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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. One needs to invest and earn return on their idle resources and generate a specified sum of money for a specific goal in life and make a provision for an uncertain future. One of the important reasons why one needs to invest wisely is to meet the cost of inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it cost to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or service in the future as it does now or did in the past. The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are: Invest early Invest regularly Invest for long term and not for short term
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The purpose of the analysis is to determine the investment behaviour of investors and investment preferences for the same. Investors perception will provide a way to accurately measure how the investors think about the products and services provided by the company. Today s trying economic conditions have forced difficult decisions for companies. Most are making conservative decisions that reflect a survival mode in the business operations. During these difficult times, understanding what investors on an ongoing basis is critical for survival. Executives need a third party understanding on where investor s loyalties stand. More than ever management needs ongoing feedback from the investors, partners and employees in order to continue to innovate and grow. The main objective of the project is to find out the needs of the current and future investors. For this analysis, customer perception and awareness level will be measured in important areas such as:
1. To understand in depth about different investment avenues available in India. 2. To find out how investors get information about the various financial instruments. 3. The type of financial instruments, they would prefer to invest. 4. The duration for which they would prefer to keep their money invested. 5. What are the factors that they consider before investing? 6. To give a recommendations to the investors that where they should invest.
7. To know the risk tolerance level of the individual investor and suggest a suitable
portfolio.
8. To develop a profile of sample Indian individual investor in terms of their demographics.
Plan study
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Chapter 1 covers the core areas of the report: The introduction, objectives, need, limitations and research methodology of the study. It also covers value addition and sources of information. Chapter 2 covers the literature review given by various behavioural scientists and investment experts. Chapter 3 covers the industry profile, which is a brief explanation of the financial industry, governing bodies and various investment avenues. Chapter 4 covers data analysis and interpretation part. Analysis is made from the data obtained through questionnaires. Chapter 5 covers the findings and suggestions drawn from the data analysis and interpretations. Chapter 6 covers the summary and conclusion of the report.
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Stock market has been subjected to speculations and inefficiencies, which are beached to the rationality of the investor. Traditional finance theory is based on the two assumptions. Firstly, investors make rational decisions; and se condly investors are unbiased in their predictions about future returns of the stock. However financial economist have now realized that the long held assumptions of traditional finance theory are wrong and found that investors can be irrational and make predictable errors about the return on investment on their investments. This analysis on Individual Investors Behaviour is an attempt to know the profile of the investor and also know the characteristics of the investors so as to know their preference with respect to their investments. The study also tries to unravel the influence of demographic factors like age on risk tolerance level of the investor.
The common problem areas faced by the investors can be understood. It also enhances new services initiatives. This study will help in gaining a better understanding of what an investor looks for in an investment option.
It can be used by the financial sector in designing better financial instrument customized to suit the needs of the investor.
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It will also help the agents and brokers in marketing the existing financial instruments. It will provide knowledge to the investors about the various financial services provided by the company to their investors.
It will also help the company to understand what is the requirement and expectations of different categories of investors.
This analysis will be originated in order to empower the investors with detailed research on various investments avenues available in India. The awareness lever of the investors about the various investment options and what is the perception of the investors with regard to the investments they want to make.
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This analysis is based upon investors behaviour for investment preferences during normal time vis--vis recessionary period. This analysis would be focusing on the information from the investors about their knowledge, perception and behaviour on different financial products. The various limitations of the study are:
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The total number of financial instruments in the market is so large that it needs a lot of resources to analyze them all. There are various companies providing these financial instruments to the public. Handling and analyzing such a varied and diversified data needs a lot of time and resources.
As the analysis is based on primary as well as secondary data, possibility of unauthorized information cannot be avoided.
Reluctance of the people to provide complete information about them can affect the validity of the responses.
The lack of knowle dge of customers about the financial instruments can be a major limitation.
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Information is collected by conducting a survey by distributing a questionnaire to 100 investors in Hyderabad. These 100 investors are of different age group, different occupation, diffe rent income levels, and different qualifications. (A copy of the questionnaire is given in the last as ANNEXURE 1). Secondary Data: This data is collected by using the following means. 1. Articles in Financial Newspapers ( Economic times and Business Standard ). 2. Investment Magazines, Business Magazines, Financial chronicles. 3. Expert s opinion published in various print media. 4. Books written by various Foreign and Indian authors on Investments. 5. Data available on internet through various websites www.tax4India.com www.economictimes.Indiatimes.com www.business-standard.com www.Indiamoney.com www.moneymanagementideas.com www.savingwala.com
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Literature suggests that major research in the area of investors behaviour has bee n done by behavioural scientists such as Weber, Shiller and Shefrin. Shiller who strongly advocated that stock market is governed by the market information which directly affects the behaviour of the investors. Several studies have brought out the relationship between the demographics such as Gender, Age and risk tolerance level of individuals. Of this the relationship between Age and risk tolerance level has attracted much attention. Horvath and Zuckerman suggested that one s biological, demographic and socioeconomic characteristics; together with his/her psychological makeup affects one s risk tolerance level. Malkiel suggested that an individual s risk tolerance is re lated to his/her household situation, lifecycle stage and subjective factors. Mittra discussed factors that were related to individuals risk tolerance, which included years until retirement, knowledge sophistication, income and net worth. Guiso, Jappelli and Terlizzese, Bajtelsmit and VenDerhei, Powell and Ansic, Jianakoplos and Bernasek, Hariharan, Chapman and Domain, Hartog, Ferrer-ICarbonell and Jonker concluded that males are more risk tolerant than females. Wallach and Kogan were perhaps the first to study the relationship between risk tolerance and age. Cohn, Lewellen et.al found risky asset fraction of the portfolio to be positively correlated with income and age and negatively correlated with marital status. Morin and Suarez found evide nce of increasing risk aversion with age although the households appear to become less risk averse as their wealth increases. YOO found that the change in the risky asset holdings were not uniform. He found individuals to increase their investments in risky assets throughout their working life time, and decrease their risk exposure once they retire.
