CHAPTER 1

INTRODUCTION OF INVESTMENTS AND PORTFOLIO MANAGEMENT

1.1

INTRODUCTION

For most of the investors throughout their life, they will be earning and spending money.
Rarely, investors current money income exactly balances with their consumption
desires. Sometimes, investors may have more money than they want to spend; at other
times, they may want to purchase more than they can afford. These imbalances will
lead investors either to borrow or to save to maximize the long-run benefits from their
income.
When current income exceeds current consumption desires, people tend to save the
excess. They can do any of several things with these savings. One possibility is to put
the money under a mattress or bury it in the backyard until some future time when
consumption desires exceed current income. When they retrieve their savings from the
mattress or backyard, they have the same amount they saved.
Another possibility is that they can give up the immediate possession of these savings
for a future larger amount of money that will be available for future consumption. This
tradeoff of present consumption for a higher level of future consumption is the reason
for saving. What investor does with the savings to make them increase over time is
investment. In contrast, when current income is less than current consumption desires,
people borrow to make up the difference.
Those who give up immediate possession of savings (that is, defer consumption) expect
to receive in the future a greater amount than they gave up. Conversely, those who
consume more than their current income (that is, borrowed) must be willing to pay back
in the future more than they borrowed.

The rate of exchange between future consumption (future rupee) and current
consumption (current rupee) is the pure rate of interest. Both peoples willingness to pay
this difference for borrowed funds and their desire to receive a surplus on their savings
give rise to an interest rate referred to as the pure time value of money. This interest
rate is established in the capital market by a comparison of the supply of excess income
available (savings) to be invested and the demand for excess consumption (borrowing)
at a given time.
An investment is the current commitment of rupee for a period of time in order to derive
future payments that will compensate the investor for
(1) The time the funds are committed,
(2) The expected rate of inflation, and
(3) The uncertainty of the future payments.

The Investor can be an individual, a government, a pension fund, or a corporation.

Similarly, this definition includes all types of investments, including investments by
corporations in plant and equipment and investments by individuals in stocks, bonds,
commodities, or real estate. This study emphasizes investments by individual investors.
In all cases, the investor is trading a known rupee amount today for some expected
future stream of payments that will be greater than the current outlay.
Definition of Individual investor: An individual who purchases small amounts of
securities for themselves, as opposed to an institutional investor, Also called as Retail
Investor or Small Investor.
At this point, researcher has answered the questions about why people invest and what
they want from their investments. They invest to earn a return from savings due to their
deferred consumption. They want a rate of return that compensates them for the time,
the expected rate of inflation, and the uncertainty of the return.
In todays world everybody is running for money and it is considered as a root of
happiness. For secure life and for bright future people start investing. Every time
investors are confused with investment avenues and their risk return profile. So, even if

Researcher focuses on past, present or future, investment is such a topic that needs
constant upgradation as economy changes. The research study will be helpful for the
investors to choose proper investment avenue and to create profitable investment
portfolio.

1.2

MEANING OF INVESTMENT

Investment is the employment of funds with the aim of getting return on it. In general
terms, investment means the use of money in the hope of making more money. In
finance, investment means the purchase of a financial product or other item of value with
an expectation of favorable future returns.
Investment of hard earned money is a crucial activity of every human being. Investment
is the commitment of funds which have been saved from current consumption with the
hope that some benefits will be received in future. Thus, it is a reward for waiting for
money. Savings of the people are invested in assets depending on their risk and return
demands.
Investment refers to the concept of deferred consumption, which involves purchasing an

asset, giving a loan or keeping funds in a bank account with the aim of generating future
returns. Various investment options are available, offering differing risk-reward tradeoffs.
An understanding of the core concepts and a thorough analysis of the options can help
an investor create a portfolio that maximizes returns while minimizing risk exposure.
There are Two concepts of Investment:
1) Economic Investment: The concept of economic investment means addition to
the capital stock of the society. The capital stock of the society is the goods
which are used in the production of other goods. The term investment implies the
formation of new and productive capital in the form of new construction and
producers durable instrument such as plant and machinery. Inventories and
human capital are also included in this concept. Thus, an investment, in
economic terms, means an increase in building, equipment, and inventory.

2) Financial Investment: This is an allocation of monetary resources to assets that

are expected to yield some gain or return over a given period of time. It means
an exchange of financial claims such as shares and bonds, real estate, etc.
Financial investment involves contrasts written on pieces of paper such as
shares and debentures. People invest their funds in shares, debentures, fixed
deposits, national saving certificates, life insurance policies, provident fund etc. in
their view investment is a commitment of funds to derive future income in the
form of interest, dividends, rent, premiums, pension benefits and the appreciation
of the value of their principal capital. In primitive economies most investments are
of the real variety whereas in a modern economy much investment is of the
financial variety.

The economic and financial concepts of investment are related to each other because
investment is a part of the savings of individuals which flow into the capital market either
directly or through institutions. Thus, investment decisions and financial decisions
interact with each other. Financial decisions are primarily concerned with the sources of
money where as investment decisions are traditionally concerned with uses or
budgeting of money.

1.3

INVESTMENT OBJECTIVES

Investing is a wide spread practice and many have made their fortunes in the process.
The starting point in this process is to determine the characteristics of the various
investments and then matching them with the individuals need and preferences. All
personal investing is designed in order to achieve certain objectives. These objectives
may be tangible such as buying a car, house etc. and intangible objectives such as
social status, security etc. similarly; these objectives may be classified as financial or
personal objectives. Financial objectives are safety, profitability, and liquidity. Personal
or individual objectives may be related to personal characteristics of individuals such as
family

commitments,

status,

dependents,

consumption and provision for retirement etc.

educational

requirements,

income,

The objectives can be classified on the basis of the investors approach as follows:
a) Short term high priority objectives: Investors have a high priority towards
achieving certain objectives in a short time. For example, a young couple will
give high priority to buy a house. Thus, investors will go for high priority
objectives and invest their money accordingly.
b) Long term high priority objectives: Some investors look forward and invest on
the basis of objectives of long term needs. They want to achieve financial
independence in long period. For example, investing for post retirement period or
education of a child etc. investors, usually prefer a diversified approach while
selecting different types of investments.
c) Low priority objectives: These objectives have low priority in investing. These
objectives are not painful. After investing in high priority assets, investors can
invest in these low priority assets. For example, provision for tour, domestic
appliances etc.
d) Money making objectives: Investors put their surplus money in these kinds of
investment. Their objective is to maximize wealth. Usually, the investors invest in
shares of companies which provide capital appreciation apart from regular
income from dividend.

Every investor has common objectives with regard to the investment of their
capital.
The importance of each objective varies from investor to investor and depends upon the
age and the amount of capital they have. These objectives are broadly defined as
follows.

a. Lifestyle Investors want to ensure that their assets can meet their financial
needs over their lifetimes.
b. Financial security Investors want to protect their financial needs against
financial risks at all times.

c. Return Investors want a balance of risk and return that is suitable to their
personal risk preferences.
d. Value for money Investors want to minimize the costs of managing their
assets and their financial needs.
e. Peace of mind Investors do not want to worry about the day to day
movements of markets and their present and future financial security.

Achieving the sum of these objectives depends very much on the investor having all
their assets and needs managed centrally, with portfolios planned to meet lifetime
needs, with one overall investment strategy ensuring that the disposition of assets will
match individual needs and risk preferences.

1.4

INVESTMENT AND SPECULATION

Speculation is an activity, quite contrary to its literal meaning, in which a person

assumes high risks, often without regard for the safety of their invested principal, to
achieve large capital gains. The time span in which the gain is sought to be made is
usually very short.

Investment involves putting money into an asset which is not necessarily marketable in
order to enjoy a series of returns. The investor sacrifices some money today in
anticipation of a financial return in future. He indulges in a bit of speculation. There is an
element of speculation involved in all investment decisions. However, it does not mean
that all investments are speculative by nature. Genuine investments are carefully
thought out decisions. On the other hand, speculative investment, are not carefully
thought out decisions. They are based on tips, and rumors.

Speculation has a special meaning when talking about money. The person who
speculates is called a speculator. A speculator does not buy goods to own them, but to
sell them later. The reason is that speculator wants to profit from the changes of

market prices. One tries to buy the goods when they are cheap and to sell them when
they are expensive.

Speculation includes the buying, holding, selling and short selling of stocks, bonds,
commodities, currencies, real estate collectibles, derivatives or any valuable financial
instrument. It is the opposite of buying because one wants to use them for daily life or to
get income from them (as dividends or interest).

Speculation should not be considered purely a form of gambling, as speculators do

make an informed decision before choosing to acquire the additional risks. Additionally,
speculation cannot be categorized as a traditional investment because the acquired risk
is higher than average. More sophisticated investors will also use a hedging strategy in
combination with their speculative investment in order to limit potential losses.

1.4.1 DIFFERENCE BETWEEN INVESTOR AND SPECULATOR:

Planning
horizon

Investor

Speculator

An investor has a Relatively

longer planning horizon. His
holding period is usually at
least 1 year.

A speculator has a Very short

planning horizon. His holding
period may be a few days to a
few months.

Risk
disposition

An investor is normally not A speculator is ordinarily

willing to assume more than willing to assume high risk.
moderate risk. Rarely does he
knowingly assume high risk.

Return
expectation

An investor usually seeks a

modest rate of return which is
commensurate with the limited
risk assumed by him/her.

Basis for
decisions

A speculator looks for a high

rate of return in exchange for
the high risk borne by
him/her.

An investor attaches greater A speculator Relies more on

significance to Fundamental hearsay, tips, technical charts
factors and attempt a careful and market psychology.
evaluation of the prospects of
the firm.

Leverage

1.5

Typically an investor uses his A speculator normally resorts

own funds and eschews to borrowings, which can be
borrowed funds.
very
substantial,
to
supplement
his
personal
resources.

