Risky Risk
Risky Risk
Risky Risk
Savings form an important part of the economy of any nation. With savings
are invested in many forms of investment options available, the money acts
as the driver for growth of the country. Indian financial scene too presents a
plethora of avenues to the investors.
We, Indians work hard for our entire life to earn our living. Out of that we
save some part in a hope that it will be used for our future to make it happy
and reliable. These savings are generally invested with a hope to get good
returns from it. So, this invested money earns us profit in a regular course.
These profit margins depend upon the different investment options available
in the market. Below are mentioned some of the basic and most opted for
investment options to suit all financial situations.
Investment options:
We can divide investment options in two categories. They are mainly, real
investments and financial investments. Real investments include investments
made to buy house, car or machinery which are real assets. Financial
investments include investing funds in buying some shares, mutual funds or
bonds which are financial assets.
INVESTMENT
OPTIONS
There are many investment options available for the people in the market,
but there are mainly five investment options, which are considered to be as
most popular and most effective investment options available in the current
market scenario. In general, almost 95-98% people do invest in these, since
the Expected Rate of Return is much higher than any other investment
options, irrespective of the amount of risk is very high in some of the cases.
These investment options are:
FIXED DEPOSITS:
This investment option is most popular and safest option available in the
market. With almost every working people invest in fixed deposits; this
investment option leads the chart of four investment options because of its
safety and popularity. Though the amount of return is much lesser than the
other three options, this option heads the table as it has almost no risk of
losing the invested amount. Also, it is the oldest among the other three, so
the trust factor of people is very high.
There are mainly three types of fixed deposits available in the market,
namely, viz.
Considered as the safest of all options, banks have been the roots of the
financial systems in India. Promoted as the means of social development,
banks in India have indeed played an important role in not only urban
areas, but also in rural upliftment. For an ordinary person though, banks
have acted as the safest avenue wherein a person deposits money and
earns interest on it. The two main modes of investment in banks, savings
accounts and fixed deposits have been effectively used by one and all.
On the other hand the Private Sector Banks in India is witnessing immense
progress. They are leaders in Internet banking, mobile banking, phone
banking, ATMs. On the other hand the Public Sector Banks are still facing the
problem of unhappy employees. There has been a decrease of 20 percent in
the employee strength of the private sector in the wake of the Voluntary
Retirement Schemes (VRS).
Just like banks, post offices in India have a wide network. Spread across the
nation, they offer financial assistance as well as serving the basic
requirements of communication. Among all saving options, Post office
schemes have been offering the highest rates. Added to it is the fact that the
investments are safe with the department being a Government of India
entity. So the two basic and most sought features, those of return safety and
quantum of returns were being handsomely taken care of.
Though certainly current market position is not the most efficient systems in
terms of service standards and liquidity; these have still managed to attract
the attention of small, retail investors. However with the government
investing its intention of reducing the interest rates in small savings options,
this avenue is expected to lose some of the investors. Public Provident Funds
act as options to save for the post retirement period for most people and
have been considered good option largely due to the fact that returns were
higher than most other options and also helped people gain from tax benefits
under various sections. This option too is likely to lose some of its sheen on
account of reduction in the rates offered.
Another oft-used route to invest has been the fixed deposit schemes floated
by companies. Companies have used fixed deposit schemes as a means of
mobilizing funds for their options and have paid interest on them. The safer a
company is rated, the lesser the return offered has been the thumb rule.
Firstly, of all the danger of financial positions of the company not being
understood by the investor lurks. The investors rely on intermediaries who
more often than not, don’t reveal the entire truth.
The Indian Stock Market is also the other name for Indian Equity Market or
Indian Share Market. The forces of the market depend on the monsoons,
global funding flowing into equities in the market and the performance of
various companies. The market of equities is transacted on the basis of two
major stock indices, National Stock Exchange of India Ltd. (NSE) and The
Bombay Stock Exchange (BSE), the trading being carried on in a
dematerialized form. The physical stocks are in liquid form and cannot be
sold by the investors in any market.
