Investment Alternatives

Investments alternatives

The investment alternatives ranging from financial securities to traditional non-security investments. The financial security may be negotiable or non-negotiable.

NEGOTIABLE SECURITIES

The negotiable securities are financial securities that are transferable. The negotiable securities may yield variable income or fixed income. Securities like equity shares are variable income securities. Bonds, debentures, Indra Vikas Patras, Kisan Vikas Patras, Government securities and money market securities yield a fixed income.

Variable Income Securities

Equity shares- The equity shares attract the interest of many. The stock market classifies shares into Growth shares, Income shares, Defensive shares, Cyclical shares
and Speculative shares.

i) Growth shares The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. For example, the list of major gainers for 1999 is dominated by software sector stocks. The HCL and Infosystems share prices increased sharply.

ii) Income shares These stocks belong to companies that have comparatively stable operations and limited growth" opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares.

iii) Defensive shares Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy.

iv) Cyclical shares The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles.

v) Speculative shares Shares that have lot of speculative trading in them are referred to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the traders.

The stocks, which fall under one category in one period may switch over to another categury in another period. The classification should not be considered rigid. For example, growth shares may be speculative shares.

Fixed Income Securities

a) Preference shares A detailed description of the preference shares is given in chapter 1. Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed Rs.150 Cr. worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also make it attractive. The biggest advantage is the tax-exempt status of the preference share's dividend.
b) Debentures Corporate debentures are an option available to the investors who are willing to sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. If the instruments were actively traded in the secondary market, it would have perhaps changed hands at a considerable premium, thereby lowering the
yield on par with the present interest rate. These reasons contribute towards high coupon rates on debentures.

c) Bonds Bonds are similar to the debentures but they are issued by the public sector undertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and conditions of the issuance of the debt security. Being contractual it cannot be changed during the tenure of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would appreciate. lOBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are deep discount bond, education benefit bond, retirement benefit bond and index bond.

d) IVPs and KVPs These are saving certificates issued by the post office with the name Indira Vikas Patra (IVP) and Kisan Vikas Patra (KVP). The IVPs are in the face value of R~500, 1000 and 5000. The KVPs are in the denomination of Rs, 1000, 5000 and 10000. The capital is doubled in 5.5 years with the return of 13.47%. IVPs are like bearer bonds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment.

e) Government securities The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim 1m the Government, it is a secured financial instrument, which guarantees the income and the capital. The rate of interest on these securities is relatively lower because of their high liquidity and safety.

f) Money market securities Money market securities have very short term maturity say less than a year. Common money market instruments are:
Treasury bills
Commercial paper
Certificate of deposit

i) Treasury bills A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, treasury bill of 28-day
was introduced on aucti9n basis. Further, it was decided to reintroduce 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the treasury bills are very low, individuals very rarely invest in them.

ii) Commercial papers Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicates the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30 days.

iii) Certificate of deposit The certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. The denominations of the CD and the interest rate on them are high. It is mainly preferred by institutional investors and companies rather than the individuals. The minimum size of the certificate is Rs 10 lakh. The additional amount is issued in multiples of Rs 5 lakh.


NON-NEGOTIABLE SECURITIES

The non-negotiable financial investment as the name itself suggests is not transferable. This is also known as non-securitised financial investments. Deposit schemes offered by the post offices, banks, companies, and non-banking financial· companies are of this category. The tax-sheltered schemes such as public provident fund, national savings certificate and national savings scheme are also non-securitised financial investments.


(A) Deposits
Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently.

a)Bank deposits It is the simple investment avenue open for the investors. He has to open an account and deposit the money. Traditionally the banks offered current account, savings account and fixed deposit account. The deposits in the banks are considered to be safe because of the RBI regulation. The risk averse investors prefer the bank deposits.

b) Post office deposits Like the banks, post office also offers fixed deposit facility and monthly incomescheme. Post office Monthly Income Scheme is a popular scheme for the retired. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.

c) NBFC deposits In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. The NBFC comes under the purview of the RBI.The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.

i) Period The maturity period ranges from few months to five years. It varies from company to company. For example, the Birla Global Finance, the company belonging to Aditya Birla group accepts deposits with maturity from 3-5 years.
ii) Maximum limit The limit for acceptance of deposit has been based on the credit rating of the company. The NBFCs not having net owned funds ofRs 25 lakh are not entitled to accept deposits.
iii) Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The interest rate differs according to maturity period. There is a disparity in the interest rate among the companies in accordance with the credit ratings and policies of the companies.
iv) Security Security of the deposits of the NBFCs is much lower than the depositsw
improve the liquidity ofNBFCs the percentage of liquid assets required to be maint
has been enhanced from 12.5 percent to 15 percent with effect from April 1999 respe
pany Law Board is authorised to direct the defaulting NBFCs to repay the deposits. I
strict rules and regulations laid down by RBI the default rate is high in the case ofNE