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Lewellen et.al while identifying the systematic patterns of investment behaviour exhibited by individuals found age and expressed risk taking propensities to be inversely related with major shifts taking place at age 55 and beyond. Indian studies on individual investors' were mostly confined to studies on share ownership, except a few. The RBI's survey of ownership of shares and L.C. Gupta's enquiry into the ownership pattern of Industrial shares in India were a few in this direction. The NCAER's studies brought out the frequent form of savings of individuals and the components of financial investments of rural households. The Indian Shareowners Survey brought out a volley of information on shareowners. Rajarajan V classified investors on the basis of their demographics. He has also brought out the investors' characteristics on the basis of their investment size. He found that the percentage of risky assets to total financial investments had declined as the investor moves up through various stages in life cycle. Also investors' lifestyles based characteristics has been identified. The above discussion presents a detailed picture about the various facets of risk studies that have taken place in the past. In the present study, the findings of many of these studies are verified and updated.
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Indian financial industry is considered as one of the strongest financial sectors among the world markets. Many industry experts may give various reasons for such Indian financial industry reputation, but there is only one answer which no one can deny, control and governance of the country s supreme monetary authority the INDIA(RBI). Financial sector in India has expe rienced a better environment to grow with the presence of higher competition. The financial system in India is regulated by independent regulators in the field of banking, insurance, mortgage and capital market. Government of India plays a significant role in controlling the financial market in India. Ministry of Finance, Government of India controls the financial sector in India. Every year the finance ministry presents the annual budget on 28th February. The Reserve Bank of India is an apex institution in controlling banking system in the country. Its monetary policy acts as a major weapon in India's financial market. Various governing bodies in financial sector: 1. RBI -Reserve Bank of India is the supreme authority and regulatory body for all the monetary transactions in India. RBI is the regulatory body for various Banking and Non Banking financial institutions in India. 2. SEBI Securities and Exchange Board of India is one of the regulatory authorities for India's capital market. 3. IRDA Insurance regulatory and development authority in India regulates all the is the effective
RESERVE BANK OF
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4. AMFI Association of mutual funds in India regulates all the mutual fund companies in India. 5. FIPB Foreign investments promotion board regulates all the foreign direct investments made in India. y Ministry of housing is planning to establish a real estate regulatory and governing body by the end of financial year 2010 - 11. y Investments in gold is governed by the world gold council, in India we do not have any regulatory authority for investments in gold. y Ministry of Finance, Gove rnment of India has a control over all the financial bodies in India. y Government securities, Public Provident Fund (PPF), National Savings Certificate (NSC), Post Office Savings are all unde r the control of the central government.
Investment are normally categorized using the risk involved in it, risk is dependent on various factors like the past performance, its governing body, involvement of the government etc., in this scenario Indian investments are classified in to 3 categories based on risk. They are 1. Low Risk/ No Risk Investments. 2. Medium Risk Investments. 3. High Risk Investments. Apart from these, there are traditional investment avenues and emerging investment avenues.
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High Risk Avenues: y y y Equity Share Market. Commodity Market. FOREX Market.
Emerging Avenues: y y y Virtual Real Estate. Hedge Funds/Private Equity Investments. Art and Passion.
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DESCRIPTION AVENUES
ON
VARIOUS
INVESTMENT
SAVINGS ACCOUNT
As the name denotes, this account is perfect for parking your temporary savings. These accounts are one of the most popular deposits for individual accounts. These accounts provide cheque facility and a lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but no bank enforces these. However, banks have every right to enforce such boundaries if it is felt that the account is being misused as a current account. At present the interest on these accounts is regulated by Reserve Bank of India. Presently Indian banks are offering 3.50% p.a. interest rate on such deposits. This account gives the customer a nominal rate of interest and he can withdraw money as and when the need arises. The position of account is depicted in a small book known as 'Pass Book'. Such accounts should be treated as a temporary parking area because the rate of interest is much less than Fixed Deposits. As soon as one s savings accumulate to an amount which he can spare for a certain period of time, shift this money to Fixed Deposit. The returns on the money kept in Savings Bank account will be less but the freedom to withdraw is the highest.
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Tax deduction:Banks should deduct tax at source on interest paid in excess of Rs. 5000 pe r annum to any depositor. This is not per deposit but per individual. The refore if an individual has 5 deposits and the aggregate interest earned on these is Rs. 7000 though in each individual deposit, interest should not exceed Rs. 2000, tax must be deducted at source.
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Where to open: A PPF account can be opened at any branch of State Bank of India or its subsidiaries or in few national banks or in post offices. On opening of account a pass book will be issued wherein all amounts of deposits, withdrawals, loans and repayment together with interest due shall be entered. The account can also be transferred to any bank or post office in India. Interest rate: Deposits in the account earn interest at the rate notify by the Central Govt from time to time. Interest is designed on the lowest balance among the fifth day and last day of the calendar month and is attributed to the account on 31st March every year. So to derive the maximum, the deposits should be made betwe en 1st and 5th day of the month, as it also enables you to earn interest on your Savings Bank A/c for the previous month. Tenure:Even though PPF is 15 year scheme but the effectual period works out to 16 years i.e. the year of opening the account and adding 15 years to it. The sum made in the 16th financial year will not earn any interest but one can take advantage of the tax rebate. Withdrawal: The investor is allowable to make one removal every year beginning from the seventh financial year of an amount not more than 50% of the balance at the end of the fourth year or the financial year immediately preceding the withdrawal, whichever is less. This facility of making partial withdrawals provide liquidity and the withdrawn amount can be used for any purpose.
