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/ 14
&
INVESTMENT ALTERNATIVES
were limited to real assets, schemes of the post office and banks. At present, a wide variety of
investment avenues are open to the investors to suit their needs and nature. A knowledge about the
different avenues enables the investors to choose investment intelligently. The required level of return and the
risk tolerance level decide the choice of the investor. The investment alternatives ranges from financial
securities to traditional non-security investments. The financial securities may be negotiable or non-nego-
tiable.
7 | =: problem of surplus gives rise to the question of where to invest. In the past, investment avenues
The negotiable securities are financial securities that are transferable. The negotiable securities may yield
variable income or fixed income. Securities like equity shares are variable income securities. Bonds, deben-
tures, Indra Vikas Patras, Kisan Vikas Patras, Government securities and money market securities yield a
fixed income.
‘The non-negotiable financial investment as the name itself suggests is not transferable. This is also known
as non-securitised financial investments. Deposit schemes offered by the post offices, banks, companies, and
non-banking financial companies are of this category. The tax-sheltered schemes such as public provident
fund, national savings certificate and national savings scheme are also non-securitised financial investments.
Mutual fund is another investment alternate. It is of recent origin in India. Within a short span-of time
several financial institutions and banks have floated varieties of mutual funds. The investors with limited
funds can invest in the mutual funds and can have the benefits of the stock market and money market
investments as specified by the particular fund.
‘The real assets always find a place in the portfolio. They are gold, silver, arts, property and antiques.
‘These are non-financial investment.
NEGOTIABLE SECURITIES .
Mariable Income Securities
Equity shares The equity shares attract the interest of many. In the early nineties, the stock market was
the best and safest place for the common individual to invest. Since 1996 the share market prices have been
low. This made the retail investors to turn away from the stock market. The characteristic features of the
equity are given in the previous chapter. J
[22] Security Anaysis and Portfolio Management
Income shares, Defensive shares, Cyetca
S$,
‘The stock market classifies shares into Growth shares
and Speculative shares. :
i ite ol
i) Growth shares The stocks that have ae pee a
profitability are referred to as growth err reed mfosystems 8 :
y software sector stocks. The
cane panies that have comparatively stable operajog,
d some of the fast moving consumer soy
be termed as income shares.
growth than the industrial growth ra,
ple, the list of major gainers for 19
hare prices increased sharp),
ein
ii) Income shares These stocks belong 0 com)
and limited growth’ opportunities. The bank shares ant
stocks such as Cadburys, Nestle and Hindustan Lever may 7
iii) Defensive shares Defensive stocks are relatively eater fe a cas For
example, a host of pharmaceutical stocks posted returns in exces cae el The
pharmaceutical industry owing to its inherent nature of demand is not WW tur in
the economy,
iv) €yclical shares The business cycle affects the cyclical shares. The upward and downvard
movements of the business cycle affect the business prospects of certain companies and their stock
prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For
example, the automobile sector stocks are affected by the business cycles.
\) Speculative shares Shares that have lot of speculative trading in them are referred to as
speculative shares. During the bull and bear phases of the market, this type of shares attracts the
attention of the traders,
The stocks, which fall under one category in one period may switch over to another category in another
period. The classification should not be considered rigid. For example, growth shares may be speculative
shares.
Fixed Income Securities
a) Preference shares A detailed description of the Preference shares is given in chapter 1. Prefer-
ence shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed
Rs. 150 Cr. worth of preference shares. High tax
a Paying companies or investors prefer to subscribe to the
preference shares and investors with a low tax burden would Prefer to go in for debt instruments. The
Conversion options provided in the by preferenc
shares also make i i i s
the tax-exempt slats of the preference shares dane it attractive. The biggest advantage i
©) Bonds Bonds are similar to the debentures but e)
iii)
Investment Alternatives [23]
nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and
Conditions of the issuance of the debt security, Being contractual it cannot be changed during the tenure
of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are
lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would
@ppreciate, IDBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are
deep discount bond, education benefit bond, retirement benefit bond and index bond.
IVPs and KVPs These are saving certificates issued by the post office with the name Indira Vikas
Patra (IVP) and Kisan Vikas Patra (KVP). The IVPs are in the face value of Rs,500, 1000 and 5000. The
KVPs are in the denomination of Rg 1000, 5000 and 10000. The capital is doubled in 5.5 years with the
return of 13.47%. IVPs are like bearer bonds, transferable by hand delivery and therefore are attractive
{0 the persons who prefer cash transactions. No income tax concession is available for this type of
investment.