ELEMENTS OF INVESTMENTS

The Elements of Investments are as follows:

a) Return: Investors buy or sell financial instruments in order to earn return on
them. The return on investment is the reward to the investors. The return
includes both current income and capital gain or losses, which arises by the
increase or decrease of the security price.

b) Risk: Risk is the chance of loss due to variability of returns on an investment. In

case of every investment, there is a chance of loss. It may be loss of interest,
dividend or principal amount of investment. However, risk and return are
inseparable. Return is a precise statistical term and it is measurable. But the risk
is not precise statistical term. However, the risk can be quantified. The
investment process should be considered in terms of both risk and return.

c) Time: time is an important factor in investment. It offers several different courses

of action. Time period depends on the attitude of the investor who follows a buy
and hold policy. As time moves on, analysis believes that conditions may change
and investors may revaluate expected returns and risk for each investment.

d) Liquidity: Liquidity is also important factor to be considered while making an

investment. Liquidity refers to the ability of an investment to be converted into
cash as and when required. The investor wants his money back any time.
Therefore, the investment should provide liquidity to the investor.

e) Tax Saving: The investors should get the benefit of tax exemption from the
investments. There are certain investments which provide tax exemption to the
investor. The tax saving investments increases the return on investment.
Therefore, the investors should also think of saving income tax and invest money
in order to maximize the return on investment.

1.6

INVESTMENT ATTRIBUTES

Every investor has certain specific objective to achieve through his long term or short
term investment. Such objectives may be monetary/financial or personal in character.
The Three financial objectives are:1. Safety & Security of the fund invested (Principal amount)
2. Profitability (Through interest, dividend and capital appreciation)
3. Liquidity (Convertibility into cash as and when required)
These objectives are universal in character as every investors will like to have a fair
balance of these three financial objectives. An investor will not like to take undue risk
about his principal amount even when the interest rate offered is extremely attractive.
These factors are known as investment attributes.
There are personal objectives which are given due consideration by every investor
while selecting suitable avenues for investment. Personal objectives may be like
provision for old age and sickness, provision for house construction, provision for
education and marriage of childrens and finally provision for dependents including wife,
parents or physically handicapped member of the family.
Investment Avenue selected should be suitable for achieving both the financial and
personal objectives. Advantages and disadvantages of various investment avenues
need to be considered in the context of such investment objectives.

1) Period of Investment :- It is one major consideration while selecting avenue for

investment. Such period may be,
a. Short Term (up to one year) To meet such objectives, investment avenues that
carry minimum or no risk are suitable.
b. Medium Term (1 year to 3 years) Investment avenues that offers better returns
and may carry slightly more risk can be considered, and lastly
c. Long Term (3 years and above) As the time horizon is adequate, investor can
look at investment that offers best returns and are considered more risky.
2) Risk in Investment :- Risk is another factor which needs careful consideration
while selecting the avenue for investment. Risk is a normal feature of every
investment as an investor has to part with his money immediately and has to
collect it back with some benefit in due course. The risk may be more in some
investment avenues and less in others.
Risk connected with the investment are, liquidity risk, inflation risk, market risk, business
risk, political risk etc. Thus, the objective of an investor should be to minimize the risk
and to maximize the return out of the investment made.

1.7

INVESTMENT ALTERNATIVES

Wide varieties of investment avenues are now available in India. An investor can
himself select the best avenue after studying the merits and demerits of different
avenues. Even financial advertisements, newspaper supplements on financial matters
and investment journals offer guidance to investors in the selection of suitable
investment avenues.
Investment avenues are the outlets of funds. A bewildering range of investment
alternatives are available, they fall into two broad categories, viz, financial assets and
real assets. Financial assets are paper (or electronic) claim on some issuer such as
the government or a corporate body. The important financial assets are equity shares,
corporate debentures, government securities, deposit with banks, post office

schemes, mutual fund shares, insurance policies, and derivative instruments. Real
assets are represented by tangible assets like residential house, commercial property,
agricultural farm, gold, precious stones, and art object. As the economy advances, the
relative importance of financial assets tends to increase. Of course, by and large the
two forms of investments are complementary and not competitive.

Investors are free to select any one or more alternative avenues depending upon
their needs. All categories of investors are equally interested in safety, liquidity and
reasonable return on the funds invested by them. In India, investment alternatives
are continuously increasing along with new developments in the financial market.
Investment is now possible in corporate securities, public provident fund, mutual
fund etc. Thus, wide varieties of investment avenues are now available to the
investors. However, the investors should be very careful about their hard earned
money. An investor can select the best avenue after studying the merits and
demerits of the following investment alternatives:

1) Shares
2) Debentures and Bonds
3) Public Deposits
4) Bank Deposits
5) Post Office Savings
6) Public Provident Fund (PPF)
7) Money Market Instruments
8) Mutual Fund Schemes
9) Life Insurance Schemes
10) Real Estates
11) Gold-Silver
12) Derivative Instruments
13) Commodity Market (commodities)

For sensible investing, investors should be familiar with the characteristics and features
of various investment alternatives. These are the various investment avenues; where
individual investors can invest their hard earn money.
The following investment avenues are popular and used extensively in India:

1) SHARES

Share means a share in the share capital of a company. A company is a business

organization. The shares which are issued by companies are of two types i.e. Equity
shares and Preference shares. It is registered as per Companies Act, 1956. Every
company has share capital. The share capital of a company is divided into number of
equal parts and each of such part is known as a 'share'. A public limited company has
to complete three stages. The first is registration. The second is raising capital and the
third is commencement of business. A public limited company issues shares to the
public for raising capital. The first public issue is known as Initial Public Offerings (IPO).
The shares can be issued at par, premium or discount. Each share has a face value of
Rs 1, 2 ,5 or 10. In order to issue shares a prospectus is prepared and it is got
approved from Securities and Exchange Board of India (SEBI). These shares are listed
with the stock exchange so that the shareholders can sale these shares in the
market. The company has to make an application to the stock exchange for listing of
shares.

The shares are also called as "stock". Nowadays, shares are issued in DEMAT form. It
means shares are credited to a separate account of the applicant opened with
depository participant. This is also called paperless security because shares are not
issued in physical form. Demat account is compulsory when the shares are issued
through Book Building Process, Book Building is a method of public issue of shares by a
company in which the price is determined by the investors subject to a price band or
range of prices given by the company.

Investment in shares is more risky because the share prices go on changing day by
day. Today, the market is more 'volatile' means more fluctuating. The share prices may
go up or go down. If the stock market falls the share prices will go down and the
investor will lose money in the investment However, the return on investment in
shares is higher. The return on investment in shares is in the form of regular dividend,
capital appreciation, bonus and rights. There is also liquidity in this kind of investment.
The shares can be sold in stock market and money can be collected within 3 to 4 days.
Investment in shares is not a tax saving investment.

Companies (Private and Public) need capital either to increase their productivity or to
increase their market reach or to diversify or to purchase latest modern equipments.
Companies go in for IPO and if they have already gone for IPO then they go for FPO.
The only thing they do in either IPO or FPO is to sell the shares or debentures to
investors (the term investor here represents retail investors, financial institutions,
government, high net worth individuals, banks etc).

Investors in Mumbai are so familiar to the ups and downs in the stock markets, but still
no one has loosed the confidence over the investment in shares. Even a small investors
keeping long term view in mind, are investing some part of their hard earn money in
shares. Many investors are playing in market on the basis of the cash balance or the
margin funding allowed by the depository (service provider). In Mumbai there are two
secondary markets they are as follows,
1. Bombay stock exchange (BSE)
2. National stock exchange (NSE)
Investors in Mumbai are playing in both the markets i.e. primary market and secondary
market. Shares constitute the ownership securities and are popular among the
investing class. Investment in shares is risky as well as profitable. Transactions in
shares take place in the primary and secondary markets. Large majority of investors
(particularly small investors) prefer to purchase shares through brokers and other
dealers operating on commission basis. Purchasing of shares is now easy and quick
due to the extensive use of computers and screen based trading system (SBTs).

Orders can be registered on computers. The shares available for investment are
classified into different categories. Shares certificates in physical form are no
more popular in India due to Demat facility. It gives convenience in handling and
transfer of shares. For this, demat account can be opened in the bank which
provides depository services.

The shares are listed and traded on stock exchanges which facilitate the buying and
selling of stocks in the secondary market. The prime stock exchanges in India are The
Stock Exchange Mumbai, known as BSE and the National Stock Exchange India ltd
known as NSE. The purpose of a stock exchange is to facilitate the trading of securities
between buyers and sellers, thus providing a marketplace. Investing in equities is riskier
and definitely demands more time than other investments.

There are two ways in which investment in equities can be made:

i.

Through the primary market (by applying for shares that are offered to the public)

ii.

Through the secondary market (by buying shares that are listed on the stock
exchanges)

2) DEBENTURES AND BONDS

A debenture is a document issued by a company as an evidence of a debt. It is a

certificate issued by a company under its seal, acknowledging a debt due by it to
its holders. The term debenture includes debenture stock, bonds and any other
securities issued by a company. The Companies Act provides that a company can
raise loans from the public by issue of debentures. The debenture holder becomes
the creditor of the company. The debenture holder gets interest on the debenture
which is fixed at the time of issue. The debentures are also issued to the public just
like issue of shares. However, there is a need for credit rating before issue of
debentures or Bonds. Bonds are issued by Government companies and the
debentures are issued by the Private sector companies. Therefore, bonds may be
tax saving but debentures are not tax saving investment.

The companies use owned capital as well as borrowed capital in their capital
structure as compared to equity shares because debenture holders have no say
in the management of the company and interest on debentures is allowed as a
business expense for tax purposes. The debentures are considered as secured
loan. There is no much risk in the investment in debentures as compared to
shares. The return on debentures is also reasonable and stable. The debentures
are also listed with the stock exchanges and can be traded in the stock market.
However, the prices of debentures are not much volatile.

The debenture, being a loan, is redeemable at a certain period or maturity,

otherwise it can be irredeemable. The debentures can be convertible or nonconvertible. If a debenture is convertible into shares at maturity, it is called
convertible. The convertible debentures may be partly convertible or fully
convertible. Convertible debentures became popular in the last decade. The
method of raising long term funds through debentures is not much popular in India.
A very few companies have issued debentures and very few companies
debentures or bonds are traded in the stock market. The debentures were also
not popular till recent years.

Bonds refer to debt instruments bearing interest on maturity. In simple terms,

organizations may borrow funds by issuing debt securities named bonds, having a fixed
maturity period (more than one year) and pay a specified rate of interest (coupon rate)
on the principal amount to the holders. Bonds have a maturity period of more than one
year which differentiates it from other debt securities like commercial papers, treasury
bills and other money market instruments.

Debt instrument represents a contract whereby one party lends money to another on
pre-determined terms with regards to rate and periodicity of interest, repayment of
principal amount by the borrower to the lender. In Indian securities markets, the term
bond is used for debt instruments issued by the Central and State governments and

public sector organizations and the term debenture is used for instruments issued by
private corporate sector.