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The Central Government borrows funds to finance its 'fiscal deficit'. The market borrowing of the Central Government is increased through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans. In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing program of the Central Government. Features Issued at face value No default risk as the securities carry sovereign guarantee. Ample liquidity as the investor can sell the security in the secondary market Interest payment on a half yearly basis on face value No tax deducted at source Can be he ld in Demat form. Redeemed at face value on maturity Maturity ranges from of 2-30 years. Securities qualify as SLR investments (unless otherwise stated). Benefits of Investing in Government Securities No tax deducted at source Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals Qualifies for SLR purpose Zero default risk being sovereign paper Highly liquid. Transparency in transactions and simplified settlement procedures through CSGL/NSDL.
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MUTUAL FUNDS
A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-te rm money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's unde rlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. Advantages of Mutual Funds 1. Diversification 2. Professional Management 3. Regulatory oversight 4. Liquidity 5. Convenience 6. Transparency 7. Flexibility 8. Choice of schemes 9. Tax benefits 10. Well regulated 11. Drawbacks of Mutual Funds Following are the few drawbacks of Mutual Funds: 1. 2. 3. 4. No Guarantees Fees and commissions Taxes Management risk
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LIFE INSURANCE
Life insurance is a contract between the policy owner and the insurer, where the insure r agrees to pay an amount of money upon the happening of the insured individual's or individuals' death or other event, like terminal illness, critical illness. In return, the policy owner agrees to pay a fixed amount called a premium at regular intervals or in bulge sum. Like other insurance policies, life insurance is also a contract between the insurer and the policy owner whereby a benefit is paid to the nominated beneficiaries if an insured event occurs which is covered by the policy. The assessment for the policyholder is derived not from an actual claim event. But to a certain extent it is the value derived from the 'peace of mind' experienced by the policyholder, because of the negating of adverse financial consequences caused by the death of the Life Assured. To be a life policy the insured event must be based upon the lives of the people named in the policy.
Advantages of a Life Insurance Policy 1. 2. 3. 4. Financial Security Helps to diverts States Resources for Other Purpose Facilitates Economic Movements Helps to Avail Tax Exemptions
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However, this amount varies from issue to issue. There is no prescribed upper limit to your investment. The duration of a bond issue usually varies between 5 and 7 years. Selling of Bonds: Selling bonds in the secondary market has its own drawbacks. First, there is a liquidity problem which means that it is a tough job to find a buyer. Second, even if you find a buyer, the prices may be at a sharp discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. If interest rates are running high, bond prices will be down and you may well end up incurring losses. On the other hand, Debentures are always secured. Debentures A debenture is similar to a bond except the securitization conditions are different. A debenture is generally unsecured in the sense that there are no liens or pledges on specific assets. It is defined as a certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. Debentures vs. Bonds: Debentures and bonds are similar except for one difference bonds are more secure than debentures. In case of both, you are paid a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, but carry a lower interest rate. The company provides collateral for the loan. Moreover, in case of liquidation, bondholde rs will be paid off before debenture holders.
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STOCK MARKET
The first step is to understand the stock market. A share of stock is the smallest unit of ownership in a company. If you own a share of a company s stock, you considered as the part owner of the company. Stock Market Trading Stock market trading consists of buying and selling of company stocks and as well as stock derivatives. This type of trading usually takes place in a stock exchange, in which companies need to be listed in order for their shares to be bought and sold. This trading market provides with substantial earnings potential and is one among the most popular investment options. Working of Stock Market Stock market trading is normally done by brokers. As a result, the first step is to seek a reliable investment broker. Stock market trading occurs at a physical stock exchange, where buyers and sellers of company shares meet and agree on the price at which the transactions would materialize. Conventional stock trading entails an investor placing an order for a specific number of shares of a company with his/he r broker present in the physical stock market. The broker forwards the order to the floor clerk, who then attempts to locate a trader desire to sell those shares. Bids are then exchanged. The transaction closes only after the buyer agrees on the price
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quoted by the seller. This technique is also called open outcry, because it involves traders crying out the ir bids. Stock market trading will also takes place online. This procedure is much quicker and less complicated than trading in the physical stock market. Online stock market trading engrosses the real time placement of buying and selling orders for stocks. The transaction is accomplished when the trading system is capable to match bids and a confirmation is received. Benefits of Stock Market Trading 1. It promotes economic growth. 2. It helps companies raise capital and handle financial issues. 3. It ensures that money is invested in businesses to enhance profit potential. 4. It helps investors realize substantial profits. Drawbacks of Stock Market Trading: 1. It proposes lower leverage than other forms of trading, such as Forex trading. 2. The short selling of stocks is hard, because stock prices do not appreciate significantly in a short span of time. Accordingly, there is a wait period before you can book healthy profits. 3. It is traded for limited hours in a day.