Government securities The securities issued by the Central, State Government and Quasi Gov-
emment agencies are known as Government securities or gilt edged securities, As Government guaran-
teed security is a claim‘bn the Government, it is a secured financial instrument, which guarantees the
income and the capital. The rate of interest on these securities is relatively lower because of their high
liquidity and safety.
Money market securities Money market securities have very short term maturity say less than
@ year. Common money market instruments are:
Treasury bills
2 Commercial paper
As Certificate of deposit
Treasury bills A treasury bill is basically an instrument of short term borrowing by the Government
of India. To develop the treasury bill market and provide investors with financial instruments of varying
short-term maturities and to facilitate the cash management requirements of various segments of the
economy, in April 1997 treasury bills of varied maturities were introduced. 14-day treasury bill on a
weekly basis was introduced from June 6, 1997. In the second half of 1997-98, treasury bill of 28-day
was introduced on auction basis. Further, it was decided to reintroduce 182-day treasury bills through
auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the treasury bills are
very low, individuals very rarely invest in them.
Commercial papers Commercial paper is a short-term negotiable instrument with fixed maturity
period. It is an unsecured promissory note issued by the company either directly or through bank/
merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maxi-
mum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The
commercial papers are sold at a discount and redeemed at their face value. The discounted value impli-
cates the interest rate, The denomination of commercial paper is high. Mostly the companies and insti-
tutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30
days.
Certificate of deposit The certificate of deposit is a marketable receipt of funds deposited in a
bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. sortfolio Manageme”!
24) Security Analysis and P nei
te a
‘The denominations of the CD and the ine nino
tae ‘and companies rather than the i eR ris
‘The additional amount is issued im multip!
NON-NEGOTIABLE SECURITIES
Deposits
n though bank depos!
rate of return. Ever
ily.
s. some of the deposits are dealt subsequently.
Deposits eam fixed
negotiable instrument:
n for the
Je investment avenue OPE
2) Bank deposits It is the simp!
ly the ba
and deposit the money. Traditional . oa
‘account. Current account does not offer any interest rate
accounts is that the return is just 4.5 per cent. ‘The savings eee
Beak of India and kept low because ofthe high cost of servicin
and convenientto handle. The fixed account carries high interes’
period. With increasing competition among t
with the fixed account to cater to the needs of
below in the Table 2.1
inks offered current account, Sa"
It is mainly preferred by institu
size of the certificate is Rs 19 a!
sts resemble fixed income securities they aren
investors. He has to open an account
Table 2.1 Hybrid Accounts Offered by Some Banks
ings account and fixed deposit
e drawback of having large amounts in savings
runt interest rate is regulated by the Reserve
g them. The savings account is more liquid
trate and the money is locked up fora fixed
he banks, the banks have bundled the plain savings accoun
‘the small savers. Some of the hybrid accounts are given
Bank Product ‘Nature Min. Dep Other
(Rs) benefits
ee Maxi cash Savings account, 5,000 ATM card, Internet
savings with Auto- banking and
aa , assistance in
a investing funds in
can be issued to.“ cee
transfer surplus aes
funds of FD, opie bens
and cheque book
Quantum. FD linked to
Optima savings account 25,000 ATM card,
with Auto-sweep Anywhere banking,
Reverse-sweep, Internet Banking,
& overdraft
facility.
-* i septs:
G
. /
Ne Investment Alternatives [25]
Bank Product
. mas Nature Min. Dep Other
(Rs., benefits
IndusInd 2in-1 “ s
aa A Savings account 25,000 Cheque book and
' count with link to FD. overdraft facility.
Closter Savings linked 25,000 Cheque book
Deposits FD with
Auto-sweep and
Reverse-sweep.
HDFC Super Savings linked to 25,000 Overdraft, cheque
Bank saver FD. book, ATM and
account phone banking.
