A STUDY ON VARIOUS INVESTMENT OPTIONS OF

DIFFERENT CATEGORY OF INDIVIDUALS

A Project Submitted to
University of Mumbai for Partial Completion of the Degree of
Bachelor in Commerce (Accounting and Finance)

SUBMITTED BY

SHAIKH MAIMOON MOTIYAR REHMAN

ROLL NO -55

Under the Guidance of

MRS.AFSHA KIRKIRE

Smt . Mithibai Motiram Kundnani College of Commerce and

Economics 32nd Road,T.P.S 3, Bandra (W),MUMBAI -400050

2023-2024

1
 DECLARATION

I MR. SHAIKH MAIMOON MOTIYAR REHMAN

Student of Smt . Mithibai Motiram Kundnani College of Commerce and

Economics

Declare that I have completed this project on topic

“Study on Various Investment Options of Different Category of

Individuals”
in the academic year 2023-2024

The empirical findings in this project report are not copied from any report
and are true and best of my knowledge.

I here by further declare that all information of this document has been
obtained and presented according to rules and regulations

Name and signature of student

SHAIKH MAIMOON
Certified by

Name and signature of guiding teacher

Ms . AFSHA KIRKIRE

2
 CERTIFICATE

This is to certify That SHAIKH MAIMOON MOTIYAR REHMAN

that has completed her Project report

on
“Study on Various Investment Options of Different Category of Individuals”
as a partial fulfillment of BAF program satisfactorily
for the academic year 2023-2024

The student has shown immense interest in the subject and the study was carried out
with total devotion.

Name of the Guide - Ms . AFSHA KIRKIRE

Signature:

BAF Co-ordinator - MS. LAVEENA BATHIJA

Signature:

Principal – DR .CA.KISHORE S. PESHORI

Signature:

Name of External Evaluator-

Signature:

3
 ACKNOWLEDGEMENT

Preservation, inspiration and motivation have always played a key role in the
success of any venture. In the present world of cutthroat competition, project is
like a bridge between theoretical and practical working and I am grateful to all
who have helped me through this project work and made it a successful one.
I would like to acknowledge the help rendered by each of them.

I am thankful to Principal - DR .CA.KISHORE S. PESHORI

BAF Co-ordinator - MS. LAVEENA BATHIJA for giving this opportunity to

undertake this project.

I would also like to thank – Ms. AFSHA KIRKIRE

For her guidance and motivation. Without her valuable advice and support, this
project would have not been a success.

I thank all the respondents for providing me with valuable information for
carrying out this project.

I am grateful to my parents, friends and all my well wisher

Who have helped me from behind the schene

4
 CONTENTS

Sr. No Title

1 CHAPTER- I PAGE
NO.
ECONOMIC OVERVIEW
1.1 Market size 9
1.2 India as an investment destination 10
1.3 Government initiatives to boost Indian economy 11
1.4 Road ahead 12

2 CHAPTER-II
z INTRODUCTION
2.1 An overview of Investment 13
2.2 What is Investment? 15
2.3 Objectives of Investment 17
2.4 Reasons for Investing 18
2.5 Features of investment programme 20
2.6 Investment and Speculation 22
2.7 Types of Risks in finance 24
2.8 Sources of study for investors 29
2.9 Stage in investment process 30
2.10 Three approaches to succeed as an investor 32
2.11 Types of investment 35
2.12 Investor and its categories 36
2.13 Wealthy investor 38
2.14 What is Portfolio Management? 40
2.15 Portfolio investment by foreign sources 43
2.16 Investment Avenues 47

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3 CHAPTER-III

RESEARCH METHODOLOGY PAGE

3.1 Objectives of the study 59
3.2 Meaning of research design 60
3.3 Sources of data collection 60
3.4 Methods of data collection 61
3.5 Data collection instrument (Questionnaire) 62
3.6 Sampling plan 62
3.7 Data analysis techniques 62

4 CHAPTER-IV
DATA ANALYSIS AND INTETPRETATION
(Presentation of data collected) 64

5 CHAPTER-V

CONCLUSION AND RECOMMENDATIONS

5.1 Recommendations 84
5.2 Conclusion 85

6 Limitations of the project 87

7 Scope for future work 88

8 Bibliography 89

9. Appendix 90

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 LIST OF TABLES

Sr. No Description

1. Table showing why to invest?

2. Table showing the features of investment avenues

Table showing the distinction between investment and

3.
speculation

4. Table showing the details of provident fund account

LIST OF CHARTS

Sr. No Description

1. Chart showing the three golden rules of all investors

2. Chart showing the types of risk in finance

3. Chart showing the 3 approaches to succeed as an investor

4. Chart showing the categories of investors

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 LIST OF ABBREVIATIONS

 GDP- Gross Domestic Product

 OECD- Organisation For Economic Co-Operation And Development

 HNIs-High Net Worth Investors

 FDI- Foreign Direct Investors

 TNC- Trans National Corporations

 FIPB-Foreign Investment Promotion Board

 FIIs- Foreign Institution Investors

 GDRs- Global Depository Receipts

 ADRs- American Depository Receipts

 PPF- Public Provident Fund

 NAV- Net Asset Value

 SEBI- Securities Exchange Board Of India

 RBI-Reserve Bank Of India

 IMF-International Monetary Fund

 IRDA- Insurance Regulatory And Development Authority

 AMFI- Association Of Mutual Funds In India

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CHAPTER-I ECONOMIC OVERWIEW

India is set to emerge as the world’s fastest-growing major economy by 2015 ahead of China,
as per the recent report by The World Bank. India’s Gross Domestic Product (GDP) is
expected to grow at 7.5 per cent in 2015, as per the report.
The improvement in India’s economic fundamentals has accelerated in the year 2015 with the
combined impact of strong government reforms, RBI's inflation focus supported by benign
global commodity prices.

1.1 MARKET SIZE:

According IMF World Economic Outlook April, 2015, India ranks seventh globally in terms
of GDP at current prices and is expected to grow at 7.5 per cent in 2016.
India’s economy has witnessed a significant economic growth in the recent past, growing by
7.3 per cent in 2015 as against 6.9 per cent in 2014. The size of the Indian economy is
estimated to be at Rs 129.57 trillion (US$ 2.01 trillion) for the year 2014 compared to Rs
118.23 trillion (US$ 1.84 trillion) in 2013.

The steps taken by the government in recent times have shown positive results as India's
gross domestic product (GDP) at factor cost at constant (2011-12) prices 2014-15 is Rs 106.4
trillion (US$ 1.596 trillion), as against Rs 99.21 trillion (US$ 1.488 trillion) in 2013-14,
registering a growth rate of 7.3 per cent. The economic activities which witnessed significant
growth were ‘financing, insurance, real estate and business services’ at 11.5 per cent and
‘trade, hotels, transport, communication services’ at 10.7 per cent.
Stating that its great time to invest in India, Minister of State for Finance Mr Jayant Sinha
said the Indian economy has potential to become a US$ 4-5 trillion economy in the next 10-
12 years.

1.2 INDIA AS AN INVESTMENT DESTINATION

India is the most attractive investment destination in the world, according to a survey by
global consultancy firm Ernst & Young (EY). Organisation for Economic Co-operation and
Development (OECD) projections on growth rate of India are 3.4 per cent for 2013-14, 5.1
percent in FY 2014–15 and 5.7 per cent in FY 2015–16. The HSBC Trade Confidence Index,

9
the largest trade confidence survey in the world, has positioned India at the top with 142
points. The increasing demand due to its population makes the country a good
market. Sectors projected to do well in the coming years include automotive, technology, life
sciences and consumer products.

 INDIAN EXPORTS:
India’s exports have also been doing well, touching US$ 303 billion in FY 2012–13,
almost double of what it managed (US$ 167 billion) four years ago. The US$ 1.2
trillion investment planned for the infrastructure sector in the 12th Five-Year Plan will
go a long way in improving export performance of Indian companies and the Indian
growth story.

 INDIAN GDP:
India is the third biggest economy in the world in terms of GDP measured at purchasing
power parity (PPP), according to a World Bank report. India is also projected to become
the third largest economy (Nominal GDP) in the world by 2043.

With the improvement in the economic scenario, there have been various investments leading
to increased M&A activity. Some of them are as follows:
India has emerged as one of the strongest performers with respect to deals across the world in
terms of mergers and acquisitions (M&A). M&A activity increased in 2014 with deals worth
US$ 38.1 billion being concluded, compared to US$ 28.2 billion in 2013 and US$ 35.4
billion in 2012. The total transaction value for the month of May 2015 was US$ 3.3 billion
involving a total of 115 transactions. In the M&A space, pharmacy continues to be the
dominant sector amounting to 23 per cent of the total transaction value.

 India’s Index of Industrial Production (IIP) grew by 4.1 per cent in April 2015
compared to 2.5 per cent in March 2015. The growth was largely due to the boost in
manufacturing growth, which was 5.1 per cent in April compared to 2.8 per cent in
the previous month.

 India’s Consumer Price Index (CPI) inflation rate increased to 5.01 per cent in May
2015 compared to 4.87 per cent in the previous month. On the other hand, the

10
 Wholesale Price Index (WPI) inflation rate remained negative at 2.36 per cent for the
seventh consecutive month in May 2015 as against negative 2.65 per cent in the
previous month, led by low crude oil prices.

 India's consumer confidence continues to remain highest globally for the fourth
quarter in a row, riding on positive economic environment and lower inflation.
According to Nielsen’s findings, India’s consumer confidence score in the first
quarter of 2015 increased by one point from the previous quarter (Q4 of 2014). With a
score of 130 in the first quarter (2015), India's consumer confidence score is up by
nine points from the corresponding period of the previous year (Q1 of 2014) when it
stood at 121.

 India’s current account deficit reduced sharply to US$ 1.3 billion (0.2 per cent of
GDP) in the fourth quarter of 2015 compared to US$ 8.3 billion (1.6 per cent of GDP)
in the previous quarter, indicating a shrink in the current account deficit by 84.3 per
cent quarter-on-quarter basis.

 India's foreign exchange reserve stood at a record high of US$ 354.28 billion in the
week up to June 12, 2015 – indicating an increase of US$ 1.57 billion compared to
previous week.
 Owing to increased investor confidence, net Foreign Direct Investment (FDI) inflows
touched a record high of US$ 34.9 billion in 2015 compared to US$ 21.6 billion in the
previous fiscal year, according to a Nomura report. The report indicated that the net
FDI inflows reached to 1.7 per cent of the GDP in 2015 from 1.1 per cent in the
previous fiscal year.

1.3 GOVERNMENT INITIATIVES TO BOOST INDIAN ECONOMY

a) Frame work for Investments by RBI:

a. In a bid to bring more investments into India’s debt and equity markets, the
Reserve Bank of India (RBI) has set up a framework for investments which
will enable foreign portfolio investors to take part in open offers, buyback of
securities and disinvestment of shares by the Central and State governments.

11
b) Opening up Insurance sector:
a. FIIs and non-resident Indians (NRIs) will now be able to invest in the
insurance sector, within the 26 per cent cap on FDI. DIPP confirmed in a press
note that the norms would also apply to insurance brokers, third-party
administrators (TPAs), loss assessors and surveyors. The investments can be
made through the automatic route.

c) Promotion of SMEs:
a. The Government of India along with the industry has been working towards
fashioning a more dynamic environment for small and medium enterprises
(SMEs) and start-ups over the last few years. Indian SMEs employ about 40
per cent of the country’s workforce and contribute 45 per cent to the overall
manufacturing output. A positive policy framework allied with the growth of
angel funds and a vibrant entrepreneurial culture is contributing to the growth
of first generation entrepreneurs in the country.

d) Infrastructure:
a. The Cabinet Committee on Investments (CCI) under UPA government had
approved the speedy execution of 36 infrastructure projects entailing
investments of Rs 1,830 billion (US$ 29.28 billion) to boost investor
confidence.

