What is investment ?
- earn return on your idle resources.
- generate a specified sum of money for a specific goal in life.
- make a provision for an uncertain future.
When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principle 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 short term
Before making any investment, one must ensure to :
- Obtain written documents explaining the investment
- Read and understand such documents
- Verify the legitimacy of the investment
- Find out the costs and benefits associated with the investment
- Assess the risk-return profile of the investment
- Know the liquidity and safety aspects of the investment
- Ascertain if it is appropriate for your specific goals
- Compare these details with other investment opportunities available
- Examine if it fits in with other investments you are considering or you have already made
- Deal only through an authorized intermediary
- Seek all clarifications about the intermediary and the investment
- Explore the options available for you if something were to go wrong and then, if satisfied make the investment.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender's money. Interest is usually calculated as a percentage of the principle balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.
What factors determine interest rates?
When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are:
- Demand for money
- Level of Government borrowings
- Supply of money
- Inflation rate
- The Reserve Bank of India and the Government policies which determine some of the variables mentioned above
- Physical assets like real estate, gold/jewellery, commodities etc, and/or
- Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.
One may invest in:
- Physical assets like real estate, gold/jewellery, commodities etc, and/or
- Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.
What are various Long-term financial options available for investment?
Post office Savings Schemes, Public Provident Fund, Company Fixed Deposits Bonds and Debenture, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly, Minimum amount, which can be invested, is Rs. 1000/- and additional investment in multiples of 1000/-. Maximum amount is Rs. 300000/- (if single) or Rs. 600000/- (if held jointly) during a year. It has maturity period of 6 years. A bonus of 10% is paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principle amount if withdrawn prematurely; the 10% bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi annually or annually. They can also be cumulative fixed deposits where the entire principle along with the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.) in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversification. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Fund are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments.
What is meant by a Stock Exchange?
The Securities Contract (Regulation) Act. 1956 [ SCRA ] defines 'Stock Exchange' as any body of individuals, whether incorporate or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange.
What is an 'Equity'/Share?
Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs. 2,00,00,000 units of Rs. 10 each. Each such unit of Rs. 10 is called a share. Thus, the company then is said to have 20,00,000 equity shares of Rs. 10 each. The holders of such shares are members of the company and have voting rights.
What is a 'Debt Instrument'?
Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayments of principle amount by the borrower to the lender.
In the Indian securities markets, the term 'bond' is used for debt instruments issued by the Central and State governments and public sector organizations and the term 'debenture' is used for instruments issued by the private corporate sector.
What is a Derivative?
Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990, they accounted for about two-thirds of total transactions in derivative products.
What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, Debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund Scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fun, or to participate only in the capital appreciation of the scheme.
What is an Index?
An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.
what is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor's account with his Depository Participant (DP)
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