. Sweep- Savings linked to 25,000 ‘ATM, Cheque book
ine FD with Reverse- and phone banking
account Sweep and add-on-
deposit.
t
— The deposits in the banks are considered to be safe because of the RBI regulation. The risk averse inves-
tors prefer the bank deposits.
a) Post office deposits Like the banks, post office also offers fixed deposit facility and monthly
income scheme. Post office Monthly Income Scheme is a popular scheme forthe retired. An interest rate of
13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The
annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is
allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.
b) NBFC deposits In recent years there has been a significant increase inthe importance of non-banking
financial companies in the process of financial intermediation. The NBFC comes under the purview of the
RBI. The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.
Period The maturity period ranges from few months to five years. It varies from company t0
company. For example, the Birla Global Finance, the company belonging to Aditya Birla group
accepts deposits with maturity from 3-5 years.
i)
ii) Maximum limit The limit for acceptance of deposit has been based on the credit rating of the
company. The NBFCs not having net owned funds of Rs 25 lakh are not ‘entitled to accept deposits.
Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The inter-
= est rate differs according to maturity period. There is a disparity in the interest rate among the aa
panies in accordance with the credit ratings and policies of the companies, Even the companies Ls
similar credit ratings provide different interest rates for their deposits: Generally, comps lo Management nance Companies h
secur Anayts and Porfote Manage eposits offered bY F \
an ‘Table 2.2 Interest Rates 0” Fyears 3 years Armour,
Bajaj Auto Finance 6.00 ; . = 25,000
Birla Home Finance _ 1. “ 3 an
5:
Canbank Factors 525 a ane 10,000
Can Fin Homes 7 = nn
Chola Finance 6.10 im aa
yer Housing Finance 6: .
ae “ “” 5.80 6.05 10,000
Hl .
sid 25,000
HDFC a 315 6.25 i
IDBI * 6.50 7.00 10,000
Lakshmi General Finance : - 750 10,000
M&M Financial Services i ie cn 20,000
PNB Housing Finance - 7.00 ano 10,000
= : 10,000
‘Sundaram Finance 6.00 6.50 7.00
6.25 6.50 10,000
Sundaram Home 6.00 oa
TN Power Finance = 6.54 7.23 10,
lower credit ratings offer high
interest rates offered by some of the finance compani
er interest rates to cover the risk. The following Table 2.2 shows the
ies as on July 2004.
iy
Security Security ofthe deposits of the NBFCs is much lower than the deposits with banks. To
improve the liquidity of NBFCs the pe
Tax Sheltered Savings Scheme
Tax sheltered savings schemes are of reat im . tax
sheltered savings schemes offer tax relietys those who participate ye oe facpaying category. The _
laws, The important tax sheltered savings Schemes arg PN®Intheir schemes According to the income ti
= Public Provident Fund Scheme
= National Savings Scheme
= National Savings Certfi
portance to the investors in the
icate VIII series —
1)
°)
Investment Alternatives [27]
0 ua eeeecan, Fund! scheme (PPF) PPE crs an interest rate of 12 percent er
carpenters fom the income tax under sec 88. The individuals and Hind undivided families
Frere tis echeme, The maximum tiit per annum for the deposit is Rs 60,000. The
Peete re ebro eary vite hice ommelaatlerry
after, the account holder has an option to withdraw 50 per cent of the balance to his credit,
4 years a a cl Fy
| Years ago or 1 year ago whichever is lower. The facility makes PPF a self-sustaining account from
7” year onwards, ”
National savings scheme (NSS) This scheme helps in deferring the tax payment. Indi-
viduals and HUF are eligible to open NSS account in the designated post office. ‘The NSS-87 gives
100 per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn
during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a
rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of Rs 12,000.
The investment also earns an interest rate of 11 per cent per year covered by Sec 80L. Compared to
other tax savings” instruments the return offered by this scheme is lower.
On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the
financial year in which the account is opened. The entire amount can be withdrawn. ‘The account
can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the
account alive and eam interest at Il percent per annum.
As a tax saving instrument “anytime” withdrawal after 4 years is the only interesting feature to the
prospective investor, The tax deduction at source at the rate of 20 percent on the entire amount
withdrawn has proved too costly to the investors.
National savings certificate ( 6 yrs.) - Il This scheme is offered by the post office
These certificates come in the denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution
and the interest for the first 5 years are covered by Sec 88. The interest is cumulative at the rate of
12% per annum and payable biannually is covered by Sec 80L. No withdrawals are permitted. There
is no deduction at maturity.
fe Insurance
Life insurance is a contract for payment of a sum of money to the person assured (or to the person entitled to
receive the same) on the happening of event insured against, Usually the contract provides for the payment of
‘an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs.