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COMMODITY TRADING
The terms commodities and futures are often used to depict commodity trading or futures trading. It is similar to the way stocks and equities are used when investors talk about the stock market. Commodities are the actual physical goods like gold, crude oil, corn, soybeans, etc. Futures are contracts of commodities that are traded at a commodity exchange like MCX. Apart from numerous regional exchanges, India has three national commodity exchanges namely, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and National Multi-Commodity Exchange (NMCE). Forward Markets Commission (FMC) is the regulatory body of commodity market. It is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period of time. Many people have become very rich by investing in commodity markets. Commodity trading has a bad name as being too risky for the average individual. The fact is that commodity trading is only as risky as you want to make it. Those who treat trading as a get-rich-quick scheme are likely to lose because they have to take big risks. If you act carefully, treat your trading like a business and are willing to settle for a reasonable return, the possibility of success is very high. The course of trading commodities is also known as futures trading. Unlike other kinds of investments, such as stocks and bonds, when you trade futures, you do not really buy anything or own anything. You are speculating on the future direction of the price in the commodity you are trading. This is like a bet on future price direction. The terms "buy" and "sell" merely indicate the direction you expect future prices will move. If, for example, you were 30
speculating in wheat, you would buy a futures contract if you thought the price would be going up in the future. You would sell a futures contract if you thought the price of wheat would go down. For every trade, there is always a buyer and a seller. Neither person has to own any wheat to participate. But he has to deposit sufficient capital with a brokerage firm to insure that he will be able to pay the losses if his trades lose money. Working of Commodity Market: Commodity Market works Just like stock futures. When you buy Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin. Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 Gms. 100 gms of gold may be worth Rs. 1,50,000. The margin for gold set by MCX is 3.5%. So you only end up paying Rs 5,250. The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the price. So you bought the Gold Futures contract when it was Rs. 1,50,000 per 100 gms. The next day, the price of gold rose to Rs 1,60,000 pe r 100 gms. Rs 10,000 (Rs 1,60,000 - Rs 1,50,000) will be credited to your account. The following day, the price dips to Rs 1,55,000. Rs 5000 will get debited from your account (Rs 1,60,000 - Rs 1,55,000).
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FOREX MARKET
Forex trading is the immediate trade of one currency and the selling of anothe r. Currencies are traded through an agent or dealer and are traded in pairs. For example Euro (EUR), US dollar (USD), British pound (GBP) or Japanese Yen (JPY). Here you are not buying anything physical; this type of trading is confused. Think of buying a currency as buying a share of a particular country. When you purchase say Japanese Yen, you are in effect buying a share in the Japanese financial syste m, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy. In common, the exchange rate of a curre ncy versus other currencies is a reflection of the condition of that country's financial system compared to the other countries financial system. Unlike othe r financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is measured an Overthe-Counter (OTC) or Interbank market, due to the fact that the entire market is run electronically within a network of banks continuously over a 24-hour period. Until the late 1990's only the big guys could play this game. The first requirement was that you could trade only if you had about ten to fifty million bucks to start with Forex. Forex was initially intended to be used by bankers and large institutions and not by small guys. However because of the rise of the Internet, online Forex trading firms are now able to offer
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trading accounts to 'retail' traders. All you need to get started is a computer, a high-speed Internet connection, and the information. The foreign exchange market is exclusive because of the following reasons; Its trading volumes The tremendous liquidity of the market Its geographical dispersion Its long trading hours The variety of factors that affect exchange rates. The low limits of profit compared with othe r markets of fixed income but profits can be high due to very great trading volumes The use of leverage
Benefits of Forex Trading 1. Forex is the largest market. 2. No Bulls or Bears! 3. Forex trading online offers great leverage 4. Forex prices are predictable. 5. Forex trading online is commission free 6. Forex trading online is instant.
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INVESTMENT IN GOLD
Gold has got lot of emotional value than monetary value in India. India is the largest consumer of gold in the world. In western countries, you can find most of their gold in their central banks. But in India, we use gold mainly as jewels. If you look at gold in a business sense, you will understand that gold is one of the all time best investment tool. My dear readers, today I would like to discuss on investments in gold and its potential. Indian Gold Market Current Scenario: y y y y Size of the Gold Economy: more than Rs. 30,000 crores Number of gold jewelry manufacturing units: 1,00,000 Number of people employed: 5,00,000 Gems & Jewellery constitute 25% of Indias exports about 10% of our import bill constitute gold import. y Number of banks allowed importing gold: 15 (While recently this has been liberalized, detailed notification is awaited) y y y y Official estimates of the stock of gold in India: 9,000 tons Unofficial estimates of the stock of gold in India: 12,000 V 14,000 tons Gold held by the Re serve Bank of India: 358 tons Gold production in India: 2 tons per annum.
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Demand for gold in the Indian Market: India has the highest demand for gold in the world and more than 90% of this gold is acquired in the form of jewellery. Following are the factors influencing the demand for gold. The movement of gold prices is one of the important variables determining demand for gold. The increase in the irrigation, technological change in agriculture (through mechanization and high yielding varieties), have generated large marketable surplus and a highly skewed rural income distribution is another factors contributing to additional demand for gold. Supply of Gold:The main economic effects that arise from the changes in the supply of gold can be seen against the quantum of gold that is already in existence in the economy. The supply of gold is not up to the requirements as the production of gold is also coming down and demand for gold is going up very sharply. Gold as an Investment Option: Gold as an investment tool always gives good returns, flexibility, safety and liquidity to the investors. Therefore as a financial consultant my advice to you all is, kindly allocate a portion of your portfolio for gold investments. Practice the habit of buying at least one gram of gold every month.
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Investment avenues
products
and
Managed products: anaged product service is the most popular investment strategy M adopted by wealthy investors globally Real Estate: ealthy investors have found this asset class very attractive and have W invested directly in real estate and indirectly through real estate investment trusts. Art and passion: ealthy investors also have their investment in art, wine, antiques, W and collectibles Precious Metals: Gold and other precious metals are attractive investment options to balance the asset allocation
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Commodities:Wealthy investors have turned to commodities to offset the lower returns from fixed income securities. Alternative investments:Hedge funds and Private equity investments such as venture funds are becoming increasingly popular with wealthy investors to reduce the investment risks related to stock market fluctuations. This is because these instruments have low correlation with equity asset class performance. Investment in non correlated assets, such as commodities helps to improve diversification of the portfolio amidst volatile market conditions.
INVESTMENT IN ART
Today, we find that an increasing number of individuals are looking at alternative investments, which provide them with a diversification away from a particular asset class. People are willing to invest and looking for areas other than the stock market for investing. Investing in the vintage wine, coins, stamps and Art, is now an indulgence which gives them an opportunity to cash in on their hobbies, without having the level of expertise that is required for other dire ct investments. Art is being incorporated into the investor's overall asset allocation decision. The art scene around the world is growing significantly. With more and more investors looking at art as an alternative asset class and a store of a long term value, average annual art valuations have outpaced average annual stock market valuations by more than three times since 2000.