Infrastructure bonds / Infra bonds : In 2010, the government introduced a new

section 80CCF under the Income Tax Act, 1961 ("Income Tax Act") to provide for
income tax deductions for subscription to long-term infrastructure bonds and pursuant to
that

the

Central

Board

of

Direct

Taxes

passed

Notification

No.

48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure

bonds offer an additional window of tax deduction of investments up to 20,000 for the
financial year 2010-11. This deduction is over and above the

1 lakh deduction

available under sections 80C, 80CCC and 80CCD read with section 80CCE of the
Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings
into infrastructure sector directly.

3) PUBLIC DEPOSITS

The Companies Act provides that companies can accept deposits directly from the
public. This mode of raising funds has become popular in the 1990s, because the
bank credit had become costlier. As per provisions of the Companies ACT, a company
cannot accept deposits for a period of less than 6 months and more than 36
months. However, deposits up to 10% of the paid up capital and free reserves
can be accepted for a minimum period of three months for meeting short-term
requirements. Again, a company cannot accept or renew deposits in excess of 35%
of its paid up capital and free reserves.

In order to meet, temporary financial needs, companies accept deposits from the
investors. Such deposits are called public deposits or company fixed deposits and
are popular particularly among the middle class investors. All most all companies
collect crores of rupees through such deposits. Companies were offering attractive
interest rates previously. However, the interest rates are now reduced considerably.
At present, the interest rate offered is 9 to 12 per cent.

On maturity, the depositor has to return the deposit receipt (duly discharged) to the
company and the company pays back the deposit amount. The depositor can renew
his deposit for further period of one to three years at his option. Many companies are
now supplementing their fixed deposit scheme by cumulative time deposit scheme
under which the deposited amount along with interest is paid back in lumpsum on
maturity. Companies, now, appoint managers (collecting agents) to their fixed deposit
schemes. The managers are usually reputed share brokers. They help companies in
collecting the deposits and also look after the administrative work in connection with
such deposits.

At present, along with private sector companies, even public sector companies and
public utilities also accept such deposits in order to meet their working capital needs.
This source is popular and used extensively by the companies. The popularity of
public deposits is due to the following Advantages:

a) Public deposits are available easily and quickly, provided the company enjoys
public confidence.
b) This method of financing is simple and cheaper than obtaining loans from
commercial banks. This makes public deposits attractive and agreeable to
companies and also to depositors.
c) Public deposits enable the companies to trade on equity and pay higher
dividends on equity shares.
d) The depositors receive interest on their deposits. This rate is higher than the
interest rate offered by banks. The interest is also paid regularly by reputed
companies.
e) The formalities to be completed for depositing money are easy and simple.
There is no deduction of tax at source where interest does not exceed a
particular limit.
f) The risk involved is also limited particularly when money is deposited with
a reputed company.

4) BANK DEPOSITS

Investment of surplus money in bank deposits is quite popular among the investors
(Particularly among salaried people). Banks (Co-operative and Commercial) collect
working capital for their business through deposits called bank deposits. The
deposits are given by the customers for specific period and the bank pays interest on
them. In India, all types of banks accept deposits by offering interest. The deposits
can be accepted from individuals, institutions and even business enterprises, the
business and profitability of banks depend on deposit collection. For depositing money
in the bank, an investor/depositor has to open an account in a bank.

Different types of deposit accounts are:

1. Current Account
2. Savings Bank Account
3. Fixed Deposit Account, and
4. Recurring Deposit Account

The rate of interest for Fixed Deposits (FD) differs from bank to bank unlike previously
when the same were regulated by RBI and all banks used to have the same interest
rate structure. The present trends indicate that private sector and foreign banks offer
higher rate of interest. Usually a bank FD is paid in lump sum on the date of maturity.
However, some banks have facility to pay interest at the end of every quarter. If one
desires to get interest paid every month, then the interest paid will be at a discounted
rate. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or
Current Account of the customer.

This indicates the use of bank deposit as an avenue of investment by Indian investors.
NRIs and NREs can keep money in nationalised and other banks as savings or
fixed deposits. The case of NRI and NRE Account, the bank interest is not taxable. Some

banks offer one percent higher interest rate on NRI/NRE accounts. Important features
of bank deposit account are as follows:
a) Any individual (of major age) can open a bank account by following simple
procedure. An accountholder is treated as bank customer and all normal banking
facilities and services are offered to him. A bank account may be single or joint
Nomination facility is also given to accountholders.
b) Deposits in the banks are safe and secured. They can be withdrawn as per
the terms and conditions of the bank account. The benefit of deposit insurance
scheme is also available to bank depositors.
c) Money can be deposited at any time in the case of current and savings
bank accounts. In the case of fixed deposit account, it is deposited only once and
money is deposited every month in the case of recurring deposit account.
d) Interest is paid on bank deposits (except current deposits). The interest rate is
decided by the RBI from time to time as per the money market situation. The cooperative banks offer nearly one per cent higher interest rate as compared
to commercial banks. Even senior citizens are offered a little higher interest
rate (normally one per cent).
e) Interest is paid on quarterly or six monthly basis. However, if the deposit period is
less than 90 days, the interest is paid on maturity,
f) Bank deposits have high liquidity. Banks even give loan on the security of fixed
deposit receipts.

A. Advantages of Bank Deposits:

1. Investment is reasonably safe and secured with adequate Liquidity.
2. Banks offer reasonable return on the investment made and that too in a
regular manner.
3. Banks offer loan facility against the investments made.
4. Procedures and formalities involved in bank investment are limited, simple and
quick.
5. Banks offer various services and facilities to their customers.

B. Limitations of Bank Deposits:

1. The rate of return in the case of bank investment is low as compared to
other avenues of investment.
2. The return on investment is not adequate even to give protection against the
present inflation rate in the country.
3. Capital appreciation is not possible in bank investment.

5) POST OFFICE SAVINGS

Post office operates as a financial institution. It collects small savings of the people
through savings bank accounts facility. In addition, time deposits and government loans
are also collected through post offices. Certain government securities such as Kisan
Vikas Patras, National Saving Certificates, etc. are sold through post offices. New
schemes are regularly introduced by the Postal Department in order to collect savings
of the people. This includes recurring deposits, monthly income scheme, PPF and so
on.

Postal savings bank schemes were popular in India for a long period as banking
facilities were limited and were available mainly in the urban areas upto 1950s. The
popularity of postal savings schemes is now reducing due to the growth of banking and
other investment facilities throughout the country. However, even at present, small
investors use postal savings facilities for investing their savings/ surplus money for
short term/long term due to certain benefits like stable return, security and safety of
investment and loan facility against postal deposits. Even tax benefit is one
attraction for investment in post office. Investment in postal schemes is as good as giving
money to the government for economic development along with reasonable return
and tax benefits. Post Office Savings Bank (POSB) has a customer base of more than
11 crores accountholders with annual deposits exceeding Rs.70,000 crores and a
network of 1,55,000 branches. The outstanding balance under all national savings
schemes in post offices stood at Rs.2,18,695.15 crore by March 2001.

Postal savings schemes include the following:

(1) Savings Bank Account: Simple interest rate 3.5% with effect from March 1, 2003
(The rate was 3.50 from March 1, 2002). Maximum deposit upto 150,000
individual account and Rs.1 lakh in joint account. Interest earned is totally tax free.
(2) Monthly Income Scheme: Period: 6 years. Interest rate is 8.00 per cent p.a.
payable monthly. Plus bonus @ 10 per cent at maturity with effect from March 1,
2003. (The rate was 9 per cent from March 1, 2002). There will be no tax deduction
at source.
(3) Recurring Deposits: Period: 5 years. Interest rate 7.5 with effect from March
1, 2003. The interest is compounded on quarterly basis. Maturity value is notified
and paid accordingly.
(4) Time Deposits: Period: 1 year to 5 years. No maximum limit of deposit in
an account. The interest rates on time deposits vary from time to time but it is
higher than other deposits due to long maturity period.

Thus, post office provides various schemes for safe investment of surplus funds.
However, the return on investment is rather low. The interest rates are reduced
considerably in recent years. Such trend of lowering of interest rate is applicable to
all types of savings schemes in India. The postal rules and procedures are
lengthy. Moreover, quick service and personal attention are not given due to
inadequate staff, use of old methods and procedures, etc.

6) Public Provident Fund (PPF)

PPF is one attractive tax sheltered investment scheme for middle class and
salaried persons. It is even useful to businessmen and higher income earning
people. The PPF scheme is very popular among the marginal income tax payers.
The scheme was introduced in 1969.

The features of PPF scheme are as noted below:

1. PPF account may be opened at any branch of the SBI or its subsidiaries or at
Specified branches of nationalised banks. PPF account can be opened even in
a post office on the same terms and conditions. Such account can be opened
by any individual.
2. Only one account can be opened in the name of a person.
3. The PPF account is for a period of 15 years but can be extended for more
years (five years at a time) at the desire of the depositor.
4. The depositor is expected to make a minimum deposit of Rs.500 every year. In
addition, money can be deposited once in every month. (A minimum deposit in a
year is Rs. 500 and maximum is Rs. 70,000/-)
5. The PPF account is not transferable, but nomination facility is available.
6. Loan is admissible from the third year. Loan amount is limited to 25 % of

at the

end of two years preceding.

7. Fresh loan is not allowed when previous loan or interest thereof is outstanding.
8. Interest is charged at the rate of 1% if prepaid within 36 months and at 6% on
the outstanding loan after 36 months.
9. Withdrawal is permissible from seventh financial year from the year of opening,
limited to one in a financial year.
10. Amount of withdrawal is limited to 50 % of balance at the end of the fourth
preceding year less amount of outstanding loan or 50% of balance at the end of
immediate preceding year of withdrawal less amount of outstanding loan, if any
whichever is less.
11. The deposits in a PPF account are qualified for tax exemption under the
Income-tax Act (Section 80 - C). The balance amount in a PPF account is fully
exempted from the Wealth Tax. The PPF account is also exempted from
attachment from the court.
12. A compound interest at 8% per annum is paid in the case of PPF account with
effect from 1-3-2003. The interest accumulated in the PPF account is also tax
free.
13. On maturity, the credit balance in the PPF account can be withdrawn.
However, at the option of the subscriber, the account can be continued for

three successive block periods of five years each, with or without deposits.
During the extensions the account holder can make one withdrawals per
year, subject to the condition that the total amount withdrawn during a 5year block does not exceed 60 percent of the balance to the credit of the
account at the beginning.