‘Among other things, the contracts also provide for the payment of premium periodically tothe corporation by
the policy holders.
Life insurance eliminates risk. The major advantages of life insurance are given below:
Protection Saving through life insurance guarantees full protection against risk of death of the
saver, The full assured sum is paid, whereas in other schemes only the amount saved is paid.
Easy payments For the salaried people the salary savings’ schemes are introduced, Further,
there is an easy instalment facility method of payment through monthly, quarterly, half yearly or
yearly mode.
Liquidity Loans can be raised on the security of the policy.
Tax relief Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of
premium for life insurance subject to the tax rates in force. eer
: on.
io Manageme!
2a) Secty Anais wm :
‘eadual i a
SCHEMES oF LIC — pine needs of the indi idual investor. Naty Tax B:
LIC offers a wide rane of scl en
capped
Basic Lie Insurance PiAT® surance plan where the Sam assured is payable on ihe ay
san Itis alow cost ins
whole life assurance P ve througbout Hf N.
eeesured and premiums are Pa : 7
Unrealised appreciation per unit
SEB! regulations Th:
prohibited mutual funds as ce ee ae ere coemeten a Jay oe
Companies of the sponsors. listed or privately placed securities by as group
A limit of 25 percent of
the net
the group companies of the sponsors ia of the fund was im
REAL ASSETS
Gold and Silver
"a Be
pr oo)
CY
Investment Alternatives [31]
asi Besides, investors tend to invest in jewellery instead of pure gold. As a result, when they buy jewellery, the
Price realisation is usually less than total purchase price (this is due to higher making charge of jewellery),
The price of gold has declined in the later part of the nineties. Gold prices are suppressed because of large
supplies overtaking the demand. The government has allowed imports of gold to certain banks and agencies
and they have huge stocks of gold. The gold prices remained depressed in the international markets too in the
late nineties. The following reasons are cited for the low price of gold in the international market,
=> Weak demand from Asian countries which are the largest consumers of gold
= Continuing pressure on central banks to dishoard gold
=> Legislative measure like the Swedish Government move to delink gold from Swiss Franc and lower gold
reserves by the European union
According to World Gold Council (WGC), as against an increase of 9.0 percent in world demand, the
demand for gold in India increased by 45.0 percent to a record level of 737 tones during 1997 from 507 tones
in 1996, reflecting the increased response to the decline in prices. The substantial increase in domestic
demand for gold was met by ease of supply facilitated by (i) allowing non-resident Indians to import 10 kg. of,
gold (as against 5 kg. earlier) once in every six months with effect from January 1, 1997, (ji) allowing 12
authorised agencies to import gold under Open General Licence (OGL) without any limit on quantity and sell
, _itin the local market against rupees after paymient of approximately 5 percent duty and (jit) lower prices in the
international market. The following table 2.3 gives prices of gold and silver.
Table 2.3 Gold and Silver Prices
Silver (Rupees per kilogram)
Year/Month Gold (Rupees per 10 grams)
Mumbai-London Mumbai - New York.
Mumbai__London _ Spread Mumbai New York Spread
1990-91 3451.52 2164.26 1287.26 6760.79 2579.21 4181.58
1995-96 4957.60 4188.58 769.02 7220.50 5811.03 1409.47
1996-97 5070.71 4283.97 786.74 7165.07 5762.65 1402.42
1997-98 4347.07 3775.93 571.14 7352.27 6153.96 1198.31
April 1998 4210.22 3941.42 268.79 8810.00 8024.88 785.12
May 1998 4141.92 3887.10 255.82 7988.96 7161.03 827.93
June 1998 4215.38 3968.86 246.53 7765.00 _ 7144.01 620.99
Source:RBI Annual Number Sept. 1998
‘The monthly average price of silver in Mumbai market fell from Rs 6969 per kg. in April 1997 to Rs 6332
per kg. in July 1997. Thereafter, it exhibited a near-steady increase to Rs 8557 per kg. in March 1998. The
price of silver in the Mumbai and New York markets reached a high of Rs 9350 per kg. and 731 cents per
| Gunce, respectively, on February 5, 1998. The average spread between the domestic and international prices
of silver declined to 19.5 percent in 1997-98 from 24.3 percent in 1996-97 with the prices in the domestic
‘market moving in tandem with the international market prices.