Indian Equity Market at present is a lucrative field for the investors and
investing in Indian stocks are profitable for not only the long and medium-
term investors, but also the position traders, short-term swing traders and
also very short term intra-day traders. In terms of market capitalization, there
are over 2500 companies in the BSE chart list with the Reliance Industries
Limited at the top. The SENSEX today has rose from 1000 levels to 8000
levels providing a profitable business to all those who had been investing in
the Indian Equity Market. There are about 22 stock exchanges in India which
regulates the market trends of different stocks. Generally the bigger
companies are listed with the NSE and the BSE, but there is the OTCEI or the
Over the Counter Exchange of India, which lists the medium and small sized
companies.
In the Indian market scenario, the large FMCG companies reached the top
line with a double-digit growth, with their shares being attractive for investing
in the Indian stock market. Such companies like the Tata Tea, Britannia, to
name a few, have been providing a bustling business for the Indian share
market. Other leading houses offering equally beneficial stocks for investing
in Indian Equity Market, of the SENSEX chart are the two-wheeler and three-
wheeler maker Bajaj Auto and second largest software exporter Infosys
Technologies.
Now apart from all these, the first question that comes in our mind is,
Simply put, you want to invest in order to create wealth. While investing is
relatively painless, its rewards are plentiful. To understand why you need to
invest, you need to realize that you lose when you just save and do not
invest. That is because the value of the rupee decreases every year due to
inflation. Historically shares have outperformed all the other investment
instruments and given the maximum returns in the long run. In the twenty-
five year period of 1980-2005 while the other instruments have barely
managed to generate returns at a rate higher than the inflation rate (7.10%),
on an average shares have given returns of about 17% in a year and that
does not even take into account the dividend income from them. Were we to
factor in the dividend income as well, the shares would have given even
higher returns during the same period.
Tax advantages: shares appear as the best investment option if you also
consider the unbeatable tax benefits that they offer. First, the dividend
income is tax-free in the hands of investors. Second, you are required to pay
only a 10% short term capital gains tax on the profits made from investments
in shares, if you book your profits within a year of making the purchase.
Third, you don't need to pay any long-term capital gains tax on the profits if
you sell the shares after holding them for a period of one year. The capital
gains tax rate is much higher for other investment instruments: a 30% short-
term capital gains tax (assuming that you fall in the 30% tax bracket) and a
10% long-term capital gains tax.
Easy liquidity: shares can also be made liquid anytime from anywhere (on
sharekhan.com you can sell a share at the click of a mouse from anywhere in
the world) and the gains can be realized in just two working days.
Considering the high returns, the tax advantages and the highly liquid nature,
shares are the best investment option to create wealth.
A. Appreciation in share prices: You buy shares with the belief that their
price will increase and that when this happens you will be able to sell off your
shares and earn profit. For example, if you bought a share for Rs100 three
years ago and it is Rs500 today, then you have earned Rs400 in three years.
A. Capital gains tax: If you purchase a share and sell it at a price higher
than the purchase price and if this sale is within a year of the purchase, then
a 10% capital gains tax is levied on the profit that you make. For example, if
you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July
1, 2005, then you have to pay a tax of 10% on the Rs50 profit that you make.
If you sell after a year of purchase, there is no tax on the long-term gains.
Set of risks that deals with a company and its sector are referred to as
company specific risk.
Examples of company specific risk: bad management, bad marketing
strategies, sector disturbances that have an impact on industry etc.
External factors (economic, global factors) that affect the market as a whole
are referred to as market risk.
Examples of market risk: political instability, high inflation, rupee
depreciation, rising interest rates, global incidents like wars and disasters
that throttle the nation's economy etc.
How people can minimize their risk and maximize their return?
Buy when stocks are falling, sell when these are rising. This works well when
you are a long-term investor and there is an extended bear or Bull Run. Don't
try to second guess or predict that the market will fall today and rise
tomorrow. Even seasoned investors cannot do that!
7. Think portfolio
Don't put all your earnings in a single stock. Try to have a diverse portfolio of
stocks. This way even if one stock doesn't do well, you are still well protected.