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HEDGE FUNDS
Over the last 15 years, hedge funds have become increasingly popular with high net worth individuals, as well as institutional investors. The number of hedge funds has risen by about 20% per year and the rate of growth in hedge fund assets has been even more rapid. A hedge fund is a private investment fund, charging a performance fee and is open to only a limited number of investors. These funds are like mutual funds, which collect money from investors and use the proceeds to buy stocks and bonds. They can invest on almost any type of opportunity; in any market where in good returns are expected with low risk levels. Hedge Fund Risks: y y y y y y y Lack of transparency Limited liquidity Difficulty accessing quality hedge funds Unreliable or incomplete return data Valuation risk Asymmetrical nature of Hedge fund returns distributions [SKEW] Counterparty risk [Leverage]
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Private equity investors have proven to be the single most important players in the entrepreneurial marketplace. Private capital investors fund thirty to forty times as many entrepreneurial companies as the entire venture capital industry and estimates put the total amount between $20 - $60 billion annually. 40
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100 100%
AGE GROUP BELOW 20 0 0% BETWEEN 20 30 35 35% BETWEEN 30 40 35 35% ABOVE 40 30 30% TOTAL 100 100%
QUALIFICATIO N UNDER GRADUATES 7 7% GRADUATES 46 46% POST GRADUATES 39 39% OTHERS 8 8% TOTAL 100 100%
OCCUPATION SALARIED 52 52% BUSINESS 22 22% PROFESSIONAL 14 14% HOUSE WIFE 11 11% RETIRED 1 1% TOTAL 100 100%
ANNUAL INCOME BELOW Rs. 2,00,000 37 37% Rs. 2,00,000 - 4,00,000 31 31% Rs. 4,00,000 - 6,00,000 18 18% ABOVE Rs, 6,00,000 14 14% TOTAL 100 100%
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Interpretation:
Table 1 above shows, that 58 (58%) of the investors are men and the rest 42(42%) are females. Generally males bear the financial responsibility in Indian society, and therefore they have to make investment (and other) decisions to fulfill the financial obligations. When it comes to age, it was found that 35% are young and significant number under the age group of 20 30. 35% of them are in the age group of 30 to 40. 30% of them are above 40 years of age. There are no investors below 20 years of age. Nearly 52% of the investors belong to the salaried class, 22% were business class, 14% were professionals, 11% were housewives and the rest were retired. It was found that irrespective of annual income they earn all the investors interested in investments since today s inflated cost of living is forcing everyone to save for the ir future needs, and invest those saved resources efficiently. 39(39%) of the individual investors covered in the study are postgraduates; 46(46%) investors are graduates and 7(7%) of the investors are under-graduates, and 8(8%) investors are categorized as others who are either illiterates, had less education than under graduation or who are more qualified than post graduates. It is interesting to note that most investors (covered in the study) can be said to possess higher education (Bachelor Degree and above), and this factor will increase the reliability of conclusions drawn about the matters under investigation. 37(37%) of the investors are earning less than 2 lakhs per annum, 31(31%) investors are earning between 2 lakhs and 4 lakhs, 18(18%) investors are earning between 4 lakhs and 6
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Lakhs, 14(14%) investors are earning more than 6 lakhs per annum. Since most of the investors are below 4 lakhs annual earnings, many of them are non risk takers.
Interpretation:since many of the investors annual earnings are below 2 lakhs and 4 lakhs, many of them do not take the risk of losing their principal investment amount. 95% of the
sample investors are not ready to lose their principal investment amount. 5% are ready to take risk of losing their principal up to certain extent.
Table 2.2 TIME PERIOD PREFERED TO INVEST PARAMETER NO OF INVESTORS PERCENTAGE SHORT TERM 10 10 MEDIM 60 60 LONG TERM 30 30 TOTAL 100 100
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Interpretation:It s interesting to know that many of the investors prefer to invest their money for medium term i.e. from 1 5 yrs, instead of short term or long term. 10% preferred short
term, 60% preferred medium term, and 30% preferred long term.
Table 2.3 FREQUENCY OF MONITORING INVESTMENT NO OF INVESTORS PERCENTAGE PARAMETER DAILY 17 17 MONTHLY 35 35 OCCATIONALLY 41 41 OTHER 7 7 TOTAL 100 100
THE
NO OF INVESTORS
OTHER, 7 DAILY, 17
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Interpretation: Due to the busy life schedule, many of the investors are not able to spend time in monitoring their investments, only 17% of the investors are monitoring their investments daily, 35% are monitoring on a monthly basis, 41% , the majority investors are monitoring their investments occasionally. Many of them who have invested in safe investment avenues do not bother about their investments, some of them forget about the investments for many years.
Table 2.4 INVESTMENT IN EQUITY MARKET PARAMETER NO OF INVESTORS PERCENTAGE YES 30 30 NO 70 70 TOTAL 100 100
Out of the total sample investors only 70% of the investors invest in equity share market through their DEMAT A/C, 30% of the investors never invested in equity shares. The investors who invest in equity share market are asked another question, what would they do if the stock market falls immediately after their investment, many of them replied that they would wait till the market increases instead of selling them at a loss, very few answered that they would average the investment by buying some more shares.
Table 2.5 FAMILY BUDGET PARAMETER NO OF INVESTORS PERCENTAGE YES 73 73 NO 27 27 TOTAL 100 100
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73% of the sample investors had a monthly family budget for their daily expenditure. 27% of the investors replied the y never thought of having a budget calculation, and few think of having a budget but never implemented so far. Many people with excess money never cared to make any family budgets.
