves Tax:
With the directives of the income tax department stating that investment in fixed deposits up
to a maximum of Rs.100, 000 for 5 years are eligible for tax deductions under section 80 C of
income tax act; fixed deposits have again become popular. Fixed deposits save tax and give
high returns on invested money

Maturity in FDs

With fixed deposits or FDs as they are popularly known, a person can invest an amount for a
fixed duration. The banks provide interest rates depending on this loan amount and the tenure
of deposit.

1) Variable deposit periods ranging from 6 months to 120 months

2)  You get interest once in 6 months

(B) Mutual Funds - Mutual fund is just a convenient package or basket for lot of
investments mainly stocks & bonds. Mutual funds allow you to invest mainly stocks &
bonds. Mutual funds allow you to invest your money in a way that will provide you the
future benefits. They are cheap, easy & efficient without a lot of money.

Mutual funds are easy to buy, hold or sell. We should buy mutual funds instead of just
trading in stocks. Mutual funds can be easier & safer if you pick the right investments.
 But you have to make a professional judgment about when to sell & keep an eye on the
broader economy.

Risk in Mutual Fund

Every type of investment, including mutual funds, involves risk.  Risk refers to the
possibility that you will lose money (both principal and any earnings) or fail to make money
on an investment.  A fund's investment objective and its holdings are influential factors in
determining how risky a fund is.

Following is a glossary of some risks to consider when investing in mutual funds.

 Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—
or call—its high-yielding bond before the bond's maturity date.

 Country Risk. The possibility that political events (a war, national elections), financial
problems (rising inflation, government default), or natural disasters (an earthquake, a
poor harvest) will weaken a country's economy and cause investments in that country to
decline.

 Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in
a timely manner. Also called default risk.

 Currency Risk. The possibility that returns could be reduced for Americans investing in
foreign securities because of a rise in the value of the U.S. dollar against foreign
currencies. Also called exchange-rate risk.

 Income Risk. The possibility that a fixed-income fund's dividends will decline as a result
of falling overall interest rates.

 Industry Risk. The possibility that a group of stocks in a single industry will decline in
price due to developments in that industry.

 Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate
a fund's real inflation-adjusted returns.

 Interest Rate Risk. The possibility that a bond fund will decline in value because of an
increase in interest rates.

 Manager Risk. The possibility that an actively managed mutual fund's investment
adviser will fail to execute the fund's investment strategy effectively resulting in the
failure of stated objectives.

 Market Risk. The possibility that stock fund or bond fund prices overall will decline
over short or even extended periods. Stock and bond markets tend to move in cycles, with
periods when prices rise and other periods when prices fall.
  Principal Risk. The possibility that an investment will go down in value, or "lose
money," from the original or invested amount.

Returns in Mutual fund

 Diversification - Using mutual funds can help an investor diversify their portfolio
with a minimum investment.  When investing in a single fund, an investor is actually
investing in numerous securities.

 Professional Management - Mutual funds are managed and supervised by investment

professionals.  Fund managers have more money to research more securities more in
depth than the average investor.

 Convenience - With most mutual funds, buying and selling shares, changing
distribution options, and obtaining information can be accomplished conveniently by
telephone, by mail, or online.

 Liquidity - Mutual fund shares are liquid and orders to buy or sell are placed during
market hours.

 Minimum Initial Investment - Most funds have a minimum initial purchase of $2,500
but some are as low as $1,000.  If you purchase a mutual fund in an IRA, the
minimum initial purchase requirement tends to be lower.  You can buy some funds
for as little as $50 per month if you agree to dollar-cost average, or invest a certain
dollar amount each month or quarter.

 If you invest $1,000 in a mutual fund with an NAV of $24.75, you will
receive 40.40 shares of that fund. (Unlike stocks, you can own fractional shares in a
mutual fund).  When the value of the portfolio increases, the value of your
investment also increases.

Returns on any fund will reflect the particular market it invests in. For example, you
cannot realistically expect an equity fund to deliver a return of 25% if the stock
market is down 10%. Moreover, even if a fund shows a positive return, you might
not; it may take you some time to recoup any transaction costs.

 Returns show how your investment has increased or decreased in value.

 Compounding earns returns on your returns.
 Compound average annual returns show how wealth grows over time.
 Transaction costs reduce returns.

Maturity in mutual Fund

 Depending upon the maturity period a Mutual Fund scheme can be classified into open-ended
scheme and close-ended scheme.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on a
daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open
for subscription only during a specified period at the time of launch of the scheme. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where the units are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling back
the units to the mutual fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided to the investor i.e.
either repurchase facility or through listing on stock exchanges. These mutual funds schemes
disclose NAV generally on weekly basis.

