"Security Forms of Financial Investment " - SAPM-2

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Security Forms of Financial Investment
 
 
We know that the recipient of money in a financial investment issues a document or a piece of paper to the investor (supplier of money), evidencing the liability of the former to the latter to provide returns. This document also outlines the rights of the investor to certain prospects and/or property and sets the conditions under which the investor can exercise his/her rights. This document is variously called 'Security Certificate', 'Note' and so on.
 
The term 'security' is a generic term used generally for those documents evidencing liabilities that are negotiable - that can be bought and sold in the stock market. The security form of investment has received great impetus since 1980 following the Central Government's liberal policy towards foreign investments-direct and portfolio, streamlining of licensing, capital issues, and other procedural formalities to facilitate faster capital formation; providing incentives for exports; and encouraging private sector to tap the primary market for meeting their long-term capital requirements.
 
There are different types of securities conferring different sets of rights on the investors and different sets of conditions under which these rights can be exercised. They are gilt-edged securities, corporate debentures, preference shares and equity shares. The important characteristic features of these securities are described below.
 
Gilt-Edged Securities
 
The debt securities issued by the government and semi-government bodies are called gilt-edged securities. They comprise the treasury bills and the dated securities (also called bonds or dated loans) of the central government, state government, and semi-government bodies like Port Trusts and State Electricity Boards. They are the acknowledgments of debt incurred by the issuing government or semi-government body. Gilt-edged securities thus represent the public borrowings of the issuing government or semi-government bodies. Over the years, the central and state governments and the semi-government bodies have made an extensive use of these securities for meeting their short and long-term resource requirements.
 
Treasury Bills: These short-term securities are issued by the RBI on behalf of the Central Government. Currently, the T-Bills having a maturity of 91 and 364 days only are being traded. No interest is paid on these bills. Instead they are sold at a discount. In other words, the buyer pays a price less than the face value of the bill and receives the full face value on the last day of maturity. The difference between the discount price and face value represents the interest income to the investor.
 
Example: Suppose the 91-day treasury bills of Rs.100 each are sold for Rs.99 per bill. The buyer pays Rs.99 and will receive Rs.100 after 91-days from the Government of India for every bill he buys today. These bills are said to have been sold at
 
 X 100 = 4.01% discount per annum. The rupee income, the buyer makes for 91-days investment is Re.1 per bill and the return on his investment works out to be
 
 X 100 = 4.05% per annum. Rs.99       
 
Since April 1st, 1996 the sale of treasury bills by Public Debt Office of the RBI had been stopped. Now it is carried out by the RBI by conducting auctions: weekly for 91 days T-bills and fortnightly for 364 days T-bills.
 
The discount rate on treasury bills being very low, the return to the investor is meager. However, they are the safest and the most liquid securities you can find in the market. They are a safe investment because the central government will never default on making payment when the bills mature. They are liquid because the commercial banks are ready to buy them at any time due to the facility of rediscounting with the RBI. There is however little public interest in treasury bills because of the availability of equally safe investment opportunities providing a better return and also because they are sold in large denominations. Frequent buyers of treasury bills are the commercial banks, state governments, and semi-government bodies. Due to rediscounting facility, the RBI generally ends up holding nearly 80 percent of the outstanding treasury bills at any given time.
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On 21 December 2009 at 20:52 Report
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certificate is that while the former is negotiable and transferable by a simple endorsement, a stock certificate can As against the periodic issue of the ad hoc treasury bills to the RBI in the past, the government is now raising funds through the Ways and Means financing.
 
Since the RBI has started selling treasury bills auction, through, the discount rate is now determined by market forces and on a competitive basis. The discount rates on treasury bills increase as the number of days to maturity increase. However, the discount rates on T-Bills are lower than the rates on the dated government securities.
 
Central Government Dated Securities: These securities of the central government have a maturity period longer than one year and carry a fixed rate of interest. The interest is payable semi-annually and the payment is usually made by issuing coupons which can be encashed at any bank. Though these securities are redeemed at par, their issue price can be higher or lower than the face value depending upon the prevailing market conditions.
 
These securities are held either in the form of promissory notes or stock certificates. The difference between a promissory note and a stock be transferred only by executing a transfer deed and submitting a copy of the deed to the RBI. The RBI issues a new certificate to the transferee. A promissory note has to be presented to RBI every time the payment of interest is due, but no such presentation of the stock certificate is required because the RBI knows who the present owner is and mails the interest coupon to him on the due date. The public/recognized provident funds are required to hold these securities only in the form of stock certificates.
 