A. Special Advantages of PPF Account:

1) Reasonably attractive interest rate even when it is reduced by one per cent
with effect from 1-3-2003.
2) Income from PPF A/c (interest payment) is exempted from income tax and
wealth tax.
3) Tax exemption on investment made in PPF.
4) Withdrawal facility at certain intervals which also avoids frequent withdrawals.
5) It is useful as a provision for old age, or as provision for certain expenses
such as marriage of a son/daughter, purchase of flat, etc.
6) PPF account is exempted from attachment from the court. This gives
security to family members /dependents.

B. Limitations of PPF Account:

1) LOW liquidity as one withdrawal is allowed in a year.
2) The PPF account is for a period of 15 years which is a very long period.

Inspite of limitations, PPF is an attractive avenue for investment in the case of Tax
payers/Salariedclass/Businessmen/Professionals.

7) MONEY MARKET INSTRUMENTS

Money market is a centre in which financial institutions join together for the purpose
of dealing in financial or monetary assets, which may be of short term maturity.
The short term generally means a period upto one year and the term near

substitutes to money denotes any financial asset which may be quickly converted
into money with minimum transaction cost.
Thus, money market is a market for short term financial instruments, maturity period
of which is less than a year. The deals are over the counter. The numbers of players
in the market are limited. It is regulated by Reserve Bank of India. Money Market
Instruments where Investors can invest are Treasury bills, Certificate of Deposit,
Commercial Paper, Repurchase Options (Repo), Money Market Mutual Funds
(MMMFs).

8) MUTUAL FUNDS

Mutual fund is a financial intermediary which collects savings of the people for
secured and profitable investment. The main function of mutual fund is to mobilize
the savings of the general public and invest them in stock market securities. The
entire income of mutual fund is distributed among the investors in proportion to
their investments- Expenses for managing the fund are charged to the fund, like
mutual funds in India are registered as trusts under the Indian Trust Act. The
trustees are appointed and they look after the management of the trust. They
decide the investment policy and give the benefit of professional investment
through the mutual funds. These funds are managed by financial and professional
experts. The savings collected from small investors are invested in a safe,
secured and profitable manner. Therefore, it is said that mutual fund is a boon to the
small investors.

UTI had virtual monopoly in the field of mutual fund from 1964 to 1987. After 1987,
State Bank of India, Bank of India and other banks started their mutual funds. After
1991 (due to economic liberalisation) many financial institutions started their mutual
funds (e.g. Kothari Pioneer Fund, CRB Capital Markets and so on). In brief, along
with UTI, many more mutual funds are now started for the benefit of small
investors. They are given recognition by RBI/SEBI. Mutual funds, in general,
are popular among the investing class. Moreover, practically all mutual fund

organisations are successful in collecting crores of rupees from the investing class. A
mutual fund is formed by the coming together of a number of investors who
hand over their surplus funds to a professional organisation to manage their
funds.

The main function of mutual fund is to mobilise the savings of the general public and
invest them in stock market securities. At present, there is diversion of savings of
the middle class investors from banks to mutual funds. The government has
thrown the field open to the private sector and joint sector mutual funds. The
performance of mutual funds is showing significant growth during 1998-99 and 992000. During 2000-01, the public sector and private sector mutual funds (excluding
UTI) mobilised resource worth Rs.11,340 crores as against Rs. 15,400 crores during
1999-00. More than 43 mutual funds are operating in India.

Mutual funds have introduced many schemes for attracting investors and also for
collecting their savings. Such schemes include open ended schemes which are
open to the investors for all the time. They can buy or sell the units whenever they
desire. Such schemes are Regular Income Schemes, Recurring Income Schemes,
Cumulative Growth Schemes, etc. There are close-ended schemes in which there is a
lock in period of three to five years and investors cannot buy or sell the investment
during that period. Such schemes are Dhanshree 1989, of LIC mutual fund.
Magnum Regular Income Scheme 1987, of SBI mutual fund.

Basically, there are four schemes by which mutual funds collect money from the
investors such as (1) Growth Schemes (2) Income Schemes (3)Balanced Schemes (4)
Tax Saving Schemes. In case of growth schemes the investment grows according to
the time and in case of income schemes the investors get regular income from the
investments. Balanced schemes are the combination of both these schemes. Tax
saving scheme is designed to save income tax while investing in the market. There
are different types of investors and their objectives are also different. Therefore,

mutual funds have started different schemes in order to suit the objectives of these
investors.

Mutual funds are popular investments because of low risk and high returns. There
is liquidity in case of open-ended schemes and some of the schemes provide tax
savings. There are income schemes which provide regular income to the investors.

The popularity of mutual funds is fast growing in India. The number of such funds is
increasing and is getting popular support from the investing class. Investors prefer
to give their savings to mutual funds for the safety of their funds and also for
securing the benefits of diversified investment. These funds take appropriate
investment decisions and handover the benefits of profitable investment to the
investors.

Now a days, investors are creating their mutual fund portfolios on the basis of the nature
of mutual funds i.e. instead of categorizing the mutual funds in different types (as given
above) investors mainly focus on the following categories which simple to understand
and the schemes itself explains the risk factor associated with the particular category.

1. Equity mutual funds: These funds invest a maximum part of their corpus into
equities holdings. The structure of the fund may vary different for different
schemes and the fund managers outlook on different stocks. The Equity Funds
are sub-classified depending upon their investment objective, as follows:
i.

Diversified Equity Funds(Large Cap)

ii.

Mid-Cap Funds

iii.

Small Cap Funds

iv.

Sector Specific Funds

v.

Tax Savings Funds (ELSS)

vi.

Thematic Funds
Equity investments are meant for a longer time horizon, thus Equity funds rank
high on the risk-return matrix.

2. Debt mutual funds: The objective of these Funds is to invest in debt papers.
Government authorities, private companies, banks and financial institutions are
some of the major issuers of debt papers. By investing in debt instruments, these
funds ensure low risk and provide stable income to the investors. Debt funds are
further classified as:
i.

Gilt Funds

ii.

Income Funds

iii.

MIPs

iv.

Short Term Plans

v.

Liquid Funds

3. Balanced funds: As the name suggest they, are a mix of both equity and debt
funds. They invest in both equities and fixed income securities, which are in line
with pre-defined investment objective of the scheme. These schemes aim to
provide investors with the best of both the worlds. Equity part provides growth
and the debt part provides stability in returns.

More than 43 mutual funds are operating in India. The assets under management
(AUM) is Rs. 7 Trillion (Rs. 7 lakhs crore) in india. The top three mutual fund companies
are (1) reliance mutual funds (2) HDFC mutual funds (3) Birla mutual funds. Currently
3,500 schemes are offered by mutual fund companies in india. As of now there are
85000 mutual fund agents, are operating in india. But few of them are active in the
market. Basically these agents are ARN holders i.e. certified to sell the mutual funds in
the market. The SEBI and AMFI are acting as a regulators in the market. According to
current updates SEBI has made KYC compulsory for all the investors. As per new SEBI
guidelines, Currently there is no concept of entry load. Also if investors investment
horizon is long term then there is no exit load charged by the company but at the same
time if investor would like to withdraw invested money before 1 year then the investors
are liable to pay prescribed exit load on the mutual funds schemes.

9) LIFE INSURANCE POLICIES

Nothing is more important to a person than the feeling that their family is financially
secure - at all times. Life insurance is a contract whereby the insurer, in
consideration of a premium paid either in a lumpsum or in periodical installments
undertakes to pay an annuity or certain sum of money either on the death of the
insured or on the expiry of a certain number of years, whichever is earlier.

There are 23 life insurance companies in India. Life Insurance Corporation of India (LIC)
is the only Public Sector insurance company, the rest all being private insurance
players. Most of the private players have tied up with international insurance biggies for
their life insurance foray. The life insurance sector in India has seen a lot of action in the
last decade with a lot of new players entering the market. The distribution system for life
insurance products involves various intermediaries between the insurer and the insured.
The different distribution channels used by insurance companies are, Agents, Brokers,
Corporate Agents, Bancassurance. Private insurance companies have been exploring
the various distribution channels available instead of concentrating on individual agents.

Insurance Regulatory and Development Authority (IRDA) is the regulatory arm of the
government of India which oversees the proper functioning of the insurance sector.

Life insurance is a kind of Investment Avenue provides family protection to the

investor as well as return on investment in the form of yearly bonus on the policy. The
return on investment is reasonably low i.e. 6% p.a. because of risk coverage and tax
incentives. The amount of premium paid on a life insurance policy is exempted from
taxable income under section 80-C of the Income-tax Act. Though, the maturity period is
longer the insurance policy can be surrendered or loan can be availed on the policy,
therefore there is some sort of liquidity in this investment. Thus, investment in life
insurance is a profitable investment and there is no risk in this investment.

Life insurance covers the risk that exists in one's life. These risks may arise due to
accident, illness or natural causes like fire, flood, earthquake. Life insurance aims to
protect the family of the life insured so that they may not suffer from financial
consequences on the death or disability of the insured person. Life insurance needs to
be a mandatory part of every person's life. Life insurance covers three contingencies:
1. Contingency of death
2. Contingency of old age
3. Contingency of disability and critical illness.
The three major concerns of any person are: Dieing too early, Living too long,
and Living with disability. Besides, there are other concerns about taking care of
children and their future and about creating wealth that most individuals think.
Life insurance products are generally designed to address such needs. With
these situations in mind, life insurance products also provide for risk cover,
investment, health care and tax saving.

Life insurance is usually taken by the earning member(s) of the family to ensure that in
case of their death, and hence their source of income ceasing to exist, the dependent
family members would have a lump-sum amount to fall back on. So by paying a small
amount every year the earning member of the family can ensure that the future of their
loved ones is absolutely secure from a financial point of view. So in the event of death
of an insured person, the nominee of the policy would receive an amount called the sum
assured which can then be used effectively to plan for their future.

Broadly one can classify their requirements into protecting the family when they die or
planning for childrens careers or retirement. Whether it is protection or planning needs
there are suitable insurance policies that suffice the need appropriately. For Planning
needs Endowment, Pension or ULIP will be a good choice based on the risk one can
afford to take. For protection needs the traditional Term or whole life policies are must.
The Common Types of Insurance Policies are as follows:
1. Term Insurance
2. Whole Life Insurance

3. Endowment Insurance
4. Money Back Insurance
5. Annuities (Pension Plans / Retirement Insurance)
6. Unit-Linked Insurance Plan (ULIPs)
7. Child Life Insurance Policy

Health expenses are increasing considerably each day and so are the health risks.
Health Insurance, also known as medical insurance is a form of insurance which
covers the expenses incurred on medical treatment and hospitalisation. It covers the
individual and family against any financial constraints arising from medical emergencies.

