Investment Avenues

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Meaning of Investment:

Meaning of Investment The employment of funds with the aim of getting return on it. Parting with one’s own money to be used by another person, for productive activity. According to William F. Sharpe, Investment is sacrifice of current dollar for future dollars.” The art of investment is to see that the return is maximised with the minimum of risks.

Accounting Standard 13 (w.r.t. Investment):

Accounting Standard 13 (w.r.t. Investment) ‘AS’ are the standards issued by the Institute of Chartered Accountants of India, prescribed by the Central Govt in consultation with the National Advisory Committee on ‘AS’. Current ‘I’ & long term ‘I’ be disclosed distinctly with the further sub-classification into govt. or trust securities, shares, debentures or bonds, investment properties etc. ‘I’ properties should be accounted as long term investments. Cost of investment to include acquisition charges including brokerage, fees & duties..

Accounting Standard 13 (w.r.t. Investment):

Accounting Standard 13 (w.r.t. Investment) Current investments be carried at lower cost and fair value either on individual investment basis or by category of investment but not on global basis. Long term investments be carried at cost. Provision for decline to be made for each investment individually. If any investment is acquired by issue of shares/ securities or in exchange of an asset, the cost of the investment is the fair value of the securities issued or the assets given up.

Accounting Standard 13 (w.r.t. Investment):

Accounting Standard 13 (w.r.t. Investment) Acquisition cost may be determined considering the fair value of the investment acquired. Changes in the carrying amount and the difference between carrying amount and the net proceeds on disposal be charged or credited to the P & L A/c. Disclosure is required for the accounting policy adopted, profit/ loss on disposal & changes in carrying amount of such investment. Significant restrictions on right of ownership, reliability of investment, remittance of income and proceeds of disposal thereof be disclosed.

Different Concepts of Investment:

Different Concepts of Investment Economic Investment : Indicates additions to the capital stock of the society. Investment implies the formation of new & productive capital in the form of new construction & producer’s durable instrument such as Plant & Machinery. For eg. Inventories & Human Capital. Investment in economic terms means an increase in building, equipment & inventory.

Different Concepts of Investment:

Different Concepts of Investment 2. Financial Investment : Allocation of monetary resources to assets that are expected to yield some gain or return over a given period of time. Involves contract written on pieces of paper such as shares and debentures. Indicates exchange of financial claims such as shares, bonds, real estate etc. Investment decisions are primarily concerned with uses or budgeting of money. Financial decisions are concerned with the sources of money.

Types of Investment:

Types of Investment Shares Debentures & Govt. Bonds Money Market Instruments Public Deposits Bank Deposits Post Office Savings HDFC Schemes/ Housing Bank Schemes Mutual Fund Schemes Life Insurance Schemes Public Provident Fund Gold Silver Real Estate

Types of Investment:

Types of Investment Shares : A share in the share capital of a company registered under Indian Companies Act 1956. The share K of a company is divided into a no. of equal parts & each of such part is known as a ‘share’. A Public Ltd. Co. has to complete three stages: Registration Raising K Commencement of Business

Types of Investment:

Types of Investment Shares : The first public issue is known as Initial Public Offering (IPO). The shares can be issued at par, premium or discount. Each share has a Face Value of Rs. 1, 2, 5 or 10. The shares can be sold in stock market & money can be collected within 3 to 4 days. Issue of shares is along the lines of the prospectus approved by SEBI. These shares are listed with the SE 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.

Types of Investment:

Types of Investment Shares : There are two types of shares: a. Equity Shares (Stock) b. Preference Shares The preference shares may be cumulative, participating & convertible. Shares are issued in Demat Form, which is compulsory when shares are issued through Book Building Process. Book Building Process is a method of public issue of shares by a company in which price is determined by the investors subject to a price band or range of prices given by the company

Types of Investment:

Types of Investment Shares : Shares of a known & financially sound companies (Blue Chip Companies) are called Blue Chip Shares. Blue Chip Companies are stable, safe, secure, profitable, provide attractive rate of return, carry goodwill & market reputation. For Eg. Reliance, TATA Companies, L & T Companies related to IT. Investment in shares is more risky since the market is more volatile. Investment in shares is not a tax saving investment.

