Investment Avenues

enthroneiture AVENUES 1. 1 INTRODUCTION TO INVESTMENT The finances single stools is partly spent and the rest is saved for meeting here subsequently expenses, instead of keeping savings idle sensation whitethorn homogeneous to use savings in order to get shines on it in the incoming, this is c each(prenominal) tolded as rankiture. In an scotch sense, an coronation is the purchase of ripes that atomic hail 18 not consumed to daylight b atomic number 18ly argon utilise in the early to attain wealth.In finance, an enthronisation is a monetary asset purchased with the theme that the asset leave behind provide income in the future or appreciate and be supplant at a soaringer cost. Mere earning imparting not alleviate one to secure the future, so it becomes important to consec crop. One of the important reasons why one inescapably to invest wisely is to meet the cost of fanf argon. pompousness is the charge per unit at which the cost of living increases. The cost of living is solely what it costs to buy the p each(prenominal)ys and ser wrong-doings you create to live.Inflation causes specie to lose pass judgment because it entrust not buy the aforementioned(prenominal) ward off of a sober or a service in the future as it does flat or did in the prehistorical. The sooner one starts sp oddity the better. By investing early one al let loose ones investitures more than(prenominal)(prenominal) than snip to grow, whereby the idea of deepening increases ones income, by accumulating the principal and the by-line or dividend bring in on it, category after year. The dictionary signifi basince of investiture is to commit bullion in order to earn a monetary birth or to hit use of the gold for future benefits or advantages. hatful commit gold to investings with expectations to increase their future wealth by investing cash to spend in future old age. For example, if you invest Rs. railyard today and earn 10% over the neighboring year, you exit buzz off Rs. 1 snow one year from today. An enthronement loafer be described as entire if it satisfies all the needs of all investors. So, the starting compass point in searching for the perfect enthronement would be to examine investor needs.If all those needs ar met by the investment, then that investment piece of tail be bourneed the perfect investment. ab sur formula(prenominal) investors and advisors spend a heavy(p) drive of clock ground the merits of the thousands of investments useable in India. Little quantify, however, is spent representing the needs of the investor and ensuring that the closely portion investments argon selected for him. Before qualification any investment, one moldiness ensure to ? ? ? ? ? ? ? ? ? ? ? ? Obtain written documents xplaining the investment Read and come crosswise much(prenominal)(prenominal) documents Verify the legitimacy of the investment Find out the costs and bene fits associated with the investment Assess the adventure- takings profile of the investment Know the liquidity and safety aspects of the investment As certain(a) if it is tolerate for your special goals Comp ar these details with some impertinent(prenominal) investment opportunities available Examine if it fits in with former(a) investments you be considering or you stir already do Deal only by means of an authorized in landmarkediator Seek all clarifications intimately the intermediary and the investment Explore the options available to you if fewthing were to go wrong, and then, if satisfied, make the investment. 1. 2 INVESTMENT NEEDS OF AN INVESTOR Investing gold is a stepping stone to manage spending habits and prep atomic number 18 for the future expenses. Most people recognize the need to put their money away for nonethe slightts or circumstances that may occur in future. People invest money to manage their someoneal finances some of them invest to plan for r etirement, magic spell opposites invest to accumulate wealth. each(prenominal) one has a variant need and each of them expect something from their money in future. By and large, close investors spend a penny eight common needs from their investments i. ii. iii. iv. v.Security of original bang-up Wealth accumulation valuate Advantages feeling cover Income 1. 3 TYPES OF INVESTMENT AVENUES Fi gure 1. 1 different investment alternatives stemma enthronisation abstract and portfolio concern condition Prasanna Chandra traffic pattern 1. 1 shows conglomerate investment alternatives which atomic number 18 explained under. One can invest money in different types of Investment instruments. These instruments can be fiscal or non- monetary in nature. in that respect atomic number 18 many factors that contact ones plectrum of investment. Millions of Indians buy decided defines, lieu biture savings certificates, communication channels, bonds or rough- sheer specie, purchase gold, silver, or make similar investments. They all accommodate a reason for investing their money.Some people want to supplementation their retirement income when they reach the age of 60, piece of music former(a)s want to become millionaires sooner the age of 40. We will panorama at conf utilize factors that affect our choice of an investment alternative, let us prime(prenominal) understand the bases of some of the popular investment avenues. 1. 3. 1 Non martable Financial Assets A good portion of financial assets is represent by non- grocery store targetable financial assets. These can be categorize advertisement into the fol griming broad categories ? stick Deposits The simplest of investment avenues, by go-ahead a argot account and depositing money in it one can make a bank deposit. There argon mixed kinds of bank accounts current account, savings account and touch on deposit account.The by-line range on fixed deposits varies with the term of the de posit. In general, it is measlyer for fixed deposits of scamer term and higher(prenominal)(prenominal) for fixed deposits of bulky-range term. Bank deposits enjoy exceptionally high liquidity. ? ? Post Office Savings Account A post office savings account is similar to a savings bank account. The participation rate is 6 percent per annum. Post Office Time Deposits (POTDs) sympathetic to fixed deposits of commercial banks, POTD can be make in multiplies of 50 without any limit. The interest order on POTDs be, in general, slightly higher than those on bank deposits. The interest is calculated half-yearly and paid annually. monthly Income dodge of the Post Office (MISPO) A popular scheme of the post office, the MISPO is meant to provide come up-ordered monthly income to the depositors. The term of the scheme is 6 years. The lower limit make out of investment is 1,000. The maximum investment can be 3, 00,000 in a single account or 6, 00,000 in a vocalise account. The interest rate is 8. 0 percent per annum, compensationable monthly. A premium of 10 percent is payable on due date. ? Kisan Vikas Patra (KVP) A scheme of the post office, for which the minimum amount of investment is 1,000. There is no maximum limit. The investment doubles in 8 years and 7 months. indeed the compound interest rate works out to 8. 4 percent. There is a withdrawal facility after 2 ? years. National Savings enfranchisement Issued at the post offices, National Savings Certificate comes in denominations of 100, 500, 1,000, 5,000 and 10,000. It has a term of 6 years. Over this stoppage Rs. 100 becomes Rs. 160. 1. Hence the compound rate of re bend dexter works out to 8. 