Tax Benefits of taking a Health Insurance Policy Under Section 80D of the Income Tax
Act, income tax benefit is provided to the customer for the premium amount till a
maximum of Rs. 15,000 for regular and Rs. 20,000 for senior citizen respectively.

Hence, life insurance should be planned and the correct amount of life insurance needs
to be purchased but only after evaluating the requirement and the need depending on
Investors life stage, priority and capacity. If properly planned, the life insurance can be
the answer to a sound financial planning for lifetime!

10) INVESTMENT IN REAL ESTATES

Investment in real estate includes properties like building, industrial land,

plantations, farm houses, agricultural land near cities and flats or houses. Such
properties attract the attention of affluent investors. It is an attractive, as well as
profitable investment avenue today. A residential building represents the most
attractive real estate property for majority of investors. The prices of real estate are
increasing day by day. The land is limited on the earth but the population has been
increasing. As the demand increases but the supply of land is limited, the prices tend to
increase. Therefore, it is attractive investment which generates higher return during a
short period of time.

Types of properties are Residential property, Commercial property, N.A. Plots and
Agricultural land. Ownership of a residential house provides owned accommodation to
the family and gives satisfaction to the family members. It acts as one useful family
asset with saleable value. It is a long term investment. The government provides tax
incentives to the individuals who buy the residential house. The interest paid on
borrowings for purchase of house is exempted from income tax. The repayment of
principal amount during a year is also exempted from income tax up to an amount of
Rs.100000. Thus, the investment in residential house is also treated as tax saving
investment.

Investment in real estate provides capital appreciation of residential buildings, urban

land and flats. It gives reasonable return on investment. There is a low risk but there is
no liquidity. There are chances of capital appreciation also. The property can also be
used as security for raising loans. There is a tax saving in case of residential house. It is
a long term investment. There is a quick appreciation in the value of assets.

There is a low liquidity in case of investment in real estates. The risk in the
investment is also more as compared to investment in banks and mutual funds. The
government Rules and Regulations regarding buying and selling of the property are
troublesome in case of real estates. Stamp duty, registration and legal formalities are
complicated and there is a chance of cheating at the time of buying or selling. The
amount of investment is huge and therefore the benefits of diversification of investment
are not available. In real estate profitability is available at the cost of liquidity. The
liquidity is low.
The property rates in Mumbai are increasing day by day. Buying a property in Mumbai
is a dream of every resident, but now due to tremendous increase in property rates, the
investors started buying property at affordable rate. Despite the availability of more
rationally priced options, investing in real estate is most definitely not childs play. It
requires forethought, research and planning.

11) INVESTMENT IN GOLD AND SILVER

Gold and silver are the precious objects. Everybody likes gold and hence requires gold
or silver. These two precious metals are used for making ornaments and also for
investment of surplus funds over a long period of time. In India, gold is an obsession
deep-rooted in mythology, religious rites and it is very psychological. In every family
at least a little quantity of gold and silver is available. Some people buy these metals
as an investment. The prices of gold and silver are also increasing continuously. The
prices also depend upon demand and supply of gold. The supply has been increasing
at low speed. However, the demand has been increasing very fast. Therefore, the
prices also go on increasing. People use gold and silver at the time of marriages and
other festivals. Apart from gold and silver, precious stones such as diamonds, rubies
and pearls are also appealing for long term investment particularly among rich people.

Gold and silver are useful as a store of wealth. They act as secret assets. The
investment is highly liquid, which can be sold at any time. The market prices are
continuously increasing. Therefore, the return on investment is also increasing. The
investment is also safe and secured. There is a high degree of prestige value for gold
and silver in the society. The benefit of capital appreciation is also available.

The investment in gold and silver is risky due to the chances of theft. It may also
cause an injury to the life of the investor. It is a long term investment. Regular income
from the investment is not available. This investment is not available for capital
formation and economic growth of the country. The traditional attraction for gold and
silver is gradually reducing. The import of gold is now free. There is no tax saving on
this investment. Gold and silver, the two most widely held precious metals, appeal to
almost all kinds of investors for the following reasons.
i.

Historically, they have been good hedges against inflation.

ii.

They are highly liquid with very low trading commissions.

iii.

They are aesthetically attractive.

iv.

Returns on gold, in general, have been negatively correlated with returns on

stocks. So, gold provides a good diversification opportunity.

v.

They process a high degree of moneyness. According to jack clark francis: A

substance possesses moneyness when it is (1) a store of value, (2) durable, (3)
easy to own anonymously, (4) easy to subdivide into small pieces that are also
valuable, (5) easy to authenticate, and (6) interchangeable, that is, homogeneous
or fungible."

As against these advantages, investment in gold and silver has the following
disadvantages:
i.

They do not provide regular current income.

ii.

There is no tax advantage associated with them,

iii.

There may be a possibility of being cheated.

Investment in gold and silver can be in physical or nonphysical forms. The physical form
includes bullion, coins, and jewellery. Gold or silver bars, called bullion, come in a wide
range of sizes. Jewellery made of gold or silver may provide aesthetic satisfaction but is not
a good form of investment because of high making charges which may not be recovered.

The nonphysical form includes futures contracts, units of gold exchange-traded funds,
and shares of gold mining companies. Investors can buy futures contracts in gold and
silversuch contracts tend to be highly leveraged investments. The units of gold
exchangetraded funds (ETFs) are listed on a secondary market and investors can buy
such units easily. Gold ETFs have been permitted in India since March 2007. Benchmark
Mutual Fund and UTI were the first two funds to launch gold ETFs. Each share of a gold
ETF represents one-tenth of an ounce of physical gold. This may be the best way to invest
in gold as it spares you the hassles involved in ascertaining the purity of gold and storing it
safely. Finally, investors can buy shares of common stock of a company that mines gold
or silver as an indirect way of investing in these metals.

12) DERIVATIVE INSTRUMENTS

A derivative is a product whose value is derived from the value of an underlying asset,
index or reference rate. The underlying asset can be equity, forex, commodity or any
other asset. For example, if the settlement price of a derivative is based on the stock
price of a stock for e.g. Tata Steel which frequently changes on a daily basis, then the
derivative risks are also changing on a daily basis. This means that derivative risks and
positions must be monitored constantly. A derivative security can be defined as a
security whose value depends on the values of other underlying variables. Very often,
the variables underlying the derivative securities are the prices of traded securities.
Derivatives are of four types, (1) Forward (2) Futures (3) Options and (4) Swaps. From
the point of view of investors and portfolio managers, futures and options are the two
most important financial derivatives. They are used for hedging and speculation.
Trading in these derivatives has begun in India. The difference between a share and
derivative is that shares/securities are an asset while derivative instrument is a contract.

13) COMMODITIES

A commodity may be defined as a product or material or any physical substance like

food grains, processed products and agro-based products, metals or currencies, which
investors can trade in the commodity market. One of the characteristics of a commodity
is that its price is determined as a function of its market as a whole. Well-established
physical commodities are actively traded in spot and derivative commodity market.
Commodities actually offer immense potential to become a separate asset class for
market-savvy investors, arbitragers and speculators. Retail investors, who claim to
understand the equity market, may find commodity market quite tricky. But commodities
are easy to understand as far as fundamentals of demand and supply are concerned.
Retail investors should understand the risks and advantages of trading in commodity
market before taking a leap. Historically, prices of commodities have remained
extremely volatile.

The gradual evolution of commodity market in India has been of great significance for
the country's economic prosperity. The commodity futures exchanges were evolved in
1800 with the sole objective of meeting the demand of exchangeable contracts for
trading agricultural commodities. For example, the cotton exchange located at Cotton
Green in Mumbai (then Bombay) was the one of the first organised commodity market
in the country.

A commodity market is a market where various commodities and derivatives products

are traded. Most commodity market across the world trade in agricultural products and
other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk
products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts
can include spot prices, forwards, futures and options on futures. Other sophisticated
products may include interest rates, environmental instruments, swaps, or ocean freight
contracts. The sale and purchase of commodities is usually carried out through futures
contracts on exchanges that standardize the quantity and minimum quality of the
commodity being traded.

Commodities exchanges usually trade futures contracts on commodities, such as

trading contracts to receive a particular commodity in physical form. Speculators and
investors also buy and sell the futures contracts at commodity exchanges to make a
profit and provide liquidity to the system.

The Indian commodity market offers a variety of products like rice, wheat, coal,
petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many
more. There are some commodities such as sugar, cocoa, and coffee, which are
perishable, so cannot be stocked for long time. These days, a wide range of agricultural
products, energy products, perishable commodities and metals can be sold under
standardised contracts on futures exchanges prevailing across the globe. Commodities
have gained importance with the development of commodity futures indexes along with
the mobilisation of more resources in the commodity market.

India has around 25 recognised commodity future exchanges including three nationallevel commodity exchanges. They are:
1. National Commodity & Derivatives Exchange Limited (NCDEX)
2. Multi Commodity Exchange of India Limited (MCX)
3. National Multi-Commodity Exchange of India Limited (NMCE)
All these exchanges are under the control of the Forward Market Commission (FMC) of
Government of India.

Multi Commodity Exchange of India Limited (MCX) in Mumbai, is also an

independent and de-mutualised exchange recognized by the Government of India. This
commodity exchange which started operations in November 2003 has above 40
commodities on its platform and has a market share of around 80% in the Indian
commodity market. Key shareholders of MCX are Financial Technologies (India) Ltd.,
State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara
Bank. This commodity exchange facilitates online trading, clearing and settlement
operations for commodity futures market across the country.

As compared to other markets in the last ten years, commodity market has performed
relatively better than other markets like bonds, equity or currency. However, the
participation in future trading in Indian commodity market is very low as compared to
other countries as there is lack of knowledge about this market to the investors and
traders. It is not for mere trading purpose; commodity trading is also used for hedge
against inflation, price discovery of the commodity and also as a sound investment. In
order to trade in commodities, DEMAT account is required.

