CHAPTER-1 INTRODUCTION

1.1 INTRODUCTION REPORT

TO

THE

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

1.2 OBJECTIVE STUDY

OF

THE

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.

And demographics based on occupation of the sample investor.

9. To identify the objective of savings of an investor. 10. To study the dependence/independences of the demographic factors (Age) of the

investor and his/her risk tolerance level.

Plan study

of

the

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.

1.3 NEED STUDY

FOR

THE

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.

1.4 VALUE ADDITION

This analysis will he lp to strengthen investor intimacy. This analysis will also throw light on various investment avenues available in India that will he lp in many ways like. The expectations of differe nt types of investors regarding particular se rvice requirements can be identified.
y y y

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.

y y

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.

1.5 LIMITATIONS STUDY

OF

THE

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:
y

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.

The information can be biased due to use of questionnaire.

1.6 RESEARCH METHODOLOGY

Sampling technique Initially, a rough draft will be prepared keeping in mind the objective of the research. A pilot study will be undertaken in order to know the accuracy of the questionnaire. The final questionnaire will be arrived at only after certain important changes are incorporated. Convenience sampling technique will be used for collecting the data from different investors. The investors are selected by the convenience sampling method. The selection of units from the population based on their easy availability and accessibility to the researcher is known as convenience sampling. Convenience sampling is at its best in surveys dealing with an exploratory purpose for generating ideas and hypothesis. Sampling unit: The respondents who will be asked to fill out the questionnaires are the sampling units. These comprise of employees of MNC s, government employees, house wives, self employed, professionals and other investors. Sampling size: The sample size will be restricted to only 100, which comprised of mainly people from different regions of Hyderabad due to time constraints. Sampling area: The area of the research is Hyderabad.

1.7 SOURCES INFORMATION

Primary Data :

OF

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

CHAPTER -2 LITERATURE REVIEW

10

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.

11

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.

12

CHAPTER-3 INDUSTRY PROFILE

13

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

insurance companies in India.

14

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.

15

Various Investment avenues available in India

Safe/Low Risk Avenues: y y y y y y Savings Account Bank Fixed Deposits. Public Provident fund. National savings certificates. Post office savings. Government Securities.

Moderate Risk Avenues: y y y y Mutual Funds. Life Insurance. Debentures. Bonds.

High Risk Avenues: y y y Equity Share Market. Commodity Market. FOREX Market.

Traditional Avenues: y y y Real Estate (property). Gold/Silver. Chit Funds.

Emerging Avenues: y y y Virtual Real Estate. Hedge Funds/Private Equity Investments. Art and Passion.

16

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.

17

FIXED DEPOSITS/ TERM DEPOSITS

The term "fixed" in Fixed Deposits denotes the period of maturity or tenor. Fixed Deposit, therefore, pre plans a length of time for which the depositor decides to keep the money with the Bank and the rate of interest payable to the depositor is decided by this tenure. Rate of interest differs from Bank to Bank. Normally, the rate is highest for deposits for 3-5 years. This, however, does not mean that the depositor loses all his rights over the money for the duration of the tenor decided. Deposits can be withdrawn before the period is over. However, the amount of interest payable to the depositor, in such cases goes down. Every Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits for the duration of time for which the depositor decide s to keep the money with the bank. However, in case of need, the depositor can ask for closing the fixed deposit in advance by paying a penalty. Soon some banks have even introduced variable interest fixed deposits. The rate of interest in such deposits will keep on varying with the prevalent market rates i.e. it will go up if market interest rate goes and it will come down if the market rates fall.

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.