16 percent. ? Company Deposits umteen companies, large and undersized, solicit fixed deposits from the public. Fixed deposits mobilized by manufacturing companies are regulate by the Company Law Board and fixed deposits mobilized by finance play along (more precisely non-banking finance companies) are reg ulated by the grant Bank of India. The interest rates on company deposits are higher than those on bank fixed deposits, besides so is insecurity. ?Employee Provident neckc jalopyh Scheme A major vehicle of savings for salaried employees, where each employee has a separate provident fund account in which both(prenominal) the employer and employee are required to contri besidese a certain minimum amount on a monthly basis. ? Public Provident Fund Scheme One of the most attr mobile investment avenues available in India. Individuals and HUFs can participate in this scheme. A PPF account may be mental object at any branch of State Bank of India or its subsidiaries or at specified branches of the early(a) public vault of heaven banks. The signr to a PPF account is required to make a minimum deposit of 100 per year. The maximum permissible deposit per year is 70,000. PPF deposits currently earn a compound interest rate of 8. 0 percent per annum, which is enumerately apologise from standardes. 1. 3. Bonds Bonds are fixed income instruments which are throw away intercoursed for the purpose of raising peachy. Both cliquish entities, much(prenominal)(prenominal) as companies, financial institutions, and the central or state regime and some other government institutions use this instrument as a fashion of garnering pecuniary resource. Bonds issued by the Government carry the lowest train of endangerment but could deliver fair returns. many another(prenominal) people invest in bonds with an mark of earning certain amount of interest on their deposits and/or to save valuate. Bonds are considered to be a slight assayy investment option and are principally privilegeable by take a chance-averse investors. Bond bells are also subject to merchandise adventure. Bonds may be classified into the following categories ? Government ecurities Debt securities issued by the central government state government and quasi government agencies are referr ed as gilt edge securities. It has maturities ranging from 3-20 years and carry interest rate that usually vary in the midst of 7 to 10 percent. ? Debentures of private sector companies Debentures are viewed as a mixture of having a shareholding and a fixed interest loan. Debenture holders are unremarkably entitled to a return equivalent to a fixed percentage of their sign investment. The security constitutional in debentures makes them a safer investment than shares. ? ? Preference shares Investing in shares is safer and dividends are assured every year. Savings bonds 1. 3. vulgar bullion A mutual fund allows a group of people to pool their money unitedly and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional trouble and sound regulation. There are three broad types of mutual fund schemes classified on basis of investment objective ? faith fulness schemes The aim of growth cash in hand is to provide not bad(p) appreciation over the strength to long- term. such schemes normally invest a major part of their corpus in equities. such funds have comparatively high risks. These schemes provide different options to the investors interchangeable dividend option, capital appreciation, and so forth and the investors may choose an option depending on their gustatory perceptions.Growth schemes are good for investors having a longterm outlook key outking appreciation over a period of time. ? Debt schemes The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, somatic debentures, Government securities and money trade purport instruments. Such funds are less(prenominal) risky compared to faithfulness schemes. These funds are not affected because of fluctuations in equity foodstuff places. However, opportunities of capital ap preciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates settle down, NAVs of such funds are a kindredly to increase in the gyp run and vice versa.However, long term investors may not bother about these fluctuations. ? match schemes The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for gibe growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the burgeon forth commercialises. However, NAVs of such funds are the likes ofly to be less vapourisable compared to pure equity funds. 1. 3. 4 Real Estate Residential real estate is more than just an investment.There are more slipway than ever in the first place to pull in from real estate investment. Real estate is a great investment option. It can engender an ongoing income source. It can also rise in time economic value overtime and prove a good investment in the bullion value of the home or land. Many advisors warn against acceptation money to purchase investments. The best way to do this is to save up and pay cash for the home. One should be able to afford the payments on the property when the property is vacant, otherwise the property may end up being a burden instead of helping to stool wealth. 1. 3. 5 Equity Shares Equities are a type of security that represents the self-control in a company. Equities are traded (bought and exchange) in livestock securities industrys.Alternatively, they can be purchased via the initial Public Offering (IPO) route, i. e. straight off from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the misfortune of greater returns comes greater risk. 1. 3. 6 Money market instruments The money market is the market in which short term funds are seize oned and lent. These instruments can be broadly classified as ? Treasury Bills These are the lowest risk category instruments for the short term. run batted in issues treasury bills T-bills at a prefixed day and for a fixed amount. There are 4 types of treasury bills 4-day T-bill, 91-day T-bill, 182-day T-bill and 364-day T-bill. ? Certificates of Deposits After treasury bills, the next lowest risk category investment option is certificate of deposit (CD) issued by banks and financial Institution (FI). A CD is a negotiable promissory note, secure and short term, of up to a year, in nature. Although RBI allows CDs up to one-year maturity, the maturity most quoted in the market is for 90 days. ? Commercial Papers Commercial papers are negotiable short-run unsecured promissory notes wi th fixed maturities, issued by well-rated make-ups. These are generally exchange on discount basis. Organizations can issue CPs either direct or through banks or merchant banks.These instruments are normally issued for 30/45/60/90/120/180/270/364 days. ? Commercial Bills Bills of exchange are negotiable instruments drawn by the vender or draftsperson of the goods on the buyer or drawee of the good for the value of the goods delivered. These are called as trade bills and when they are accepted by commercial banks they are called as commercial bills. If the bill is payable at a future take in and the seller needs money during the currency of the bill then the seller may nest the bank for discounting the bill. 1. 3. 7 Life insurance policies insurance is a form of risk management that is primarily used to bilk the risk of a contingent loss.policy is defined as the equitable wobble of the risk of a loss, from one entity to another, in exchange for a premium. An insurance unde rwriter is a company that sells insurance insured or the policyholder is a person or entity buying the insurance. The insurance rate is a factor that is used to determine the amount which is to be charged for a certain amount of insurance coverage, and is called the premium. It can be classified as ? Money-back Insurance Money-back Insurance schemes are used as investment avenues as they offer fond(p) cash-back at certain intervals. This money can be utilized for childrens education, marriage, and so forth ? Endowment Insurance These are term policies.Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity. 1. 3. 8 Bullion grocery store strange metals like gold and silver had been a safe haven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both money and Silver have passing appreciated in va lue both in the domestic as well as the international markets. In accompaniment to its attributes as a store of value, the human face for investing in gold revolves rough the eccentric it can exploit as a portfolio diversifier. 1. 3. 9 Financial Derivatives Derivatives are contracts and can be used as an cardinal asset. Various types of Derivatives are ? Forwards A foregoing contract is a customized contract amidst cardinal entities, where shutdown takes place on a specific date in the future at todays pre-a avarice price. Futures A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts ? Options Options are of two types calls and puts. Calls give the buyer the rightly but not the obligation to buy a presumption measurement of the underlying asset, at a given price on o r before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. E. g. Currency swaps, interest swaps. 1. 3 rating OF VARIOUS INVESTMENT AVENUES Table 1. 1 Summary evaluation of confused investment avenues Investment Avenues crop Current yield Equity shares Non transformable debentures Equity schemes Debt schemes correct Low Low game No impose on Very gritty Low lavishly High High High Very High High negligible Low add up zip fastener High Low Capital appreciation High High Fairly High High High luck Marketability/ Liquidity taxation Shelter thingumajig ividend Bank deposits Public provident fund Life insurance policies Residential Moderate Moderate Gold and Silver Source Inve stment analytic thinking and portfolio management Author Prasanna Chandra Table 1. 1 shows the evaluation of confused investment avenues. From this table we can say that risk, liquidity and return are the so called factors which are considered before making an investment. But at that place is a trade off between risk and return. Higher the risk higher is the return. Lower the risk and lower is the return. The decision of which mode of investment to choose largely depends upon the investors necessity and the factors which according to him is the most vital one. People with more security concern choose fixed investment like bank deposits and investments in government securities and various post office savings.The briny reason for choosing such an investment mode is that the amount invested in the above stated securities seems to be very secure and hence they seemed to be more pet one where security is the prime concern. People whom returns are most important are ready to take ri sk to earn fairer risk. The preferred mode of investment over here is equity shares and mutual fund. The risk factor in these modes of investment is basically the returns are basically instruction execution ground. If the company fulfills well the investors can accept fairer returns but if the company grasss to perform then on that point can be a threat to the invested amount. Hence the returns are very volatile with the changes in the market conditions.Nil Moderate Negligible Low ordinary Average Nil Moderate Nil Average Nil Moderate Nil Average Section 80 C benefit Section 80 C benefit High Nil Fair Average Very High Very High Moderate Nil Negligible High Low Very High 1. 4 ATTRIBUTES OF INVESTMENT Investment can be said to be an art. Many people invest money without haveing what they are doing. Only a few people really understand the art of investing money. They invest according to certain principles. There are also certain factors that affect the investment decisions. All these are done mainly to increase the return on the investment and also to keep the risk to a minimum. The various factors that affect the investment decisions are given below. For evaluating an investment avenue, the following attributes are relevant. ) Rate of turn in The rate of return on an investment for a period (which is usually a period of one year) is defined as follows Rate of return = Annual income + (Ending price Beginning price) Beginning price Yield Yield is the annual rate of return for any investment and is expressed as a percentage. With stocks, yield can refer to the rate of income generated from a stock in the form of regular dividends. This is ofttimes represented in percentage form, calculated as the annual dividend payments divided by the stocks current share price. Current yield= Annual cash inflows Market price Capital Appreciation Its the rise in the market price of an asset. Capital appreciation is one of two major ways for investors to profit from an in vestment in a company. The other is through dividend income. ) put on the line The risk of investment refers to the variability of its rate of return. A simple measure of dispersion is the range of values, which is s inculpate the difference between the highest and the lowest values. fingerbreadth 1. 2 Relationship between Expected Return and Risk catch 1. 2 shows the kin between expected return and risk. From this figure it is illumine that with higher risk the returns also increases patch it decrease as the risk decreases. High dissension indicates high degree of risk and low variance indicates lesser risk. Expected returns increases when investors is willing to take risk. Other measures commonly used in finance are as follows ?Variance This is the mean of the straightforwardlys of deviations of individual returns around their average values ? Standard deviation This is the square cornerstone of variance ? Beta This reflects how volatile the return from an investment is, in reply to market swings. ? Risk = Actual Return Expected Returns If, Actual Return = Expected Return = Risk Free Investment If, Actual Return or Expected Return is risky investment c) Marketability An investment is highly marketable or liquid if ? ? ? It can be transacted quickly The performance cost is low and The price change between two ensuant transactions is negligible. The liquidity of a market may be judged in terms of its depth, breadth, and resilience.Depth refers to the existence of buy as well as sells orders around the current market price. Breadth implies the presence of such orders in warm volume. Resilience means that bracing orders emerge in response to price changes. Generally, equity shares of well put ined companies enjoy high marketability and equity shares of small companies in their formative years have low marketability. High marketability is a desirable characteristic and low marketability is an undesirable one. d) Tax Shelter Tax benefits are of t he following three kinds ? ? ? Initial Tax Benefit An initial tax benefit refers to the tax relief enjoyed at the time of making the investment.Continuing Tax Benefit A continuing tax benefits represent the tax shield associated with the periodic returns from the investment. Terminal Tax Benefits A terminal tax benefit refers to relief from taxation when an investment is realized or liquidated. e) Convenience Convenience broadly refers to the ease with which the investment can be make and looked after. The degree of convenience associated with investments varies widely. At one end of the spectrum is the deposit in a savings bank account that can be made readily and that does not require any maintenance effort. At the other end of the spectrum is the purchase of a property that may involved a lot of procedural and legal hassles at the time of acquisitions and a great deal of maintenance effort subsequently. 