The coupon rate on the central government dated securities is higher than the discount rate on treasury bills, due to the fact that the maturity of dated securities is longer. Hence there is a need for providing liquidity premium to the investor. These securities are the next best alternative from the stand point of safety. There is no default risk, but the real value of income and capital returned on maturity could be lower due to possible inflation. The market for central government securities is captive in the sense that certain institutions such as commercial banks, Life Insurance Corporation (LIC), General Insurance Corporation (GIC), development financial institutions like the Industrial Development Bank of India (IDBI), recognized/public provident funds, registered trusts, government and semi-government bodies are required by law to invest at least a certain percentage of their investible funds in the central government securities. Besides the central government, and the state governments also issue dated securities.
 
Semi-Government Dated Securities: These are the promissory notes issued by the institutions and corporations set up by the central/state governments. They also include the securities of municipal corporations. The semi-government bodies such as electricity boards, housing boards, port trusts, central and state financial institutions issue securities to meet the financial needs of their developmental activities. Semi-government securities are guaranteed by their respective governments and carry a higher coupon rate or lower issue price than for their counterpart state government dated securities.
 
The price quotations for gilt-edged dated securities are reported to stock exchange for inclusion in the official quotations list by the licensed dealers. While the issue of securities, payment of interest, and transfer of the central and state government securities are handled by the RBI, the issue, interest payment and transfer of semi-government securities are handled by the commercial banks for a fee. As mentioned earlier, the gilt-edged securities market is dominated by the institutional investors like the LIC, GIC, banks, and provident funds. There are a few members of the stock exchanges who specialize in gilt-edged securities. But they operate primarily as brokers and not as dealers.
 
Corporate Debentures
 
Corporate debentures are the promissory notes issued by the joint stock companies in the private sector. They are thus the debt obligations of the issuing corporation. Like government securities, they have an issue price at which they are originally issued, a coupon interest rate, and a specified maturity date.
 
Debenture Trust Deed
 
When a debenture issue is sold to the investing public, the debenture trust deed calls for appointing a trustee. Banks, insurance companies and firms of attorneys usually act as trustees to corporate debenture issues. The main job of the trustee is to look after the interest of debenture holders by ensuring that the company adheres to the provisions of the indenture - the agreement entered into between the issuing company and the debenture holders. To perform their role effectively, the trustees are vested with adequate powers which include the right to appoint a nominee director on the board of the company in consultation with the institutional debenture holders.
 

The indenture is a legal document describing in considerable detail the contractual relationship between the issuing company and the debenture holders. This agreement specifies, among other things, the periodicity of interest payment; mode of redemption of debentures; collateral securities, if any; rights of the debenture holders in the event of default; rights, duties, and responsibilities of the trustee to the issue; and restrictive covenants such as limit on dividend payment,

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On 21 December 2009 at 20:55
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certificate is that while the former is negotiable and transferable by a simple endorsement, a stock certificate can As against the periodic issue of the ad hoc treasury bills to the RBI in the past, the government is now raising funds through the Ways and Means financing.
 
Since the RBI has started selling treasury bills auction, through, the discount rate is now determined by market forces and on a competitive basis. The discount rates on treasury bills increase as the number of days to maturity increase. However, the discount rates on T-Bills are lower than the rates on the dated government securities.
 
Central Government Dated Securities: These securities of the central government have a maturity period longer than one year and carry a fixed rate of interest. The interest is payable semi-annually and the payment is usually made by issuing coupons which can be encashed at any bank. Though these securities are redeemed at par, their issue price can be higher or lower than the face value depending upon the prevailing market conditions.
 
These securities are held either in the form of promissory notes or stock certificates. The difference between a promissory note and a stock be transferred only by executing a transfer deed and submitting a copy of the deed to the RBI. The RBI issues a new certificate to the transferee. A promissory note has to be presented to RBI every time the payment of interest is due, but no such presentation of the stock certificate is required because the RBI knows who the present owner is and mails the interest coupon to him on the due date. The public/recognized provident funds are required to hold these securities only in the form of stock certificates.
 
The coupon rate on the central government dated securities is higher than the discount rate on treasury bills, due to the fact that the maturity of dated securities is longer. Hence there is a need for providing liquidity premium to the investor. These securities are the next best alternative from the stand point of safety. There is no default risk, but the real value of income and capital returned on maturity could be lower due to possible inflation. The market for central government securities is captive in the sense that certain institutions such as commercial banks, Life Insurance Corporation (LIC), General Insurance Corporation (GIC), development financial institutions like the Industrial Development Bank of India (IDBI), recognized/public provident funds, registered trusts, government and semi-government bodies are required by law to invest at least a certain percentage of their investible funds in the central government securities. Besides the central government, and the state governments also issue dated securities.
 