18

PUBLIC PROVIDENT FUND (PPF)

PPF is a 30 year old constitutional plan of the Central Government happening with the objective of providing old age profits security to the unorganized division workers and self employed persons. Currently, there are almost 30 lakhs PPF account holders in India across banks and post offices. Eligibility:Any individual salaried or non-salaried can open a PPF account. He may also pledge on behalf of a minor, HUF, AOP and BOI. Even NRIs can open PPF account. A person can contain only one PPF account. Also two adults cannot open a combined PPF account. The collective annual payment by an individual on account of himself his minor child and HUF/AOP/BOI (of which individual is member) cannot exceed Rs.70, 000 or else the excess amount will be returned without any interest. Subscription: The yearly contribution to PPF account ranges from a least of Rs.500 to a maximum of Rs.70, 000 payable in multiple of Rs.5 either in lump sum or in convenient installments, not exceeding 12 in a year. Penalty in case of non-subscription: The account will happen to obsolete if the required minimum of Rs.500 is not deposited in any year. The amount before now deposited will continue to earn interest but with no facility of taking loan or making withdrawals. The account can be regularized by depositing for each year of default, arrears of Rs.500 along with pe nalty of Rs.100.

19

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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NATIONAL SAVINGS CERTIFICATE (NSC)

National Savings Certificate (NSC) is a fixed interest, long term instrument for investment. NSCs are issued by the Department of Post, Government of India. Since they are backed by the Government of India, NSCs are a practically risk free avenue of investment. They can be bought from authorized post offices. NSCs have a maturity of 6 years. They offer a rate of return of 8% per annum. This interest is calcula ted every six months, and is merged with the principal. That is, the interest is reinvested, and is paid along with the principal at the time of maturity. For every Rs. 100 invested, you receive Rs. 160.10 at maturity. NSCs qualify for investment under Section 80C of the Income Tax Act (IT Act). Even the interest earned every year qualifies under Sec 80C. This means that investments in NSCs and the interest earned on it every year, up to Rs. 1 Lakh, are deductible from the income of the investor. There is no tax deducted at source (TDS). Features of NSC Minimum investment Rs. 500/- No maximum limit. Rate of interest 8% compounded half yearly. Rs. 1000/- grow to Rs. 1601/- in six years. Two adults, Individuals, and minor through guardian can purchase. Companies, Trusts, Societies and any other Institutions not eligible to purchase. Non-resident Indian/HUF cannot purchase. No pre-mature encashment.

21

POST OFFICE SAVINGS

There are various investment schemes available in post offices, like KVP (Kisan Vikas Patra), MIS (Monthly Income Scheme) and various others. All these schemes are completely risk-free, and you do not need to have large sum of money to start investing in these post office schemes. Some schemes offer Tax-saving benefits and some gives tax-free returns. So you need to find out some scheme as per your requirements. These are some of the safe and secure investments that you can opt for. Though the interest rates are not so high, but still you must invest some part of your money into any of these investment instruments. It is your hard-earned money, so better play safe and invests some part in secure funds also.

GOVERNMENT SECURITIES (G-secs)

Government securities (G-secs) are supreme securities which are issued by the Reserve Bank of India on behalf of Government of India in lieu of the Central Governme nt's market borrowing program. The term Government Securities includes: Central Government Securities. State Government Securities Treasury bills

22

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

24

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

25

BONDS & DEBENTURES

Bonds & Debentures, these two words can be used interchangeably. In Indian markets, we use the word bonds to indicate debt securities issued by government, semi-government bodies and public sector financial institutions and companies. We use the word debenture to refer to the debt securities issued by private sector companies. Bonds - Debt securities issued by Govt. or Public sector companies Debentures - Debt securities issued by private sector companies In other words we can tell that a bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, or Public entity known as the issuer. The issuer promises to pay you a specified rate of interest during the life of the bond, in return for the loan. They also promise s to repay the face value of the bond (the principal) when it matures. Following are allowed to issue bonds Governments Municipalities Variety of institutions Corporations Buying and Holding of Bonds: nvestors can subscribe to primary issues of Corporates and I Financial Institutions (FIs). It is common practice for FIs and Corporates to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. 26

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.

27

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

28

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).

31

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

32

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.

