This text mayrequire to be updated after the UnionBudget 1998 - 99

1. Introduction to Investment and Savings

In order to invest one should have money and funds to invest in the first place. It is ordinarily presupposed that one should save for several reasons. It may be to provide a buffer or a security against unforeseen future eventualities and contingencies. Or it may be to enhance the social status, to acquire assets, to amass wealth for future generation etceteras. The excuses to save and invest are mostly derived out of our basic instincts driven by unlimited wants or comparisons or our insecurity or for saving tax. In India, a high savings rate of 25 to 30% of the annual income of the salaried class is not uncommon. In the case of businesspersons, it is believed that the rate of accumulation is much higher, though there are no estimates to the effect. The high growth of the business community, the amounts recovered from them during searches made by enforcement authority leads us to the belief. Right now we shall not confuse ourselves with the morality of accumulating wealth or the trusteeship principle of Mahatma Gandhi. We shall contain ourselves by exploring the various investment possibilities available to the common man in the country today.

This text was prepared essentially to refresh my own knowledge. Several persons keep asking for various avenues for investment from the point of saving Income Tax. A Chartered Accountant is not the only investment specialist advisor and investment advice is just another small part of the curriculum, which cannot in any terms be considered as the specific privy of the profession. In fact, more is probably known to the Chartered Accountant because he deals with the ways and means and the sources and application of funds. If inquisitive, by dealing and studying the methods and forms, a good idea can be developed over a period of time by anyone who is interested in quality investment. An attempt has been made in this text to keep legal mumbo jumbo and professional jargon out. Most of the statistical information and tables are derived from external sources such as India Today, Economic Times, The Week, Shanbag’s investment books, Integrated News etceteras. If such information is reproduced verbatim, the source is suitably acknowledged. I hope that you will critically evaluate the text and let me know what more you would like to know and what ought to be here, but is not being covered here according to you.

2. Mode of Savings

Mankind is insecure by nature. Unlike an animal whose requirements do not exceed beyond food for its survival and a territory to rest, man has perpetual desire. This perpetual desire is the driving force to make man accumulate things that he perceives to hold a store of value. Wealth is a creation out of holding of assets perceived to be a denominator of a measure of value. A plain piece of paper 5cm by 10cm would cost not more than 10 paise. But if the same were to bear some colour imprints, seal, inscription, serial number, facsimile signature of the reserve bank governor and a promise, it could be worth up to Rs. 500! Strains of yellow metal embedded in the mud have no practical use, but when refined and processed becomes valuable gold because of its scarcity. So store of value is ultimately a question of perception.

Traditionally, savings were invested in scarce metals, cut and polished stones, land etceteras, that is, anything that was in short supply. This was extended to include buildings, property, paintings, sculptures, coins, artefacts, other assets all of, which could be translated into quantifiable sums in terms of money when and if the rainy day came. Nevertheless, it could be handed over from one generation to another.

With the changing times we have new measures of store of value that are perceived and induced by faith either in the principle or the practice of such issue. This could range from various promises to maintain to or add to the worth of the issue. These savings could be voluntary or induced by the state policy such as the tax laws. We see the broad options that are available to us. Wherever instances refer to the tax laws, and there is some doubt, you may refer my compilation on the direct tax laws for more information.

 

3. Some of the options before us

The financial sector has been existing since the day business and trade started. There has thus been a continuous requirement for the two-fold option of investment and return. In this country, however, not much was known to the public till the recent liberalisation phase of the Indian economy. This has brought into limelight the financial sector of our country i.e. the fuel that fires business activity. The financial services sector comprises of the banks, non-banking financial companies, mutual funds, insurance companies, benefit funds, trusts, chit funds and nidhis. Thanks to the Harshad Mehta phenomenon that drove our stock markets wild and absolutely crazy, for once multiplying money seemed to be the easiest job in the world. Even the obscure street corner "Bhel poori wallah" talked of the Bombay sensitive index and provided tips on which scrips to invest in. Shoeshine boys and twenty something kids gave lectures about the Hong Kong and Singapore index, Dow Jones, and how our index was way down in "relation to international standards". Everyone with a little bit of money joined in the mad rush to make it multiply overnight in this easy fashion with utter disregard to the fact that false equations do not ultimately give correct results.