(B) Tax sheltered savings schemes

Tax sheltered savings schemes offer tax relief to those who participate in their schemes. The important tax sheltered savings schemes are

=> Public Provident Fund Scheme
=> National Savings Scheme
=> National Savings Certificate VIII series

a) Public provident fund scheme (PPF) PPF earns an interest rate of 12 percent per year,
which is exempted from the income tax under sec 88. The individuals and Hindu undivided families can participate in this scheme. The maximum limit per annum for the deposit is Rs. 6O,OOO. The interest is accumulated in the deposit. It provides early withdrawal facilities from 7th year and every year thereafter, the account holder has an option to withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever is lower. The facility makes PPF a self-sustaining account from 7th year onwards.

b) National savings scheme (NSS) This scheme helps in deferring the tax payment. Individuals and HUF are eligible to open NSS account in the designated post office. The NSS-87 gives100per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of Rs 12,000. The investment also earns an interest rate of 11per cent per year covered by Sec 80L. Compared to other tax savings' instruments the return offered by this scheme is lower.
On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the financial year in which the account is opened. The entire amount can be withdrawn. The account can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the account alive and earn interest at 11percent per annum.
As a tax saving instrument "anytime" withdrawal after 4 years is the only interesting feature to the prospective investor. The tax deduction at source at the rate of 20 percent on the entire amount withdrawn has proved too costly to the investors.

c) National savings certificate (6 yrs.) - III This scheme is offered by the post office.
These certificates come in the denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution and the interest for the first 5 years are covered by Sec 88. The interest is cumulative at the rate of 12% per annum and payable biannually is covered by Sec 80L. No withdrawals are permitted. There is no deduction at maturity.

(c) Life Insurance

Life insurance is a contract for payment of a sum of money to the person assured (or to the person entitled to receive the same) on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other things, the contracts also provide for the payment of premium periodically to the corporation by
the policy holders. Life insunmce eliminates risk. The major advantages of life insurance are given below:

i) Protection Saving through life insurance guarantees full protection against risk of death of the saver. The full assured sum is paid, whereas in other schemes only the amount saved is paid.
ii) Easy payments For the salaried people the salary savings' schemes are introduced. Further, there is an easy instalment facility method of payment through monthly, quarterly, half yearly or yearly mode.
iii) Liquidity Loans can be raised on the security of the policy.
iv) Tax relief Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of premium for life insurance subject to the tax rates in force.

MUTUAL FUNDS
Mutual fund is another investment alternate. It is of recent origin in India. Within a short span of time several financial institutions and banks have floated varieties of mutual funds. The investors with limited funds can invest in the mutual funds and can have the benefits of the stock market and money market investments as specified by the particular fund
Investment companies or investment trusts obtain funds from large number of investors through sale of units. The funds collected from the investors are placed under professional management for the benefit of the investors. The mutual funds are broadly classified into open-ended scheme and close-ended scheme.

Open-ended Scheme
The open-ended scheme offers its units on a continuous basis and accepts funds from investors continuously. Repurchase is carried out on a continuing basis thus, helping the investors to withdraw their money at any time. In other words, there is an uninterrupted entry and exit into the funds. The open-'end scheme has no maturity period and they are not listed in the stock exchanges. Investor can deal directly with the mutual fund for investment as well as redemption. The open-ended fund provides liquidity to the investors since the repurchase facility is available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998 the open-ended schemes have crossed 80 in number.



Close-ended Scheme
The close-ended funds have a fixed maturity period. The first time investments are made when the close end scheme is kept open for a limited period. Once closed, the units are listed on a stock exchange. Investors can buy and sell their units only through stock exchanges. The demand and supply factors influence the prices of the units. The investor's expectation also affects the unit prices. The market price may not be the same as the net asset value.
Sometimes mutual funds with the features of close-ended and open-ended schemes are launched, known as interval funds. They can be listed' in the stock exchange or may be available for repurchase during specific periods at net asset value or related prices.

THE REAL ASSETS

(1) GOLD & SILVER
(2) ART
(3) ANTIQUES