33

REAL ESTATE AS AN INVESTMENT OPTION

The growth curve of Indian economy is at an all time high and contributing to the upswing is the real estate sector in particular. Investments in Indian real estate have been strongly taking up over other options for domestic as well as foreign investors. The boom in the sector has been so appealing that real estate has turned out to be a convincing investment as compared to other investment vehicles such as capital and debt markets and bullion market. It is attracting investors by offering a possibility of stable income yields, moderate capital appreciations, tax structuring benefits and higher security in comparison to other investment options. A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young has predicted that Indian real estate industry is poised to emerge as one of the most preferred investment destinations for global realty and investment firms in the next few years. The potential of India's property marke t has a revolutionizing effect on the overall economy of India as it transforms the skyline of the Indian cities mobilizing investments segments ranging from commercial, residential, retail, industrial, hospitality, healthcare etc. But maximum growth is attributed to its growth from the booming IT sector, since an estimated 70 per cent of the new construction is for the IT sector. Real estate industry research has also thrown light on investment opportunities in the commercial office segment in India. The demand for office space is expected to increase significantly in the next few years, primarily driven by the IT and ITES industry that requires an projected office space of more than 367 million sq ft till 2012-13. 34

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.

35

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.

36

EMERGING INVESTMENT AVENUES

According to a study unde rtaken jointly by Merrill Lynch, Cap Gemini, and Ernst & Young, High Net worth Individuals [HNIs] or wealthy investors are proactive in portfolio management, risk manage ment, consolidation financial assets and use of diversification strategies as actively as large institutions. HNIs are proactive in identifying new investment options and take inputs from professional advisors in volatile market conditions. HNIs are dynamic in modifying their asset allocation and were among the first investors to move from equities to fixed income during 2001-2002 period of downturn in equity markets. They shifted back to equities when they identified favorable market trends.

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

37

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.

38

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]

39

PRIVATE EQUITY INVESTMENTS

Is the most important funding source in the entrepreneurial marketplace? Private equity investments contribute to the funding of around 25 times the numbe r of businesses the venture capitalists fund each year. Private equity investments are usually derived from a high net-worth individual who represents an essential source of funding for early stage, high-risk ventures. It is estimated that one-seventh of the 300,000 + start/early growth firms in the US receive funding from angel investors. This translates into over $20 billion of investment in approximately 50,000 deals each year. This investment group exceeds venture capital sources which are estimated at $5 - $7 billion spread over 1,000 venture capital investments each year. A typical profile of a private equity investor: Is someone that prefers to invest within one day of travel? Is very well educated Tends to invest collectively within a group of other private equity investors Usually invests within the dollar range of $10,000 - $500,000, averaging $230,000 Makes one investment every two years

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

CHAPTER-4 DATA ANALYSIS & INTERPRETATION

41

Analysis in this report:

An analysis is made on the responses received from 100 sample investors. The objective of the report is to find out the investor s behaviour on various investment avenues, to find out the needs of the current and future investors. The questionnaire contains various questions on the investor s financial experience, based on these experiences an analysis is made to find out a pattern in their investments. Based on these investment experiences of the 100 sample investors an analysis is made and interpretations are drawn. Interpretations are made on a rational basis, these interpretations may be correct or may not be correct but care is taken to draw a valid and approvable interpretation. Analysis is made only from the information collected through questionnaires no other data or information is taken in to consideration for purpose of the analysis.

42

Analysis of the Sur vey: TABLE 1: INVESTOR DEMOGRAPHICS OF THE SAMPLE

PARAMETER NO: OF INVESTORS PERCENTAGE

GENDER MALE 58 58% FEMALE 42 42% TOTAL

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%

43

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

44

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.

TABLE 2 OTHER CHARACTERISTICS OF SAMPLE INVESTOR

Table 2.1 INVESTORS WILLING TO LOSE AMOUNT PARAMETER NO OF INVESTORS PERCENTAGE YES 5 5 NO 95 95 TOTAL 100 100 PRINCIPAL

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

45

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

OCCATION A LLY, 41 MONTHLY, 3 5

DAIL Y MONTHL Y OCCATIONALL Y OTHE R

46

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

47

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.