In 1992 Mutual Funds seemed to be a new divinity from the American heaven giving the "ultimate" choice in investment opportunities. But very few persons realised that the concept was already in existence in India since 1963 in the form of Unit Trust of India. Actually the term Mutual Fund is of American origin while Unit Trust is a British concept. The concept and methodology is the same but out here anybody worth his salt went out to open his own mutual fund with schemes promising totally absurd returns. Most of our public did not let their minds work and so we have big goof-ups with virtually all the Mutual funds having failed. Most of them in any case were fabricating results, Book values and Net Asset Values. It is only when the bubbles burst that something trickles out. By that time the so-called fund operators have made their personal moolah, siphoned it off and probably gone to America.

In 1993-94 unincorporated firms promised unheard of returns (some firms in Bombay were offering 35 to 40% interest) while real estate prices seemed to shoot up perennially because someone said that people from Hong Kong as well as multinational companies are coming in a big way ton India. We live amidst several big dreams. Virtually overnight, the great American dream of becoming a millionaire or billionaire became an Indian fantasy. Alas! Such dreams can only be dreams.

Since the last year we are witnessing a realistic situation. A time when reality has grasped the utopian euphoria and strangled the stock market, and in turn the mutual fund, industry in general, a banking industry assaulted by problems and an immobilised non-banking financial services industry. Now the time of fair play, intuition, foresight, and basics has come up. The importance of being a prudent, sensible, careful, serious and realistic investor rather than somebody who would hop at several questionable opportunities of making money fast is beginning to make sense.

Carefully planned, rational and realistic investment decisions, rather than tips provided by a ‘dependable’ neighbour or broker or the ‘friend’ who has made lakhs on his funds in ten days, is the vital element in a structured investment. The following broad principles should be very clear.

We now take a look at the prominent investment options along with their positive and negative features. But first we shall emphasise the concept of risk and return.

RETURN is the value addition to an investment in a given time-period. For example, if a bank deposit of Rs. 25000 on maturity after a year fetches a value of Rs. 27500, the return on the original investment is 10 per cent. We should note here that we are not considering inflation or the compounded rate of return into consideration, while arriving at the rate of return.

RISK is the extent of uncertainty associated with the actual realisation of the rate of return assured expected on an investment. The risk associated with any investment is influenced by several factors such as the industrial situation, economic factors, the financial and monetary policies of the government, political imbalances, natural calamities, managerial capacity and even the external environment.

Further investment risk would include several qualitative factors such as the background of the promoters of the scheme and professionalism of the organisation that can influence the amount of risk associated with an investment. Generally, investments in government bonds or bank deposits are considered ‘low risk’ while investments in speculative ventures are considered ‘high risk’. We can see the indicative table below.

Investments in equity shares of a Company come with the following in-built catches.

• There is no obligation whatsoever on the company to either redeem it for the value the investor has paid for it, except on liquidation or winding–up of the company. Even then the values paid out would be the book value and not the amount invested.
• There is no compulsion to pay any sort of return on such investment.
• Most companies do pay dividends to shareholders when they earn profits, to keep the company image in order. However, even when dividends are paid they would rarely exceed an average of about 4 to 5 percent of the prevailing market price of the share.

Obviously, this means that unlike other options where the investor gets a return on investment directly, over here the returns are based on Capital gains. In other words it is dependent on the market price at which the share is traded to obtain his investment return, especially in the short to medium term. It is imperative that one has to assess the likely price at which the stock will be traded at a future date before making an investment.

There is an easier option for the investor who does not want to buy shares off the stock market, the primary or new issues market offers an easier option. Shares are usually available at lower price-earnings multiple during an issue and the likelihood of price appreciation is much higher.

But in the business of shares, whether you buy from the primary or secondary market, you have to have a knack. The skill to choose the right shares, buy and sell at the appropriate time. These are competencies that have to be coupled with luck, your aptitude, risk taking capacity and deft decision making.

The Investment Strategy

Most investment specialists advise a top-down approach. This means that the prospective investor should do the following.

• Keep tabs on the overall economic scenario, looking at specific industries that are growing more rapidly than others.
• Look out for industries that face a favourable demand-supply situation.
• Try to find out how long such a variation could continue to be advantageous i.e. advantages outweigh risk factors.
• The investor should then identify specific companies that he should invest in within that industry.

This strategy is the most simple, eliminates complicated calculations and comparisons. It helps in structured elimination of certain industries with weak growth prospects or unfavourable demand-supply situation from consideration. It also helps to limit ourselves to core companies and increases attention to industries with growth potential. This policy is equally relevant to primary issues as well as acquisitions from the stock market.