1.4 ROAD AHEAD:

With the objective of taking bilateral trade relations to the next level of a
comprehensive economic partnership agreement, India is readying itself to sign the
free trade agreement (FTA) on services and investment with the Association of
Southeast Asian Nations (ASEAN). The target for the two-way trade partnership is
US $100 billion by 2015, for which an integrated transport network is necessary.
Thus, the emphasis is on a massive road connectivity plan to tie the region together to
enhance economic objectives

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CHAPTER-II INTRODUCTION

2.1 AN OVERVIEW OF INVESTMENT

In today’s scenario there has been a major change i.e. economic prosperity all over. The
entire world is talking about the robust growth rates in this part of the world. Higher income
levels and booming stock markets have led to more and more numbers of high net worth
investors (HNIs). This means the availability of huge investible surplus. The investors with
higher risk appetite want to experiment and try new and exotic products in the name of
diversification. This has resulted in emergence of new options within the same or fresh asset
classes. There are more products available within each asset class be it Equity, Mutual Fund,
Gold, Real Estate.

After the global financial crisis of 2008 and 2009, the Indian financial sector has now
emerged stronger. The investments and savings are increasing in terms of volumes and
number of investors. An investment refers to the commitment of funds at present, in
anticipation of some positive rate of return in future. Today the spectrum of investment is
indeed wide.

The common perception of investors is to buy when the market supports in uptrend and not to
invest in the falling time. They wait for the stabilization in the market; so in this research, we
would like to draw a clear picture on the trends of traders and investors. Markets have
personalities because investors have emotions. Markets are ultimately driven by people and
stock prices are what individuals make them out to be. People have a tendency to see their
own actions and decisions as totally rational, when the truth is they may not be.

An investment is confronted with array of Investment Avenues. The two main classes of
investments are:
1. Fixed Income Investment such as bonds, fixed deposits, preference shares and,
2. Variable Income Investment such as business ownership (equities) or property
ownership.
On the basis of tenure, the investments are classified as-
 Short-term Investment and
 Long- Term Investment.

13
With reference to individuals, investment decisions should be made very wisely
and with proper research and analysis. Investment is always attached with the
element of risk of losing the invested money and this loss is not under the
control of the investor. Plenty of investment avenues available for the investors
make their decision making process more critical and complex. There are a
number of factors which influence the people to make their investment
decisions.

Key points on investor behaviours:

 Investments are often thought of as pieces of paper rather than part
ownership of a company.
 Investors are often impatient to sell a good stock.
 Investors often make a distinction between money easily made from
investments, savings or tax refunds and hard-earned money – found
money is more readily spent or wasted.
 People tend to think in extremes – the highly probable news is considered
certain, while the improbable is considered impossible.
 Investors often take a short-term viewpoint. Recent market losses lead to
suspicion and caution, while recent gains lead to action.
 Investors may overestimate their skills; attributing success to ability they
don’t possess and seeing order in information or data where it doesn’t
exist.
 Investors follow the crowd, and are heavily influenced by other investors
or compelling news; they fail to check out the real facts.
 Investors become obsessed with prices and trend-watching, rather than
solid information.

Taken as a whole, these psychologies really have only one effect, that is - a
financial decision is taken that lacks accuracy. And these errors are strongest
when uncertainty, inexperience, attitudes and market pressures come together to
14
undermine decision-making ability. Each person has his own personal
psychology and response style

2.2 WHAT IS INVESTMENT?

Investment is the employment of funds with the aim of achieving additional income or
growth in value. The essential quality of income is that, it involves ‘waiting ‘for a reward. It
involves the commitment of resources which have been saved or put away from current
consumption in the hope that some benefits will occur in future. The term ‘investment’ does
not appear to be a simple as it has been defined. Investment has been categorized by financial
experts and economists. It has also often been confused with the term speculation.

 FINANCIAL AND ECONOMIC MEANING OF INVESTMENT:

Investment is the allocation of monetary resources to assets that expected to yield some gain
or positive return over a given period of time. These assets range from safety investment to
risky investments. Investments in this form are also called ‘Financial Investments’.

To the economists, ‘Investment’ means the net additions to the economy’s capital stock
which consists of goods and services that are used in the production of other goods and
services. In this context the term investment implies the information of new and productive
capital in the form of new construction, new producers’ durable equipment such as plant and
equipment. Inventories and human capital are included in the economist’s definition of
investment.

In simple words investment means buying securities or other monetary or paper (financial)
assets in the money markets or capital markets, or in fairly liquid real assets, such as gold as
an investment, real estate, or collectibles. Valuation is the method for assessing whether a
potential investment is worth its price. Types of financial investments include shares or other
equity investment, and bonds (including bonds denominated in foreign currencies). These
investments assets are then expected to provide income or positive future cash flows, but may
increase or decrease in value giving the investor capital gains or losses.

 WHAT IS INVESTING?

The act of committing money or capital to an endeavour with the expectation of obtaining an

15
additional income or profit.

There are many different ways you can go about making an investment. This includes putting
Zyour own business. Sometimes people refer to these options as "investment vehicles," which
is just another way of saying "a way to invest."

 WHAT INVESTING IS NOT?

Investing is not gambling. Gambling is putting money at risk by betting on an uncertain

outcome with the hope that you might win money. Part of the confusion between investing
and gambling, however, may come from the way some people use investment vehicles. For
example, it could be argued that buying a stock based on a "hot tip" you heard at the water
cooler is essentially the same as placing a bet at a casino.

True investing doesn't happen without some action on your part. A "real" investor does not
simply throw his or her money at any random investment; he or she performs thorough
analysis and commits capital only when there is a reasonable expectation of profit. Yes, there
still is risk, and there are no guarantees.

 WHY BOTHER INVESTING?

However, investing is becoming more of a necessity. The days when everyone worked the
same job for 30 years and then retired to a nice fat pension are gone. For average people,
investing is not so much a helpful tool as the only way they can retire and maintain their
present lifestyle.

Whether you live in the U.S., Canada, or pretty much any other country in the industrialized
Western world, governments are tightening their belts. Almost without exception, the
responsibility of planning for retirement is shifting away from the state and towards the
individual. There is much debate over how safe our old-age pension programs will be over
the next 20, 30 and 50 years. But why leave it to chance? By planning ahead you can ensure
financial stability during your retirement
WHY INVEST?

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2.3 OBJECTIVES OF INVESTMENT

The objectives of investment are as follows:

1. Maximize Current Income:

This objective emphasizes on current yield over other factors. It is typical of people who
must rely on investment income for part of their entire livelihood.

2. Preservation of Capital:

In its purest form it means that the dollar value of the portfolio should not fall. However, in a
more complex form, it means investing so that the potential for declines in the overall value
of the portfolio is within tolerable limits. In this form, it is a common and quite logical
objective.

3. Reasonable Current Income with Moderate Capital Growth:

This modifies the first objective. While current income is important, capital gains also are
sought.

4. Long-Term Capital Growth:

This objective aims primarily at capital gains over a relatively long period of time. It implies
a greater degree of risk in the portfolio.

5. Aggressive capital growth:

This objective seeks maximum capital growth and implies making riskier investments with
considerable investment analysis and management.

6. Tax-Advantaged Investments:

A person’s top marginal income tax bracket may make tax-free or tax-sheltered investments
attractive.

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2.4 REASONS FOR INVESTING

1. Rate of Return:

Rate of return is a profit on an investment over a period of time, expressed as a proportion of

the original investment. The time period is typically a year, in which case the rate of return is
referred to as annual return.

Rate of return on an investment for a period is defined as follows:

Rate of return=Current value - Original value

X 100
Original value

2. Risk:

Risk of an investment refers to the variability of its rate of return. The greater the variability
or dispersion of the possible outcomes or the broader the range of possible outcomes, the
greater is the risk.

3. Marketability:

An investment is highly marketable or liquid if:

i. It can be transacted quickly

ii. The transaction cost is low.
iii. The price change between two successive transactions is negligible.

High marketability is a desirable characteristic of any company whereas low marketability is

an undesirable characteristic.

4. Tax Shelter:

Some investments provide tax benefits, others do not.

Tax benefits are of following three kinds.

i. Initial Tax Benefit: It refers to the tax relief enjoyed at the time of making the
investments.
ii. Continuing Tax Benefit: Tax shield associated with the periodic returns from the
investment.

18
 iii. Terminal Tax Benefit: It refers to relief from taxation when an investment is
realized or liquidated.

5. Convenience:

Degree of convenience associated with investments varies widely. At one end of the spectrum
is the deposit in a saving bank account that can be made readily and does not require any
maintenance effort. At the other end of the spectrum is purchase of a property that may
involve a lot of legal hassles and a great deal of maintenance effort.

6. Concealability:

It is another essential characteristic of the investment. It means investment to be safe from

social disorders, government confiscations or unacceptable levels of taxation. Property must
be concealable and leave no record of income received from its use or sale.

7. Capital Growth:

Capital growth refers to appreciation of investment. It has today become an important

character of investment and is recognising its connection between corporation and industry
growth.

8. Purchasing Power Stability:

It refers to the buying capacity of investment in market. Investment always involves the
commitment of current funds with the objective of receiving greater amounts of future funds.

9. Stability of Income:

It refers to the constant return from an investment. Stability of income must look for different
path just as security of principal. Every investor always considers stability of monetary
income and stability of purchasing power of income.

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2.5 FEATURES OF AN INVESTMENT PROGRAMME:

In choosing specific investments, investors will need definite ideas regarding features, which
their investment avenue should possess. These features should be consistent with the
investors’ general objectives and in addition, should afford them all the incidental
conveniences and advantages, which are possible under the circumstances. The following are
the suggested features as the ingredients from which many successful investors compound
their selection policies.

1. Liquidity:

Even investor requires a minimum liquidity in his investment to meet emergencies. Liquidity
will be ensured if the investor buys a proportion of readily saleable securities out of his total
portfolio. He may therefore, keep a small proportion of cash, fixed deposits and units which
can be immediately made liquid investments like stocks and property or real estate cannot
ensure immediate liquidity

2. Safety of principal:

The investor, to be certain of the safety of principal, should carefully review the economic
and industry trends before choosing the types of investment. Errors are avoidable and
therefore, to ensure safety of principal, the investor should consider diversification of assets.
Adequate diversification involves mixing investment commitments by industry,
geographically, by management, by financial type and maturities. A proper combination of
these factors would reduce losses.

3. Tangibility:

Intangible securities have many times lost their values due to price level inflation,
confiscatory laws or social collapse. Some investor prefers to keep a part of their wealth
invested in tangible properties like building, machinery and land. It may, however, be
considered that tangible property does not yield an income apart from direct satisfaction of
possession or property.

4. Legality and freedom from care:

All investments should be approved by law. Law relating to minors, estates, trusts, shares and
insurance be studied will bring out many problems for the investor. One way of being free

20
from care is to invest in securities like Unit Trust of India, Life Insurance Corporation or
Saving Certificates. The management of securities is then left to the care of the Trust who
diversifies the investments according to safety, stability and liquidity with the consideration
of their investment policy. The identity of legal securities and investments in such securities
also help the investor in avoiding many problems.

5. Appreciation and purchasing power stability:

Investors should balance their portfolios to fight against any purchasing power stability.
Investors should judge price level inflation, explore their possibility of gain and loss in the
investments available to them, limitations of personal and family considerations. The investor
should also try and forecast which securities will possibly appreciate. A purchase of property
at the right time will lead to appreciation in time. Growth stock will also appreciate over time.
These, however, should be done thoughtfully and not in a manner of speculation.

6. Income stability:

Regularity of income at a consistent rate is necessary in any investment pattern. Not only
stability, it is also important to see that income is adequate after taxes. It is possible to find
out some good securities, which pay particularly all their earnings in dividends.

21
2.6 INVESTMENT AND SPECULATION

Traditionally, investment is distinguished from speculation in three ways, which are based on
the factors of:

1. Capital gains
2. Time period
3. Risk

The distinction between investments and speculations is given in the table below:

1. Capital Gain:

The distinction between investment and speculation emphasizes that if the motive is primarily
to achieve profits through price changes, it is speculation. If purchase of securities is
preceded by proper investigation and analysis and review to receive a stable return over a
period of time, it is termed as investment. Thus, buying low and selling high, making large
capital gain is associated with speculation.

