Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings.
Banks are considered as the safest of all options, as they have been the roots of the financial systems in India. Promoted as the means to social development, banks in India have indeed played an important role in the rural upliftment. For an ordinary person though, they have acted as the safest investment 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.
However, today the Interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering little above 9 percent in their Fixed Deposits for 1 year, the yields have come down substantially in recent times. Add to this, the Inflationary Pressures in Economy and one has a position where the savings are not earning. The Inflation is creeping up, to almost 8-9 percent at times, and this means that the value of money saved goes down instead of going up. This effectively mars any chance of gaining from the investments in banks. 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 after features, such as – return safety and quantum of returns was being handsomely taken care of. Though certainly 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 announcing 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 & also due to Increasing Inflation.
Another often-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 operations and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks in these.
First of all, the danger of financial position 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. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low-interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascos have resulted in low confidence in this option. The options discussed above are essentially for the risk-averse, people who think of safety and then quantum of return, in that order. For the brave, it is dabbling in the stock market.
Stock markets provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the options discussed above can generally generate, the risk is undoubtedly of the highest order. But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the process can endanger the hard-earned money.
For those who are not adept at understanding the stock market, the task of generating superior returns at similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture.
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). Appreciation or reduction in value of investments is reflected in Net Asset Value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with reputed international firms.
Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future.
Investment Alternatives in India
- Non Marketable Financial Assets: These are such financial assets which gives moderate returns but can not be traded in market.
- Bank Deposits
- Post Office Schemes
- Company FDs
- PPF
- Equity shares: These are shares of company and can be traded in Secondary market. Investors get benefit by change in price of share and dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market:
- Blue chip shares
- Growth shares
- Income shares
- Cyclic shares
- Speculative shares
- Bonds: Bonds are the instruments that are considered as a relatively safer investment avenues.
- G sec bonds
- GOI relief funds
- Govt. agency funds
- PSU Bonds
- RBI BOND
- Debenture of private sector co.
- Money market instrument: By convention, the term “Money Market” refers to the market for Short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year.
- T-Bills
- Certificate of Deposit
- Commercial Paper
- Mutual Funds– A Mutual fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. The different types of schemes are
- Balanced Funds
- Index Funds
- Sector Fund
- Equity Oriented Funds
- Life insurance: Now-a-days life insurance is also being considered as an Investment avenue. Insurance premiums represent the sacrifice and the assured sum the benefit. Under it different schemes are:
- Endowment Assurance policy
- Money back policy
- Whole life policy
- Term assurance policy
- ULIPS
- Real estate: One of the most important assets in portfolio of investors is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate:
- Agricultural land
- Semi urban land
- Farm House
- Precious objects: Investors can also invest in the objects which have value. These comprises of:
- Gold
- Silver
- Precious stones
- Art objects
- Financial Derivatives: These are such instruments which derive their value from some other underlying assets. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are:
- Options
- Futures
Let me know about the feedback for the article, through your valuable comments.
Bharat Sahni
PlanUrMoney 