At the same time the investor must assess favourable demand-supply situations and not concentrate only on growth prospects. This is because only if demand exceeds supply can companies in an industry obtain pricing flexibility and earn higher margins. If supply exceeds demand, competion will drive down margins and profits of companies. A very good example of this is the domestic airline industry, which saw attractive growth in 1995, but due to oversupply, most companies in the industry have fared badly even to the extent of closing down. The airline share values have eventually lost 80-90% of their market values in 1995!

Selection of shares

The next vital step the investor should take is to identify shares within the sector that offer better value for investments. In order to do this the quality of the company and the share price have both to be considered. The following points may be borne in mind.

• The size of the company and its relative position in the industry – It is better to avoid extremely small companies or companies that are not the leaders in the industry / segments in which they are placed. The easiest option could be to concentrate on the top few companies in the industry.

• The quality of the company management -–Investors should avoid companies whose management is suspect. The management inter alia reflects the financial capacity, ability in business management, long-term track record, integrity, effective and fairness in the corporate communication, dealings with investor complaints etc. In the case of new issues, the management structure and quality is evident from the prospectus / offer documents issued by the company. This and the director’s reports on operations of earlier years would throw light on facts regarding fulfilment of commitments.

• The investment programmes and financing plans of the company -–The investor must value the size and nature of the investment programmes of the companies considered for investment. The investor should also try to ascertain how the investment programmes will be financed. Investors should generally avoid companies, which come out with very large investment programmes in relation to their present size. Issues that offer large quantity of additional shares should be given a rethink. The investor may run the risk of putting his money in a company that is dependent on getting its new projects off the ground and whose share value gets depressed because of large floating stock of new shares.

The other extreme may also be a dead-end. Companies having no investment programmes at all could very well have reached a saturation level in their business and may not have further opportunities for further growths. Thus the prudent investor should concentrate on companies that is a balance between the two. The company should have justified fixed investment programmes for addition capacities, which can be financed by funds generated by internal generations and moderate external debt.

• The track record of the company – The growth and financial performance is the key factor to judge the fundamentals of any company. A moderate track record for about five previous years should help to assess the following attributes:

1. The turnover growth should be consistent or exceed the annual inflation rate.
2. The Profits should be rising or consistently above industry trends.
3. Return on net worth should be consistently high and not having a declining trend.
4. The company must have a consistent track record of paying dividend.

• Judging the financial position of a company – For the layman to analyse a companies financial position is complex. Even expert analysts have been foxed in cases such as that of CRB, MS Shoes, Fairgrowth and Peerless, which have been touted as great financial wonders. Or internationally who could have faulted Barings or BCCI? But all is not lost in this chase of finding a company with good credentials.

The potential investor is not always in a position to assess the financial capability of a company only by seeing a company’s balance sheet or the ratios. Hence a better option would be to go through media reports and consultations with professional persons such as, chartered accountants. By attending the annual general meeting of a company can also give investors a feel of the company’s management though it may not be the best judge of managerial competance. The best way is only to have better understanding that can lead to better savings and return on investment.

• The growth prospects of a company – The investor has to evaluate the growth prospects of the company by reviewing the capacity, cost of setting up additional capacies, plans to introduce new products and availability of funds to finance new capacities or new plants.

In respect of new issues, a glamourous future is generally shown to attract investors. Further, companies that tap funds from the capital market frequently, enjoy a poor discounting in the market. There is also the danger of such funds not being used for their core business and used to bolster the coffers of group companies or used for investments in stock markets. A study of the ‘investments’ and ‘loans and advances’ given in the company’s balance sheet would throw light over such arbitrary end uses. In some cases, the stock markets react well before the company announces its financial results. This may be result of insider information, rigging, speculation on the director or chairman’s speech or interviews to newspapers. Previous trends and results of similar companies in the same lines of business may also affect the share price movement.

• The valuation of the company’s share value – This is a difficult part of the investment decision as share prices fluctuate on a daily basis in view of several factors beyond just the intrinsic worth of the company, such as market sentiment. Share prices quoted in the stock market are overvaluations of its true price or an undervaluation based on several unubiquitious factors.

The sole objective of the investor should be to buy a shares when they are available at prices, which are an under valuation of its true worth. The share value is denoted in terms of a multiple of net profit per share (Price per share in the stock market/ Earnings per share).