22
 2. Time Period:

The second difference is the consideration of the time period. A longer-term fund allocation
is termed as investment. A short-term holding is associated with trading for the ‘quick turn’
and is called speculation.

The distinction between investment and speculation is helped to identify the role of the
investor and speculator. The investor constantly evaluates the worth of a security through
fundamental analysis, whereas the speculator is interested in market action and price
movement. These distinctions also draw out the fact that there is a very fine line of division
between investment and speculation. There are no established rules and loss, which identify
securities, which are permanent for investment. There has to be a constant review of
securities to find out whether it is a suitable investment. To conclude, it will be appropriate to
state that some financial experts have called investment ‘a well grounded and carefully
planned speculation’, or good investment is a successful speculation. Therefore, investment
and speculation are a planning of existing risks. If artificial and unnecessary risks are created
for increased expected returns, it becomes gambling.

3. Risk:

The word ‘risk’ has a definite financial meaning. It refers to possibility of incurring a loss in
a financial transaction. In a broad sense, investment is considered to involve limited risk and
is confined to those avenues where the principal is safe.

‘Speculation’ is considered as an involvement of funds of high risk. An example may be cited

of stock brokers’ lists of securities which labels and recommends securities separately for
investments and speculation purposes. Risk, however, is a matter of degree and no clear-cut
lines of demarcation can be drawn between high risk and low risk and sometimes these
distinctions are purely arbitrary. No investments are completely risk-free. Even if it safety of
principal and interest are considered, there are certain non manageable risks which are
beyond the scope of personal power.

These risks affect both the speculator and the investor. High risk and low risk are, therefore,
general indicators to help and understanding between the terms investments and speculation.

23
2.7 TYPES OF RISK

A. SYSTEMATIC RISK

Systematic risk is due to the influence of external factors on an organization. Such factors are
normally uncontrollable from an organization's point of view.

It is a macro in nature as it affects a large number of organizations operating under a similar

stream or same domain. It cannot be planned by the organization.

The types of systematic risk are depicted and listed below:

1. Interest rate risk

Interest-rate risk arises due to variability in the interest rates from time to time. It particularly
affects debt securities as they carry the fixed rate of interest.

The types of interest-rate risk are depicted and listed below.

a. Price risk:

It arises due to the possibility that the price of the shares, commodity, investment, etc. may
decline or fall in the future.

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 b. Reinvestment rate risk:

It results from fact that the interest or dividend earned from an investment can't be reinvested
with the same rate of return as it was acquiring earlier.

2. Market risk:

Market risk is associated with consistent fluctuations seen in the trading price of any
particular shares or securities. That is, it arises due to rise or fall in the trading price of listed
shares or securities in the stock market.

The types of market risk are depicted and listed below.

a. Absolute risk:

It is without any content. For e.g., if a coin is tossed, there is fifty percentage chance of
getting a head and vice-versa.

b. Relative risk:

It is the assessment or evaluation of risk at different levels of business functions. For e.g. a
relative-risk from a foreign exchange fluctuation may be higher if the maximum sales
accounted by an organization are of export sales.

c. Directional risks:

They are those risks where the loss arises from an exposure to the particular assets of a
market. For e.g. an investor holding some shares experience a loss when the market price of
those shares falls down.

d. Non-Directional risk:

It arises where the method of trading is not consistently followed by the trader. For e.g. the
dealer will buy and sell the share simultaneously to mitigate the risk

e. Basis risk:

It is due to the possibility of loss arising from imperfectly matched risks. For e.g. the risks
which are in offsetting positions in two related but non-identical markets.

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 f. Volatility risk:

It is of a change in the price of securities as a result of changes in the volatility of a risk-

factor. For e.g. it applies to the portfolios of derivative instruments, where the volatility of its
underlying is a major influence of prices.

3. Purchasing power or inflationary risk:

Purchasing power risk is also known as inflation risk. It is so, since it emanates (originates)
from the fact that it affects a purchasing power adversely. It is not desirable to invest in
securities during an inflationary period.

The types of power or inflationary risk are depicted and listed below.

a. Demand inflation risk:

It arises due to increase in price, which result from an excess of demand over supply. It
occurs when supply fails to cope with the demand and hence cannot expand anymore. In
other words, demand inflation occurs when production factors are under maximum
utilization.

b. Cost inflation risk:

It arises due to sustained increase in the prices of goods and services. It is actually caused by
higher production cost. A high cost of production inflates the final price of finished goods
consumed by people.

B. UNSYSTEMATIC RISK

Unsystematic risk is due to the influence of internal factors prevailing within an organization.
Such factors are normally controllable from an organization's point of view.

It is a micro in nature as it affects only a particular organization. It can be planned, so that

necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.

The types of unsystematic risk are depicted and listed below.

1. Business or liquidity risk

Business risk is also known as liquidity risk. It is so, since it emanates (originates) from the
sale and purchase of securities affected by business cycles, technological changes, etc.

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The types of business or liquidity risk are depicted and listed below.

a. Asset liquidity risk:

It is due to losses arising from an inability to sell or pledge assets at, or near, their carrying
value when needed. For e.g. assets sold at a lesser value than their book value.

b. Funding liquidity risk:

It exists for not having an access to the sufficient-funds to make a payment on time. For e.g.
when commitments made to customers are not fulfilled as discussed in the SLA (service level
agreements).

2. Financial or credit risk:

Financial risk is also known as credit risk. It arises due to change in the capital structure of
the organization. The capital structure mainly comprises of three ways by which funds are
sourced for the projects. These are as follows:

 Owned funds. For e.g. share capital.

 Borrowed funds. For e.g. loan funds.
 Retained earnings. For e.g. reserve and surplus.

The types of financial or credit risk are depicted and listed below.

a. Exchange rate risk:

It is also called as exposure rate risk. It is a form of financial risk that arises from a potential
change seen in the exchange rate of one country's currency in relation to another country's
currency and vice-versa. For eg: investors or businesses face it either when they have assets
or operations across national borders, or if they have loans or borrowings in a foreign
currency.

b. Recovery rate risk:

It is an often neglected aspect of a credit-risk analysis. The recovery rate is normally needed
to be evaluated. For e.g. the expected recovery rate of the funds tendered (given) as a loan to
the customers by banks, non-banking financial companies (NBFC), etc.

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 c. Sovereign risk:

It is associated with the government. Here, a government is unable to meet its loan
obligations, reneging (to break a promise) on loans it guarantees, etc.

d. Settlement risk:

This risk exists when counterparty does not deliver a security or its value in cash as per the
agreement of trade or business

3. Operational risk:

Operational risks are the business process risks failing due to human errors. This risk will
change from industry to industry. It occurs due to breakdowns in the internal procedures,
people, policies and systems.

The types of operational risk are depicted and listed below.

a. Model risk:

It is involved in using various models to value financial securities. It is due to probability of

loss resulting from the weaknesses in the financial-model used in assessing and managing a
risk.

b. People risk:

It arises when people do not follow the organization’s procedures, practices and/or rules. That
is, they deviate from their expected behaviour.

c. Legal risk:

It arises when parties are not lawfully competent to enter an agreement among them.
Furthermore, this relates to the regulatory-risk, where a transaction could conflict with a
government policy or particular legislation (law) might be amended in the future with
retrospective effect.

d. Political risk:

It occurs due to changes in government policies. Such changes may have an unfavourable
impact on an investor. It is especially prevalent in the third-world countries.

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2.8 SOURCES OF STUDY FOR INVESTORS:

A look out for new investment opportunities helps investors to beat the market. There
are many sources from which investors can gather the required information such as:

1. Financial institutions
Corporate house, government bodies and mutual funds are the main source of
investment information. Many of these enterprises have their own website and
post investment related information on their websites.

2. Financial market:
Stock exchange and regulated bodies also provide useful information to
investor to make their investment decisions. With respect to secondary market,
the Securities and Exchange Board of India uses various modes to promote
investors education and takes great effort to achieve an investor friendly
secondary market in India. The Reserve Bank of India also provide useful
information relating to the prevent interest rates and non-banking financial
intermediaries that mobiles money through deposit schemes.

3. Financial service intermediaries:

These are intermediaries who promote securities among the public. Many of
these intermediaries are the agencies of specific instruments especially tax
saving instruments. These intermediaries offer to share their commission from
there concerned organization with the individual investor thus investor get
additional advantages while investing through intermediaries.

4. Media:
Press sources such as financial newspapers, financial magazine, business news
channel, websites etc. provide information related to investment to the public.
Besides information on securities, these sources also provide analysis of
information and in certain instance suggest suitable investment decisions to be
made by investor.

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2.9 STAGES IN INVESTMENT PROCESS

1. Investment Policy:

The first stage determines and involves personal financial affairs and objectives before
making investments. It may also be called preparation of the investment policy stage. The
investor has to see that he should be able to create an emergency fund, an element of liquidity
and quick convertibility of securities in to cash. This stage may, therefore, be considered
appropriate for identifying investment assets and considering the various features of
investment.

This stage involves taking decisions. It involves finding answers to the following questions.

 How much money can you set aside to invest?

 With the money you have, what are the assets in which you can invest?
 How much time can you wait for your investments to grow?
 What are your financial objectives? Do you think that you will be able to achieve your
objectives with the money you have decided to invest? If yes, have you arrived at that
decision by calculating the returns at a reasonable rate?
 If you decide to invest in different assets like shares, real estate, gold etc. How much
are you willing to allocate to each type of assets and why?
 What’s the risk you’re willing to take? Risk and returns are closely related. The more
risk you’re willing to take, the more returns you’d expect. Where do you stand – are
you a moderate risk taker or a heavy gambler? Or are you a really risk averse person?
Finding answers to the above questions would reveal your preferred investment policy.

2. Investment Analysis:

When an individual has arranged a logical of the types of the investments that he requires on
his portfolio, the next step is to analyse the securities available for investment. He must make
a comparative analysis of the type of the industry, industry of security and fixed vs. variable
securities. The primary concern at this stage would be to form beliefs regarding future
behaviour of stocks, the expected returns and associated risk.

This would help you to decide whether the mix is optimal to achieve your goals.
 At the base level it includes the analysis of your chosen investment asset – equity,
debentures, bonds, commodities, real estate etc..

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  At the broader level, it includes analysis of the economy and industry, qualitative and
historical analysis.

3. Valuation of investments:

The third step is perhaps most important consideration of the valuation of investments,
investments value, in general, is taken to be the present worth to the owners of the futures
benefits from investments. The investor has to bear in mind the value of these investments.

Appropriate sets of weights have to be applied with use of the forecasted benefits to estimate
the value of the investment assets. Comparison of the value with the current market price of
the asset allows a determination of the relative alternativeness of the asset.

For example – if a builder offers an apartment for 65 lakhs, would you blindly buy it without
analysing the builder’s track record and the facilities offered? Won’t you try to find out why
he charges 65 lakhs for that apartment? Finally you would buy that apartment only if you find
it attractive at that price. It is an individual decision after considering all the factors.

The same process needs to be done in any form of investment – whether it’s shares or mutual
funds or commodities. You have to make sure that the asset you get is worth the money you
spend.

Each asset must be valued on its individual merit. Finally the portfolio should be
constructed.

4. Portfolio Construction:
As discussed under features of investment programme, portfolio construction requires
knowledge of the different aspects of securities consisting of safety and growth of principal,
liquidity of assets after taking into account the stage involving investment timing, selection of
investment, and allocation of savings to different investments.

The success of every investment decision has become increasingly important in recent times.
Making sound investment decision requires both knowledge and skill. Skill is needed to
evaluate risk and returns associated with an investment decision. Knowledge is required
regarding the complex investment alternatives available in the economic environment.

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2.10 THREE APPROACHES TO SUCCEED AS AN INVESTOR

As Charles Ellis argued, it appears that there are three different ways of earning superior risk-
adjusted returns on stock market. The first one is physically difficult, the second one is
intellectually difficult, and the third one is psychologically difficult.

