Investment Patterns in India

Changing Trend of Investment Pattern in India and Emergence of Mutual Fund Industry ABSTRACT: This project is about how the Investor's Behavior is changing and they are now leaving behind the sacred investment options like the fixed deposits, company deposits, gold etc. Investors are now looking towards equity linked investment options. Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual Fund makes it easy and less costly for investors to satisfy their need for capital growth, income preservation. And in addition to this a mutual fund brings the benefit of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few. In this project I have given a brief about economy, inflation, and equity and debt market. Then it is explained how to cope with the inflation and how mutual fund is one of the best investment options today. A brief about mutual fund industry and the some information about HDFC Mutual Fund and its various products are given INTRODUCTION: Many individuals find investments to be fascinating because they can participate in the decision making process and see the results of their choices. Not all investments will be profitable, as investor wills not always make the correct investment decisions over the period of years; however, you should earn a positive return on a diversified portfolio. In addition, there is a thrill from the major success, along with the agony associated with the stock that dramatically rose after you sold or did not buy. Both the big fish you catch and the fish that get away can make wonderful stories. Investing is not a game but a serious subject that can have a major impact on investor's future well being. Virtually everyone makes investments. Even if the individual does not select specific assets such as stock, investments are still made through participation in pension plan, and employee saving programme or through purchase of life insurance or a home. Each of this investment has common characteristics such as potential return and the risk you must bear. The future is uncertain, and you must determine how much risk you are willing to bear since higher return is associated with accepting more risk. In 1986, Microsoft Corporation first offered its stock to the public. Nine years later, the stock's value had increased over 5,000 percent- a $ 10,000 investment was worth over $ 5,00,000 in the same year, worlds of wonder also offered its stocks to the public. Nine years later the company was defunct- a $ 10,000 was worth nothing. These are two examples of emerging firms that could do exceedingly well or fail. Would investing in large, well establish firms generate more consistent returns? The answer depends, of course, on which firms were invested in. Over the years some investments have generated extraordinary gains, while others have produced only mediocre returns, and still others have resulted in substantial losses. The individual should start by specifying investment goals. Once these goals are established, the individual should be aware of the mechanics of investing and the environment in which investment decisions are made. These include the process by which securities are issued and subsequently bought and sold, the regulations and tax laws that have been enacted by various levels of government, and the sources of information concerning investment that are available to the individual. An understanding if this financial background leads to three important general financial concepts that apply to investing. Toady the field of investment is even more dynamic than it was only a decade ago. World event rapidly-events that alter the values of specific assets the individual has so many assets to choose from, and the amount of information available to the investors is staggering and continually growing. Furthermore, inflation has served to increased awareness of the importance of financial planning and wise investing. In this project I will first talk about economy, inflation, equity markets and debt markets to understand investments behavior. INFLATION: Inflation is a situation where there is ‘ too much money chasing too few goods'. In such times buyers bid up prices of scarce products/services The scarcity could be caused by supply issues or a faster than expected rise in demand. Irrespective of what causes inflation, the impact is the same. The value of the currency you are holding declines. Let's explain this with the help of an example. Suppose the Indian Rupee was freely exchangeable with only one commodity- crude oil. Let's assume the conversion rate is Re 1= 1 barrel of crude (wish it were true! ). Now there is tension in the Gulf region resulting in reduced supply. Due to the subsequent rise in price of crude oil in international markets, we would now have to pay more Rupees for every barrel of oil. Suppose crude prices rise by 10%. The new exchange rate will be Rs. 1. 1 = 1 barrel of declined from 1 barrel of crude per Rupee to only 0. 91 barrel of crude per Rupee this is the erosion in the value of the currency that we are talking about. Also note that while the Indian Rupee may be appreciating vis-a-vis other currencies, in the ‘ real sense' there is erosion in value. Another important fallout one can expect due to rising inflation is higher interest rates. The central banks aim to reduce demand in the economy by rising the cost of money. When making fresh investments or evaluating your existing holdings in potentially inflationary times you need to keep two things in mind: The possibility of higher interest rates The erosion in the value of the currency CONCEPT OF MUTUAL FUND: A mutual fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A mutual fund is created when investors put their money tighter. It is therefore a pool of the investor's funds The most important characteristic of a mutual fund is that the contributors and the beneficiaries of the fund are the same class of people, namely the investors. The term mutual