Semi-Government Dated Securities: These are the promissory notes issued by the institutions and corporations set up by the central/state governments. They also include the securities of municipal corporations. The semi-government bodies such as electricity boards, housing boards, port trusts, central and state financial institutions issue securities to meet the financial needs of their developmental activities. Semi-government securities are guaranteed by their respective governments and carry a higher coupon rate or lower issue price than for their counterpart state government dated securities.
 
The price quotations for gilt-edged dated securities are reported to stock exchange for inclusion in the official quotations list by the licensed dealers. While the issue of securities, payment of interest, and transfer of the central and state government securities are handled by the RBI, the issue, interest payment and transfer of semi-government securities are handled by the commercial banks for a fee. As mentioned earlier, the gilt-edged securities market is dominated by the institutional investors like the LIC, GIC, banks, and provident funds. There are a few members of the stock exchanges who specialize in gilt-edged securities. But they operate primarily as brokers and not as dealers.
 
Corporate Debentures
 
Corporate debentures are the promissory notes issued by the joint stock companies in the private sector. They are thus the debt obligations of the issuing corporation. Like government securities, they have an issue price at which they are originally issued, a coupon interest rate, and a specified maturity date.
 
Debenture Trust Deed
 
When a debenture issue is sold to the investing public, the debenture trust deed calls for appointing a trustee. Banks, insurance companies and firms of attorneys usually act as trustees to corporate debenture issues. The main job of the trustee is to look after the interest of debenture holders by ensuring that the company adheres to the provisions of the indenture - the agreement entered into between the issuing company and the debenture holders. To perform their role effectively, the trustees are vested with adequate powers which include the right to appoint a nominee director on the board of the company in consultation with the institutional debenture holders.
 

The indenture is a legal document describing in considerable detail the contractual relationship between the issuing company and the debenture holders. This agreement specifies, among other things, the periodicity of interest payment; mode of redemption of debentures; collateral securities, if any; rights of the debenture holders in the event of default; rights, duties, and responsibilities of the trustee to the issue; and restrictive covenants such as limit on dividend payment,

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On 21 December 2009 at 20:56
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c.     Part B of the PCD will be redeemed at par in three installments of Rs.28, Rs.28 and Rs.29 at the end of 7th,8th and 9th years respectively from the date of allotment.
 
'Convertible' Zero Coupon Bond: A zero coupon bond is a loan instrument slightly different from a debenture. A debenture is usually offered at a face value (say Rs.100), earns a stream of interest (say, 14 percent p.a.) till redemption and is redeemed with or without premium. Unlike the above, a zero coupon bond, say a five-year bond, may be offered at a discount (say, at Rs.50), fetches no periodic interest and is redeemed at the face value (say, Rs.100). The return on such a bond when subscribed to at Rs.50, is also about 14 percent. It is just that in this case the interest is reinvested in the company for a period of five years. A zero coupon bond may also be redeemed by allocation of ordinary share(s). For want of better terminology, such a bond has been referred to as a 'Convertible' zero coupon bond.
 
Redemption: Irredeemable corporate debentures are perhaps non-existent.In fact, all corporate debentures are redeemable and the redemption takes place in a pre-specified manner. Typically, debentures have a term-to-maturity of 7 to 10 years and are redeemed in installments over a period of time. Recently, companies have been permitted to issue debentures of shorter maturities like debentures with a maturity period of one year. Corporate debentures can be redeemed by creating a sinking fund. A sinking fund provision in the indenture requires the issuing company to make periodic payments to the trustees. The trustee can retire the debentures by purchasing them in the market or calling them in a manner acceptable to the debenture holders. In some cases, however, the company itself can handle the retirement with the sinking fund amount.
 
Debenture Redemption Reserve
 
The guidelines for protecting the interests of debenture holders requires, among other things, the issuing company to create a Debenture Redemption Reserve (DRR) out of its profits to the extent of 50% of the amount of debentures to be redeemed before the date of redemption. The company can utilize the DRR for redeeming debentures only after 10% of the debenture liability has been actually redeemed by the company.
 
Call Option
 
Some debenture issues have a call feature attached to them, which provides an option to the issuing company to redeem debentures at a specified price before the maturity date. In this case, there is, what is known as an effective call option period during which the option can be exercised. The call option period usually commences after 1 to 3 years from the date of allotment. When the debentures are redeemed by call, they are done so at the call price which can be 5% above the par value. The call price is maximum at the start of the effective call option period and declines step-wise towards the face value as the call date approaches the maturity date. The effective call option period and the time-series schedule of call price are announced at the time of issue.
 