We take for example a company that has issued 100 million shares of Rs. 10 each (Paid up capital of Rs. 100 crore). This company is said to earn Rs. 3 per share (EPS) if it makes a net profit after taxes of Rs. 30 crore. Thereafter we can derive the valuation by dividing the market price of the share by the per share earning (Market Prices / EPS). If the market price of this share is Rs. 60, we can say that the share is trading at 20 times its earning. This is a way to value a company’s shares by comparing it with valuation of other shares or with, past trends of the same share, from which an average can be derived to see whether the share is currently over or under priced.

1. Mutual Funds

Mutual funds are usually trusts that act as an agent or a intermediary, which collect the savings of individual investors and invest the moneys raised in a diversified portfolio of securities such as equity, bonds and other instruments. Small investors contribute their money into this common pool or fund and hand over the investment decision to the fund managers. The fund managers comprise a management company or group of professionals who invest the trust funds as a single portfolio for maximising returns. The theoritical advantages for the small investor is that there are no more searching for good buys or obscure decisions relying on the neighbourhood sub-broker for advice or even waiting anxiously for allotments. This is taken care of by the cumulative size and bargaining power of the fund.

The mutual fund is a tool to reduce the risk associated with investing in a single securities portfolio. Naturally, investments in a securities portfolio is to be done after an in depth research of the economic scenario, industry and company analysis. The fund manager’s own experience, judgement and intuition also play a vital part in deciding the investment process. A unit of mutual fund is equivalent to investing in a large number of companies. The fund normally distributes the entire income / profits after mangement costs from the investment to the investors in proportion to their investment. For the small and lay investor, mutual funds offer a better investment option than the share market. Mutual funds usually have a large corpus of funds which enables them to achieve transactions at relatively costs on brokerage, postage, printing etc., besides they can command much better market rates than individual investors. There is also investment decision after in-depth research of economic, industry and company factors.

In practice, these facts are far from flawless, as investors who have lost their shirt will qualify. The Professionals who manage several of these funds are simply not good enough, they tend to be highly paid without discriminating their efficiency vis-�-vis the pay drawn. There is a tendency by some fund managers to misuse funds and invest in scrips for personal advantage that ultimately lose money for the fund. Mutual funds may not quantify any minimum returns and end up offering sub-standard returns. Investors then have only the choice to be very selective in exercising their choices.

Mutual fund schemes generally fall into one of the four broad categories:

• Schemes with major investments in equity – Growth schemes.

• Schemes with large investments in fixed-income – Income schemes.
• Schemes combining both of the above – Balanced schemes.

• Special aim schemes – Tax saving / Insurance or Children’s education etc.

These schemes can be further classified into the following i.e. open-ended or close-ended.

NAV= (market value of all assets + accrued income – accrued expenses) / number of units.

Additionally, some open-ended funds offer the flexibility of regular or periodic investment plan and regular withdrawal plan to investors.

(ii) Close-ended funds – These are schemes that are operational for a specified period only. They have a fixed corpus and terminate after the term ends. At the end of the term, the entire corpus is disinvested / transferred to other funds to realise liquid funds and the proceeds are proportionally distributed to the unit holders. Repurchase of the units during the scheme period may or may not allowed depending on the terms of the scheme. A close-ended scheme is generally listed on the stock exchanges. Depending on the objective for which the close-ended scheme has been floated, it can be classified into a growth scheme or an income scheme.

The objective of a growth scheme is to provide the investor substantial capital appreciation at the end of the period. Hence, the funds collected in this scheme are mainly deployed in high growth equity related instruments. An income scheme, on the other hand, provides the investor regular income on his investments.

What to consider:

7. While buying a fresh issue

• Past performance by fund or its other schemes – It is said that the best time to buy into a growth fund is when the equity markets are down and the best time to buy into an income fund is when interest rates are ruling high. This is partly true as one also needs to discriminate between good and bad funds. Past performance of the fund should be one of the key criterias here which is beyond merely choosing only big names. Good funds with good fund management would imply that the schemes out perform the stock market. That is, if the market moves up by 10 per cent the NAV should move higher that that. Again, if the market falls, the NAV of the fund should come down, if at all, marginally less than the market.

• Open-ended or close-ended – Open ended funds, as a rule are more liquid than close-ended funds. However, most close-ended funds are listed on stock exchanges and can be traded, providing some liquidity. All funds are subject to the same market risk, affecting any equity avenue.