means that investors contribute to the pool, and also benefit from the pool. There are no other claimants to the funds. The pool of fund mutually by investors is the mutual fund. A mutual fund's business is to invest the funds thus collected, according to the wishes of the investors who created the pool. In many markets these wishes are articulated as  Ã‚   â€Å"investment mandates†. Usually, the investors appoint professional investment managers, to manage their â€Å"product†, and offer it for investment to the investor. This product represents a share in the pool, and pre-states investment objectives. For example, a mutual fund, which sells a † money market mutual fund â€Å", is actually seeking investors willing to invest in a pool that would invest predominantly in money market instruments. IMPORTANT CHARACTERSTICS: A Mutual fund belongs to the investors who have pooled their funds. The ownership of the mutual fund in the hands of the investors Investment professional and other service providers, who earn a fee for their services, from the fund, manage the mutual fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investor's share in the fund is denominated by â€Å"units†. The value of the units changes with change in the portfolio's value, every day. The value of one unit of investors is called as the Net Asset Value or NAV. The investment portfolio of the mutual fund is created according to the stated investment objectives of the fund. PHASES IN THE HISTORY OF MUTUAL FUND: The history of mutual fund in India can be divided into 5 important phases: A 1963-1987: The Unit Trust of India was the sole player in the industry. Created by an Act of Parliament in 1963, UTI launched its first product, the unit scheme 1964, which is even today the single largest mutual fund scheme. UTI created a number products such as monthly income plans, children's plans, equity-Oriented schemes and offshore funds during this period. UTI managed assets of Rs 6700 crore at the end of this phase. B 1987-1993: In 1987 public sector banks and financial institutions entered the mutual fund industry. SBI mutual fund was the first non-UTI fund to be set up in 1987. Significant shift of investors from deposits to mutual fund industry happened during this period. Most funds were growth oriented closed ended funds. By the end of this period, assets under UTI's management grew to Rs 38247 crore and public sector funds managed Rs 8750 crore. C 1993-1996: In 1993, the mutual fund industry was open to private sector players, both Indian and foreign. SEBI's first set of regulations for the industry was formulated in 1993 and, substantially revised in 1996. Significant innovations in servicing, product design and information disclosure happened in the phase, mostly initiated by private sector players. D 1996-1999: The implementation of the new SEBI regulation and the restructuring of the mutual fund industry led to rapid asset growth. Bank mutual fund was re-cast according to the SEBI recommended structure, and UTI came under voluntary SEBI supervision. E 1999-2003: very rapid growth in the industry and significant increase in market shares of private sector player marked this phase. Assets crossed Rs. 100,0000 crore. The tax break offered to mutual funds in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and liquid funds registered the highest growth in this period, accounting for nearly 60% of the assets. UTI's share of the industry dropped below 50%. 2. 3 ADVANTAGES OF MUTUAL FUND: The following are the important advantages of mutual funds to investors: Portfolio diversification Professional management Reduction in risk Reduction of transaction costs Liquidity Convenience and flexibility DISADVANTAGES OF MUTUAL FUND, The following are important disadvantages of investing through mutual fund: No control over costs: Since investors do not directly monitor the fund's operations they cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds. No tailor- made portfolio: Mutual fund portfolio is created and marketed by AMCs, into which investors invest. They cannot create tailor made portfolios. Managing a portfolio of funds: As the number of mutual funds increase, in order to tailor a portfolio for himself, an investors may be holding a portfolio of funds, with the costs Of monitoring them and using them, being incurred by him. NEED FOR INVESTMENT: Increasing household expense. Creation of wealth Increasing cost of living. Financial needs according to life stages. Regular income Combination of all above INVESTMENT OPTION AVAILABLE: Physical and Financial assets. Equity and Debt Govt. securities and non-govt. securities Other option Public provident fund RBI Relief Fund. Mutual Fund Others like Indira Vikas Patra, Kisan Vikas Patra CP FD, and Debenture.    |FDs |FI BONDS |Mutual Fund | |Accessibility |Low |Low |Low | |Tenor |Fixed (medium) |Fixed (Long) |No lock in period | |Tax Benefit |None  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   |Under section 80C |None | |Liquidity |Low |Very Low |none | |Convince |Medium |Tedious |Very high | |Transparency |None |None |Very high | CONCLUSION: The unique investment strategy of letting the maturity of the debt investment run down with time and targeting equity investments to capture dividends is targeted to deliver positive returns over medium time frame. The investment strategy of the fixed income portfolio is designed to remove the impact of interest rate movements over the medium term. The strategy of targeting dividends in equities over a period is expected to improve the yield of the fund. The above investment strategy expects to minimize capital loss in adverse market condition and deliver moderate returns in stable/positive market conditions. So, if you are looking for an investment product that offers you low risk of capital loss and the potential to earn reasonable returns in the uncertain environment of today, HDFC Multiple Yield Fund might be the right fund for you.