1. Physically Difficult Approach:

Many investors seem to follow this approach, wittingly or unwittingly. They look at the
newspapers and financial periodicals to learn about new issues, they visit the offices of
brokers to get advice and application forms, and they apply regularly in the primary market.
They follow the budget announcements intently, they read CMIE reports to learn about the
developments in economy and various industrial sectors, they read investment columns
written by the so called ‘experts’, they follow developments in the companies, they solicit
information from company executives, they read the columns in technical analysis, and they
attend seminars and conferences. In a nutshell, they apply themselves assiduously, diligently,
and even doggedly. They operate on the premise that if they can be a step ahead of others,
they will outperform the market.

The physically difficult approach seems to have worked reasonably well for most of the
investors in India since the late 1970s to the early 1990s, for three principal reasons:

a. Typically, issues in the primary market have been priced very attractively.

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 b. The secondary market, thanks to limited competition till almost 1991, was
characterized by numerous inefficiencies that provided rewarding opportunities to the
diligent investor.

c. An advancing price-earnings multiple, in general, bailed out even inept investors.

Things, however, have changed from mid-1995. The opportunities for subscribing issues in
the primary market have substantially dried up as companies, quite understandably, are
placing securities with institutional investors at prices that are fairly close to the prevailing
market prices. Likewise, the scope for earning superior returns in the secondary market has
diminished as the degree of competition and efficiency is increasing, thanks to the emergence
of hundreds of new institutional players (mutual funds, foreign institutional investors,
merchant banking organisations, corporate bodies) and millions of new individual investors.
Finally, the prospects of a fluctuating price-earnings multiple seem to be a greater than the
prospects of a rise in the price-earnings multiple.

2. Intellectually Difficult Approach:

The Intellectually Difficult Approach to successful investing calls for developing profound
understandings of the nature of investments and hammering out a strategy based on superior
insights. This approach has been followed mainly by the highly talented investors who have
an exceptional ability, a rare perceptiveness, an unusual skill, or a touch of clairvoyance.
Such a gift has been displayed by investors like Benjamin Graham, John Maynard Keynes,
John Templeton, George Soros, Warren Buffet, Phil Fisher, Peter Lynch, and others.

Benjamin Graham, widely acclaimed as the father of modern security analysis, was an
exceptionally gifted quantitative navigator who relied on hard financial facts and religiously
applied the ‘margin of safety’ principle. John Maynard Keynes, arguably the most influential
economist of the 20th Century, achieved considerable investment success on the basis of his
sharp insights into market psychology. John Templeton had an unusual feel for bargain stocks
and achieved remarkable success with the help of bargain stock investing. Warren Buffett,
the most successful stock market investor of our times, is the quintessential long-term value
investor. George Soros, a phenomenally successful speculator, developed and applied a
special insight which he labels as the ‘reflexivity’ principle. Peter Lynch, perhaps the most
widely read investment guru in recent years, has performed exceptionally well, thanks to a
rare degree of openness and flexibility in his approach.

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The intellectually difficult approach calls for a special talent that is diligently honed and
nurtured over time. Obviously, it can be practiced only by a select few and you should have
the objectivity to discern whether you can join this elite club. Remember that many investors
unrealistically believe that they have a rare gift because the stock market provides an
exceptionally fertile environment for self-deception. Participants in the stock market can
easily live in a world of make belief by accepting confirming evidence and rejecting
contradictory evidence. As David Dreman says: “Under conditions of anxiety and
uncertainty, with vast interacting information grid, the market can become a giant Rorschach
test, allowing the investor to see any pattern that he wishes....experts cannot only analyse
information incorrectly, they can also find relationships that aren’t there- a phenomenon
called illusory correlation

3. Psychologically Difficult Approach:

The stock market is periodically swayed by two basic human emotions, viz. Greed and fear.
When greed and euphoria sweep the market prices rise to dizzy heights. On the other hand,
when fear and despair envelop the market, prices fall to abysmally low levels. If you can
surmount these emotions which can wrap your judgment, create distortions in your thinking,
and induce you to commit follies, you are likely to achieve superior investment results.

The psychologically difficult approach essentially calls for finding ways and means of
substantially overcoming fear and greed. Its operational guidelines are as follows:

a. Develop an investment policy and adhere to it consistently.

b. Do not try to forecast stock prices.

c. Rely more on hard numbers and less on judgment.

d. Maintain a certain distance from the market place.

e. Face uncertainty with equanimity.

These guidelines look simple, but they are psychologically difficult to follow. Yet, for the
bulk of the investors this appears to be only sensible approach to improve the odds of their
investment performance.

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2.11 TYPES OF INVESTMENTS

1. Short-term investments: Short-term investments are any assets that are anticipated
to expire or to be liquidated within the course of 1-3 years. The goal of this type of
asset is to protect capital with low-risk investments. However, with low risk, the
return on short-term investments is very low. Examples: Savings Accounts,
Certificates of Deposit (CD), Money Market Funds, Treasury Bills.

2. Long-term investments: Long-term investments are assets that are held for more
than one year or accounting period and are used to create other income outside of the
normal operations of the company.

Examples: Mutual funds, fixed bank deposits, PPF, insurance etc.

 BEFORE MAKING ANY INVESTMENT, ONE MUST ENSURE TO:

1. Obtain written documents explaining the investment

2. Read and understand such documents

3. Verify the legitimacy of the investment

4. Find out the costs and benefits associated with the investment

5. Assess the risk-return profile of the investment

6. Know the liquidity and safety aspects of the investment

7. Ascertain if it is appropriate for your specific goals

8. Compare these details with other investment opportunities available

9. Examine if it fits with other investments you are considering

10. Deal only through an authorized intermediary

11. Seek all clarifications about the intermediary and the investment

12. Explore the options available to you if something were to go wrong, and then, if
satisfied, make the investments.

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2.12 INVESTOR:

Investor is a person or an organization that invest money in various investment sources for
specific objective. Attitude of investment is different in each alternative. E.g. financial market
have different attitude towards risk and return. Some investors are risk averse, while some
have an affinity of risk. The risk bearing capacity of investor is a function of personal,
economical, environment, and situational factors such as income, family size, expenditure
pattern, and age. A person with higher income is assumed to have higher risk- bearing
capacity. Thus investor can be classified as risk skiers, risk avoiders, or risk bearers.

 CATEGORIES OF INVESTORS:

While there are as many investing styles as there are investors, most people fall more or less
into one of three broad categories:

1. Conservative investors:

Generally, conservative investors feel that safeguarding what they have is their top priority.
These investors want to avoid risk — particularly the risk of losing any principal (their
original investment) — even if that means they’ll have to settle for very modest returns.
Conservative investors allocate most of their portfolios to bonds, such as Treasury notes or
high- rated municipal bonds, and cash equivalents, such as CDs and money market accounts.
They’re generally reluctant to invest in stocks, which may lose value, especially over the
short term. When conservative investors do venture into stocks they‘re often inclined to
choose blue chips or other large-cap stocks with well-known brands because they tend to
change value more slowly than other types of stock and often pay dividend income.

36
 2. Moderate investors:

Moderate investors want to increase the value of their portfolios while protecting their assets
from the risk of major losses. For example, a moderate investor might use an allocation
model that has 60% in stock, 30% in bonds, and 10% in cash equivalents. While they will
tend to favour blue chip and other large-cap stocks, they may be willing to invest a modest
portion of their principal in higher risk securities — such as international stock, small-caps,
and volatile sector funds — in order to increase their potential for higher returns.

3. Aggressive investors:

Aggressive investors concentrate on investments that have the potential for significant
growth. They are willing to take the risk of losing some of their principal, with the
expectation that they will realize greater returns.

Aggressive investors might allocate from 75 to 95% of their portfolios to individual stocks
and stock mutual funds. While large- and small-cap stocks and funds may make up the core
of their portfolios, many aggressive investors will have significant holdings in more
speculative stocks and funds, such as emerging market and sector mutual funds. Since
aggressive investors focus on growth, they are usually less inclined to hold income producing
securities, such as bonds.

An aggressive investing style is definitely not for the faint of heart. It’s best suited for
investors with a long-term investing horizon of 15 years or more, who are willing to make a
long-term commitment to the stocks they buy. But history has shown that an aggressive
investing approach, combined with a well diversified portfolio, and the patience to stick to a
long-term buy-and-hold investing strategy through inevitable market downturns, can be the
most profitable in the long run.

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2.13 WEALTHY INVESTORS:

According to a study undertaken jointly by Merrill Lynch, Cap Gemini, Young, High Net
worth Individuals [HNIs] or wealthy investors are proactive in portfolio management, risk
management, consolidation of financial assets and use of diversification strategies as actively
as large institutions. HNIs are proactive in identifying new investment options and take inputs
from professional advisors in volatile market conditions.

HNIs are dynamic in modifying their asset allocation and were among the first investors to
move from equities to fixed income during 2001-2002 period of downturn in equity markets.
They shifted back to equities when they identified favourable market trends.

Needs of wealthy investors

 Wealthy investors being aware of the emerging investment opportunities use

sophisticated investment strategies such as:
 Leveraging on the professional advisors' capability to analyse market trends and make
appropriate investments
 Searching for innovative products to enhance value
 Diversifying across various types of assets
 Investing across emerging geographies
 Consolidating financial information and assets Investment products and avenues

Characteristics of wealthy investor:

The wealthy investor of today is:

 Young, educated and knowledgeable

 Well informed about global trends

 Willing to take risks

 Demanding and quality conscious

 Performance oriented in taking decisions and less loyal

 Techno savvy and seeks information from various sources

 Smart in looking for the best deal

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  Not attracted by traditional status symbols that do not add value
 Hands on in checking investments, making deals and getting personally involved

Special needs of wealthy investors

The strategies and characteristics of wealthy investors have led to financial institutions
innovating and expanding their product range to meet the growing demands of such investors.
A financial advisor should keep in mind the following special needs and expectations of the
wealthy clients

 Demand broader range of services and skills:

Wealthy clients not only are on the lookout for multiple investment avenues, unlike
other clients, but are also ready to face the risks associated with newer products.

 Net worth and goals need to be matched and assets need to be planned tax
effectively:

Since wealthy investors have surplus funds that can be passed on to the next
generations and also come into the high tax-paying category, investors need to advise
them on the best methods to transfer their assets after death as well as on the best tax
saving investments.

 Estate planning and tax planning:

In-depth knowledge about tools of estate planning such as wills, trusts, and power of
attorney is necessary. It is also important to know the succession rules and tax rules to
do effective tax planning resulting in minimal/no tax on transfer of assets.

 Educate the client:

Educating the client on various and different types of investment avenues that will
suit him the best will prove very beneficial for the financial advisor. Wealthy clients,
especially those who are self made, may assume that if they can make wealth in one
industry they can manage their own portfolio as well. In such cases it is best to
educate the client about the best investment options rather than trying to push a
product; because if one is trying to push a product, the client is unlikely to get
interested since he/she will be having enough people chasing him/her for investments.

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2.14 WHAT IS PORTFOLIO MANAGEMENT?

 MEANING OF 'PORTFOLIO':
A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their
mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by
investors and/or managed by financial professionals.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the
choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other
tradeoffs encountered in the attempt to maximize return at a given appetite for risk.
Prudence suggests that investors should construct an investment portfolio in accordance with
risk tolerance and investing objectives. Think of an investment portfolio as a pie that is
divided into pieces of varying sizes representing a variety of asset classes and/or types of
investments to accomplish an appropriate risk-return portfolio allocation.

For example, a conservative investor might favour a portfolio with large cap value stocks,
broad-based market index funds, investment-grade bonds and a position in liquid, high-grade
cash equivalents. In contrast, a risk loving investor might add some small cap growth stocks
to an aggressive, large cap growth stock position, assume some high-yield bond exposure,
and look to real estate, international and alternative investment opportunities for his or her
portfolio.