Types of Investment:

Types of Investment 2. Debentures & Govt. 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 debenture holder becomes the creditor of the company, who gets the rate of return which is fixed at the time of issue. Bonds are issued by the Govt companies & the debentures are issued by the Private sector companies. Bonds may be tax saving but debentures are not tax saving investments.

Types of Investment:

Types of Investment 2. Debentures & Govt. Bonds : The return on debenture is reasonable & stable as the prices of it are not much volatile. The debentures are listed on Stock Exchanges & can be traded in Stock market. The debentures are further divided into following two types: a) Redeemable or Irredeemable b) Convertible (partly or fully) or Non-Convertible If a debenture is convertible into shares at maturity, it is called convertible debenture.

Types of Investment:

Types of Investment 3. Public Deposits (Company Fixed Deposit) : The companies are allowed to accept deposits from the public under Indian Companies Act, 1956. However can not accept the deposits for a period of less than 6 months & more than 36 months. Companies were offering attractive interest rates at present it is 9%-12 %. On maturity, the depositor has to return the deposit receipt to the company & the company pays back the deposit amount. The depositor can renew his deposit for further period of 1-3 years at his option.

Types of Investment:

Types of Investment 3. Public Deposits (Company Fixed Deposit) : 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 lump sum on maturity. Companies appoint managers (collecting agents), usually reputed share brokers to their fixed deposit schemes, who help companies in collecting the deposits & also look after the administrative work in connection with such deposits. Advantages: a) available easily & quickly b) enable the companies to trade on equity & pay higher dividends on equity shares

Types of Investment:

Types of Investment 3. Public Deposits (Company Fixed Deposit) : c) the rate of interest which is paid regularly is higher than the interest rate offered by the banks. d) the formalities to be completed for depositing money are easy & simple. e) the risk involved is limited particularly when money is deposited with a reputed company.

Types of Investment:

Types of Investment 4. Post Office Deposits : Post office operates as a FI. It collets small savings of the public through savings bank A/c facility. Also collects time deposits & govt loans. National Saving Certificates are also sold through post offices. New schemes are regularly introduced such as recurring deposits, monthly income scheme, PPF & so on. Small investors use postal saving facilities for investing their savings/ surplus money for short/ long term due to stable return, security, safety of investment & loan facility against postal deposits.

Types of Investment:

Types of Investment 4. Post Office Deposits : Postal saving schemes include the following: Saving Bank A/c : - No fixed period - Simple Interest 3.5% w.e.f. March 1, 2003. - Maximum deposit upto Rs. 50,000 individual A/c & Rs. 1 lakh in Joint A/c. - Interest earned is totally tax free. b) Recurring Deposit A/c : - period: 5 years - Interest rate 7.5% w.e.f. March 1, 2003. - The interest is compounded on quarterly basis.

Types of Investment:

Types of Investment 4. Post Office Deposits : Postal saving schemes include the following: c) Monthly Income Scheme : - Period: 6 years. - Interest rate 8% p.a. payable monthly. - Bonus @ 10% p.a. at maturity w.e.f. March 1, 2003. - No tax deduction at source. d) Time Deposits : - period: 1 to 5 years. - Interest rate is higher due to long maturity but varies from time to time. - No maximum limit of deposit on time.

Types of Investment:

Types of Investment 4. Post Office Deposits : e) Public Provident Fund : - Introduced in 1969, it is an attractive tax sheltered investment scheme as a provision for old age or expenses such as marriage of a son/ daughter, purchase of flat etc. - A/c can be opened in post office/ any branch of the SBI or its subsidiaries/ at specified branches of nationalised banks. - A/c is for a period of 15 years but can be extended at the desire of the depositor - Nomination facility is available - the depositor is expected to make a minimum deposit of Rs. 100 every year.

Types of Investment:

Types of Investment 4. Post Office Deposits : e) Public Provident Fund : - A compound interest of 8% p.a. is paid w.e.f. March 1, 2003. - A/c holder is eligible for on withdrawal per F.Y. after 5 years from the end of the year in which the subscription is made. It is limited to 50% of the balance at the end of the fourth year. - On maturity, the credit balance in PPF A/c can be withdrawn or the subscriber can extend A/c for 5 years more.