48

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.

Table 3 Objectives of Investment

Table 3.1 SAVINGS OBJECTIVE PARAMETER VOTES WEIGHTS RANKING EDUCATION 71 29 1 CHILDREN'S RETIREMENT 47 19 3 HOME PURCHASE 38 15 4 CHILDREN'S MARRIAGE 30 12 5 HEALTHCARE 57 23 2 OTHERS 5 2 6 TOTAL 248 100

49

OTHER S CHILDREN'S MARRIAGE HOME PURCHASE CHILDREN'S EDUCATION

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.

51

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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Independent Variables and Dependent Variables

There are total four independent variables 1. Age group. 2. Occupation. 3. Qualification. 4. A nnual income There can be many dependent variables like 1. Level of risk tolerance 2. Percentage of income that can be invested 3. Time period that can be taken for investments 4. Savings objectives 5. Investment preference. These independent variables can be compared with any dependent variables for finding the relations between the parameters. In my analysis I have taken occupation category for comparison with dependent variable investment preference and age group comparing with the dependent variable level of risk tolerance. Below are the demographics of the sample investors based on the category occupation.

53

TABLE 4 : OCCUPATION
I. SALARIED

DEM

OGRAPHICS

BASED

ON

PARAMETER NO: OF - SALARIED PERCENTAGE

AGE GROUP BELOW 20 0 0% BETWEEN 20 - 30 22 42% BETWEEN 30 - 40 18 35% ABOVE 40 12 23% TOTAL 52 100%

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

PARAMETER NO: OF - BUSINESS PERCENTAG E

AGE GROUP BELOW 20 0 0% BETWEEN 20 - 30 2 9% BETWEEN 30 - 40 10 45% ABOVE 40 10 45% TOTAL 22 100%

QUALIFICATIO N UNDER GRADUATES 5 23%

54

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

PARAMETER NO: OF - PROFESSIONAL PERCENTAG E

AGE GROUP BELOW 20 0 0% BETWEEN 20 - 30 8 57% BETWEEN 30 - 40 2 14% ABOVE 40 4 29% TOTAL 14 100%

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%

55

IV. HOUSEWIFE

PARAMETER NO: OF - HOUSEWIFE PERCENTAG E

AGE GROUP BELOW 20 0 0% BETWEEN 20 - 30 4 36% BETWEEN 30 - 40 3 27% ABOVE 40 4 36% TOTAL 11 100%

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.

56

Table 5: INVESTMENT OCCUPATION

PREFERENCE

BASED

ON

Table 5.1 Preferred investment avenues for salaried

INVESTMENT AVENUES VOTES WEIGHTS RANK LIFE INSURANCE 35 16 1 GOLD 25 12 2 BANK FIXED DEPOSITS 24 11 3 MUTUAL FUNDS 23 11 4 REAL ESTATE 23 11 5 POST OFFICE SAVINGS 20 9 6 PPF 18 8 7 NSC 17 8 8 EQUITY SHARES 16 7 9 SAVINGS ACCOUNT 14 7 10 TOTAL 215 100

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.

Table 5.2 Preferred investment avenues for business people

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

57

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.

Table 5.3 Preferred investment avenues for professionals

III. PROFESSIONAL INVESTMENT AVENUES VOTES WEIGHTS RANK BANK FIXED DEPOSITS 10 19 1 INSURANCE 10 18 2 GOLD 6 11 3 REAL ESTATE 6 11 4 POST OFFICE SAVINGS 5 9 5 SAVINGS ACCOUNT 4 7 6 MUTUAL FUNDS 4 7 7 PPF 3 6 8 BONDS 3 6 9 GOVT SECURITIES 3 6 10 TOTAL 54 100

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

rank), where salaried and

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

Table 5.4 Preferred investment avenues for housewives

INVESTMENT AVENUES VOTES WEIGHTS RANK GOLD 9 18 1 INSURANCE 9 18 2 BANK FIXED DEPOSITS 8 16 3 REAL ESTATE 5 10 4 POST OFFICE SAVINGS 5 10 5 CHIT FUNDS 4 8 6 EQUITY 4 8 7 SAVINGS ACCOUNT 3 6 8 NSC 2 4 9 MUTUAL FUNDS 1 2 10 TOTAL 50 100

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.