1. APPROACHES TO INVESTMENT DECISION MAKING The stock market is thronged by i nvestors pursuing diverse investment strategies which may be subsumed under four broad cuddlees i. Fundamental Approach The basic tenets of the extreme court, which is perhaps most commonly advocated by investment professionals, are as follows ? There is an internal value of a security, which depends upon underlying economic (fundamental) factors. The built-in value can be established by a penetrating analysis of the fundamental factors relating to the company, patience, and economy. ? At any given point of time, in that location are some securities for which the existing market price will differ from the intrinsic value.Sooner or later, of course, the market price will give back in line with the intrinsic value. ? Superior returns can be earned by buying under-valued securities (securities whose intrinsic value exceeds the market price) and selling over-valued securities (securities whose intrinsic value is less than the market price). ii. Psychological Approach The mental speak to is based on the premise that stock prices are guided by emotion rather than reason. cable prices are believed to be influenced by the psychological mood of investors. 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 take aims.Since psychic values appear to be more important than intrinsic values, the psychological approach suggests that it is more profitable to analyze how investors ladder to act as the market is swept by waves of optimism and pessimism, which seem to alternate. The psychological approach has been described vividly as the castles in the air theory Burton G. Malkiel. Those who subscribe to the psychological approach or the castles in the air theory generally use some form of proficient analysis which is concerned with a probe of internal market selective information, with a view to developing work rules aimed at profit making. The basic premise of technical analysis is that there are certain persistent and recurring patterns of price movements, which can be discerned by analyzing market information.Technical analysts use a diversity of as well asls like bar chart, point and figure chart, moving average analysis, breadth of market analysis, etc. iii. Academic Approach Over the last five decades or so, the academician community has studied various aspects of the capital market, particularly in the advanced countries, with the help of fairly sophisticated manners of investigation. ? Stock markets are reasonably clientelelike in reacting quickly and rationally to the flow of information. Hence, stock prices reflect intrinsic value fairly well. Put differently, Market price = Intrinsic value ? Stock price demeanour corresponds to a random walk. This means that ordered price changes are independent. As a result, past price demeanor cannot be used to predict future price behavior. ?In the capital market, there is a positive relationship between risk and return. more specifically, the expected return from a security is linearly relate to its dogmatic risk iv. Eclectic Approach The eclectic approach draws on all the three different approaches discussed above. The basic premises of the eclectic approach are as follows ? Fundamental analysis is helpful in establishing basic standards and benchmarks. However, since there are uncertainties associated with fundamental analysis, exclusive reliance on fundamental analysis should be avoided. Equally important, excessive refinement and complexity in fundamental analysis must be viewed with caution. Technical analysis is useful in broadly gauging the prevailing mood of investors and the relative strengths of supply and demand forces. However, since the mood of investors can vary unpredictably excessive reliance on technical indicators can be hazardous. More important, complicated technical systems should ordinarily be regarded as suspect because they lots represent figments of imagination rather than tools of proven usefulness. ? The market is neither as well-ordered as the academic approach suggest, nor as speculative as the psychological approach indicates. While it is characterized by some inefficiencies and imperfection, it seems to react reasonably efficiently and rationally to the flow of information.Likewise, disdain many instances of mispriced securities, there appears to be a fairly strong coefficient of correlation between risk and return. ? take of return often necessitates the assumption of a higher level of risk. 1. 7 COMMON ERRORS IN INVESTMENT caution Investments everlastingly do not generate wealth sometimes it fail do so because of some conditions. The reason for this failure is either the market condition or some mistakes made by the investors. We cannot control market condition but errors made by investors could be avoided. Investors appear to be prone to the errors in managing their investments. So me of the errors made by investors are discussed below 1. 7. Inadequate Comprehension of Return and Risk Many investors have wild and exaggerated expectations from investments, in particular from equity shares and convertible debentures. One often comes across investors who say that they consent to earn a return of 25 to 30 percent per year with virtually no risk video or even double their investment in a year or so. They have apparently been misled by one or more of the following (a) tall and unjustified claims made by people with vested interests (b) portentous performance of some portfolio they have seen or managed, which may be overdue mostly to fortuitous factors and (c) Promises made by tipsters, operators, and others. In most of the cases, such expectations reflect investor inexperience and gullibility. 1. 7. Vaguely Formulated Investment Policy a great deal investors do not clearly spell out their risk passion and investment policy. This tends to create confusion a nd impairs the quality of investment decisions. Ironically, conservative investors turn aggressive when the bull market is near its peak in the hope of reaping a bonanza likewise, in the wake of sharp losses inflicted by a bear market, aggressive investors turn unduly cautions and overlook opportunities before them. Ragnar D. Naess put it this way The fear of losing capital when prices are low and declining, and the greed for more capital gains when prices are rising, are plausibly, more than any other factors, responsible for poor performance. if you know what your risk attitude is and why you are investing, you will learn how to invest well. A well articulated investment policy, adhered to consistently over a period of time, saves a great deal of disappointment. 1. 7. 3 Naive Extrapolation of the Past Investors generally believe in a simple extrapolation of past trends and events and do not effectively in incorporate changes into expectations. As Arthur Zeikel says People general ly, and investors particularly, fail to appreciate the working of countervailing forces change and momentum are largely misunderstood concepts. Most investors tend to cling to the course to which they are currently committed, especially at turning point. The apparent comfort provided by extrapolating too far, however, is dangerous. As Peter Bernstein says Momentum causes things to run bring forward and longer than we anticipate. They very familiarity of a force in motion reduces our ability to see when it is losing its momentum. Indeed, that is why extrapolating the present into the future so frequently turns out to be the genesis of an embarrassing forecast. 