 MAJOR TASKS INVOLVED WITH PORTFOLIO MANAGEMENT ARE:

1. Taking decisions about investment mix and policy

2. Matching investments to objectives

3. Asset allocation for individuals and institution

4. Balancing risk against performance

 TWO TYPES OF PORTFOLIO MANAGEMENT ARE (in case of mutual and

exchange-traded funds)

1. Passive management involves tracking of the market index or index investing.

40
2. Active management involves active management of a fund’s portfolio by manager or
team of managers who take research based investment decisions and decisions on
individual holdings.

 FACTS ABOUT PORTFOLIO:

1. There are many investment vehicles in a portfolio.

2. Building a portfolio involves making wide range of decisions regarding buying or

selling of stocks, bonds, or other financial instruments. Also, one needs to make
decision regarding the quantity and timing of the buy and sell.

3. Portfolio Management is goal-driven and target oriented.

4. There are inherent risks involved in the managing a portfolio.

 OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Security of Principal Investment:

Investment safety or minimization of risks is one of the most important objectives of

portfolio management. Portfolio management not only involves keeping the
investment intact but also contributes towards the growth of its purchasing power over
the period. The motive of a financial portfolio management is to ensure that the
investment is absolutely safe. Other factors such as income, growth, etc., are
considered only after the safety of investment is ensured.

2. Consistency of Returns:

Portfolio management also ensures to provide the stability of returns by reinvesting

the same earned returns in profitable and good portfolios. The portfolio helps to yield
steady returns. The earned returns should compensate the opportunity cost of the
funds invested.

3. Capital Growth:

Portfolio management guarantees the growth of capital by reinvesting in growth

securities or by the purchase of the growth securities. A portfolio shall appreciate in
value, in order to safeguard the investor from any erosion in purchasing power due to

41
 inflation and other economic factors. A portfolio must consist of those investments,
which tend to appreciate in real value after adjusting for inflation.

4. Marketability:

Portfolio management ensures the flexibility to the investment portfolio. A portfolio

consists of such investment, which can be marketed and traded. Suppose, if your
portfolio contains too many unlisted or inactive shares, then there would be problems
to do trading like switching from one investment to another. It is always
recommended to invest only in those shares and securities which are listed on major
stock exchanges, and also, which are actively traded.

5. Liquidity:

Portfolio management is planned in such a way that it facilitates to take maximum

advantage of various good opportunities upcoming in the market. The portfolio should
always ensure that there are enough funds available at short notice to take care of the
investor’s liquidity requirements.

6. Diversification of Portfolio:

Portfolio management is purposely designed to reduce the risk of loss of capital

and/or income by investing in different types of securities available in a wide range of
industries. The investors shall be aware of the fact that there is no such thing as a zero
risk investment. More over relatively low risk investment give correspondingly a
lower return to their financial portfolio.

7. Favourable Tax Status:

Portfolio management is planned in such a way to increase the effective yield an

investor gets from his surplus invested funds. By minimizing the tax burden, yield can
be effectively improved. A good portfolio should give a favourable tax shelter to the
investors. The portfolio should be evaluated after considering income tax, capital
gains tax, and other taxes.

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2.15 PORTFOLIO INVESTMENT BY FOREIGN SOURCES

Foreign Investment in India or more precisely Foreign Direct Investment (FDI) in India is
one of the most talked about issues in the entire world economy in recent times. Rated among
the top emerging nations, India's liberalization policies are paying rich dividends to the
economy as a whole.

Foreign Direct Investment (FDI) is defined as "investment made to acquire lasting interest in
enterprises operating outside of the economy of the investor." The FDI relationship consists
of a parent enterprise and a foreign affiliate which together form a Trans-National
Corporation (TNC)

India, post liberalization, has not only opened its doors to foreign investors but also made
investing easier for them by implementing the following measures:

 Foreign exchange controls have been eased on the account of trade.

 Companies can raise funds from overseas securities markets and now have
considerable freedom to invest abroad for expanding global operations.
 Foreign investors can remit earnings from Indian operations.
 Foreign trade is largely free from regulations, and tariff levels have come down
sharply in the last two years.
 While most Foreign Investments in India (up to 51 %) are allowed in most industries,
foreign equity up to 100 % is encouraged in export-oriented units, depending on the
merit of the proposal. In certain specified industries reserved for the small scale
sector, foreign equity up to 24 % is being permitted now.

As the industry progresses, opportunities abound in India, which has the world's largest
middle class population of over 300 million, is attracting foreign investors by assuring them
good returns. The scope for foreign investment in India is unlimited. India offers to foreign
investors a well balanced package of fiscal incentives for exports and industrial investments
that includes:

 Complete tax exemptions.

 Investment incentives are offered by both the Central Government and the
Government of the State in which the unit is located.
 India has tax treaties with 40 countries.

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Moreover, the support of the common man regarding FDI< is clearly from the sharp hike in
India's gross expenditure in the past few years. Thus the Indian economy is proving itself
highly conducive to Foreign Investment.

Portfolio Investment by Foreign Sources at a glance:

Portfolio Investment by Foreign Sources faced a decline during the year 1997-98 and after
that further decline was recorded in terms of both foreign institutional investment and GDRs

Fresh inflows of investments from foreign sources enervated from USD 1,926 million in
1996-97 to USD 979 million in 1997-98. During the year 1998-99, the expenditure was lesser
than the inflows in the previous year. The expenditure for 1998-99 had been USD 752 million
whereas; the inflows in the previous year were USD 973 million.

GDRs witnessed a rise of USD 645 million during the year 1997-98 which was almost lower
than half the amount of GDRs of USD 1366 million in the year 1996-97.

A major decline in portfolio investment followed till the year 1998-99, which witnessed only
USD 15million rise in GDRs as compared to USD 612million rise during the year 1997-98.
The indented scenario of domestic capital market and the enhanced emerging market risk-
perception causes this decline in the portfolio investment by foreign entities.

1. Portfolio Investment by NRIs-

Portfolio investments by the NRIs have undergone a number of liberalization measures that
have been effective since 1998-99 in favour of NRIs. The ceiling for investment in an
enterprise by all NRIs/ PIOs/ OCBs through stock exchanges have been directed in a separate
route, which does not include investment ceiling available for FIIs.

The total investment ceiling for NRIs has been increased from 5 percent to 10 percent of the
paid up capital of the enterprise. Furthermore, the portfolio investment carried out by a single
NRI has increased from 1 percent to 5 percent of the paid up capital. The policies attached
with the same have also eased.

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  Investment sectors in India for NRIs

The sectors in which the non-resident Indian (NRI) can invest through the automatic route
include agriculture, mining, alcohol brewing, power, industrial explosives, hazardous
chemicals, drugs and pharmaceuticals, transport, insurance, industrial parks, non-banking
financial institutions, etc. In some cases, the approval of the Foreign Investment Promotion
Board (FIPB) may be required. These include sectors like tea, infrastructural companies
except telecom, publication of newspaper and periodicals, courier service and single brand
product retailing.

The various sectors where NRI investments in India are prohibited include retail, atomic
energy, lottery and gambling establishments, tobacco products, etc.

 Ways of investing in India

The foreign investors can invest in India in two ways:

o Incorporation of an Indian company: The foreign investor can set up a separate

legal entity in India under the provisions of the Companies Act, 1956. The foreign
investors can invest in such Indian company up to 100 per cent of capital based on
sectoral guidelines specified by the Government of India.

o Unincorporated entity: A foreign company can operate in India, by establishing

a Branch Office of the other place of business (foreign entity), subject to
conditions and activities permitted under the Foreign Exchange Management
Regulations.

2. Portfolio Investments by Foreign Institutional Investors (FIIs)-

FIIs are permitted to buy and sell government securities as well as Treasury Bills within the
entire approved debt ceilings. The authorized dealers are allowed to provide concealment to
the fresh equity investments carried out by the FIIs in order to ensure better risk management
by the investors. In addition to this, the transactions made for Indian stocks among the FIIs
will not require post-facto confirmation from the reserve Bank of India anymore. The unlisted
debt securities of Indian firms are permitted about 100 percent FII debt funds in terms of
portfolio investment.

45
The buying of shares of any Indian company from the subsidiary market is entitled to a cap of
5 percent of the paid-up share assets and 5 percent of the paid-up value of each order of
unsecured bonds. As per the portfolio investment policies, the Foreign Institutional Investors
can buy and sell Government securities and Treasury Bills with the entire debt ceilings.

The Foreign Institutional Investors SEBI (FII), 1995, controls the portfolio investment. The
investments carried out by Foreign Institutional Investors include, a wide spectrum of
programs as listed below:

 Pension Funds
 University Funds
 Mutual Funds
 Endowment Foundations,
 Charitable Trusts and Charitable Societies
 Incorporated or Institutional Portfolio Managers or their Power of Attorney holders
 Investment Trusts as Nominee Companies
 Asset Management Companies

SEBI plays a pivotal role in the registration matters of FIIs. SEBI registered FIIs have been
granted permission by RBI to carry out investment matters in India under the Portfolio
Investment Scheme (PIS). As per the Portfolio Investment Scheme, individual investors
cannot surpass 10 percent of paid up capital and the foreign registered sub accounts of FII are
not allowed to cross 5 percent of the paid up capital as well. The Foreign Institutional
Investors along with their sub accounts cannot occupy more than 24 percent of the paid up
capital of an Indian firm.

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2.16 INVESTMENT AVENUES

In India, numbers of investment avenues are available for the investors. Some of them are
marketable and liquid while others are non-marketable and some of them also highly risky
while others are almost risk less. The investor has to choose Proper Avenue among them,
depending upon his specific need, risk preference, and return expected.

 Investment avenues can broadly be categorized under the following heads:

1. Corporate securities

 Equity shares

 Preference shares

 Debenture/Bonds

 Depository Receipts (GDRs/ADRs)

2. Deposit in bank and non banking companies

3. Post office schemes

4. Life insurance policies

5. Provident fund schemes

6. Government and semi-government securities

7. Mutual fund and schemes

8. Real estate

9. Bullion investment:

1. CORPORATE SECURITIES:

 Equity shares:

Total equity capital of a company is divided into equal units of small denominations, each
called a share. The holders of such shares are members of the company and have voting
rights. When company makes profit shareholder receives their share of the profit in form of
dividends. In addition, when company performs well and the future expectation from the

47
company is very high, the price of the companies share goes up in the market. Investor can
invest in shares either primary market offerings or in the secondary market.

 Preference shares:

Preference share as that part of share capital of the Company which enjoys preferential rights
as to:

a. Payment of dividend at a fixed rate during the lifetime of the Company

b. The return of capital on winding up of the Company

It lies in between pure equity and debt. But preference shares cannot be traded, unlike equity
shares, and are redeemed after a pre-decided period. Also, Preferential Shareholders do not
have voting rights. These are issued to the public only after a public issue of ordinary shares.

Preference shares also get traded in the market and give liquidity to investor. Investor can opt
for this type of investment when their risk performance is very low.

 Debentures and Bonds:

It is a fixed income (debt) instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government corporations and similar
institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed
rate of interest on a specified date, called the Maturity Date.

Many types of debenture and bonds have been structured to suit investors with different time
needs. Though having higher risk as compared to bank fixed deposits, bonds and debentures
do offer higher returns. Debenture instruments require scanning the market and choosing
specific securities that will cater to investment objectives of the investor.

 Depository Receipts (GDRs/ADRs):

Global depository receipts are the instrument in the form of a depository receipts or
certificate created by the overseas depository bank outside India and issued to non-resident
investors against ordinary shares. A GDR issued in America, is an American Depositary
Receipts. As investors seek to diversify their equity holdings, the option of GDRs and ADR’s
is very lucrative, while investing in such securities, investors should identify the
capitalization and risk characterizes of the instrument and the companies’ performance in the
home country.

48
 2. DEPOSIT IN BANK AND NON BANKING COMPANIES:

 Savings bank account with commercial bank:

Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with
banks may be considered as short-term financial investment options: Savings Bank Account
is often the first banking product investors use, which offers low interest (3.5% ), making
them only marginally better than fixed deposits.