• Redemption – When do you want your money back? Is the period of return suitable to you and whether there are periodic exit options as well?

• Pattern of disclosures – Periodicity and extent of portfolio disclosures including returns thereupon..

B. While buying from the market

The extent to which the buying price is quoted less than the Net Asset Value should be seen.

• Liquidity of securities in the funds portfolio – A highly liquid portfolio means that the fund can easily cash its portfolio at the stated NAV while redeeming units.

• Number of schemes run by the fund – If similar schemes are being run by the fund there is a tendency to enter into inter-fund transactions to balance the performance. This may mostly be to the detriment of investors.

• Composition of the fund’s portfolio – The balancing of investment is important, as fund managers need to invest in the right industries and the right companies at the right time.

If it is a close-ended scheme it is wise to consider buying it close to redemption. Mutual fund managers usually invest the funds in high and fixed income instruments such as debentures and bonds. These schemes aim at declaring regular dividends.

7. Deposits With Banks, Companies Etceteras

Commercial Banks, Non Banking Finance Companies (NBFC) and Industrial Companies offer investment options in the form of fixed deposits. Deposits with Banks and Companies are the traditional and most well known among investment options. The investor should take care to follow a few precautions before making his investment. Especially as fixed deposits are totally unsecured deposits, which means that if the company or bank concerned goes bankrupt, the claims of the fixed deposit holders have the last priority to get payment on the company’s / bank’s liquidation under law. Companies / Banks also give depositors the flexibility of regular returns (monthly, quarterly, and half yearly) on their investments. Hence such deposits offer a very liquid and flexible investment option offering a moderately high return at a nominal risk.

Fixed / Term Deposits with banks - Fixed deposits with commercial banks is a safe form of investment, especially if the bank is a nationalised one. There are several foreign and private banks that too accept fixed deposits. Banks accept deposits both for flexible terms such as 30 days to 60 months or more, at variable rates of interest. While banks offer facilities such as loans against deposits, pre-closure option, the return from bank deposits is usually low ranging from 5% to 12%.

• Service and ease of renewal – Many banks offer automatic renewal of deposits every 30 / 46 days as the case may be.

• Short-term avenue – Hence amount deposited should be what one expects to withdraw in the next one or two months. For al1 investments that an individual can afford to lock in for more than this period, other avenues should also he considered.

• Presence of automatic loan facility. Some banks have popularised this type of deposit by making the loan facility automatic, and a chequebook or ATM card is given to the individual to avail of the loan whenever he wants to. This gives a very high liquidity to a part of the deposit amount.

• Minimum deposit amount required in avail such a facility.

• Yield.

Deposits with non-banking finance / industrial companies - Non-banking finance companies are allowed to Accept deposits for periods ranging from 6 months and above up to a period of 5 years. But non-banking finance companies (NBFC’s) unlike manufacturing companies have to get their fixed deposit schemes rated by credit rating agencies. Currently there are three agencies and the details of rating are given elsewhere in this note. The RBI has allowed rated NBFC’s registered with it fullfilling certain conditions and accounting norms to offer any interest rate on deposits. However, reputed and professional non-banking finance companies may offer a maximum of 18-19 per cent for a two / three year deposit. They are also allowed to offer a brokerage of 1 per cent of the deposit amount. For a conservative investor, deposits with good, and rated and long-standing non-banking finance companies is one of the best investment options. Deposits can also he foreclosed any time after the expiry of three months from the date of placing the deposit. Loan facilities could be available, but are not automatic—as in the case of some banks. However, premature withdrawal facility subject to reduction in interest rate at the discretion of the company is available. In the case of a industrial company the maximum interest on a deposit would be around 15%, other terms being similar.

• Credit rating – Schemes with an AAA/AA+ rating are preferable.

• Financial parameters – Net worth, market share of key products, profits etc.

• Service – Promptness in sending interest warrants and fixed deposit receipts, answering queries and sorting problems.

• Efficient and timely replies to queries.

• Are interests warrants payables all over India?

• Actual returns – The basic interest cannot exceed RBI stipulations. However, many companies offer additional brokerage incentives depending on the amount invested and the tenure of the deposit. If the tenure is longer than a year, it is better to go in for companies that are perceived as low-risk options rather than for high returns or lucrative additional incentives. It is better to invest in different company deposits and limit the risks.