Preference these Shares
 
These are a hybrid variety of securities which have some features of equity shares and some features of debentures. Preference shares carry a fixed rate of dividend. Preference dividend is payable only out of distributable profits. Generally, dividend on preference shares is cumulative. Hence dividend not paid in one year has to be paid during the subsequent years before equity dividend is paid. All preference shares shall be redeemable within 20 years as per the Companies Act, 1956.
 
Equity Shares
 
Investors' Classification of Equity Stocks
 
Unlike in the West where we find different classes of common stock with differing voting rights and rights to income and assets of the company, the equity stocks of all Indian joint stock companies belong to just one class. The rights and privileges conferred on the shareholders are all the same and they are enjoyable in proportion to one's shareholdings. With the commencement of the Companies Amendment Act, 2000, companies are allowed to issue shares with disproportionate voting rights.
 
The investment community in India, however, has its own categorization of equity stock, not on the basis of voting or any other right, but on the basis of behavior of prices (and returns) of equity stocks. These categories include Blue chips, Growth stocks, Income stocks, Cyclical stocks, Defensive stocks, Speculative stocks, Glamor stocks, and so on.
 
Non-security Forms of Financial Investment
 
There are a number of non-security forms of investment opportunities available to an investor in India. Unlike stocks and debentures discussed above, the certificates or notes evidencing these investments are neither transferable nor are they traded in any organized financial market. Hence, the nomenclature 'Non-security form', although, in the strict sense, is a misnomer.
 
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On 21 December 2009 at 20:57
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Broadly, these financial investment media can be classified into (1) National Savings Schemes, (2) Post Office Savings Deposit Schemes, (3) Deposits with Commercial Banks, (4) Corporate Fixed Deposits, and (5) Unit Schemes of UTI.
 
As can be seen from the above classification, most of the non-security forms of investment are the schemes or the plans of the central government, and the bodies controlled by it. These schemes are meant to mobilize small private savings for public use. Excepting corporate deposits, the other non-security forms of investment provide adequate safety and a reasonable liquidity. Many of these investments also have significant tax advantages. Although nominal returns on these investments are low vis-a-vis security returns, the features of tax advantage and safety can swing many small investors into their fold, particularly the conservative investors. In fact, statistics indicate that nearly 80% of the household savings are in these forms of investment.
 
The knowledge of non-security forms of investment is important not only because they are popular among small investors, but also because they help in fulfilling an important task of an investor, money manager/investment counselor - to obtain a balanced portfolio that satisfies a given set of objectives. The financial investments in media - security and non-security types differ in their return, risk, liquidity, and tax characteristics. So, it would be possible to form a portfolio by spreading one's investment across these forms such that investment objectives are best served. In this section, we will discuss the salient features of the major non-security forms of investment media available in India.
 
National Savings Schemes
 
Over the years, the Government of India has floated several national savings schemes with a view to mobilize private savings for public use. These schemes are operated mainly through the Post Offices because of the familiarity of these places to the masses. Some series of National Savings Schemes are operated through the State Bank of India and other nationalized banks. These series are known as ' Bank Series'. Investment in the eighth series of this scheme qualifies for a tax rebate. At present, the rate of return on NSS is 9% p.a. credited annually on April 1. Interest income qualifies for a limited tax deduction.
 
Public Provident Fund Scheme
 
This was introduced on July 1, 1968 and is primarily meant for self-employed individuals. The salaried individuals are also allowed to make contributions to this scheme over and above their contributions to the recognized provident funds in their organizations. It is a 15-year scheme with a facility to accept the last contribution in the 16th year.
 
At the option of the investor, the tenure of the account opened under this scheme can be extended by blocks of 5 years each.
 
A PPF Account can be opened in a Head Post Office or in a branch of SBI or its subsidiaries or at specified branches of some other nationalized banks by an individual on his own behalf or on behalf of a minor of whom he is a guardian or on behalf of a Hindu Undivided Family of which he is a member.
 
The minimum amount that can be contributed in a year is Rs.100 and the maximum amount is Rs.60000.
 