1. 7. 4 Cursory Decision Making Investment decision making is characterized by a great deal of cursoriness. Investors tend to ? ? ? Base their decisions on partial march, unreliable hearsay, or casual tips given by brokers, friends, and others.Cavalierly brush aside several of investment risk (market risk, business risk, an d interest rate risk) as greed overpowers them. Uncritically follow others because of the come-on to ride the bandwagon or lack of confidence in their own judgment. 1. 7. 5 Untimely entries and exits Investors tend to follow an irrational start and stop approach to the market characterized by untimely entries (after a market advance has long been underway) and exit (after a long period of stagnation and decline). 1. 7. 6 High costs Investors trade excessively and spend a lot on investment management. A good proportion of investors indulge in day barter in the hope of making quick profits.However more often transaction cost wipes out whatever profits they may generate from frequent trading. 1. 7. 7 Over-Diversification and Under-Diversification Many individuals have portfolios consisting of thirty to sixty, or even more, different stocks. Managing such portfolios is an unwieldy task and as R. J. Jenrette put it Overdiversification is probably the greatest enemy of portfolio perform ance. Most of the portfolios we look at have too many names. As a result, the impact of a good idea is negligible. Perhaps as common as over-diversification is under-diversification. Many individuals do not apparently understand the principle of diversification and its benefit in term of risk reduction.A number of individual portfolios seem to be highly under-diversified, carrying an avoidable risk impression. 1. 7. 8 Wrong Attitude towards Losses and Profits An investor has an antipathy to admit his mistake and cut losses short. If the price falls, contrary to his expectation at the time of purchase, he somehow hopes that it will rebound and he can break even. Surprisingly, such a belief persists even when the prospects look dismal and there may be a greater possibility of a further decline. If the price recovers due to favourable conditions, there is a aspiration to dispose of the share when its price more or less equals the original purchase price, even though there may be a fair chance of further increases.The psychological relief experient by an investor from recovering losses seems to motivate such deportment. This means the tendency is to let the losses run and cut profits short, rather than to cut the losses short and let the profits run. 1. 8 RISKS IN INVESTMENT Risk is uncertainty of the income /capital appreciation or loss or both. Every investment (equity, debt, property, etc. ) carries an element of risk that is unique to it. though risk cannot be totally eliminated, it can be managed by parturiency effective risk management. To manage risk, one first need to target different kinds of risks involved in investing and then take appropriate stairs to reduce it.Risk and return share a direct relationship with one another. Therefore, an investment which carries negligible risk, will offer a low return (viz. bonds issued by the modestness Bank of India) sequence an investment which carries a higher risk, also offers the potential of higher re turns (stocks). All investments are a trade off between risk and returns. Let us first discuss the types of risks. 1. 8. 1 Types of Risks All investments carry their unique set of risks. though there are several types of risks, the important ones are market risk, denotation risk, interest rate risk, inflation risk, currency risk and liquidity risk. These are briefly explained below ) Market Risk A share may rise or fall depending on the fortunes of the company, the industry it is in, or in response to investor sentiment. b) Credit Risk This risk is attributed to debt investments wherein the borrower may default on interest and/or principal repayment. c) Interest Rate Risk When interest rates rise, fixed income investments lose value. This is because the investor will continue to earn the same (lower) interest rate until the investment matures while market interest rates have already gone up. In order to compensate for a lower interest rate compared to the market rate, the fixed in come investment will thus have to be priced at a lower rate. ) Inflation Risk Rising inflation will erode the value of your income and asset. referable to inflation, the cost of products and services will rise and consequently, your future income and assets will be worth less than what they are worth today. e) Currency Risk Changes in exchange rates between currencies could lead to decline in value of your investments. With Indian investors now being allowed to invest in other countries, you will now be exposed to currency risk i. e. a fall in the value of the currency in which you are investing opposite number your home currency i. e. the Rupee. f) Liquidity Risk Certain investments carry the risk of poor liquidity either due to the nature of the asset or regulatory reasons.For example, property is inherently an illiquid investment as it cannot be sold as simply as selling stocks. Certain investments like the oblige Bank of India bonds are not transferable till maturity. Investm ents in Equity Linked Savings Schemes are illiquid for a period of 3 years and in case you redeem from such schemes, your tax benefit is withdrawn. 1. 8. 2 Risk Management Once different kinds of risks associated with investments are identified appropriate steps can be taken to reduce these risks. Some of these steps are a) Diversification Most types of risks can be managed by diversifying your investments across asset classes (stocks, bonds, properties etc. ), industry, currencies etc.Diversification spreads the risk and reduces the adverse impact that any one investment might have on a portfolio. b) Research and superintend Rigorous research and continuous monitoring will help in controlling the market and credit risk of your investments. This will caution onward to avoid an investment and alert in case the risk is increase on an investment already undertaken. 1. 8. 