(C) Post-office Scheme - Indian Post offers several Savings Schemes which are safe, (
earlier tax rebates, now are interest earned in these schemes are taxed under the
income head of Income from Other Sources ) and relatively more interest rates than
bank deposits.
Its risk, return and maturity depends upon the types of different post-office
scheme. Types of post-office schemes are –

(1) Recurring Deposit Account (RDA): It is one of the best investment options for
the low income groups. Basically it is a banking service offered by Department
of post, Government of India at all post office counters in the country.

Amount of Investments:

 Minimum investment- Rs. 10 p.m. or any amount in multiples of Rs. 5

 Maximum investment- No maximum limit

Payment Terms:
The deposit shall be paid as monthly installments and each subsequent monthly
installment shall be made before the end of the calendar month and shall be equal to
the first deposit
 
Maturity Terms:
One withdrawal is allowed after one year of opening a post-office RDA on meeting certain
conditions. You can withdraw up to half the balance lying to your credit at an interest
 charged at 15%. The withdrawal or the loan may be repaid in one lump sum or in equal
monthly installments. Premature closure is allowed on completion of three years from
the date of opening and in such case, interest is payable as per the rate applicable for
the Post Office Savings Bank Account.

After maturity of the account, it can be continued for a further period of 5 years with or
without further deposits. During this extended period, the account can be closed at any
time.
 
Returns:
The post-office recurring deposits offers a fixed rate of interest, currently at 7.5 per cent
per annum compounded quarterly.

(2) Post Office Monthly Income Scheme (MIS): MIS provides a source of regular
income on a long term basis. This scheme is, therefore, more beneficial for retired
persons. Basically  it is meant for investors who want to invest a sum amount
initially and earn interest on a monthly basis for their livelihood.
Amount of Investments:
 
   Single account Joint Account
Minimum Investment Rs. 1000 Rs. 1000
Maximum Investment Rs. 3 lakhs Rs. 6 lakhs
     

Lock in period:

The duration of MIS is six years. However, premature closure of the account is permitted any
time after the expiry of a period of one year of opening the account. Investors can withdraw
money before three years, but at a discount of 2%. Closing of account after three years has 1%
deduction.

Returns:

The post-office MIS gives a return of 8% plus a bonus of 10 per cent on maturity. However, this
10 per cent bonus is not available in case of premature withdrawals.

(3)  Time Deposit - Time Deposit is a  banking service similar to a Bank Fixed
Deposit  offered by Department of post, Government of India at all post office
counters in the country. This scheme is meant for those investors who want to
deposit a lump sum of money for a fixed period. Investor gets a lump sum
(principal + interest) at the maturity of the deposit. Time Deposit scheme offers a
lower, but safer, growth in investment.
Amount of Investment:

The minimum investment in a post-office time deposit is Rs 200 and there is no prescribed
upper limit on your investment. Account can be opened in multiples of Rs. 50 in single or joint
names.

Liquidity:

Time Deposits can be made for the period of 1 year, 2 years, 3 years and 5 years. If amount is
withdrawn after 6 months but before 1 year from date of deposit, no interest will be paid. If the
amount is withdrawn prematurely after 1 year from the date of deposit, interest will be paid at
2% less than the rate of interest specified for the period for which the deposit has been held.

Returns:
This investment option pays annual interest rates between 6.25 and 7.5 per cent, compounded
quarterly.
Time period Rate of return (%)
1 Year 6.25
2 Years 6.5
3 Years 7.25
4 Years 7.5

(4) Senior Citizen Scheme - A new savings scheme called "Senior Citizens Savings
Scheme" has been started with effect from August 2, 2004. Citizens of 60 years of
age and above are eligible to invest. Single or joint account (with spouse only)
can be opened. Citizens who have retired under a voluntary or a special voluntary
retirement scheme and have attained the age of 55 years are also eligible, subject
to specified conditions.

Maturity Period:

Maturity period of the deposit will be five years, extendable by another three years. Initially the
scheme will be available through designated post offices through out the country. However, the
depositor may be permitted to withdraw the deposit and close the account at any time after the
expiry of one year from the date of opening of the account subject to the following conditions:

If the account is closed after the expiry of 1 year but before the expiry of 2 years from the date of
opening of the account, an amount equal to one and half percent of the deposit shall be deducted.
If the amount is closed on or after the expiry of 2 years from the date of opening of the account,
an amount equal to 1% of the deposit shall be deducted.

Amount of Investment:

The minimum investment is Rs. 1000 and in multiples of Rs.1000 subject to a maximum of
Rs.15 lakh.

Returns:

The deposit will carry an interest of 9% per annum.