The interest is paid annually, but the rate is determined by the central government from time to time. The current rate of interest is 9.5% per annum compounded annually. The interest on PPF contributions is tax-free under Section 10 of the Income Tax Act, 1961 and the contributions towards the scheme qualify for 20% tax rebate up to Rs.60000 under Section 88 of the Act. The investment is exempt from Wealth Tax subject to the overall exemption limit of Rs.15 lakhs. Besides the tax benefits, the other attractive features of the scheme are as follows:
 
i.      Yearly contributions can be made in one lump sum or in 12 or less installments of varying amounts, in multiples of Rs.5.00.
ii.     It provides liquidity as loans and withdrawals are permitted. The application for the first loan can be made in the third year from the year of opening the PPF account. That is, if an investor opened the account in say 2000-01, the application for the first loan can be made in the year 2002-03. The loan amount is restricted to 25% of the balance amount to the credit at the end of the preceding financial year.
 
Also one can withdraw 50% of the balance amount to his credit at the end of the sixth year immediately preceding the year in which the amount is withdrawn. That is on 1-4-07, an investor can withdraw 50% of the balance standing to his credit on 31-3-01. Similar withdrawals can be made subsequently at three year intervals with the amount loanable remaining at the 50% of the amount due to ones credit at the end of the sixth year immediately preceding the year in which the withdrawal is made.
iii.    A PPF account can be revived by paying a fee of Rs.10 for each year of default along with the arrears of subscripttion of Rs.100 for each year of such default. The credit balance in the PPF account is not subject to attachment under an order or decree of court with respect to any debt or other liability.
iv.   The facility of nomination is available.
 
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On 21 December 2009 at 20:59
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Broadly, these financial investment media can be classified into (1) National Savings Schemes, (2) Post Office Savings Deposit Schemes, (3) Deposits with Commercial Banks, (4) Corporate Fixed Deposits, and (5) Unit Schemes of UTI.
 
As can be seen from the above classification, most of the non-security forms of investment are the schemes or the plans of the central government, and the bodies controlled by it. These schemes are meant to mobilize small private savings for public use. Excepting corporate deposits, the other non-security forms of investment provide adequate safety and a reasonable liquidity. Many of these investments also have significant tax advantages. Although nominal returns on these investments are low vis-a-vis security returns, the features of tax advantage and safety can swing many small investors into their fold, particularly the conservative investors. In fact, statistics indicate that nearly 80% of the household savings are in these forms of investment.
 
The knowledge of non-security forms of investment is important not only because they are popular among small investors, but also because they help in fulfilling an important task of an investor, money manager/investment counselor - to obtain a balanced portfolio that satisfies a given set of objectives. The financial investments in media - security and non-security types differ in their return, risk, liquidity, and tax characteristics. So, it would be possible to form a portfolio by spreading one's investment across these forms such that investment objectives are best served. In this section, we will discuss the salient features of the major non-security forms of investment media available in India.
 
National Savings Schemes
 
Over the years, the Government of India has floated several national savings schemes with a view to mobilize private savings for public use. These schemes are operated mainly through the Post Offices because of the familiarity of these places to the masses. Some series of National Savings Schemes are operated through the State Bank of India and other nationalized banks. These series are known as ' Bank Series'. Investment in the eighth series of this scheme qualifies for a tax rebate. At present, the rate of return on NSS is 9% p.a. credited annually on April 1. Interest income qualifies for a limited tax deduction.
 
Public Provident Fund Scheme
 
This was introduced on July 1, 1968 and is primarily meant for self-employed individuals. The salaried individuals are also allowed to make contributions to this scheme over and above their contributions to the recognized provident funds in their organizations. It is a 15-year scheme with a facility to accept the last contribution in the 16th year.
 
At the option of the investor, the tenure of the account opened under this scheme can be extended by blocks of 5 years each.
 
A PPF Account can be opened in a Head Post Office or in a branch of SBI or its subsidiaries or at specified branches of some other nationalized banks by an individual on his own behalf or on behalf of a minor of whom he is a guardian or on behalf of a Hindu Undivided Family of which he is a member.
 
The minimum amount that can be contributed in a year is Rs.100 and the maximum amount is Rs.60000.
 
The interest is paid annually, but the rate is determined by the central government from time to time. The current rate of interest is 9.5% per annum compounded annually. The interest on PPF contributions is tax-free under Section 10 of the Income Tax Act, 1961 and the contributions towards the scheme qualify for 20% tax rebate up to Rs.60000 under Section 88 of the Act. The investment is exempt from Wealth Tax subject to the overall exemption limit of Rs.15 lakhs. Besides the tax benefits, the other attractive features of the scheme are as follows:
 
i.      Yearly contributions can be made in one lump sum or in 12 or less installments of varying amounts, in multiples of Rs.5.00.
ii.     It provides liquidity as loans and withdrawals are permitted. The application for the first loan can be made in the third year from the year of opening the PPF account. That is, if an investor opened the account in say 2000-01, the application for the first loan can be made in the year 2002-03. The loan amount is restricted to 25% of the balance amount to the credit at the end of the preceding financial year.
 