Table 5.5 Preferred investment avenues overall

INVESTMENT AVENUES VOTES WEIGHTS RANK LIFE INSURANCE 67 17 1 BANK FIXED DEPOSITS 55 14 2 GOLD 50 13 3 REAL ESTATE 45 12 4 MUTUAL FUNDS 38 10 5 POST OFFICE SAVINGS 35 9 6 EQUITY SHARES 29 8 7 SAVINGS ACCOUNT 25 6 8 NSC 25 6 9 PPF 22 5 10 TOTAL 391 100

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HYPOTHESI Increase in Age decreases the Risk tolerance level. S

y y y y Relation between Age and risk tolerance Level of risk tolerance dependent on the age of the investor. Risk tolerance of an investor shows a negative relation to the age of that investor Lower the age higher the risk capabilities, higher the age lower the risk capabilities.

LEVEL OF RISK TOLERANCE WITH RESPECT TO AGE GROUP

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%

Table 6.2 risk tolerance of age group 30 - 40

PARAMETER 30 - 40 AGE GROUP NO OF LEVEL OF RISK INVESTORS PERCENTAGE LOW RISK 20 57% MEDIUM RISK 11 32% HIGH RISK 4 11% TOTAL 35 100%

Table 6.3 risk tolerance of age group above 40

PARAMETER ABOVE 40 AGE GROUP LEVEL OF RISK OF INVESTORS PERCENTAGE NO

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.

62

Attributes Risk Tolerance Level Age -0.74

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.

63

CHAPTER -5 FINDINGS & SUGGESTIONS

64

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.

65

Risk tolerance level and Suggestion of Suitable Portfolio to the Investors

The role of uncertainty and the knowledge about the return on Investment Avenue are important components of any investment. The extent of an investor s ability to tolerate these uncertainties of return is refe rred as risk tolerance level of an investor (Schaefer, 1978). Risk tolerance tends to be subjective rather than objective. Schaefer described the relation this way: two persons may very well agree on the riskiness of a set of gambles, but may nevertheless prefer different gambles, rank ordering them differently according to their pe rsonal tolerance. There are two common methods of estimating investors tolerance of risk. The first method is a clear understanding of the investor and his/her history with investment securities. The second method is to use a questionnaire designed to elicit feelings about risky assets and the comfort level of the investor given certain changes in the portfolio or certain investment scenarios. The second method is used to know the risk tolerance level of the investors. Based on the responses to the questionnaire, the cumulative scale is constructed and scores are assigne d to each investor accordingly to categorize the respondents in to i.e. Low, Moderate and High risk tolerance level. The investors are divide d into 3 categories i.e., A, B and C depending on their risk tolerance starting with Low risk tolerance, Moderate risk tole rance and High risk tolerance. Generally investors with a low risk tolerance act differently with regard to risk than individuals with a high risk tolerance. Investor with a high level of risk tolerance would be comfortable with market volatility, while low risk-tolerance individuals require stability and are 66

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

CHAPTER -6 SUMMARY & CONCLUSION

68

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

NIZAM COLLEGE Hyderabad

Department Management of Business

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.

investment decisions? (Return, safety of

_________________________________________________________________________________________________________________

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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

High Returns (through A/C) a DEMAT

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)

Name: ____________________________________________________: _________________________________________ Designation Organization : ________________________________________ Age Group: Below 20

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)

Rs. 2,00,000- Rs 4,00,000 Above Rs. 6,00,000

Date: Signature :

You have successfully completed this Questionnaire Thank you again for your time and support!

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