Also invest across sectors, since any problem in one sector would affect all
stocks in the sector. As a thumb rule, if you have investments of up to Rs50,
000 invest in two to three stocks. For about Rs150, 000 invest in three to five
stocks, for around Rs500, 000 have five to seven stocks and around ten
stocks for higher amounts.
9. Be level-headed
Invest wisely, don't get swayed by rumors and allow Sharekhan to be your
guide at all times. Investment success won't happen overnight, so avoid
overreacting to short term market swings.
Mutual funds:
Mutual Funds are essentially investment vehicles where people with similar
investment objective come together to pool their money and then invest
accordingly. Each unit of any scheme represents the proportion of pool
owned by the unit holder (investor).
Mutual Funds in India are financial instruments. These funds are collective
investments which gather money from different investors to invest in stocks,
short-term money market financial instruments, bonds and other securities
and distribute the proceeds as dividends. The Mutual Funds in India are
handled by Fund Managers, also referred as the portfolio managers. The
Securities Exchange Board of India regulates the Mutual Funds In India. The
share value of the Mutual Funds in India is known as net asset value per
share (NAV). The NAV is calculated on the total amount of the Mutual Funds
in India, by dividing it with the number of shares issued and outstanding
shares on daily basis.
Like most developed and developing countries the mutual fund cult has been
catching on in India. The important reasons for this interesting occurrence are:
• Mutual funds make it easy and less costly for investors to satisfy their need for
capital growth, income and/or income preservation.
• Mutual fund brings the benefits of diversification and money management to the
individual investor, providing an opportunity for financial success that was once
available only to a select few.
Understanding Mutual funds is easy as it's such a straightforward concept. A mutual fund is a
company that pools the money of many investors, its shareholders to invest in a variety of
different securities.
Investments may be in stocks, bonds, money market securities or some combination of these.
For the individual investor, mutual funds propose the benefit of having someone else manage
your investments and diversify your money over many different securities that may not be
available or affordable to you otherwise. A mutual fund, by its very nature, is diversified -- its
assets are invested in many different securities. Beyond that, there are many different types of
mutual funds with different objectives and levels of growth potential, furthering your odds to
diversify.
Benefits of
mutual funds:
One of the primary benefits of mutual funds is that an investor has access to
professional management. A good investment manager is certainly worth the fees
you will pay. Good mutual fund managers with an excellent research team can do a
better job of monitoring the companies they have chosen to invest in than you can,
unless you have time to spend on researching the companies you select for your
portfolio. That is because Mutual funds hire full-time, high-level investment
professionals. Funds can afford to do so as they manage large pools of money. The
managers have real-time access to crucial market information and are able to
execute trades on the largest and most cost-effective scale. When you buy a mutual
fund, the primary asset you are buying is the manager, who will be controlling
which assets are chosen to meet the funds' stated investment objectives.
Diversification :
A crucial element in investing is asset allocation. It plays a very big part in the
success of any portfolio. However, small investors do not have enough money to
properly allocate their assets. By pooling your funds with others, you can quickly
benefit from greater diversification. Mutual funds invest in a broad range of
securities. This limits investment risk by reducing the effect of a possible decline in
the value of any one security. Mutual fund unit-holders can benefit from
diversification techniques usually available only to investors wealthy enough to buy
significant positions in a wide variety of securities.
Low Cost :
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000,
and sometimes less.
Investing in mutual funds has its own convenience. While you own just one security
rather than many, you still enjoy the benefits of a diversified portfolio and a wide
range of services. Fund managers decide what securities to trade collect the
interest payments and see that your dividends on portfolio securities are received
and your rights exercised. It also uses the services of a high quality custodian and
registrar. Another big advantage is that you can move your funds easily from one
fund to another within a mutual fund family.
Liquidity :
In open-ended schemes, you can get your money back promptly at net asset value
related prices.
Transparency :
Regulations for mutual funds have made the industry very transparent. You can
track the investments that have been made on your behalf and the specific
investments made by the mutual fund scheme to see where your money is going. In
addition to this, you get regular information on the value of your investment.