Table 2.6 INVESTMENT TARGET PARAMETER NO OF INVESTORS PERCENTAGE YES 48 48 NO 52 52 TOTAL 100 100
It s interesting to know that almost same proportion of investors have different thoughts, 48% of the investors have an investment target every year, and 52% of the investors do not go for any targets for investment. On personal questioning many of the investors who had an investment target every year are not able to reach their targets due to contingent expenses. Few investors invest regularly but never thought of having a target every year.
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Table 2.7 FINANCIAL ADVISOR PARAMETER NO OF INVESTORS PERCENTAGE YES 23 23 NO 77 77 TOTAL 100 100
77% of the investors never had a financial advisor, they never approached an advisor for their financial needs, the reason may be inadequate income and excess expenditure, and there wouldn t be surplus money to worry about. 23 % of the investors have financial advisors, who manage their investments.
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Table 3.1 shows the savings objectives of the sample investors, investors are given
weights are given for each parameter bases on the votes given by the investors, the maximum
calculated ranks are given in the order of maximum weightage given by investors. First rank is
Childs education is very important than any other need. Many of the investors are in the age
So children s marriage is given last rank. After children s education investors are saving for their
a mechanical life. Retirement and home purchase are given subsequent ranks after health care.
Table 3.2 PURPOSE BEHIND INVESTMENT PARAMETER VOTES WEIGHTS RANK WEALTH CREATION 37 22 4 TAX SAVING 43 25 3 EARN RETURNS 45 27 1 FUTURE EXPENDITURE 44 26 2 TOTAL 169 100
All the investors have very common purposes for investing, they have more than one purpose for investing their money. Salaried people invest for tax savings, and for future expenditure, business people invest for the purpose of earning returns. Almost all the investors have all the 4 purposes behind investing their money.
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Table 3.3 FACTORS CONSIDERING INVESTING PARAMETER VOTES WEIGHTS RANKING PRINCIPAL 60 43 1 SAFETY OF LOW RISK 35 25 2 HIGH RETURNS 27 19 3 MATURITY PERIOD 16 11 4 TOTAL 138 100
BEFORE
When the investors are asked about the factors considering before investment many of them have voted for safety of principal and low risk. First rank is given to safety of principal and 2 nd to low risk. Here there are some contradicting results, some investors expect high returns at a very low risk, and this is not possible in practical Indian investment avenues. Investment believes in a proved principle, higher the risk higher the returns, lower the risk lower the returns . Investors need to know about this principle before investing.
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TABLE 4 : OCCUPATION
I. SALARIED
DEM
OGRAPHICS
BASED
ON
QUALIFICATIO N UNDER GRADUATES 0 0% GRADUATES 21 40% POST GRADUATES 25 48% OTHERS 6 12% TOTAL 52 100%
ANNUAL INCOME BELOW Rs. 2,00,000 15 29% Rs. 2,00,000 - 4,00,000 15 29% Rs. 4,00,000 - 6,00,000 17 33% ABOVE Rs, 6,00,000 5 10% TOTAL 52 100%
II. BUSINESS
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GRADUATES 11 50% POST GRADUATES 6 27% OTHERS 0 0% TOTAL 22 100% ANNUAL INCOME BELOW Rs. 2,00,000 11 50% Rs. 2,00,000 4,00,000 5 23% Rs. 4,00,000 6,00,000 1 5% ABOVE Rs, 6,00,000 5 23% TOTAL 22 100%
III. PROFESSIONAL
QUALIFICATIO N UNDER GRADUATES 0 0% GRADUATES 6 43% POST GRADUATES 6 43% OTHERS 2 14% TOTAL 14 100%
ANNUAL INCOME BELOW Rs. 2,00,000 2 14% Rs. 2,00,000 4,00,000 8 57% Rs. 4,00,000 6,00,000 1 7% ABOVE Rs, 6,00,000 3 21% TOTAL 14 100%
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IV. HOUSEWIFE
QUALIFICATIO N UNDER GRADUATES 1 9% GRADUATES 6 55% POST GRADUATES 2 18% OTHERS 2 18% TOTAL 11 100%
ANNUAL INCOME BELOW Rs. 2,00,000 9 82% Rs. 2,00,000 4,00,000 1 9% Rs. 4,00,000 6,00,000 0 0% ABOVE Rs, 6,00,000 1 9% TOTAL 11 100%
ASSUMPTION As a part of the analysis I assumed that preference for investment avenues is dependent on the occupation of the investor. Hence preferred investment avenue are derived from the demographics of the sample investor based on occupation.
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PREFERENCE
BASED
ON
Since the investor has an option to invest in more than one Investment Avenue, weights are given on the basis of preference to investment avenues. The avenue which is given maximum weightage by the investors is ranked first. First Ten ranks are given to the first ten preferred investment avenues. First preference is given to life insurance, second to investing in gold, third to bank fixed deposits. Tenth preference is given to bank savings account.
INVESTMENT AVENUES VOTES WEIGHTS RANK BANK FIXED DEPOSITS 13 16 1 INSURANCE 13 16 2 REAL ESTATE 11 14 3 MUTUAL FUNDS 10 12 4 GOLD 8 10 5
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EQUITY SHARES 7 9 6 CHIT FUNDS 6 7 7 POST OFFICE SAVINGS 5 6 8 SAVINGS ACCOUNT 4 5 9 NSC 4 5 10 TOTAL 81 100
Thinking of the business people is almost same to that of salaried people, both are similar in preferring insurance and bank fixed deposits, but given third pre ference to real estate. Gold is given 5 th place here. Last place is given to national savings certificates.