(5) Kisan Vikas Patra - This scheme is available at all post offices and brokers/agents
of UTI, LIC and government schemes.

Amount of Investment:

No limit ( available in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10000 and Rs
50000).

Liquidity:

Maturity period of certificate is 8 years and 7 months.

Premature encashment is possible after 2 and half years.

Returns:

Money doubles in 8 years and 7 months.

Comparative analysis of mutual funds, fixed deposit & post offices schemes-

Mutual funds

 Mutual funds can give dividend more than 15%. If your horizon is fairly long like 5 yrs.
  This is tax free.
 Good liquidity. If you want money back you will get within 2 days as per the NAV of
the scheme.
 If you have large amount like 4 - 5 Lakh it is good place to keep. 
 On longer duration MFs have given good gains.
 . The amount invested would have a risk involved. 
  The risk factor can be decided with the 3 available categories as "No Risk Fund"
"Balanced Fund" and "High Risk Fund"
 There is no guarantee given by the funders for the amount invested. 
 The amount invested would not have a guaranteed small percentage of appreciation. This
may be quite high also. 
 As Indian Economy is growing very rapidly every day, the funds can be expected to give
good return in the long term investment like 3 years lock in.

Fixed deposit 

 Banks give today 6 to 9 % rate on FDs. 

 This is taxable. If you are taxpayer you will get cut of 20% on interest.
   If you need money back (liquidity) you may get money after about 2 days with 1 or 2%
reduced rate.
 For large amounts it will not be attractive since it will attract taxes.
 If investing for long period it is giving lesser gains.
 The amount invested would not have any risk involved. 
 The amount would be appreciated with a very minimal percent within the investment
time. 
 There is no depreciation in the amount. 
 Here, there would be a guarantee given for our amount and can be with drawn with the
appreciated value. 
 

Post office

 Rates are 8% on FD.

   This is taxable.
   Liquidity is poorer than banks.

  Post office operations are not user friendly.

Different strategies which can be implemented by an individual during their

financial planning:

 On the basis of age and Income an individual can go for the following Investment plans.

Age Income Investment Plan

Students 14-18 Nil (only pocket RDA (post office
money) scheme)
College students 18-23 Pocket money or MF, post office
 part time job scheme (RDA).
Job holders 23-30 Fixed income MF, FDs
(Freshers)
Job holders 30-55 Fixed income MF, FDs, MIS
(Experienced)
Retired person 55 and above Pensions Senior citizen
scheme

According to the above slab prepared I have tried to explain that the individual falling at the
students category have no incomes except their pocket moneys. So there is only one way of
investment for them that is recurring deposit scheme in post office as there is no risk and lower
investment required. When talking about college students there is income from part time jobs
and they are more averse to take risks so they can invest in Mutual funds and RDAs. For fresh
job holders as they have fixed income so they can invest in any of these investment alternatives
and the experienced job holders would opt for MIS together with other alternatives as they are
more concerned for their retirement plans. At last there is also plan for retired persons which is
Senior citizen scheme.

Impact of Budget 2010

 The individuals having income upto Rs 50,000 to Rs 5 lakh will save Rs 20,000 and individuals
having income of Rs 8 or 10 lakh they will save nearly Rs 50,000 income tax saving. But the
worst part is the common man having income Rs 25,000 per month—his saving is a big zero.
Not a single rupee saving inspite of the fact we are having big rise in inflation and other things in
the country—it’s still the poor man or the common man with income of Rs 25,000 per month—
no income tax saving at all because the initial exemption limit has not been changed—that’s the
big problem.

On the heels of India's provident fund board hiking interest rates by a percentage point to 9.5 per
cent, the Reserve Bank of India (RBI) on signaled to domestic banks to raise fixed deposit rates
to compensate small savers for rising inflation. The move would also help banks garner
more funds to meet their lending needs."If bank credit is not to become a constraint to growth,
the real rates need to move in the direction of encouraging bank deposits," the RBI said, while
raising the key policy rate by up to 50 basis points for the fifth time this year.

This budget brings the smiles in people who are looking to invest their money bank deposits and
save the tax. This budget amends the existing restrictions on tax saving fixed deposits. Nowadays
most people prefer the mutual funds as the tax savings instrument because of their 3 years lock-
in period. Tax saving fixed deposit has the 5 years as the lock-in and it reduces the banks to get
more depositors. 

 The lock-in period for the tax savings fixed deposit will be reduced to 3 years. At present
it is 5 years.
 As of now you can show only Rs.100000 in tax savings fixed deposit. It is expected to be
increased to Rs.200000 for the financial year 2010-11.
 If the interest earned on single branch exceeds Rs.10000, it is taxable and TDS is
deducted by the banker. This limit will be increased to Rs.25000.