Also one can withdraw 50% of the balance amount to his credit at the end of the sixth year immediately preceding the year in which the amount is withdrawn. That is on 1-4-07, an investor can withdraw 50% of the balance standing to his credit on 31-3-01. Similar withdrawals can be made subsequently at three year intervals with the amount loanable remaining at the 50% of the amount due to ones credit at the end of the sixth year immediately preceding the year in which the withdrawal is made.
iii.    A PPF account can be revived by paying a fee of Rs.10 for each year of default along with the arrears of subscripttion of Rs.100 for each year of such default. The credit balance in the PPF account is not subject to attachment under an order or decree of court with respect to any debt or other liability.
iv.   The facility of nomination is available.
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On 21 December 2009 at 21:00
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The interest on public deposits is paid semi-annually on a cumulative or non-cumulative basis. While the interest rates offered on company deposits are attractive vis-a-vis bank deposits, it should be noted that there is no tax benefit neither on the interest income, nor, does the investment in CFD qualify for any tax rebate.
 
Besides, company deposits have a higher degree of default risk than bank deposits. For one thing, these deposits do not enjoy any risk cover from the Deposit Insurance Corporation like bank deposits. Further, these deposits are serviced and finally repaid from the earnings of the company which by nature are uncertain and fluctuate over time. To add to this, these deposits are unsecured and rank paripassu with other unsecured liabilities for repayment in the event of liquidation. Therefore, the decision to invest in public deposits must be necessarily based on a thorough analysis of the financial stability and profitability of the company or on the credit ratings provided by rating agencies like CRISIL and ICRA.
 
Units of UTI
 
The Unit Trust of India (UTI) in the public sector is the only units investment trust in the country. It was set up in 1964 with a view to mobilize small savings by selling 'units' and invest the proceeds in the corporate stocks and debentures and gilt-edged securities. A unit represents a share in the income earned and in the assets (portfolio of securities) held by the trust under a given scheme. Some important unit schemes offered by UTI are discussed below.
 
Unit Scheme, 1964
 
One of the major unit schemes of UTI is the Unit Scheme, 1964. Under this scheme which is an open-ended one, units of the face value of Rs.10 each are sold on a continuous basis at a price quoted by the UTI from time to time. During the month of July, for about 3-6 weeks, these units are sold at a special price which normally is lower than the price quoted during the other periods of the year. A unit holder can avail himself of this facility, if so desired, for automatic reinvestment of dividend income in further units at the reduced price.
 
Unit Scheme, 1971
 
This unit scheme is a unit-linked insurance plan. Under this scheme, the units are not sold on tap. Instead, they are issued to the participants of the plan. It is a contractual savings plan for a target total contribution of Rs.6000 at the minimum and Rs.75000 at the maximum over a period of either 10 years or 15 years. A small amount of the contribution is paid to LIC for the insurance cover and the rest is invested. The total contribution to be made by a participant represents the insurance cover amount and this amount is paid to the nominee or legal heir in the event of the participant's death. The plan also provides for personal accident insurance cover up to Rs.15000 free of cost to the participant.
 
Unit Scheme for Charitable and Religious Trusts and Societies
 
The units sold under the scheme have a face value of Rs.100 and a participating trust or society is required to buy at least a 100 units. A participant can opt for reinvestment of dividends. The investment, however, cannot be withdrawn for the first three years.
 
Children's Gift Growth Fund 1986
 
Under this scheme, an irrevocable gift can be given by any adult to any child under 15 years of age. This investment remains with UTI till the child attains the age of 21 years. As it is indicated by the name, its primary aim is to build-up a fund for children. Till the scheme matures, there is an assured dividend of 12.5% p.a. which is automatically reinvested in further units, so the investment grows at a compound rate. Units can be gifted in multiples of 10 subject to a minimum of 50. Units are sold at par at Rs.10 throughout the year.
 
Mutual Fund Unit Scheme 1986 (Mastershares)
 
This scheme provides an opportunity to the investors to participate in the growing equity market. The funds mobilized through Mastershares are invested in a basket of equities spread over a wide range of industries, thus giving the benefit of diversification and spread of risk to the common investor. Mastershares are quoted on the stock market and so can be bought or sold at any time.
 