There is no much differe nce in the pre ferences of professionals when compared to salaried and business pe ople. Professionals does not prefer mutual funds(7
th
business people prefer at 4 th place. Professionals are more interested in post office savings rather than mutual funds. As business people professionals also pre fer bank fixed deposits in the first place, then life insurance. Professionals does not prefer national saving certificates at all, eliminated it from the top 10. 58
Indian housewives love gold as much as themselves. Housewives have given first rank to gold pushing insurance and bank fixed de posits to second and third place. House wives gave least preference to mutual funds. They are more attracted to traditional investment avenues like gold, real estate, post office savings and chit funds.
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For the purpose of analysis investors are placed under three categories. 1. Low risk category 2. Medium risk 3. High risk Classification is done based on three factors 1. Past investments of the investor. 2. Investor experience in investing( level of expe rience). 3. Investor preference for investments.
First the total sample of 100 is divided in to 3 age groups. Investors in each age group are classified in to 3 risk categories based on the above factors.
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Table 6: Finding relationship between age group and level of risk tolerance
Table 6.1 risk tolerance of age group 20 30
PARAMETER 20 - 30 AGE GROUP NO OF LEVEL OF RISK INVESTORS PERCENTAGE LOW RISK 13 37% MEDIUM RISK 17 49% HIGH RISK 5 14% TOTAL 35 100%
LOW RISK 21 70% MEDIUM RISK 6 20% HIGH RISK 3 10% TOTAL 30 100%
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OBSERVATIONS :
Obser vations fr om table 6.1, 6.2, 6.3
From the table 6.1 we find that 49% of Investors between the age group of 20 30 came under medium risk category, where as the pe rcentage of investors who came under medium risk in the age group of 30 40 has decreased to 32%. It still came down in the case of investors in the age group of 40 above, which is only 20%. We can see a decreasing trend in the behaviour of investors towards medium risk when the ir age increased. 37% of the investors in the age group of 20 30 are in the low risk category, where as Investors under the age group 30 40, 57% came under the low risk category, there is a large increase in the investors who came under low risk category in this age group. It has further increased, 70% of the investors in the age group above 40 came under the low risk category. We can see an increasing trend with respect to low risk category as the age increases. Same observations are arrived at, when comparing the high risk category with respect to the age groups. As the age increases the level of risk tolerance is coming down. 14% came under the high risk category under the age group 20 30, when it came to age group above 40 above only 10% came under the high risk category.
From the above observations we can conclude that there is a strong inverse or negative relationship between risk tolerance and age group.
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When Karl Pearson s correlation coe fficient is calculated, it is found to be -0.74 by which we can conclude that there is a strong negative corre lation between Age and Risk tolerance. Age accounts for the major differences in risk taking decisions by the investors. The older an investor, the better seemed his/her performance in comparison to the younger ones. Overconfidence in their own investment ability among the youngsters largely accounts for the excessive trading among younger investors leading to lower returns and this direct to decline in the risk tolerance level.
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Findings: 1.
The study reveals that male investors dominate the investment market in India.
2. Most of the investors possess higher education like graduation and above. 3. Majority of the active and regular Investors belong to accountancy and relate d employment, non-financial management and some other occupations are very few. 4. Most investors opt for two or more sources of information to make investment decisions. 5. Most of the investors discuss with their family and friends before making an investment decision. 6. Percentage of income that they invest depend on their annual income, more the income more percentage of income they invest. 7. The investors decisions are based on their own initiative. 8. The investment habit was noted in a majority of the people who participated in the study. 9. Most Investors prefer to park their funds in avenues like Life insurance, FD, Gold and Real Estate. 10. Most of the investors get their information related to investment through electronic media (TV) next to print media (News paper/ Business news paper/ Magazines) 11. Most of the investors are financial illiterates. 12. Increase in age decrease the risk tolerance level. 13. Women are attracted towards investing gold than any other investment avenue.
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averse to uncertainties. (MacCrimmon & Wehrung, 1986). Individuals with low levels of risk tolerance require lower chances of a loss, choose not to operate in unfamiliar situations and require more information about the performance of an investment (MacCrimmon & Wehrung).
Table 7 SUGGESTED PORFOLIO CONSTRUCTION BASED ON AGE GROUP AND LEVEL OF RISK
PARAMETER AGE GROUP LEVEL OF RISK - PERCENTAGE APPORTIONED LOW RISK RISK MEDIUM RISK HIGH OF INCOME TO BE TOTAL
BETWEEN 20 - 30 30% 50% 20% 100% BETWEEN 30 - 40 50% 35% 15% 100% ABOVE 40 70% 20% 10% 100% TOTAL 100% 100% 100%
Portfolio construction:
Step 1: Identify the age group of the investor, check in which age group he comes under. Suggest suitable portfolio from the above table. Example: An investor of age 36 working in public sector Company has approached you to invest his 8 lakhs of money in a suitable investment. Advice : the investor comes under the age group 30 40. His suitable portfolio will be 1. 50% invest in low risk investment avenues. 2. 35% invest in medium risk avenues. 3. 15% invest in high risk avenues. Step 2:investment prefere nce made from the table 5.5 or based on his occupation. Since he come under the occupation salaried he can choose the preferred investment avenues from table 5.1 67
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Summar y
This report is a reflection of the behaviour of various categories of investors. Selection of a perfect investment avenue is a difficult task to any investor. An effort is made to identify the tastes and preferences of a sample of investors selected randomly out of a large population. Despite of many limitations to the study I was successful in identifying some investment patterns, there is some commonness in these investors and many of them responded positively to the study.
This report concentrated in identifying the needs of current and future investors, investor s preference towards various investment avenues are identified based on their occupation. Investors risk in selecting a particular avenue is dependent on the age of that investor.