3 Risk Tolerance Level Risk includes the possibility of losing money. However, extra considerations should be made in addition to the safety of the principal and the potential for growth. These considerations include the likelihood of achieving the financial goals you have established.Additionally, one should consider whether he/she is willing and able to accept a higher level of risk in order to achieve further rewards. Before starting on the setting of the investment portfolio, every investor should establish his/her risk perimeter level. Only after this he/she is ready to relieve oneself strategies for the accomplishment of his/her financial goals. The higher the degree of risk involved in the investment portfolio the greater the chances of higher returns and failures. The setting of the risk allowance account level is very subjective issue. However, younger investors can afford more risk taking since they have more time to fix the losses. On the other hand older investors should apply more conservative approach since they have less time in front of them.But, they should keep in consciou sness that they greatly decrease their chances of faster achieving their financial goals. A portfolio that carries more bonds is considered more conservative and risk averse. However, the one that includes a greater percentage of stocks is more risk taking with higher potential of rewards. Many financial experts commend the diversification between investments with different degrees of risk. This is a good idea since your portfolio will benefit from the rises and falls of the different investments and will alleviate the potential of losing money. Risk Personalities Based on the risk capacity and risk tolerance, risk appetite can be decided. This is the level of risk that one is ready to bear.Broadly risk personalities can be categorised at 3 levels Conservative, equilibrise and Aggressive. Each risk personality has a different objective which it aims to achieve through the investment portfolio. These personalities are explained below ? ? ? Conservative personality For investors h aving this personality economy of the capital invested is the ultimate goal, even if it means compromising on the returns. Balanced personality People with this type of personality wish to strike a balance between high-risk and low-risk investments. Aggressive personality Investors with such personality do not wish to compromise at all on the returns, even if their capital erodes. 2. 1 INTRODUCTIONIndian investor today have to endure a slow-moving economy, the steep market declines prompted by declining revenues, alarming reports of scandals ranging from illegal corporate accounting practices like that of Satyam to insider trading to make investment decisions. Stock markets performance is not simply the result of intelligible characteristics but also due to the emotions that are still baffling to the analysts. Despite fill up of information coming from all directions, it is not the calculations of financial wizards, or companys performance or widely accepted criterion of stock per formance but the investors irrational emotions like overconfidence, fear, risk aversion, etc. seem to decisively drive and dictate the fortunes of the market. The market is so volatile that its behaviour is unpredictable. In the past couple of years, the movement of share prices exceeded all the limits and had gone remarkably low and high levels. These dramatic prices of the shares ruin the concept of intrinsic value and rational investment behaviour. The traditional finance theories choose that investors are rational but they are unable to explain the behaviour and pricing of the stock market completely. Many research studies have clear the relationship between a dependent variable i. e. , risk tolerance level and independent variables such as demographic characteristics of an investor.Most of the Indian investors are from high income group, well educated, salaried, and independent in making investment decisions and from the past trends it is also seen that they are conservative in nature. Television is the media that is largely influencing the investors decisions. Hence, in the present project report an attempt has been made to ask the relationship between risk tolerance level and demographic characteristics of Indian investors. 2. 2 STATEMENT OF THE PROBLEM This admit on investors behaviour is an attempt to know the profile and the characteristics of the investors so as to understand their preference with respect to their investments. The main focus of the postulate is to discover the influence of demographic factors like gender and age on risk tolerance level of the investor.The study mainly concentrates on the factors that influence an individual investor before making an investment. It also studies the various patterns in which investors like to invest their money based on their risk tolerance level and other demographic factors like income level, occupation etc. 2. 3 REVIEW OF LITERATURE The literature polish up section examines the importance of research studies, company data or industry reports that serve as a run agroundation for the setup of study. The research balance of the related literature and the relevant information begins from an explanatory perspective, approaching towards specific studies which do related to judge the limitations and informational gaps in data from the secondary sources.This analysis may reveal conclusions from past studies to realize the reliability of the secondary sources and their credibility. This in turn enables one to rely on a comprehensive canvass for the study. Literature suggests that major research in the area of investors behaviour has been done by behavioural scientists such as Weber (1999), Shiller (2000) and Shefrin (2000). Shiller (2000) who potently advocated that stock market is governed by the market information which directly affects the behaviour of the investors. Several studies have brought out the relationship between the demographics such as Gender, historic perio d and risk tolerance level of individuals. Of this the relationship between Age and risk tolerance level has attracted much attention.Horvath and Zuckerman (1993) suggested that ones biological, demographic and socioeconomic characteristics together with his/her psychological makeup affects ones risk tolerance level. Malkiel (1996) suggested that an individuals risk tolerance is related to his/her kinfolk situation, emotional statecycle stage and subjective factors. Mittra (1995) discussed factors that were related to individuals risk tolerance, which included years until retirement, fellowship sophistication, income and net worth. Guiso, Jappelli and Terlizzese (1996), Bajtelsmit and VenDerhei (1997), Powell and Ansic (1997), Jianakoplos and Bernasek (1998), Hariharan, Chapman and Domain (2000), Hartog, Ferrer-I-Carbonell and Jonker (2002) concluded that males are more risk big than females.Wallach and Kogan (1961) were perhaps the first to study the relationship between risk t olerance and age. Cohn, Lewellen et. al found risky asset fraction of the portfolio to be positively correlated with income and age and negatively correlated with marital status. Morin and Suarez found evidence of increasing risk aversion with age although the households appear to become less risk averse as their wealth increases. Yoo (1994) found that the change in the risky asset holdings were not uniform. He found individuals to increase their investments in risky assets throughout their working life time, and decrease their risk exposure once they retire. Lewellen et. l while identifying the systematic patterns of investment behaviour exhibited by individuals found age and expressed risk taking propensities to be inversely related with major shifts taking place at age 55 and beyond. Indian studies on individual investors were mostly confined to studies on share ownership, except a few. The RBIs survey of ownership of shares and L. C. Guptas enquiry into the ownership pattern of Industrial shares in India were a few in this direction. The NCAERs studies brought out the frequent form of savings of individuals and the components of financial investments of rural households. The Indian Shareowners be brought out a volley of information on shareowners.Rajarajan V (1997, 1998, 2000 and 2003) classified investors on the basis of their demographics. He has also brought out the investors characteristics