The investment analysts feel that there will not be majo? rise in gold prices until 2000 unless there isa
currency depreciation. They are optimistic about the tise in silver price.
TA
7 vement
vio Manas
fa0p sec ar porte
the word real estate means land ang
7 the investors. T! 7
aL ESTA’ return (0 : 1
erate re A eye of He ea ee acme ie a
: a ae an vo oa iy in South Mumbai ranges = Prices tg
: ow er land general Malpractices. Often-gullible investors become cheated in the purchase of land. The properties already
Sold are resold to the investors. The investor has to lose the hard-earned money.
= Restriction of the purchase. The land ceiling i tural Land beyond 4
Hes I iling Act restricts the purchase of agricul
in |
> Lack of liquidity. If the investor wants to sell
Waiting period may be months or years CO
= Greet ae or aoe, ‘The role of broker cannot he undermined because it is he who introduces
10 the putes and location of site, He shoul be faith and Iya keri the investor finds himsett in
Investment Alternatives [3]
ART
Paintings are the most sought after form of art, The prices in the art ma
to continue, The trend in the art market today is to invest in young upcoming pa
over the years. People who have bought paintings from young painters in the last few years are hi
kind of financial as well aesthetic appreciation they have received over the years. For example Manash Kamal
Bishwash who used to sell A 22" X 30" mixed media on paper for Rs 30,000 in 1997, commands a price of
Rs 45,000 in 1999. If an investor likes to buy paintings as a form of investments he has to consider the
arket are rising and this rise is expected
ters whose prices will soar
appy with the
following points
1) Paintings of the young painters. The works of established painters are costly and scope for appreciation
imited. But prices of the good quality paintings of the young painters may increase
in their values are
quickly.
2) Should possess the basic idea of the painting, This is needed to decide the quality of the paintings. He
should be able to judge the primary attributes of the paintings such as spontaneity, nature of strokes,
colour combination and originality.
3) The investor should have aesthetic sense because he may or may not be able to resell the paintings.
Therefore when he possesses the art piece the investor should have a sense of fulfillment.
ANTIQUES
In western countries’ investment in antiques is more common than in India. The antique is an object of
historical interest. It may be a coin, sculpture, manuscript or any other object of olden days. The owner of the
antique has to register himself with Archeological Society of India. The society after examining the authen-
ticity of the antique issues a “Certificate of Registration”. Any dealings i.e. purchase and sale of antique
should be informed to the society. The government has the right to buy the antique from the owner, if it wants
to keep it in the museum. In the case of investment, the investor has to be careful about the fake antique and
the rise in the price of the antique is uncertain.
SUMMARY
temnatives are many in number, They are negotiable financial securities and non-negotiable
with high risk. Bonds provide steady and fixed flow of
fe secured investments. Treasury bills carry a very low
| © Investment all
financial investments. Equity offers high return
\ income. The securities issued by government ar
rate of interest.
al paper has short-term maturity and is favoured by companies and institutional investors.
«© = Commerci:
Certificate of deposit’s denomination is high and the interest rate is also high.
Banks’ deposits are safe form of investment. At present accounts like maxi cash saving, quantum optima,
. ~y,
in 1 accounts and cluster accounts are offered.
N oe Vere
.e monthly income schemes sy,
“ne ate. Post offic 7
mvs 08 yg aerest 7
a posits
set ie m is also high. RBI has {y
Thea os phe risk associated with the oe
eA Engh aes oe
aus otfer high ~~
BNREC dees et nem, geheme with the early withdraw ies,
esto 8" {office ee reg
ceveral ci scheme i He POST withdrawal of entire am we
vider uN ee .
Patera iste deere
rain avant en
heavy tation ao
eee - tent cover. Deductions are allowed under U/S 89 pp
Investment i ee
-ife insurance provides wide APE y re yuan
a investors an
rua funds collect funds fr0™ 2
Cs sinvesument, The appreciation of gold presi rather very iy
real asset form 0
Gold and silver ate the
inthe past few years —
-_ lucrative form of investment with high capital appreci
oe i investment in arts and anti
i tial pre-requisite for invest —
\d antiques is the essent
«A knowledge about arts ané
QUESTIONS