 Fixed Deposits with Banks:

Fixed deposits with banks are also referred to as term deposits. Fixed Deposits in banks are
for those investors, who have low risk appetite. Bank FDs is likely to be lower than money
market fund returns. Fixed deposits may be recurring deposits where in savings are deposited
at regular intervals or fixed deposits of varying maturities or with the varying notice periods
such as 15 days, etc. The interest rates on these deposits vary depending on the maturity
period, from 4 to 9%. In general, it is lower for fixed deposits of shorter term and higher for
fixed deposits of longer term. If the deposit period is less than 90 days, the interest is paid on
maturity; otherwise it is paid quarterly.

 Current Accounts:

These accounts are used mainly by businessmen and are generally not used for the purpose of
investment. These deposits are the most liquid deposits and there are no limits for number of
transactions or the amount of transactions in a day. Cheque book facility is provided and the
account holder can deposit all types of the cheques and drafts in their name or endorsed in
their favour by third parties. No interest is paid by banks on these accounts. On the other
hand, banks charge service charges, on such accounts

 Recurring Deposits:

These kinds of deposits are most suitable for people who do not have lump-sum amount of
savings, but are ready to save a small amount every month. Normally, such deposits earn
interest on the amount already deposited (through monthly instalments) at the same rates as
are applicable for Fixed Deposits/Term Deposits. These are best if one wishes to create a
fund for his/her child’s education or marriage of daughter or buy a car without loans. Such
deposits are normally allowed for maturities ranging from 6 months to 120 months. A pass
book issued where the person can get the entries for all the deposits made by him/her and the

49
interest earned. Premature withdrawal of accumulated amount permitted is usually allowed
(however, penalty may be imposed for early withdrawals). These accounts can be opened in
single or joint names. Nomination facility is also available.

 Company fixed deposits:

For a manufacturing company the term of deposits can be one to three years, whereas for
non-banking finance company it can vary between 25 months to five years. A manufacturing
company can mobilize, by way of fixed deposits, an amount equal to 25 percent of its net
worth from the public and an additional amount equal to 10 percent of its net worth from its
share holders. A non banking finance company, however can mobilize a higher amount. The
interest rates on company deposits are higher than those on bank fixed deposits.

3. Post Office Schemes:

The investment avenues provided by post offices are non-marketable. However, most of the
savings schemes in post offices enjoy tax concessions. Post offices accept saving deposits as
well as fixed deposits from the public. There are a variety of post office savings certificates
that cater to specific savings and investment requirements of investors and are a risk free,
high yielding investment opportunity. Interest on these instruments is exempt from income
tax. Some of these instruments are also exempt from wealth tax.

 The Main Post Office Schemes are as follows:

 National Savings Certificate

 Post Office Monthly Income Scheme

 Post Office Time Deposit Account

 Post Office Recurring Deposit Account

 Advantages of Investing in Post Office Schemes:

 Procedures for investments are kept very simple.

 The interest earned is exempted from income tax.
 Money invested in National Saving Scheme can be withdrawn at the time of
emergency.

50
  In Post Office Recurring Deposit amount the money can be deposited in small amount
at regular intervals.
 Even an illiterate person can invest his/her money in Post Office: after gaining a little
knowledge.

4. LIFE INSURANCE POLICIES:

Insurance companies offer many investment schemes to investors. These schemes promote
saving and additionally provide insurance cover. LIC is the largest life insurance company in
India.

Some of its schemes include –

o Life policies,

o Convertible whole life assurance policy,

o Endowment assurance policy,

o Jeevan Saathi,

o Money back policy

o Unit linked plan

o Term assurance

o Immediate annuity

o Deferred annuity

o Riders etc

Insurance policies, while catering to the risk compensation to be faced in the future by
investor, also have the advantage of earning a reasonable interest on their investment
insurance premiums.

 Advantages of Insurance as an Investment Option

 Income guaranteed through annuities: Life indemnity is one of the ideal tools for
retirement preparation. Funds that are earned and hoarded during the lifetime are
utilized to supply a firm source of returns during the retirement period.

51
  Dividends enable growth: Customary policies enable prospect to share in the
monetary increase without taking the risk of investment. The investment revenue is
shared out among the policyholders through yearly announcement of bonus and/or
dividends.
 Risk guard: Because life is filled with uncertainties, life insurance guarantees that
your dear ones continue to have monetary back up in case of any unexpected incident
that may lead to your detriment or demise.
 Tax benefits: Insurance plans offer tax-benefits that are appealing for both at the
entry and exit period under the majority of the plan.
 Mortgage recovery: In case of demise of the policyholder who has unpaid loans and
mortgages, the insurance acts as an efficient instrument to cover up these charges,
removing the burden of repayment of the family.

5. PUBLIC PROVIDENT FUND:

A long-term savings instrument with a maturity of 15 years it can be made in monthly

instalments with a minimum of Rs.100 and a maximum of Rs.60,000 per annum and interest
payable at 8% per annum compounded annually. It is not transferable, but has nomination
facility. One withdrawal per financial year can be made any time after 5 years from the end of
the year in which the subscription is made. Withdrawal is limited to 50% at the end of the 4th
year. All subscription of PPF is completely free and balances in PPF are not taken into
account for wealth tax purpose.

Public Provident Fund Account

 Ideal investment option for both salaried as well as self employed classes
 Non-Resident Indians (NRIs) are not eligible
 Investment up to INR 1, 00,000 per annum qualifies for IT Rebate under section 80 C
of IT Act.
 The rate of interest on the subscriptions made to the fund on or after 01.12.2011 and
balances at credit of the subscriber in the existing PPF account shall bear interest at
the rate of eight point seven per cent (8.70%) per annum.
 Loan facility available from 3rd financial year up to 5th financial year. The rate of
interest charged on loan taken by the subscriber of a PPF account on or after

52
 01.12.2011 shall be18.2% p.a. However, the rate of interest of 1% p.a. shall continue
to be charged on the loans already taken or taken up to 30.11.2011.
 Withdrawal permitted from 6th financial year.

 Free from court attachment.

 An individual cannot invest on behalf of HUF (Hindu Undivided Family) or

Association of persons.

TYPE OF ACCOUNT MINIMUM LIMIT MAXIMUM LIMIT

Public Provident Fund

(Individual account on INR 500/- in a financial INR 1,00,000/- in a
his behalf or on behalf of year financial year
minor of whom he is the
guardian)

 Advantages of PPF

 It provides tax free returns because there is no tax on interest income which one
derives from this PPF which is the case with fixed deposit.
 It provides good return in the range of 8 to 9 percent and since it is government
backed scheme it is very safe investment as compared to equity.
 This can be started with minimum amount of 500 rupees and therefore even people
who are in lower income group can also start it.
 It can be opened in the name of minor along with guardian and if child is above 18
years of age then no guardian is needed therefore an individual who has having 2
adult children can open 4 accounts, 1 in name of himself, 1 in the name of his wife
and other 2 in name of his children.

 Disadvantages of PPF
 Since there is lock in period of 15 years one cannot invest the money if he or she has
liquidity problem because this funds are locked in for a long period of time.

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  Maximum investment which one can made in this is limited to 100000 rupees,
therefore one has to plan his or her investment accordingly, because suppose you sold
some land for 5 Lakhs rupees and want to put that money into PPF than you cannot
do that as maximum limit is 100000 lakhs rupees only .
 One cannot close his or her account prematurely (except in case of death) which
results in lower flexibility as compared to SIP or FD where you can close it whenever
you want.

6. GOVERNMENT AND SEMI-GOVERNMENT SECURITIES:

It is a fixed income (debt) instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government, corporations and similar
institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed
rate of interest on a specified date, called the Maturity Date. The government issues securities
in the money market and in the capital market. Money market instruments are traded in
Wholesale Debt Market (WDM) trades and retail segments. Instruments traded in the money
market are short term instruments such as treasury bills and convertible bonds.

7. MUTUAL FUND:

These are funds operated by an investment company, which raises money from the public and
invests in a group of assets (shares, debentures etc.), in accordance with a stated set of
objectives. It is a substitute for those who are unable to invest directly in equities or debt
because of resource, time or knowledge constraints.

Mutual fund units are issued and redeemed by the Fund Management Company based on the
fund's net asset value (NAV), which is determined at the end of each trading session. NAV is
calculated as the value of all the shares held by the fund, minus expenses, divided by the
number of units issued. Mutual Funds are usually long term investment vehicle though there
some categories of mutual funds, such as money market mutual funds, which are short term
instruments.

On the basis of objective we can categories mutual funds as equity funds/growth funds,
diversified funds, sector funds, index funds, tax saving funds, debt/income funds, liquid
funds/money market funds, gift funds, balanced funds. And on the basis of flexibility we can
categories them as open-ended funds, close-ended funds and interval funds.

54
  Advantages to invest in mutual funds:

 No large investment compulsory: Mutual funds allow you to make an investment,

even if you have a very small amount to invest. This advantage makes it more
attractive among investors.

 Investing in a variety of instruments: Imagine ordering a thaali at your favourite

restaurant where you can eat a variety of different foods in one affordable package!
Mutual funds also work in a similar way. Mutual Funds invest in a wide range of
securities. This diversification reduces the risk by limiting the effect of a possible
decline in the value of any one security. You achieve this diversification through a
Mutual Fund with far less money than you can do on your own.

 Convenience: You can invest directly with the fund house or through your financial
advisor. You get regular information on the value of your investments and portfolios
of the schemes.

 Professional Management: Mutual fund investments are managed by experienced

and skilled professionals, who with the help of an investment research team, analyzes
the performance & prospects of companies and selects suitable investments to achieve
the objective of the scheme.

 Easy access to your money: In open-ended mutual funds, you can redeem all or part
of your units any time you wish. Some schemes do have a lock-in period where an
investor cannot return the units until the completion of such a lock-in period. With
close-ended schemes, you can sell your units on a stock exchange at the prevailing
market price or avail of the facility of repurchase through Mutual Funds at NAV
related prices which some close-ended and interval schemes offer you on maturity of
scheme or periodically, as the case maybe.

8. REAL ESTATE:

Investment in real estate also made when the expected returns are very attractive. Buying
property is an equally strenuous investment decisions. Real estate investment is often linked
with the future development plans of the location. At present investment in real assets is
booming. There are various investment source are available for investment which are directly
or indirectly investing real estate.

55
 Advantages of investing in real estate:

 Income Stream:

If the property is easily convertible to rental units, the owner of the property can earn
a steady income stream in the form of rent. Depending on the geographical location
the property is located in, the earnings can be quite significant. For example, urban
city centres or towns with colleges and universities tend to offer the highest income
streams because the demand for rental units is always high.

 Security:

Owning property can offer the investor a sense of security because the value does not
tend to fluctuate as much as other assets such as stocks and bonds. However, this does
not mean that the investor will always break even or earn a profit on their investment.
Although housing prices do not tend to fluctuate in the short term, they may increase
or decrease in value in the longer term. Therefore, it is important for the investor to
thoroughly research the area before making a purchase.

 Self Occupation:

Another reason why many investors are attracted to investing in real estate is because
the property can be utilized by the investor. They can either live on the property while
they fix it up, or they can be a live-in landlord and earn an income stream at the same
time by renting out the other rooms.

 Tax Shelter:

Since tax laws on income properties vary depending on your jurisdiction, you should
always be sure to thoroughly research it beforehand. However, it is very common for
taxes on any gains to be deferred until you sell the property. For example, if a house
appreciates in value from $250,000 to $300,000, the investor will not be required to
pay the taxes on the extra $50,000 until the property is sold.

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  Disadvantages of investing in real estate:

 Legal Difficulties:

Investing in real estate has the potential of being very confusing because it requires that you
are fully aware of the laws in each jurisdiction that you own property. Some jurisdictions may
even enforce land ceilings which can make the investment risky. The legal difficulties can
become much more complex if the investor is investing in commercial real estate.

 Maintenance Cost:

The cost of maintaining the property can cause the investor to lose money on the investment.
In larger cities, property taxes can be so high that it will be very difficult to resell the house at
a higher value.