1.8

TAX SAVING INVESTMENTS

There are certain schemes introduced for the purpose of tax saving. These schemes
provide income tax benefits to the investors who invest in these schemes. Under
Section 80C of the Income Tax Act, 1961, the following schemes are eligible for tax
saving. The Finance Act, 2010 provides tax exemption upto Rs.1,00,000 for the
investments in the following schemes:

1. Life Insurance Premium: Life insurance premium paid by a person on his life
or on the life of spouse or on life of any child of that person is entitled for
deduction under this section. Maximum premium of 20% of the policy amount
can be allowed for deduction.
2. Public Provident Fund: Investment made by an individual towards the 15
year Public Provident Fund set up by the government under the Public
Provident Fund Scheme, 1968 is qualified for deduction upto a maximum of Rs.
70,000 in a year.
3. Post Office Savings Deposits: Any sum deposited in a 10 year or 15 year
account under the Post Office Savings Bank Rules 1959 by an individual is
entitled for deduction upto a limit of Rs.1,00,000.
4. National Savings Certificate (NSC): Amount invested by an individual in
National Savings Certificate issued by post office is entitled for deduction.
5. Unit Linked Insurance Plan (ULIP): Investments made by an individual for
participating in the Unit Linked Insurance Plan of Unit Trust of India are entitled
for deduction upto an amount of Rs.1,00,000 in a year.
6. Deposits in National Housing Bank: Any sum invested in home loan
account scheme of the National Housing Bank is entitled for deduction upto an
overall limit of Rs.60,000 in a year.
7. Repayment of Housing Loan: Payment not exceeding Rs.1,00,000 in respect
of loan installment or repayment of housing loan taken for the purpose of a
residential house is entitled for deduction. Deduction under section 24(b) :
Under this section, Interest on borrowed capital for the purpose of house
purchase or construction is deductible from taxable income up to Rs. 1,50,000
with some conditions to be fulfilled.

8. Fixed Deposit: FD in a bank for more than 5 years maturity period is allowed
as deduction upto Rs.1,00,000.
9. Mutual Fund: Investment upto Rs.1,00,000 in units of a mutual fund referred to
in Section 10(23D); popularly known as Equity Linked Savings Scheme (ELSS)
and approved by the board are eligible for deduction under this act.
10. LIC's Pension Plan: The premium paid for LIC's New Jeevan Suraksha policy
qualifies for deduction upto a limit of Rs.1,00,000 in a year.

In addition, deduction of Rs.20,000 is available u/s 80CCF of the Income Tax Act, 1961
towards the amount invested in the Infrastructure Bonds which will be of Long Term in
nature.

1.9

INTRODUCTION OF PORTFOLIO

Portfolio means combined holding of many kinds of financial securities i.e. shares,
debentures, government bonds, units and other financial assets. The term investment
portfolio refers to the various assets of an investor which are to be considered as a
unit. It is not merely a collection of unrelated assets but a carefully blended asset
combination within a unified framework. It is necessary for investors to take all
decisions as regards their wealth position in a context of portfolio. Making a portfolio
means putting ones eggs in different baskets with varying element of risk and return.
The object of portfolio is to reduce risk by diversification and maximise gains.
Thus, portfolio is a combination of various instruments of investment.

It is also a

combination of securities with different risk-return characteristics. A portfolio is built up

out of the wealth or income of the investor over a period of time with a view to manage
the risk-return preferences. The analysis of risk-return characteristics of individual
securities in the portfolio is made from time to time and changed that may take place in
combination with other securities are adjusted accordingly. The object of portfolio is to
reduce risk by diversification and maximize gains.

1.10 PORTFOLIO MANAGEMENT

Portfolio management means selection of securities and constant shifting of the portfolio
in the light of varying attractiveness of the constituents of the portfolio. It is a choice of
selecting and revising spectrum of securities to it in with the characteristics of an
investor.
Portfolio management includes portfolio planning, selection and construction, review and
evaluation of securities. The skill in portfolio management lies in achieving a sound
balance between the objectives of safety, liquidity and profitability.
Timing is an important aspect of portfolio revision. Ideally, investors should sell at market
tops and buy at market bottoms. Investors may switch from bonds to share in a bullish
market and vice-versa in a bearish market.
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.
Portfolio management is an art and science of making decisions about investment mix
and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance.
Portfolio management in common parlance refers to the selection of securities and their
continuous shifting in the portfolio to optimize the returns to suit the objectives of the
investor. This however requires financial expertise in selecting the right mix of securities
in changing market conditions to get the best out of the stock market. In India, as well as
in many western countries, portfolio management service has assumed the role of
specialized service now a days and a number of professional merchant bankers compete
aggressively to provide the best to high net-worth clients, who have little time to manage
their investments. The idea is catching up with the boom in the capital market and an
increasing number of people are inclined to make the profits out of their hard earned
savings.

Markowitz analysed the implications of the fact that the investors, although seeking
high expected returns, generally wish to avoid risk. It is the basis of all scientific
portfolio management. Although the expected return on a portfolio is directly related to
the expected returns on component securities, it is not possible to deduce a portfolio
riskiness simply by knowing the riskiness of individual securities. The riskiness of
portfolio depends upon the attributes of individual securities as well as the
interrelationships among securities.
A professional, who manages other people's or institution's investment portfolio with the
object of profitability, growth and risk minimization is known as a portfolio manager.
He is expected to manage the investor's assets prudently and choose particular
investment avenues appropriate for particular times aiming at maximization of profit.
Portfolio management includes portfolio planning, selection and construction, review
and evaluation of securities. The skill in portfolio management lies in achieving a sound
balance between the objectives of safety, liquidity and profitability.
Timing is an important aspect of portfolio revision. Ideally, investors should sell at
market tops and buy at market bottoms. They should be guarded against buying at
high prices and selling at low prices. Timing is a crucial factor while switching
between shares and bonds. Investors may switch from bonds to shares in a bullish
market and vice-versa in a bearish market.
Portfolio management service is one of the merchant banking activities recognized by
Securities and Exchange Board of India (SEBI). The portfolio management service can
be rendered either by the SEBI recognized categories I and II merchant bankers or
portfolio managers or discretionary portfolio manager as defined in clause (e) and (f) of
rule 2 SEBI (portfolio managers) Rules 1993.
According to the definitions as contained in the above clauses, a portfolio manager
means any person who pursuant to contract or arrangement with a client, advises or
directs of undertakes on behalf of the client (whether as a discretionary portfolio
manager or otherwise) the management or administration of a portfolio of securities or
the funds of the client, as the case may be. A merchant banker acting as a portfolio

Manager shall also be bound by the rules and regulations as applicable to the portfolio
manager. Realizing the importance of portfolio management services, the SEBI has laid
down certain guidelines for the proper and professional conduct of portfolio management
services. As per guidelines only recognized merchant bankers registered with SEBI are
authorized to offer these services.
Portfolio management or investment helps investors in effective and efficient
management of their investment to achieve their financial goals. The rapid growth of
capital markets in India has opened up new investment avenues for investors.
The stock markets have become attractive investment options for the common man. But
investors should be able to effectively and efficiently manage investments in order to
keep maximum returns with minimum risk.
A portfolio manager by virtue of his knowledge, background and experience is expected
to study the various avenues available for profitable investment and advise his client to
enable the latter to maximize the return on his investment and at the same time
safeguard the funds invested.

1.11 OBJECTIVES OF PORTFOLIO MANAGEMENT

1) Security/Safety of Principal: Security not only involves keeping the principal
sum intact but also keeping intact its purchasing power intact. Safety means
protection for investment against loss under reasonably variations. In order to
provide safety, a careful review of economic and industry trends is necessary.
In other words, errors in portfolio are unavoidable and it requires extensive
diversification. Even investor wants that his basic amount of investment should
remain safe.

2) Stability of Income: So as to facilitate planning more accurately and

systematically the reinvestment consumption of income is important.

3) Capital Growth: This can be attained by reinvesting in growth securities or

through purchase of growth securities. Capital appreciation has become an
important investment principle. Investors seek growth stocks which provides a
very large capital appreciation by way of rights, bonus and appreciation in the
market price of a share.

4) Marketability: It is the case with which a security can be bought or sold. This is
essential for providing flexibility to investment portfolio.

5) Liquidity i.e. nearness to money: It is desirable to investor so as to take

advantage of attractive opportunities upcoming in the market.

6) Diversification: The basic objective of building a portfolio is to reduce risk of loss

of capital and / or income by investing in various types of securities and over a
wide range of industries.

7) Favorable Tax status (Tax Incentives): The effective yield an investor gets
form his investment depends on tax to which it is subject. By minimizing the tax
burden, yield can be effectively improved. Investors try to minimise their tax
liabilities from the investments. The portfolio manager has to keep a list of such
investment avenues along with the return risk, profile, tax implications, yields
and other returns. Investment programmers without considering tax implications
may be costly to the investor.

1.12 PORTFOLIO MANAGEMENT PROCESS

Portfolio management is on-going process involving the following basic tasks:
i.

Identification of the investors objectives, constraints and preferences.

ii.

Strategies are to be developed and implemented in tune with investment policy

formulated.

iii.

Review and monitoring of the performance of the portfolio.

iv.

Finally the evaluation of the portfolio and make some adjustments for the future.

1.13 CONSTRUCTION OF PORTFOLIO:

Portfolio construction means determining the actual composition of portfolio. It refers
to the allocation of funds among a variety of financial assets open for investment.
Portfolio theory concerns itself with the principles governing such allocation. Therefore,
the objective of the theory is to elaborate the principles in which the risk can be
minimized subject to a desired level of return on the portfolio or maximize the return
subject to the constraints of a certain level of risk. The portfolio manager has to set out
all the alternative investments along with their projected return and risk, and choose
investments which satisfy the requirements of the investor and cater to his
preferences.
It is a critical stage because asset mix is the single most determinant of portfolio
performance. Portfolio construction requires a knowledge of the different aspects of
securities. The components of portfolio construction are (a) Asset allocation (b) Security
selection and (c) Portfolio structure. Asset allocation means setting the asset mix.
Security selection involves choosing the appropriate security to meet the portfolio
targets and portfolio structure involves setting the amount of each security to be
included in the portfolio.
Investing in securities presupposes risk. A common way of reducing risk is to follow the
principle of diversification. Diversification is investing in a number of different securities
rather than concentrating in one or two securities. The diversification assures the
benefit of obtaining the anticipated return on the portfolio of securities. In a
diversified portfolio, some securities may not perform as expected but other securities
may exceed expectations with the effect that the actual results of the portfolio will be
reasonably close to the anticipated results.