Conclusion
This study confirms the earlier findings with regard to the relationship between Age and risk tolerance level of individual investors. The Present study has important implications for investment managers as it has come out with certain interesting facets of an individual investor. The individual investor still prefers to invest in financial products which give risk free returns. This confirms that Indian investors even if they are of high income, well educated, salaried, independent are conservative investors prefer to play safe. The investment product designers can design products which can cater to the investors who are low risk tole rant and use TV as a marketing media as they seem to spend long time watching TVs. 69
BIBILIOGRAPHY
BOOKS 1. The Mindful Investor, by Maria Gonzalez and Graham Bayron. 2. Understanding Indian Investors, by Jawahar Lal. 3. Security Analysis and Portfolio Management by Punithavathi Pandian. 4. Investment Analysis and Portfolio Management, by Prasanna Chandra. RESEARCH PAPERS An Empirical study on Indian individual investor s behaviour, by Syed Tabassum Sultana. WEB SITES www.tax4India.com www.economictimes.Indiatimes.com www.business-standard.com www.Indiamoney.com www.moneymanagementideas.com www.savingwala.com
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ANNEXURE 1
Dear Respondent, SUB: Request to fill the Questionnaire regarding a research study. I am a final year student currently pursuing my Master of Business Administration (MBA) at NIZAM COLLEGE, OSM ANIA UNIVERSITY. I am conducting a research study on INVESTM ENT AVENUES an analysis on investor behaviour on various investment avenues available in India. research (project) is taken as a partial requirement for the completion of my MBA This degreeOSMANIA UNIVERSITY. under I seek your kind assistance in completing the attached questionnaire which would take approximately 10 minutes of your valuable time. Your responses will be treated as Strictly Confidential . If you have any queries or concerns about completing the questionnaire, please do not hesitate to contact me @ rakesh.enugala@gmail.co Mobile 9989-1234-20 email: m Number: Note There is no right or wrong answer. To make this study possible and successful, your : kind co-operation and honest responses are greatly valued. Yours Sincerel y Rakesh Reddy E MBA Coordinator: Dr. M. Usha M.Com, M.Phil, PhD Professor, NIZAM COLLEGE Project Guide: Ms. Vinita Sharma Faculty of MANAGEMENT
INVESTMENT
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Questionnair e
1. Are you aware of the following investment avenues? Risk Investment (Tick which ever applicable in the boxes). High Risk Avenues: Investment Equity Share Market. Commodity Market. FOREX Market. Traditional Investment Avenues: Real Estate (property). Gold/Silver. Moderate Avenues: Risk Investment Chit Funds. Emerging Avenues: Investment Virtual Real Estate. Hedge Funds. Private Equity Investments. Art and Passion. 2. What do you think are the best options for investing your money? the order of preference) (Rank in (choose from above list) Mutual Funds. Life Insurance. Debentures. Bonds.
Safe/Low Avenues:
Savings Account. Bank Fixed Deposits. Public Provident Fund. National Savings Certificates. Post Office Savings. Government Securities.
1.___________________________________ 2.___________________________________ 3.______________________________________ 4.___________________________________ 5.___________________________________ 6.______________________________________ 3. Reasons for selecting these options :
1_________________________________________________________________________________ 2_________________________________________________________________________________ In the past, you have invested mostly (write as many as applicable) in _____________________________________________________________________________________________________________ _____________________________________________________________________________________________________________ 5. In which sector do you prefer to invest your money? Private Sector Government Sector Public Sector What are the important factors guiding principal, diversification, progressive values, etc.)? your Foreig n Sector 4.
6.
_________________________________________________________________________________________________________________
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7.
What are your savings objectives? Children s Education Retirement Home Purchase Children s Marriage ot hers_______________________________________________________________ Healthcare What is your investment objective? Income and Capital Preservation Long-term Growth Growth and Income short-term Growth Others_________________________________________________________________________________________________ What is the purpose behind investment? Wealth Creation Tax Saving Earn Returns Future Expenses Others________________________________________________________________________________________________
8.
9.
10. Have you set aside funds specifically for the education and marriage of your children? If yes, please give amounts and how the funds are Education: Amount Rs.__________________________________ invested in ________________________________ held Marriage: Amount Rs.__________________________________ invested in ________________________________ 11. Do you have a formal budget for family expenditure? Yes No 12. Do you have a savings and investment target amount you aim for each year? Yes if yes:_______________________________________________________________________ Amount No 13. At which rate do you want your investment to grow? Steadily At an Avera ge Rate Fast 14. Which factor do you consider before investing? Safety of Principal Low Risk 15. Do you invest your money in share market? Yes No
Maturity Period
If yes: Imagine that stock market drops after you invest in it then what will you do? ithdraw your money W Wait to increase Invest more in it 16. How often investment? Daily do you monitor Monthly your Occasionally
17. What percentage of your income do you invest? 0-15% 15-30% 30-50% 18. What is the time period you prefer to invest? Short-term (0-1yrs) Medium-term (1-5yrs) Long-term (>5yrs)
19. Can you take the risk of losing your principal investm ent amount? Yes No If yes: What percentag e ________________________ 20. What is your source of investment advice? Newspapers News Channels Family or Friends Books Internet Magazines Advisors Certified Market Professional/Financial Planners
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Personal Details
(Personal details are kept highly confidential; these details will not be revealed to any third party)
Between 20-30
Between 30-40
Above 40
Qualification: Under Graduate Graduate Post Graduate Other: ______________________________________________ Occupation (what category do you come under): Sa laried Business Housewife Student Professional Retired Other: ______________________________________________ Annual income: Rs. 2,00,000 Below Rs. 4,00,000-Rs 6,00,000 Do you have a financial advisor? Yes No What best describes your investment experience? Beginning (no investment experience) Moderate (comfortable with fixed deposits, chit funds, post office) Knowledgeable (has bought or sold individual shares of stock or bonds) Experienced (frequently trade in stocks, commodities, options and futures)
Date: Signature :
You have successfully completed this Questionnaire Thank you again for your time and support!
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