Variety :
There is no shortage of variety when investing in mutual funds. You can find a
mutual fund that matches just about any investing strategy you select. There are
funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks
and bonds. The greatest challenge can be sorting through the variety and picking
the best for you.
Having understood the basics of mutual funds the next step is to build a successful
investment portfolio. Before you can begin to build a portfolio, one should
understand some other elements of mutual fund investing and how they can affect
the potential value of your investments over the years. The first thing that has to be
kept in mind is that when you invest in mutual funds, there is no guarantee that you
will end up with more money when you withdraw your investment than what you
started out with.
That is the potential of loss is always there. Even so, the opportunity for investment
growth that is possible through investments in mutual funds far exceeds that
concern for most investors. Here's why.
At the cornerstone of investing is the basic principal that the greater the risk you
take, the greater the potential reward. Risk then, refers to the volatility -- the up
and down activity in the markets and individual issues that occurs constantly over
time. This volatility can be caused by a number of factors -- interest rate changes,
inflation or general economic conditions. It is this variability, uncertainty and
potential for loss, that causes investors to worry. We all fear the possibility that a
stock we invest in will fall substantially. Different types of mutual funds have
different levels of volatility or potential price change, and those with the greater
chance of losing value are also the funds that can produce the greater returns for
you over time. You might find it helpful to remember that all financial investments
will fluctuate. There are very few perfectly safe havens and those simply don't pay
enough to beat inflation over the long run.
Besides these important features, mutual funds also offer several other key traits.
Important among them are:
Well Regulated
Transparency
Flexible, Affordable and a Low Cost affair
• Every mutual fund shall along with the offer document of each scheme pay filing
fees.
• The offer document shall contain disclosures which are adequate in order to
enable the investors to make informed investment decision including the disclosure
on maximum investments proposed to be made by the scheme in the listed
securities of the group companies of the sponsor A close-ended scheme shall be
fully redeemed at the end of the maturity period. “Unless a majority of the unit
holders otherwise decide for its rollover by passing a resolution”.
Restrictions on Investments:
• A mutual fund scheme shall not invest more than 15% of its NAV in debt
instrument issued by a single issuer, which are rated not below investment grade by
a credit rating agency authorized to carry out such activity under the Act. Such
investment limit may be extended to 20% of the NAV of the scheme with the prior
approval of the Board of Trustees and the Board of Asset Management Company.
• A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such instruments
shall not exceed 25% of the NAV of the scheme. All such investments shall be made
with the prior approval of the Board of Trustees and the Board of Asset
Management Company.
• No mutual fund under all its schemes should own more than ten percent of any
company’s paid up capital carrying voting rights.
• Such transfers are done at the prevailing market price for quoted instruments on
spot basis. The securities so transferred shall be in conformity with the investment
objective of the scheme to which such transfer has been made.
INSURANCE:
Introduction to insurance:
The business of insurance is related to the protection of the economic values of the
assets. Every asset has a value. The asset would have been created through the
efforts of the owner. The asset is valuable to the owner, because he expects some
benefits from it. It is a benefit because it meets some of his needs. But every asset
is expected to last for a certain period of time during which it will provide the
benefits. After that the benefit may not be available. The owner is aware of this and
he can so manage his affairs that by the end of that period or life-time, a substitute
made available. Thus he makes sure that the benefit isn’t lost. Here comes the
thought of insurance.
We must remember that calculations of risk differ with these two returns. Historical
returns are based on the previously recorded data whereas anticipated returns are future
projections about “would be realized returns” based on certain assumptions, trends or
expectations.
Risk, as it stands, is the quantified value of the uncertainty in the returns (Anticipated
return).It pertains to the probability of earning a return less than that expected. So greater
is the chance of a return far below the expected return, greater is the risk.
A second school of thought defines risk as the variance (fluctuation, deviation) in the
return from a mean, stated, expected or most likely return. Hence, as long as your returns
in future (anticipated) are distant from your measurement, you are in a more risky zone.
QUESTIONAIRE
Do u hv a demat a/c
What is ur basic priority – high risk n high returns “or” low risk n low returns