1.14 MEARCHANT BANKING / INVESTMENT BANKING

A merchant bank is a financial institution primarily engaged in offering financial services
and advice to corporations and to wealthy individuals. The term can also be used to
describe the private equity activities of banking. The chief distinction between an
investment bank and a merchant bank is that a merchant bank invests its own capital in
a client company whereas an investment bank purely distributes (and trades) the
securities of that company in its capital raising role. Both merchant banks and
investment banks provide fee based corporate advisory services. Merchant banking
services are provided by the financial institutions, subsidiaries of many commercial
banks and by the private sector. The activities that merchant bankers are authorised to
perform are listed by the SEBI and include issue management, loan syndication, lease
financing, corporate advisory services, underwriting, portfolio management services and
managers or consultants to public issues.

1.15 ROLE OF PORTFOLIO MANAGER

A portfolio manager is a person who makes investment decisions using money other
people

have

placed

under

his

or

her

control.

In

other

words,

it

is

a financial career involved in investment management. They work with a team of

analysts and researchers, and are ultimately responsible for establishing an
investment strategy, selecting appropriate investments and allocating each investment
properly for a fund- or asset-management vehicle.
Portfolio managers are presented with investment ideas from internal buyside analysts and sell-side analysts from investment banks. It is their job to sift through
the relevant information and use their judgment to buy and sell securities. Throughout
each

day,

they

read

reports,

talk

to

company

managers

and

monitor industry and economic trends looking for the right company and time to invest
the portfolio's capital.

A team of analysts and researchers are ultimately responsible for establishing an

investment strategy, selecting appropriate investments and allocating each investment
properly for a fund or asset-management vehicle. Portfolio managers make decisions
about investment mix and policy, matching investments to objectives, asset allocation
for individuals and institutions, and balancing risk against performance.

A professional, who manages other people's or institution's investment portfolio with the
object of profitability, growth and risk minimization, is known as a portfolio manager.
They are expected to manage the investor's assets prudently and choose particular
investment avenues appropriate for particular times aiming at maximization of profit.

The role of portfolio manager includes the following,

1. Quantify their clients risk tolerances and return needs by taking into account his
liquidity, income, time horizon, expectations
2. Do an optimal asset allocation and choose strategy that meets the clients needs
3. Diversify the portfolio to eliminate the unsystematic risk
4. Monitor the changing market scenario, expectations, client needs etc and
rebalance accordingly
5. Lower the transaction cost by minimizing the taxes, trading turnover, and liquidity
costs.

1.16 COLLECTING THE BASIC DATA

Initially, the portfolio manager has to devote a great deal of attention to basic
consideration such as pension plans, life insurance and educational funds for children.
Usually, the basic needs must be satisfied before making an investment programme.

Every individual investor has a priority of expenditures. The following list of priority
expenditure is probably representative.
a) Food, clothing, housing and transportation.
b) Life insurance.
c) Pension plan.
d) Savings for emergency.
e) Investments.

Investments in securities can be considered only after basic family needs are satisfied.
The type of data that can be collected about the investor includes the following items:
a) Stated purpose for the portfolio,
b) Age and health of the family.
c) Marital status and responsibilities.
d) Occupation.
e) Approximate income, sources and expected duration.
f) Saving habits.
g) Property ownership.
h) Current security holdings.

If all priority expenditures have been satisfied, the portfolio manager has greater
freedom to pursue a more aggressive policy.

1.17 FORMULATING THE PORTFOLIO OBJECTIVES

The portfolio objectives can be determined by ascertaining the constraints on
portfolio. The greater the number of constraints and the more binding these
constraints, more conservative the portfolio must be. The following are the six

possible portfolio constraints which are evaluated to determine the appropriate

objectives:
1. Need for current income to meet the living expenses.
2. Need for constant income to face inflation.
3. Need for safety principal to liquidate the investments on a short notice.
4. Need for safety principal to reduce the effect of purchasing power.
5. Need for tax exemption.
6. Temperament

1.18 NEED FOR DESIGNING AN INVESTMENT PORTFOLIO

There are large numbers of savers in India. It is also surprising that the saving rate in
India is as high as 32% of GDP per annum and investment at 34% of GDP. High levels
of investment could not generate comparable rates of growth of output because of
poor investment strategy, high capital output ratios, low productivity of capital and
high rates of obsolescence of capital. Thus, the use of capital in India is wasteful and
inefficient. The portfolio managers lack the expertise and experience.
The average Indian household saves around 55% in financial form and 45% in
physical form. As per latest RBI data, savings in the financial form is held 64% in cash
and bank deposits which gives negative real returns. Around 24% of financial savings is
held in the form of Insurance, Provident Fund, Pension Funds and 5% is in Government
Securities like post office savings, NSCs, Public Provident Funds, National Savings
Schemes etc. The investment in capital market instruments is around 6% of the total
financial savings. Their objectives are capital appreciation, safety marketability, liquidity
and hedge against inflation. The investors should follow proper strategy for investment
management. Therefore, portfolio management becomes desirable. Indian markets are
developing and all the basic principles and theories of portfolio management would
apply in the market.
Since 1952, investors have better understood the dimension of attractiveness and why
the rational and professional management of portfolios includes more than the listing of

securities by the magnitude of their expected returns. The great 1952 event was the
publication of Harry Markowitz's celebrated article "Portfolio selection." Markowitz
analyzed the implications of the fact that investors although seeking high expected
returns generally wish to avoid risk. Since there is overwhelming evidence that risk
aversion characterizes most investors, especially most large-investor's rationality in
portfolio management demands that account be taken not only expected returns for a
portfolio but also of the risk that is incurred. Although the expected return on a portfolio
is directly related to the expected returns on component securities, it is impossible to
deduce a portfolio's riskiness simply by knowing the riskiness of individual securities.
The riskiness of portfolios depends not only on the attributes of individual securities,
but also on the interrelationships among securities. Therefore, it is primarily for this
reason that portfolio management is desirable.
Another reason for the need for portfolio management is that it depends upon the
preferences of individual investors. It is possible to estimate expected returns for
individual securities without regard to any investor, but it is impossible to construct on
optimal portfolio for an investor without taking personal preferences into account. The
output of security analysts is essential for portfolio management or at least portfolio
managers make use of security analysts output but this output must be analyzed
with reference to the tastes and financial circumstances of individual investors when
building portfolios.
Portfolio management is still in its infancy in India. Professional portfolio
management started in India after the setting up of public sector mutual funds in 1987.
After the success of mutual funds in portfolio management, a number of brokers and
investment consultants have become portfolio managers. Basically portfolio
management is required for proper investment decision-making regarding buy and
sell of securities. There is a need for proper money management in terms of
investment as a basket of assets so as to satisfy the asset preferences of the
investors and to reduce the risk and increase the returns on investment.

1.19 POPULARITY OF EQUITY PORTFOLIO MANAGEMENT SERVICES

Portfolio Management Service (PMS) is a professional service rendered for

management of portfolio of others with the help of experts in Investment advisory
services. It involves continuing relationship with client to manage investments with or
without discretion for the client as per his requirements. Portfolio management is an art
and requires high degree of expertise. The SEBI has set out guidelines in which the
relationship of the client and the portfolio manager and the respective rights and duties
of both have been set out. The job of the portfolio manager in managing the client's fund
either on discretionary or non-discretionary basis has become challenging and difficult
due to the multitude of obligations laid on his shoulders by the SEBI, in respect of their
operations, accounts and audit.
Thus, portfolio management has become a complex and responsible job which
requires an in-depth training and expertise. The activities of buying and selling of
securities in the primary as well as secondary market are carried out through the
mechanism of stock exchanges. There has been a substantial growth of capital market
in India during the last 25 years. There are 23 stock exchanges in India and more than
9500 listed companies. There were 56,588 capital issues and the market value of
capital was Rs.12,01,207 crores till 2004-05.
As per SEBI regulations, only those who are registered with SEBI are eligible to
operate as a portfolio manager. They have to pay required license fees. For this
purpose the eligible persons should have necessary infrastructure with professionally
qualified persons and minimum net worth of Rs.50 lakhs. The SEBI has imposed a
number of obligations and a code of conduct on the portfolio managers.

1.20 TYPES OF PORTFOLIO

When it comes to investing there are many options available to individuals. A person
can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple
products their performance needs to be tracked and strategies made to ensure the
investor reaps the most profit possible. This is where the investment portfolio comes
into play. According to Investor Awareness, it is a term that describes all investments

owned. To take this definition a little farther, an investment portfolio is a significant

aspect in diversification. Maintaining a diverse portfolio helps to mitigate loss because
the investor has not placed all of their eggs in one basket. There are different types of
investment portfolios. Perhaps the most common types individuals are exposed to are:
Conservative, Balanced and Aggressive Growth.
A portfolio is a combination of different investment assets mixed and matched for the
purpose of achieving an investor's goals. Items that are considered a part of Investors
portfolio can include any asset that they own - from real items such as art and real
estate, to equities, fixed-income instruments and their cash and equivalents. For the
purpose of this section, Investors will focus on the most liquid asset types: equities,
fixed-income securities and cash and equivalents. The asset mix they choose according
to their aims and strategy will determine the risk and expected return of their portfolio.

1. Aggressive Investment Portfolio

In general, aggressive investment strategies - those that shoot for the highest possible
return - are most appropriate for investors who, for the sake of this potential high return,
have a high risk tolerance and a longer time horizon. Aggressive portfolios generally
have a higher investment in equities. Aggressive investment portfolios are for investors
not afraid of high risk. This type of portfolio may incorporate mutual funds that aim for
high capital gain, equities, stocks, bonds, cash and maybe some commodities. In the
short-term, growth will be very small and some loss will be observed. As a result,
aggressive portfolios perform better in the long term - about five years or longer. An
actively traded aggressive portfolio will typically gain maximum returns for the investor.
The loss factor is why only individuals who are willing to take a high financial risk should
seek an aggressive investment portfolio.

An aggressive portfolio contains high growth investments that will hopefully appreciate
in value. This strategy attempts to achieve high long-term growth by investing in often
risky but profitable, short-term stocks. Under normal market conditions, the Aggressive

Growth Portfolio will invest approximately 100% of its total assets in equity securities.
The Aggressive Growth Portfolio can invest up to 100% of its total assets in equity
securities and up to 25% of its total assets in fixed income securities.

2. Balanced or Moderate Investment Portfolio

A moderately aggressive portfolio is meant for individuals with a longer time horizon and
an average risk tolerance. Investors who find these types of portfolios attractive are
seeking to balance the amount of risk and return contained within the fund. The portfolio
would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and
equivalents.

The Moderate Portfolio's primary investment objective is to seek long-term capital

appreciation and also the Moderate Portfolio seeks current income.