If the owner of the property is renting out the units, maintenance costs can take large chunks
out of the income stream. If the owner does not personally know the tenants before renting
out the units, they run into the risk of renting the space out to someone who will not take care
of the unit, causing the owner to put large sums of money into repairs. Furthermore, other
costs such as electricity and heating will also add up.

 Property Taxes:

Before investing in real estate, the investor should always factor property taxes into their
valuation of the property. In larger urban cities, property taxes can be significant and may
cause the investor to lose a big chunk of their profit. Property taxes will vary depending on
which city or state the property is purchased in. Therefore, the investor should always consult
with city officials before investing in property.

9. BULLION INVESTMENT:

The bullion offers investment opportunity in the form of gold, silver, and other metals;
specific categories of metals are traded in the metal exchange. The bullion market presents an
opportunity for an investor by offering returns and the end value of future. It has been absurd
that on several occasions, when stock market failed, the gold market provided a return on
investments.

57
 Advantages of bullion investment:

 Gold and silver are useful as a store of wealth. They even act as secret assets.
 Both the metals are highly liquid. This facilitates easy convertibility into cash at any
time and that too without incurring any loss.
 The market price of both the metals is continuously rising. This makes investment
normally profitable and acts as a hedge against inflation.
 Investment in gold and silver provides a sense of security to the investor as it has
immediate liquidity.
 There is high degree of prestige value for gold and silver in the society. The benefit or
capital appreciation is also available.
 Investment in gold and silver is quite safe and secured. The possibility of loss in the
investment is practically nil in the case of these metals.

 Disadvantages of bullion investment:

 Such investment is risky due to thefts, etc.

 It is a dead type of investment as profit will be available only when it is sold out and
people rarely sell gold.
 Regular income from the investment is not available.
 Huge amount of money is required for investment in gold/silver.
 Investment in gold and silver is not useful for capital formation and economic growth.
Even the traditional attraction for gold and silver is gradually reducing in India.

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CHAPTER-III RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. The Research
Methodology includes the various methods and techniques for conducting a research.
Research is an art of scientific investigation.

The logic behind taking research methodology into consideration is that one can have
knowledge about the method and procedure adopted for achievement of objective of the
project.

3.1 OBJECTIVES OF THE STUDY:

The purpose of the analysis is to determine the investment behaviour of investors and
investment preferences for the same. Investors perception will provide a way to accurately
measure how the investors think about the products and services provided by the company.
Today’s trying economic conditions have forced difficult decisions for companies. Most are
making conservative decisions that reflect a survival mode in the business operations. During
these difficult times, understanding what investors on an ongoing basis is critical for survival.

“The main objective of the project is to find out the needs of the current and future
investors”

For this analysis, customer perception and awareness level will be measured in important
areas such as:

a. To study the investment pattern of investors

b. To understand in depth about different investment avenues
c. To find out how investors get information about the various financial instruments
d. The type of financial instruments, they would prefer to invest
e. The duration for which they would prefer to keep their money invested
f. To give a recommendations to the investors that where they should invest
g. To know the risk tolerance level of the individual investor and suggest a suitable
portfolio
h. To identify the objective of savings of an investor

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3.2 RESEARCH DESIGN:

Research design is the conceptual structure within which research is conducted. It

constitutes the blueprint for collection, measurement and analysis of data was a
descriptive research.

This research will be Descriptive in nature. A population of investors who invest in

different investment avenues will be considered for this study. I will try to explore the
investment behaviour of the Investors. Effort will be made to throw light on most of the
factors which have either indirect or direct effect on the behaviour of the investment.

Since the type of study is descriptive in nature hence the research design will be guided
by following parameters.

1. The Research Problem: The research problem on hand is to find out investor’s
pattern towards the investment in different avenues.
2. Procedures and techniques used for gathering information: A proper and balanced
combination of observation, questionnaire of sample population will be adapted by
me for gathering information.
3. The population to be studied: In order to bring our some accurate conclusions, it is
decided to contact the investor.

3.3 SOURCES OF DATA COLLECTION:

In this research two types of data were used-

1. Primary Data:

Primary data is that data which has been collected especially for the purpose of this
newly taken research. This preliminary data for this research project has been
collected by the means of a questionnaire designed to determine those factor which
are designated by the various investors which were important to them in the decision
making process. Various Professionals / Investors / Businessmen /Students were the
focus of this questionnaire filling procedure.

60
 2. Secondary Data:

I have made extensive use of resources available in the Internet & other print media to
gather the information, do the analysis, and arrive at the conclusion. Information from
various sources has been used to understand more about various investment
alternatives & to provide suggestions for choosing better investment portfolio.

3.4 METHODS OF DATA COLLECTION:

1. Questionnaire: A questionnaire is a research instrument consisting of a series

of questions and other prompts for the purpose of gathering information from
respondents. It serves four basic purposes:

 To collect the appropriate data,

 To make data comparable and amenable to analysis,
 To minimize bias in formulating and asking question, and
 To make questions engaging and varied.

Here in this research I set questions for investors and answers can be easy to fill out with
minimum amount of time and efforts and request the respondent to answer these questions
with correct information. The questionnaire consisted of Close ended questions.

Close ended question: It contains those questions in which the respondent is given a limited
number of alternatives responses from which he/she is to select the one that most closely
matched. The fixed alternative questions may be taken in the form of-

--- Dichotomous Question: It refers to one which offers the respondents a choice between
only2 alternatives and reduces the issues to its simplest terms.

--- Multi-choice questions: A multiple – choice question refers to one, which provides
several set of alternatives. Multiple – choice questions can be used when an issue has more
than 2aspects.

2. External data: It was generated from internet websites and other print media.

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3.5 DATA COLLECTION INSTRUMENT:

As mentioned earlier, ‘Questionnaire’ (a technique or a method used for obtaining specific

information about a defined topic) was used to collect the primary data. This questionnaire
contains both close-ended (questions wherein respondent has to select based on the options
provided). Questionnaire that was floated has been attached.

3.6 SAMPLING PLAN:

 Population:

Since the study is mainly related to know the investment patterns of different category of
investors, their potentiality of earning income and reducing risk of the investment
community, where each security in the market has to be analyzed through their earnings over
the others.

 Sample size:

This refers to number of respondents to be selected to constitute a sample. Since, the

population is large the survey was carried among 50 respondents.

 Sampling unit:

The target population must be defined that has to be sampled. The sampling unit of this
research included salary earners, businessmen and professionals.

3.7 DATA ANALYSIS TECHNIQUES:

The analysis of data collection is completed and presented systematically with the use
of Microsoft Excel and MS-Word.

The tool which was used for presentation are---

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 o Bar chart:

A bar chart or bar graph is a chart that presents Grouped data with rectangular bars
with lengths proportional to the values that they represent. The bars can be plotted
vertically or horizontally. A vertical bar chart is sometimes called a column bar chart.

A bar graph is a chart that uses either horizontal or vertical bars to show comparisons
among categories.

One axis of the chart shows the specific categories being compared, and the other axis
represents a discrete value. Some bar graphs present bars clustered in groups of more
than one (grouped bar graphs), and others show the bars divided into subparts to show
cumulative effect (stacked bar graphs).

o Pie chart:

A pie chart (or a circle chart) is a circular statistical graphic, which is divided into
slices to illustrate numerical proportion. In a pie chart, the arc length of each slice
(and consequently its central angle and area), is proportional to the quantity it
represents. Area of each segment (called slice or wedge) is of the same percentage of
the circle as the component represents is of the whole data set.

Pie charts are also known as-

 Circle diagram
 Circle graph
 Pizza chart
 Sector graph

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CHAPTER-IV DATA ANALYSIS AND INTERPRETATION

1) GENDER:

Interpretation:

The first question in the survey was pertaining to the gender of respondents.

From the above chart, it is observed that-

Out of 50 respondents, 32 are male and 18 are female.

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 2) AGE GROUP:

Interpretation:

From the above chart, it is observed that-

The majority of respondents are in the age category of 25 to 30 years meaning young
investors. They are induced with investment skills at a younger age.

The second highest are the respondents in the age group of 30 to 35.

The third highest are the respondents above the age group of 45 and above. Considering their
age group, it is essential to make investment for future considerations

65
 3) ANNUAL INCOME:

Interpretation:

From the above chart, it is observed that-

The majority of respondents earn an annual income between Rs.1, 00,000 /- to Rs.2, 00,000/-

Also few of the respondents stated that they earn an annual income of more than
Rs.10,00,000 which means they have more amount left for investment purposes as compared
to those earning below Rs.10,00,000/-

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 4) SAVINGS:

Interpretation:

From the above chart, it is observed that-

The majority of respondents save only up to 10-20% of their income which means that the
spending ratio is more leaving very limited amount for investing purposes.

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 5) PORTFOLIO INTENTION:

Interpretation:

From the above chart, it is observed that-

The majority of respondents stated that the reason for them investing into products is to either
to fund a large purchase in the future or to generate income at a later date

Few of the respondents also stated that they invest for generating income for the present.

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 6) TYPE OF INVESTORS:

Interpretation:

From the above chart, it is observed that-

Majority of the respondents said that they are either medium term or long term investors
which mean that they invest keeping in mind the long term returns.

Traders are the people who deal in the stock market. They invest almost daily for generating
income.

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 7) RISK APPETITE:

Interpretation:

From the above chart, it is observed that-

Majority of the respondents believe in medium risk/medium return psychology.

Few respondents believe in taking a high risk for higher returns. Generally people trading in
stock markets take higher risk.

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 8) INVESTMENT TENURES:

Interpretation:

From the above chart, it is observed that-

It is observed that majority of the investors invest monthly.

Many respondents also invest quarterly, half yearly or yearly.

Very few respondents stated that they invest daily. As stated earlier also, traders invest daily
or fortnightly.

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 9) ASSET CLASS:

Interpretation:

From the above chart, it is observed that-

Majority of the people invest into currency.

Many respondents also invest into equity class i.e. into shares or mutual funds.

Very few respondents stated that they invest into debt.

Investors should be motivated to invest in other avenues apart from currency, shares and
mutual funds only.

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 10) INVESTMENT AVENUE SELECTION:

Interpretation:

From the above chart, it is observed that-

This question tried to find out the type of investments that respondents make. This is one of
the important questions which provide an eye-opener on the topic: ‘Investment pattern’.

Bank deposits are the top choice. However, many respondents have also chosen gold and
insurance which brings them close to the top spot.

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 11) PREFERENCES FOR FREQUENT INVESTMENTS:

Interpretation:

From the above chart, it is observed that-

When it comes to investing frequently, respondents believe in investing in bank deposits.

Highest liquidity feature enables people to invest more into bank deposits than any other
investment avenue.

As seen above, many respondents also prefer investing in gold and insurance policies.

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 12) CHURNING OF INVESTMENTS:

Interpretation:

From the above chart, it is observed that-

Majority of the respondents churn their investments monthly and yearly.

Remaining respondents churn their investments quarterly, half yearly or after a year.

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 13) TAX PURPOSES:

Interpretation:

From the above chart, it is observed that-

Majority of the investors invest for tax purposes. Avenues such as bonds, post office
schemes, etc. are tax deductible.

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 14) INVESTOR’S MENTALITY WHILE SELECTING AN INVESTMENT
AVENUE:

Interpretation:

From the above chart, it is observed that-

Majority of the respondents responded that since they have very little knowledge about
investments, they rely exclusively on the recommendations of financial advisors.

Some respondents also stated that they have good working knowledge and understand
completely how different investments work and others stated that they have limited
knowledge of stocks and bonds, and I do not follow financial markets.

Very few respondents said that understand completely how different investment products
work and that they follow financial markets closely.

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 15) KNOWLEDGE FACTOR:

Interpretation:

From the above chart, it is observed that-

Majority of the investors invest into investment products with proper knowledge of the
product. It is necessary to know the product you’ve invested your money in, the risk
involved, etc.

Very few investors invest into investment products without proper knowledge of the product.