on the basis of their investment size. He found that the percentage of risky assets to total financial investments had declined as the investor moves up through various stages in life cycle. Also investors lifestyles based characteristics has been identified. The above discussion presents a expound picture about the various facets of risk studies that have taken place in the past. In the present study, the stickings of many of these studies are verified and updated. Latha Krishnan (2006) explained as Investments come in many forms.While some people consider lab oured assets such as land, house, gold and platinum as investments, others look to monetary instruments such as stocks and bonds as ways to make their money grow. A cautious or conservative investor is unlikely to play carelessly with his hard-earned money. So he keeps to safe investments that guarantee the return of his capital and still earn good returns in a stipulated period if the product in which he invested gains in that period. In such an investment, even if the markets go down and he does not gain much, he also does not suffer a heavy loss. A wealthy person with more money to invest can take more risks and invest in a variety of products that major financial players provide.A wealth of information on these as well as comments and criticisms on their performances and profitability is readily available. Perception of investors towards capital market instruments internationally by John Marshall and Investment analysis and Portfolio management by Punithavathy Pandian. John Mar shalls study was at global scale and it explains the perception of people across globe towards capital market instruments and Pandian explains the theoretical aspects of capital market instruments and use of various investment avenues to build a strong portfolio. 2. 4 NEED FOR STUDY Investing money is a crucial and deciding the avenues where to invest needs a lot of planning. In India people are more conservative and hence prefer investments that are less risky.Similarly there are other demographic factors like age, income level, gender which affect their decision. As the availability of financial products increase, perception of investors towards such avenues changes over a period of time. It becomes important for a marketer to understand the perception of investors towards investment avenues to successfully pitch the product. Marketing is known as meeting needs profitably. If the marketer is able to understand the mindset of investor towards a product then he/she will be in a posi tion to market the product. This report attempts to study the behavior of Indian investors while making an investment. Here we also look upon other factors that influence them while making investment decisions.Innovations in financial products like derivatives, unit link up insurance products, fund of funds likewise are not well understood by the investor. Hence the need for this study arises to understand what on the nose an Indian investor thinks before investing his/her money and how much risk he/she is willing to take. This report gives the marketer and other peers to successfully market the financial products which are more popular, as it gives information regarding the perception of investors towards investment avenues in India. 2. 5 OBJECTIVES OF THE STUDY 2. 5. 1 Primary Objectives ? ? ? ? ? ? ? To study the investment characteristics of investors To study the objectives of investment plan of an investors To study the demographic information of investors 2. 5. Secondary O bjectives To know the preferred investment avenues of investors To identify the preferred sources of information influencing investment decisions To understand the risk tolerance level of the investors and suggest a adapted portfolio To study the dependence/independences of the demographic factors (Gender, Age, income level) of the investor and his/her risk tolerance level 2. 6 range of a function OF STUDY Based on previous research in related areas, a questionnaire was constructed to measure the investment pattern of individuals on the basis of demographic characteristics and the risk tolerance of investors was also calculated. It helped us to understand how an Indian investor behaves while investing.This study will be helpful to mutual fund companies and other investment companies to understand individual behaviour of investors so that they could build suitable investment options for them individually. Also this study will help the investor to decide the areas where they could i nvest. 2. 7 HYPOTHESIS A hypothesis describes the relationship between or among variables. A good hypothesis is one that can explain what it claims to explain, is testable and has greater range, probability and simplicity than its rivals. There are two approach of hypothesis examination 1) Classical or take theory statistics and 2) The Bayesian approach In the present dissertation chi square test has been used to run a risk out the dependence/independence of various factors that influence investment decision.Hypothesis has been found between following factors ? ? ? ? ? Gender and risk tolerance of respondents Age and preferred investment avenues by the respondents Income and investment avenues preferred by the respondents Age of respondents and time horizon for investment Age and risk tolerance of the respondents 2. 8 question DESIGN Research methodology is a way to systematically gain the research problem. It may be understood as a acquirement of studying how research is done scientifically. ? Research type Many investors were antipathetic to reveal their investment details especially the amount of money invested so, referral sampling method is used for this study. Sample description The sample was drawn from the existence of the potential investors from Tamil Nadu. A survey was conducted to understand the investors behaviour with the help of questionnaire. It was carried out with a sample size of 100 investors. 2. 9 TOOLS FOR DATA COLLECTION Primary data The data has been collected directly from respondent with the help of structured questionnaires. Secondary data The secondary data has been collected from various magazines, journals, newspapers, text books and related websites. 2. 10 METHOD OF synopsis Statistical techniques like Chi square test, simple percentage method are used to analyze and rede raw data. Chi square was used to show the dependency/independency of various factors.After collecting the data its variable having defined character, it was tabulated and analyzed with the help of charts and graphs in Microsoft Excel 2007. 2. 11 LIMITATIONS OF STUDY Sample size is small because of the time constraint responsive may be hesitant to provide their investment details doings of investors doesnt remain same for long time Time for the study is limited 3. 1 INDIAN FINANCIAL MARKET Money always flows from surplus sector to deficit sector. That means persons having excess of money contribute it to those who need money to fulfil their requirement. Similarly, in business sectors the surplus money flows from the investors or modifyers to the businessmen for the purpose of production or deal of goods and services.So, we find two different groups, one who invest money or lend money and the others, who borrow or use the money. The financial markets act as a link between these two different groups. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. So, financial market ma y be defined as a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated. It consists of individual investors, financial institutions and other intermediaries who are linked by a formal trading rules and communication vane for trading the various financial assets and credit instruments.Financial market talks about the old election market, FDIs, alternative investment options, banking and insurance and the pension sectors, asset management segment as well. India Financial market happens to be one of the oldest across the globe and is the fastest growing and best among all the financial markets of the uphill economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai with around 200 to 250 securities brokers participate in ac tive trade during the second half of the 19th century. 3. 1. eye socket of Indian Financial Market The financial market in India at present is more advanced than many other sectors as it became create as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities exchanges in India became eight including Mumbai, Ahmedabad and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well. Today there are 23 regional securities exchanges in India. The Indian stock markets till date have remained stagnant due to the rigid economic controls. It was only in 1991, after the liberalization go that the India securities market witnessed a flurry of IPOs serially. The market saw many new companies spanning across different industry segments and business began to flourish.The launch of the NSE (National Stock Exchange) and the OTCEI (Over the parry Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of securities trading. The regulatory body for the Indian capital markets was the SEBI (Securities and Exchange Board of India). The capital markets in India experienced turbulence after which the SEBI came into prominence. The market loopholes had to be bridged by taking drastic measures. 3. 1. 2 authorization of Indian Financial Market India Financial Market helps in promoting the savings of the economy helping to adopt an effective channel to transmit various financial policies.The Indian financial sector is welldeveloped, competitive, efficient and integrated to face all shocks. In the India financial market there are various types of financial products whose prices are determined by the numerous buyers and sellers in the market. The other determinant factor of the prices of the financial products is the market forces of demand and supply. The various other types of Indian markets help in the functionin g of the wide India financial sector. 3. 1. 3 Features of Indian Financial Market ? ? India Financial Indices BSE 30 Index, various sector indexes, stock quotes, Sensex charts, bond prices, remote exchange, Rupee & Dollar graph Indian Financial market news ?Stock News Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company information, issues on market capitalization, corporate earnings statements ? Fixed Income Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt emolument ? ? ? ? ? ? ? ? Foreign Investment Foreign Debt Database composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad Global Equity Indexes Dow Jones Global indexes, Morgan Stanley Equity Indexes Currency Indexes FX & Gold Chart Plotter, J. P. Morgan Currency Indexes National and Global Market Relations Mutual Funds Insurance Loans Forex and Bullion The main functions of financial market are ? ? ? It provides facilities for interaction between the investors and the borrowers. It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets. It provides security to dealings in financial assets. It ensures liquidity by providing a mechanism for an investor to sell the financial assets. It ensures low cost of transactions and information. 3. 2 CLASSIFICATION OF FINANCIAL MARKETS Figure 3. 1 Classification of financial markets Source Investment analysis and portfolio management Author Prasanna Chandra Figure 3. 1 shows the classification of financial markets.From this figure we can interpret that there are different ways of kick downstairsing financial market. ? One is to classify financial market by the type of financial claim. The debt market is the financial market foe fixed claims (debt instrument) and the equity market is the financial market for residual claims (equity instruments ) ? The second way is to classify financial markets by the maturity of claims. The market for short term financial claims is referred to as the money market and the market for long term financial claims is referred to as the capital market. ? The one-third way to classify financial markets is based on whether the claims represent new issues or outstanding issues.The market where issues sell new claims is referred as primary market and the market where issues sell outstanding claims is referred as secondary market. ? The fourth part way to classify financial markets is by the timing of delivery. A cash or spot market is one where the delivery occurs immediately and forward or futures markets are those markets where the delivery occurs at a pre determined time in future. ? The fifth way to classify financial markets is by the nature of its organizational structure. An exchange traded market is characterized by a centralized organization with standardized procedures and an over the c ounter market is a decentralized market with customized procedures.These markets are further explained in detail. 3. 3 MONEY MARKET The money market is a market for short-term funds, which deals in financial assets whose period of maturity is up to one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organizations and the Government to borrow the funds to meet their short-term requirement. Money market does not imply to any specific market place.Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions are taken place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market. 3. 4 CAPITAL MARKET Capital Market may be defined as a market dealing in medium and long-term funds.It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market. The primary market deals with new or fresh issue of secu rities and is, therefore, also known as new issue market whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange. 3. 4. PRIMARY MARKET The Primary Market consists of arrangements, which facilitate the procurement of longterm funds by companies by making fresh issue of shares and debentures. You know that companies make fresh issue of shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion of business. It is usually done through private placement to friends, relatives and financial institutions or by making public issue. In any case, the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters, brokers, etc. who form an integral part of the primary market.You must have learnt about many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC, GAIL, N TPC and the private sector companies like Tata Consultancy Services (TCS), Biocon, Jet-Airways and so on. 3. 4. 2 SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role in mobilizing long-term funds by providing the necessary liquidity to holdings in shares and debentures. It provides a place where these securities can be encashed without any difficulty and delay. It is an unionised market where shares and debentures are traded regularly with high degree of transparency and security.In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. The major players in the primary market are merchant bankers, mutual funds, financial institutions, and the individual investors and in the secondary market you have all these and t