3. Conservative Investment Portfolio

The conservative investment strategies, which put safety at a high priority, are most
appropriate for investors who are risk averse and have a shorter time horizon.
Conservative portfolios will generally consist mainly of cash and cash equivalents, or
high-quality fixed-income instruments. The main goal of a conservative portfolio strategy
is to maintain the real value of the portfolio, or to protect the value of the portfolio

against inflation. The portfolio shown below would yield a high amount of current income
from the bonds and would also yield long-term capital growth potential from the
investment in high quality equities.

The conservative investment portfolio is geared towards preserving capital. A minimal

risk investment strategy is used. This type of portfolio is ideal for retirees who are
focused more on having assets available than a stream of income from interest. Since
the primary goal is to preserve capital, investors can dip into their principal to
supplement living expenses instead of relying on the portfolio's earned income. The
Conservative Portfolio's primary investment objective is to seek preservation of capital
and current income. The Conservative Portfolio also seeks capital appreciation. Under
normal market conditions, the Conservative Portfolio will invest approximately 65% of its
total assets in fixed income securities and cash and approximately 35% of its total
assets in equity securities. The Conservative Portfolio can invest up to 100% of its total
assets in fixed income securities and or some time up to 20% of its total assets in equity
securities.
Investors can further break down the above asset classes into subclasses, which also
have different risks and potential returns. For example, an investor might divide the
equity portion between large companies, small companies and international firms. The
bond portion might be allocated between those that are short-term and long-term,
government versus corporate debt, and so forth. More advanced investors might also
have some of the alternative assets such as options and futures in the mix. As, the
number of possible asset allocations is practically unlimited.

1.21 NEED AND IMPORTANCE OF PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in
assets and securities. It is a dynamic and flexible concept and involves regular and
systematic analysis, judgment and action. The objective of this service is to help the
unknown and investors with the expertise of professionals in investment portfolio
management. It involves construction of a portfolio based upon the investors objectives,
constraints, preferences for risk and returns and tax liability. The portfolio is reviewed
and adjusted from time to time in tune with the market conditions. The evaluation of
portfolio is to be done in terms of targets set for risk and returns. The changes in the
portfolio are to be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus funds in hand among a variety of
financial assets open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented more go towards
the assembly of proper combination of individual securities to form investment portfolio.
A combination of securities held together will give a beneficial result if they grouped in a
manner to secure higher returns after taking into consideration the risk elements. The
modern theory is the view that by diversification risk can be reduced. Diversification can
be made by the investor either by having a large number of shares of companies in
different regions, in different industries or those producing different types of product
lines. Modern theory believes in the perspective of combination of securities under
constraints of risk and returns.

1.22 ROLE OF FINANCIAL PLANNER AND INVESTMENT ADVISOR

Portfolio manager, Investment advisor, Investment consultant, Tax planner, Tax
consultant, Financial planner, Financial advisor, Certified Financial Planner (CFP) are
the different names given by investors to investment managers. These people are

playing very important role in advising and managing investors investment portfolio in
Mumbai.
The Role played by Financial Planner and Investment Advisor in creating investment
portfolio of investors are as follows:

1.22.1

FINANCIAL PLANNER

MEANING:
A Financial Planner advises individuals on setting personal financial goals and
strategies. Many work independently or in small firms, though larger financial services
firms either are adding Financial Planners to their staffs or are insisting that their
Financial Advisors (or Financial Consultants) also become certified as Financial
Planners.

Duties and Responsibilities:

1. A Financial Planner helps clients create personal budgets, control expenditures,
set goals for saving and implement strategies for accumulating wealth.
2. They may have working relationships with Financial Advisors, Investment
Managers and/or Mutual Fund Companies, utilizing these specialists for the
actual investment of their clients funds.
3. The job requires keeping current about developments in financial products, tax
laws and strategies for personal financial management, particularly with respect
to retirement plans and real estates.
4. Success also requires sales ability, both in the acquisition of new clients and in
the development of new ideas to improve the financial situation of existing
clients.

1.22.2

INVESTMENT ADVISOR

As defined by the Investment Advisors Act of 1940, any person or group that makes
investment recommendations or conducts securities analysis in return for a fee, whether
through direct management of client assets or via written publications.
An investment advisor who has sufficient assets to be registered with the SEBI is known
as a Registered Investment Advisor, or Registered Investment Advisor (RIA).
Investment advisors are prohibited from disseminating advice known to be deceitful or
fraudulent and from acting as a principal on their own accounts by buying and selling
securities between themselves and a client without prior written consent.
Like financial planners, investment advisors must understand clients financial goals;
knowing when they will need to use their money, and what they will be using it for.
To give good advice an investment advisor must gather personal and financial data
about client (Investor). They must understand investor tolerance for risk and their
expected rate of return on their investments. An investment advisor will use this data to
analyze investors existing investments, and make recommendations about what they
should do going forward.
Most investment advisors charge either a flat fee for their services or a percentage of
the assets being managed. In most cases, there are very limited conflicts of interest
between investment advisors and their clients, because the advisor will only earn more
if the clients' asset base grows as a result of the advisor's recommendations and
securities selection.
Mr. N. J. Yasaswy has advised, Never invest your money without seeking professional
and objective advice from competent and experienced investment consultants.
Remember that like self-medication, without proper analysis and advice can often prove
to be harmful.
To invest successfully over a lifetime does not require a stratospheric IQ, unusual
business insights, or inside information. Whats needed is a sound intellectual

framework for making a decision and the ability to keep emotions from corroding that
framework

1.22.3

Certified Financial Planner (CFP)

The Certified Financial Planner (CFP) designation is a professional certification mark

for financial planners conferred by the Certified Financial Planner Board of Standards
(CFP Board) in the United States, Financial Planners Standards Council in Canada
and 18 other organizations affiliated with Financial Planning Standards Board (FPSB) ,
the international owner of the CFP mark outside of the United States.

CFP or Certified Financial Planner Certification program in India are offered mainly by
Financial Planning Standards Board India. Its a certification after doing which person
will be a certified to be a Financial Planner and take different roles in the area of
financial planning.

1.23 FINANCIAL PLANNING PROCESS

Financial planning is must for every household. Financial planning goes beyond
savings. It is an investment with a purpose. It is a plan to save and spend future income.
It should be carefully budgeted. Financial Planning is the process of meeting investors
life goals through proper management of their finances. Life goals can include buying a
house, saving for their childs higher education or planning for retirement.
In Todays world it was found that people living beyond their means, having credit card
debt, making risky investments and doing things that are irresponsible and against the
basic principles of financial planning. Further the proliferation of new and often complex

financial products demands more financial expertise. Also turbulent conditions and
changing tax laws compound the need for adequate financial planning. Thus it has
become inevitable for all to get into financial planning and understanding financial
products.
Financial planning envisages both short term and long term savings. A portion of the
savings is invested in certain assets. There are various investment options in the form
of assets: bank deposits, government saving schemes, shares, mutual funds,
insurance, commodities, bonds, debentures, company fixed deposits etc.

(SOURCE : SEBI, Financial Education for Middle Income Group)

Financial planning is not something that happens by itself. It requires focus and
discipline. It is a six step process that helps investor takes a big picture look at where
investor is and where investor want to be financially.

1.24 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Securities and Exchange Board of India (SEBI) has been established with the prime
mandate to protect the interest of investors in securities. It is also mandated to promote
the development of, and to regulate the securities market.
The securities market enables capital formation in the economy and enhances wealth of
investors who make the right choices. The investor confidence is the key prerequisite
for the emergence of a vibrant and deep capital market. The role of regulator in creating
and enhancing investor confidence is, therefore, paramount.
Accordingly, Securities and Exchange Board of India (SEBI) was set up by an Act of
Parliament of India in April, 1992 with a mandate to
a. Protect the interest of investors
b. Promote the development of and
c. Regulate the securities market

1) Market Regulation:

SEBI prescribes the conditions for issuer companies to raise capital from the pubic so
as to protect the interest of the suppliers of capital (investors). The extensive
disclosures prescribed for issuers facilitate informed investment decision making by
investors while simultaneously ensuring quality of the issuer. Further, it has prescribed
norms for such corporate on ongoing basis and also during their restructuring (like
substantial acquisition, buy back and delisting of shares) to safeguard the interest of
investors.

To ensure fair and high standards of service to investors, SEBI allows only fit and
proper entities to operate in the capital markets as intermediaries. In this regard, it has
prescribed detailed and uniform norms of their registration. Further, to ensure market
integrity, it has prescribed norms for fair market practices including prohibiting
fraudulent and unfair trade practices and insider trading. Detailed norms for
safeguarding the interest of investors in secondary markets have also been prescribed.
SEBI also prescribes conditions for operation of collective investor schemes, including
Mutual Funds.

2) Market Development:

On an ongoing basis, SEBI initiates measures to widen and deepen the securities
markets by bringing changes in market micro and macrostructure. The major market
development measures undertaken by SEBI include shift from the non transparent open
out cry system to the transparent screen based on line trading system, elimination of
problems of physical certificates by shifting to electronic mode (Demat), implementing
robust risk management framework in stock market trading etc. In the recent past SEBI
has initiated ASBA (application supported by blocked amount) to eliminate problems
pertaining to refunds in public issues.

SEBIs major policy decisions are formulated through a consultative process involving
expert committees with representation from industry, academia, investors associations.
Further, public comments are invited before implementation of major changes,
rendering the whole process participative.

3) Investor Protection:

The above mentioned regulatory framework and the market development measures of
SEBI are invariably geared towards protecting the interest of investors. Besides, SEBI
also has a comprehensive mechanism to facilitate redressal of investors grievances.
Further, in keeping with its belief that an informed investor is a protected investor, SEBI

promotes education and awareness of investors. Moreover, mechanisms for dispute

redressal (arbitration at stock exchanges) and to compensate investors have also been
provided.

4) Enforcement:

SEBI ascertains compliance to its norms by carrying out inspections of registered

intermediaries, investigations and while processing of documents filed with it, including
investors complaints. SEBI is vested with the power of civil court to call for information
and records, to issue summons, to inspect and to investigate entities associated with
securities markets. If breach of norms is established, SEBI suspends or cancels the
license granted to intermediaries. Besides, SEBI issues prohibitive and cease and
desist orders against intermediaries and non intermediaries and also imposes monetary
penalties through adjudication proceedings.
Apart from these civil proceedings, SEBI also launches criminal proceedings against
entities for breach of norms. All such orders of SEBI are available in the website
(www.sebi.gov.in), serving as a warning to potential defaulter.