Types of Investment:

Types of Investment 5. Money Market : It is a market for short-term funds. It is regulated by RBI The no. of players in the market are limited. Money Market Instruments: i. Treasury Bills: These are promissory notes issued at discount & for a fixed period. Minimum amount of face value is Rs. 1 lakh & in multiples thereof. The maturity period is 91 days or 364 days. ii. Certificate of Deposits: It was introduced in July 1989. the maturity period is not less than 15 days & not more than 12 months. Minimum amount of face value is Rs. 1 lakh & in multiples thereof. From July 30, 2002 CDs can be issued in Demat form only.

Types of Investment:

Types of Investment 5. Money Market : iii. Commercial Papers: It was introduced in 1990. The maturity period is minimum15 days & maximum 1 year. Minimum amount of face value is Rs. 5 lakhs & in multiples thereof. A company is eligible to issue CP if: - its tangible net worth is at least Rs. 4 crores. - it has been sanctioned working capital limit by banks or All India Financial Institutions. - minimum credit rating from the rating agency is P2 or its equivalent. iv. Repurchase Options v. Money Market Mutual Funds vi. Factoring

Types of Investment:

Types of Investment 6. Mutual Funds : It mobilizes the savings of the general public & invest them in Stock Market securities. The MFs in India are registered as a Trusts under Indian Trust Act. UTI had virtual monopoly in the field of MF from 1964-1987. After 1987, SBI, Bank of India & other banks started their MF. After 1991, RBI/ SEBI had given recognition to many FIS for MFs such as Kothari Pioneer Fund, CRB Capital Market etc. More than 63 MFs are operating in India. It is a popular investment due to low risk & high returns.

Types of Investment:

Types of Investment 6. Mutual Funds : They provide close-ended as well as open-ended schemes. There are 4 schemes by which MFs collect money from the investors: a. Growth Schemes b. Income Schemes c. Balanced Schemes d. Tax Saving Schemes

Types of Investment:

Types of Investment 6. Life Insurance Policies : It was introduced in India in 1956 & run by Life Insurance Corporation of India. It protects the family members through financial support in case of death of policyholder. It serves as a provision for old age (maintenance, medical expenses etc.) Provides loan facility from banks. LIC gives Bonus to the policyholder on yearly basis which adds to the maturity value of policy. It gives tax benefit. The return on investment is reasonably low i.e. 6% p.a. due to risk covered & tax incentive. The amount of premium paid is exempted for taxable income under section 80C of the Income tax Act.

Types of Investment:

Types of Investment 7. Real Estate Investment : It includes properties like building, industrial land, plantations, farm houses, agricultural land near cities, flats etc.. It is an attractive investment generating higher return over short period of time. The investment in residential house is tax saving investment since the principal amount repayment during a year is exempted from income tax upto an amount of Rs. 1,00,000. The investment in real estate is risky & has low liquidity.

Types of Investment:

Types of Investment 7. Investment in Gold & Silver : Gold & Silver are useful as a store of value. The investment is highly liquid as it can be sold any time. The return on investment is increasing due to continuous increase in their market price. The investment in Gold & Silver is safe, secure & long term in nature. The investment in Gold & Silver is risky due to chances of theft. The import of gold is not free. There is no tax saving on this investment.

Investment Criteria by Individuals:

Investment Criteria by Individuals Every investor has a certain specific objectives such as: Safety & security of the funds invested Profitability through interest, dividend & capital appreciation Liquidity i.e. convertibility into cash as & when required. Personal objectives such as provision for old age & sickness; provision for house construction; provision for education & marriage of children and provision for dependents including wife, parents or physically handicapped member of the family.

Investment Criteria by Individuals:

Investment Criteria by Individuals Period of Investment : The period may be short, medium or long. Return or the rate of interest is normally in case of longer term investment & vice-versa. The period of investment relates to liquidity. An investor has to decide when he needs money back & adjust the period accordingly.

Investment Criteria by Individuals:

Investment Criteria by Individuals 2. Risk in Investment : The risk in investment may be related to the non-payment of principal amount or interest thereon. It also involves liquidity risk, inflation risk, market risk, business risk, political risk etc. The risk is more if the period of investment is longer & vice-versa. The risk is less in case of debt instrument like debenture while more in case of ownership instruments such as equity share. The objective of an investor should be to minimise risk & to maximise the return out of the investment made.

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