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 16) RELIANCE ON FOR CHOOSING INVESTMENT AVENUE:

Interpretation:

From the above chart, it is observed that-

Majority of the respondents said that they rely on the professionals while deciding an avenue
to invest their money into. Some of them also said that they rely on their own research while
selecting an investment avenue.

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 17) MAXIMUM CAPACITY FOR BEARING LOSS:

Interpretation:

From the above chart, it is observed that-

When asked the respondents what would be the maximum drop in the portfolio value that
could be tolerated by you, majority of them said that they would be uncomfortable with any
loss. While some other respondents said that they could be comfortable with a loss of Rs.5,
00,000/-

However there were also respondents who stated that they can be comfortable with a loss of
Rs. 15, 00,000/- only

80
 18) INVESTMENT PHILOSOPHY:

Interpretation:

From the above chart, it is observed that-

When it comes to the investment philosophy of the individuals, the views of maximum
respondents were that they could only accept only minimal fluctuations and thus prefer to
invest to safer, lower-return investments.

The equal majority of respondents said that they are willing to tolerate some ups and downs
in the value of their investments to achieve overall higher returns in the long run.

Some respondents had other perspectives. According to them, since their main interest is
high, long-term returns, they are willing to tolerate some ups and downs in the value of their
investments and are not concerned about short-term decreases in the value of their
investments.

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 FINDINGS

The above survey tells us that:

 Only 4.1% of the respondents manage to save 50-60%, 60-70% and 80-90% of their
income. The majority of respondents (34.7%) save between 10 to 20% of their
income.

 44% of the respondents stated that the intent of their portfolio was to fund a large
purchase in the future, followed by 38% who said that their intention was to generate
income at a later date. Only 16% stated that their portfolio was tailored to generate
income for today.

 An overwhelming 77.1% are medium to long term investors.

 Again, when it comes to risk-taking appetite, the majority i.e. 57.1% displayed a
preference for medium risk/ medium returns investments.

 Majority of the people i.e. 51% stated that they invest monthly, 18.4% invest
quarterly, 14.3% invest half yearly and 20.4% invest yearly.

 It is observed that people mostly invest in currency followed by equity, commodities

and lastly debt.

 When it comes to the selection of investment avenues, bank deposits are the highly
preferred options. They are even preferred for frequent investments. The next
preferred in the line are gold, life insurance and real estate. The least preferred are
company deposits, debenture and bonds.

 It is observed that 27.7% people churn their investments monthly, 17% quarterly,
19.1% half-yearly, 23.4% yearly and 21.3% after a period of a year or more. It can be
concluded that majority of people churn their investments monthly.

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 It is observed that most of the respondents invest for tax purposes.

 54% of respondents said that they have little knowledge about investment and rely
exclusively on the recommendations of financial advisors whereas 20% have limited
knowledge of stocks and bonds, and they do not follow financial markets. Also, 18%
of respondents said that they have good working knowledge and follow financial
markets. 8% said that they understand how different investment products work and
regularly follow financial markets closely.

 94% of respondents invest into products with proper knowledge of the product. Only
6% of people invest into products without product knowledge.

 56% respondents rely on professionals for choosing their investment avenues.

Whereas 50% rely on their own research and 10% consider others for choosing their
investment avenues.

 Again, when it comes to the maximum drop in their portfolio value:

o Majority of the respondents (26.5%) said that they can tolerate a maximum fall of 5%,
o 51% said that they will be uncomfortable with any loss,
o 10.2% could tolerate a decline of 10%,
o 2% of respondents said that they could tolerate a drop up to 15%.
o Also, 6.1% of respondents said that they could live up to a loss of more than 20%.

 When asked which statement most correctly describes their investment philosophy,
equal majority of the respondents (i.e. 34%) said that they could accept only minimal
fluctuations and hence prefer investing in safer, lower-return investments ‘AND’ also
that they could tolerate some ups and downs in the value of their investments to
achieve overall higher returns in the long run. 18% of respondents said that their main
interest is high, long term returns and that they are not concerned about short-term
decreases in the value of their investments.

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 RECOMMENDATIONS

o The following are the recommendations from the project:

 The investors of age group 30 to 45 should make investment in higher risky
investment avenues as they have fixed source of income.

 The companies and financial institutions should determine some methods to educate
the investors about other sources of investments apart from traditional sources like
bank fixed deposits, gold and life insurance policies and real estate.

 The investors generally follow herd mentality while investments. Therefore

knowledge enhancement and empowerment to make investments should be done from
early age in India.

 The knowledge level of the investors is very narrow. So regular participative

programmes as well as educational mechanisms should be formulated to educate the
investors

 The financial service providers must concentrate on the age group 45 and above (i.e.
mostly above 51 years) as this group might want to invest because they will retire in
next few years.

 Many respondents do not prefer debentures and company deposits as investment

options; hence, the financial institutions should try to convince these respondents
through their convincing power and communication skills.

 Few respondents are not aware about the benefits of tax concession; hence the
financial advisors must give awareness about the tax exemption level.

 Some of the respondents rely on others than the professionals advisors for choosing
the investment avenues. Thus, the financial advisors have a scope to capture this
untapped segment.

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 CONCLUSION

 Most of the investors are very sensitive about the safety of their investment. They
want more safety and reliability. Current trend and easy access is not affected the
investor as much as safety and reliability.

 Most of the earning people invest their income up to different level in any sector, so
investment has a very wide scope.

 Investments should be made keeping in mind the market situation. Factors such as the
risk involved, return on investments, tax benefits should also be kept in mind while
selecting an investment avenue

 Risk and return are directly related to each other. Higher the risk involved, higher is
the return on investment. For instance, when a person buys shares of a start-up
company, a lot of risk is involved as there is an uncertainty of whether the company
will earn enough profits. However if the company earns profit and is able to pay the
dividends, the share prices will rise and higher returns will be earned.

 The profit earned by investing in shares is the highest if money is invested in the right
company. If a person who has the capacity to take risk and bear the losses, she/he
should invest into shares.

 The right time to invest in gold in the form of a biscuit or ornament is when the prices
of gold fall down considerably. People buy gold on auspicious occasions increasing
its value. Since gold is an asset, people prefer not to sell it off making it a no returns
investment.

 If a person is willing to wait till an appropriate time for earning profits, investing in
real estate is a better option but since profitability is available at the cost of liquidity,
liquidity is low.

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  If a person is looking for an affordable, flexible and liquid option for investment, s/he
should chose mutual funds. Mutual funds give a wider range of investment products
in the same amount making it a diversified product.

 If a person is looking for a fixed interest payment, s/he should invest into bonds. The
interest paid is tax deductible making it helpful for those who wish to do so. However,
the greater the debt, greater is the financial risk.

 Investing in debentures is a safe investment option. Fixed income is received when

investments are made in debentures. It has the feature of liquidity and also the
maturity period is fixed.

 Investing in government securities is secure as it ensures safety of both capital and

income.

 Investing in bank fixed deposits is the safest as there is no risk and also the rate of
return and maturity date is fixed.

 When a person wishes to earn higher interest as compared to bank deposits, company
deposit is the best option for him. It gives an assured return and is has low risk as
well.

 Any person right from a rich person to a poor person to an illiterate person can invest
in Post office savings. Interest is received on savings deposit as well as fixed deposits.
The interest is tax deductible and exempt from income tax.

From the above discussions and interpretations, I conclude that every investment product is
unique in its own way and also that the investors are investing their money with the balance
of safety, reliability and return on investment.

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 LIMITATIONS OF THE STUDY

As every study has some benefits, limitation is not an exemption to a study.

o The limitations of this study are as follows:

 This is for academic effort and thus it is limited to time, cost and geographical area.
 Sample size chosen was small in size – 50 for Consumers If the sample size would
have been large, the study would have been more accurate and near to reality as the
confidence limit will be more.
 Area was specified, limiting only to Mumbai investors.
 This study is conducted to analyze their pattern not all those factors that really matter
while investing.
 This study includes information and concept of different avenues but not every
concept of investment avenues
 An interpretation of this study is based on the assumption that the respondents have
given correct information.
 The economy and industry are so wide and comprehensive that it is difficult to
encompass all the likely factors influencing the investors’ investment pattern in the
given period of time.
 The lack of knowledge of customers about the financial instruments can be a major
limitation.
 The information can be biased due to use of questionnaire.
 As the analysis is based on primary as well as secondary data, possibility of
unauthorized information cannot be avoided.
 Reluctance of the people to provide complete information about them can affect the
validity of the responses.
 Unable to determine the seriousness of the respondents as some respondents did not
cooperate & were too busy to reply appropriately during peak hours.

87
 SCOPE FOR FUTURE WORK

The study was conducted by taking limited number of sample size which stated
earlier and this study reflect awareness, factors considered for investment, risk
taking ability of the individuals residing in Mumbai

However, there might be chances that the awareness, factors consider for
investment, risk taking ability of the individuals of different nature are varied
due to diversity in social life, living pattern, income level etc.

Hence, there is a wide scope for future study by taking in consideration, a large
sample size which will cover a wider geographic area reflecting all the factors
that affect the investment level of all categories of individuals.

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 BIBLIOGRAPHY

o SEARCH ENGINES:
 Google
 Yahoo

o BOOKS:
 Indian Financial System --- S .B. Deodhar & Aditi .A. Abhyankar.
 Financial Institutions and Markets --- L. M Bhole & Jitendra Mahakud.
 In The Wonderland of Investment --- A. N Shanbhag.
 Banking and Financial Systems --- V. Nityananda Sarma.
 Investment analysis and portfolio management --- Prasanna Chandra.
 Financial Management --- L.M Pandey.
 Business Aspects in Banking and Insurance --- P. K. Bandgar
 Financial Institutions and Financial Markets in India ---Niti Bhasin.

o WEBLIOGRAPHY:
 www.sharemarketschool.com
 www.niftydirect.com
 www.sebi.gov.in
 www.maxlifeinsurance.com
 www.finance.zack.com
 www.amfiindia.com
 www.portfoliomanagement.in
 www.ibef.org
 www.clearias.com
 www.investopedia.com

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 APPENDIX

STUDY OF VARIOUS INVESTMENT OPTIONS OF DIFFERENT CATEGORY OF

INDIVIDUALS
Dear Respondent,
I, Shaikh Maimoon is conducting a Research on "Study of various Investment Options of
different category of individuals.” I would request you to spare your few minutes, think and
answer the questions regarding your investment patterns.

I ensure that the information will be kept secretive and only be utilized for research purpose.

Thanks for giving your valuable time for the Questionnaire

Thanks and Regards,

Shaikh Maimoon

Name

Occupation

Gender

o Male

o Female

Age (in years)

o 25-30

o 30-35

o 35-40

90
Annual Income (in Rs)

o 1,00,000-2,00,000

o 2,00,000-5,00,000

o 5,00,000-10,00,000

How much percentage of income do you save?

o 10-20

o 20-30

o 30-40

o 40-50

o 50-60

What is the intent of your portfolio?

o To generate income for today

o To generate income at a later date

o To provide for your dependents

o To fund a large purchase in the future

What kind of an investor are you?

o Short-term

o Medium term/Long-term

o Trader

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How often do you invest?

o Daily

o Fortnightly

o Monthly

o Quarterly

o Half-yearly

o Yearly

In which asset class do you invest?

o Equity

o Debt

o Currency

o Commodities

Which avenues are selected by you for investment purposes?

o Shares

o Debentures/ Bonds

o Real Estate

o Gold

o Mutual Funds

o Fixed Income Securities

o Bank Deposits

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How often do you churn your investments?

o Monthly

o Quarterly

o Half-yearly

o Yearly

o More than a year

Do you invest for tax purposes?

o Yes

o No

Which statement best describes your knowledge of investments?

o I have very little knowledge and I rely exclusively on the

recommendations of financial advisors.

o I have limited knowledge of stocks and bonds, and I do not follow

financial markets.

o I have good working knowledge and I regularly follow financial markets.

o I understand completely how different investment products work;

including stocks and bonds, and I follow financial markets closely.

How would you invest into products/avenues?

o With product knowledge

o Without product knowledge

Any suggestions

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