Growing Monthly Income Scheme (GMIS'91)
 
This scheme is launched to satisfy the growing need of middle class investors for regular income schemes and to cope with the rising cost of living. The scheme offers two options. Option 'A' provides regular monthly income of 14.5% p.a. for the first 3 years and 15% p.a. for the last two years with a minimum 2% capital appreciation on maturity. Under Option 'B' invested amount more than doubles itself in 5 years.
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On 21 December 2009 at 21:01
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The interest on public deposits is paid semi-annually on a cumulative or non-cumulative basis. While the interest rates offered on company deposits are attractive vis-a-vis bank deposits, it should be noted that there is no tax benefit neither on the interest income, nor, does the investment in CFD qualify for any tax rebate.
 
Besides, company deposits have a higher degree of default risk than bank deposits. For one thing, these deposits do not enjoy any risk cover from the Deposit Insurance Corporation like bank deposits. Further, these deposits are serviced and finally repaid from the earnings of the company which by nature are uncertain and fluctuate over time. To add to this, these deposits are unsecured and rank paripassu with other unsecured liabilities for repayment in the event of liquidation. Therefore, the decision to invest in public deposits must be necessarily based on a thorough analysis of the financial stability and profitability of the company or on the credit ratings provided by rating agencies like CRISIL and ICRA.
 
Units of UTI
 
The Unit Trust of India (UTI) in the public sector is the only units investment trust in the country. It was set up in 1964 with a view to mobilize small savings by selling 'units' and invest the proceeds in the corporate stocks and debentures and gilt-edged securities. A unit represents a share in the income earned and in the assets (portfolio of securities) held by the trust under a given scheme. Some important unit schemes offered by UTI are discussed below.
 
Unit Scheme, 1964
 
One of the major unit schemes of UTI is the Unit Scheme, 1964. Under this scheme which is an open-ended one, units of the face value of Rs.10 each are sold on a continuous basis at a price quoted by the UTI from time to time. During the month of July, for about 3-6 weeks, these units are sold at a special price which normally is lower than the price quoted during the other periods of the year. A unit holder can avail himself of this facility, if so desired, for automatic reinvestment of dividend income in further units at the reduced price.
 
Unit Scheme, 1971
 
This unit scheme is a unit-linked insurance plan. Under this scheme, the units are not sold on tap. Instead, they are issued to the participants of the plan. It is a contractual savings plan for a target total contribution of Rs.6000 at the minimum and Rs.75000 at the maximum over a period of either 10 years or 15 years. A small amount of the contribution is paid to LIC for the insurance cover and the rest is invested. The total contribution to be made by a participant represents the insurance cover amount and this amount is paid to the nominee or legal heir in the event of the participant's death. The plan also provides for personal accident insurance cover up to Rs.15000 free of cost to the participant.
 
Unit Scheme for Charitable and Religious Trusts and Societies
 
The units sold under the scheme have a face value of Rs.100 and a participating trust or society is required to buy at least a 100 units. A participant can opt for reinvestment of dividends. The investment, however, cannot be withdrawn for the first three years.
 
Children's Gift Growth Fund 1986
 
Under this scheme, an irrevocable gift can be given by any adult to any child under 15 years of age. This investment remains with UTI till the child attains the age of 21 years. As it is indicated by the name, its primary aim is to build-up a fund for children. Till the scheme matures, there is an assured dividend of 12.5% p.a. which is automatically reinvested in further units, so the investment grows at a compound rate. Units can be gifted in multiples of 10 subject to a minimum of 50. Units are sold at par at Rs.10 throughout the year.
 
Mutual Fund Unit Scheme 1986 (Mastershares)
 
This scheme provides an opportunity to the investors to participate in the growing equity market. The funds mobilized through Mastershares are invested in a basket of equities spread over a wide range of industries, thus giving the benefit of diversification and spread of risk to the common investor. Mastershares are quoted on the stock market and so can be bought or sold at any time.
 
Growing Monthly Income Scheme (GMIS'91)
 
This scheme is launched to satisfy the growing need of middle class investors for regular income schemes and to cope with the rising cost of living. The scheme offers two options. Option 'A' provides regular monthly income of 14.5% p.a. for the first 3 years and 15% p.a. for the last two years with a minimum 2% capital appreciation on maturity. Under Option 'B' invested amount more than doubles itself in 5 years.
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On 21 December 2009 at 21:02
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Form
 
For investment purposes, silver may be bought in the form of bars - 5 kg. bars are the most common. There is a ready market for silver bars. Hence silver can be traded very easily.
 
Precious Stones
 
Diamonds, rubies, emeralds, sapphires, and pearls have appealed to investors from times immemorial because of their aesthetic appeal and rarity. Diamonds, in particular, have attracted most because of their high per carat value. The quality of a diamond is basically judged in terms of the 4 Cs, viz. carat, color, cut, and clarity.
 
Carat
 
This is the unit for weighing diamonds. A carat is about 0.2 grams. Most of the diamonds are less than one carat. The higher the carat value, the higher the price per carat.
 
Clarity
 
This refers to how clear a diamond looks. Almost every diamond has some flaw in it in the form of bubbles or lines. The fewer these imperfections, the more valuable a diamond is.
 
Color
 
The color of a diamond determines its ability to refract. The most valuable diamonds are brilliant white.
 
Cut
 
On the basis of its contour, a diamond is cut. The cut determines the shape of a diamond. The common shapes are rectangles, ovals, and rounds. The cut of a diamond brings out its color and clarity.
 
While precious stones may have appeal for the affluent investors and those who have skill in buying them, they are not suitable for the bulk of the investors for the following reasons.
 
Poor liquidity
 
Precious stones can be very illiquid. It may not be easy to sell them quickly without giving major price concessions.
 
Subjectivity in valuation
 
The grading process by which the quality and value of precious stones is determined can be quite subjective. It is not uncommon to find a price variation of 20 percent or more in valuation done by two experts.
 
Substantial investments
 
For investment purposes larger precious stones are suitable. Most investment grade precious stones (diamonds, in particular) require huge investments.
 
No regular returns
 
Precious stones do not earn a regular return during the period they are held. On the contrary, the investor has to incur the costs of insurance and storage.
 
Art Objects
 
Objects which possess aesthetic appeal because their production requires skill, taste, creativity, talent, and imagination may be referred to as art objects. According to this definition, paintings, sculptures, etchings, and so on may be regarded as art objects. The value of an art object is a function of its aesthetic appeal, rarity, reputation of the creator, physical condition, and fashion.
This section describes briefly two of the more commonly bought objects, viz., paintings and antiques.
 
Paintings
 
Paintings appear to be the most popular among objects of art. In the last decade or so, interest in paintings has grown considerably, thanks to the substantial appreciation in the market value of paintings of Hussain, Raza, Menon, and others.
 
The prospective investor with an inclination to buy paintings, should bear in mind the following guidelines:
 
a.    Put bets more on fledging painters: Works of established painters may be too expensive and beyond the reach of the small investors. More important, the expected appreciation in their value may not be considerable. Hence, it makes more sense to buy good quality paintings done by fledging painters - he potential Hussains of tomorrow. True, when   one bets on an 'emerging' painter, he is taking some risk. Often, the potential rewards justify such risk.
 
b.     Develop a sense for the quality of painting: Even if the investor does not have the skills of a connoisseur, he can judge the basic qualities of painting by looking at attributes like spontaneity, maturity of strokes, balance of color, and originality. Over a period of time one can refine his sensibility, provided of course he has a basic aesthetic sense.
 
Antiques
 
An object of historical interest may be regarded as an antique. It could be a coin, a manuscriptt, a sculpture, a painting, or any other object.
 
If one is interested in investing in an antique, bear in mind the following:
 
a.    The owner of an antique is required to register it with the Archeological Society of India. If the registering authority is satisfied about the authenticity of the antique, it issues a 'Certificate of Registration'.
 
b.    Whenever an antique is sold the registering authority has to be informed and the ownership must be transferred.
 
c.    Export of antiques, in general, is banned. In exceptional cases it is allowed only at the instance of the Director General of the Archeological Society of India.
 
d.    The government has the right to acquire an antique if it is felt that the same must be kept in a museum for the general good.
 
e.    Antiques are available in places like Chor Bazar (Mumbai), Mullick Market (Calcutta), and Burma Bazar (Chennai). However, it may not be easy to get good bargains at these places. To buy antiques at bargain prices, investor has to actively look for them in smaller towns and villages.
 
f.     There is a flourishing market for 'fake' antiques. These are objects which are chemically treated to give an 'antique' look, though they are not genuine antiques.
 
g.     Antiques tend to appreciate in value over time, but in a very unpredictable manner.
 
h.     Antiques seem to make sense only for those who has patience to wait and who derive psychological satisfaction from owning objects of historical interest. One may even argue that, since very few investors have the ability to assess the value of antiques, investments in these may largely be left to connoisseurs.


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On 21 December 2009 at 21:03


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