Savings A/c Deposits – This is targeted at small savings. Offered by all banks and post offices. There is no lock-in period and Money can be withdrawn whenever the need arises. Interest is paid on the minimum balance between the 10^th and last day of the month at 4.5% p.a.. The interest is credited to the account bi-annually. This is a conventional banking account for which 50 cheques (only bank savings a/c) in a year are allowed to be drawn. Currently interest earned on Post office saving accounts are exempt from tax.

What to consider:

Since the returns are very low, the balance amount should not typically exceed household requirements for one month. Surpluses should be accommodated in higher return investments.

Fixed Income Instruments – These normally have a fixed tenure and carry a fixed return, but are different from fixed deposits in that they are listed on stock exchanges and can be traded. The issue period is limited and they cannot be purchased from the company after issue closes.

When offered by government institutions, public sector units and other quasi government bodies, these are called bonds, and when offered by private sector corporate, debentures. There is currently no ceiling on the interest rate or the coupon rate as it is called for such instruments that can be offered.

The tenure and the periodicity of returns can vary for different instruments issued. The returns can also vary depending upon when and what price they are bought and when sold. It is relevant to mention here that though these instruments are traded on the stock exchanges, the trading is largely institutional with transactions usually amounting to more than Rs. 1 crore. Thus, buying and selling these instruments on the secondary market for attractive yields is out of reach of the retail investor as of now.

There are also special types of bonds called tax-free bonds, which offer a maximum of 10.50 per cent return. This return is totally exempt from tax. These are particularly attractive for individuals in the high income-tax bracket. For Individuals who are paying tax at the rate of 30 per cent the return works to 15 per cent.

When investing in fixed income instruments it is worthwhile to evaluate risk on the same parameters as fixed deposits. All bonds and debentures of more than 18 month tenures have to be rated by credit rating agencies.

What to consider:

• Periodicity of the return.

• Yields.

• Risk.

• ‘Put and call’ option. – When the investor has the option to ask the company to redeem earlier than the tenure specified, it is termed a ‘put’ option. And when the company has the option to ask for early redemption, it is termed a ‘call’ option.

• Tax liability of the instrument.

• The range of fixed deposit on offer. The greater the range the better it is, since it can then be a one-stop shop for faced deposits.

• Is he a direct sub-broker for a broker? Low level of inter mediation means better service and faster redress of complaints. Also, information that a direct sub-broker has will be more up to date.

CALCULATING YIELD

Returns from a fixed income option are expressed differently as either ‘interest rate’ or ‘yield’. These are however, two different concepts.

While interest rate only denotes the rate at which interest is paid on the face value (in the case of instrument) or the principal amount (in case of deposits), ‘yield’ signifies the actual return on the investment.

For example, consider a debenture (face value Rs. 100) with a maturity of one year which carries an interest rate of 15 per cent payable at the end of the year. If one buys the debenture for Rs. 100 at the public issue the yield is 15 per cent.

However, if the interest is paid monthly (at Rs 1.25 a month), then the yield will be higher although the actual interest received during the year is the same. This is because the interest received monthly is also assumed to have earned interest at the same rate as the debenture. Thus the yield in this case will be 16.075 per cent. Similarly, depending upon the period of payment of interest, there can be different yields.

The simple way to calculate yield or compound interest is:

Yield = Principal x (1+r) n /100

Where r = rate of interest, n = number of years

If the compounding is at a frequency of more than once a year, then the formula is:

Yield = Principal x (1+r/m) nxm /100

Where r = rate of interest, n = number of years, m = frequency of compounding

If the debenture has been picked up from the secondary market at say Rs. 90 then the yield will be 16.67, percent. This is because the interest is paid on Rs. 100, the face value, while the actual investment is Rs. 90.

If the maturity exceeds one year then the concept remains the same. However, the calculations become more complex.

In the case of corporate fixed deposits, many schemes claim to offer more than 20 per cent return over a five-year period. In effect, they offer an interest rate of 15 per cent compounded monthly. This gives a yield of 16.075 per cent for the deposit.

Effectively, the amount in the deposit at the end of the first year (principal amount + 16.075% interest on it) is again eligible for interest at 16.075 for the second year. This results in a higher amount at the start of the third year, which again earns an interest of 16.075 % for the third year and so on till the end of the fifth year.

8. Insurance Policies

To most people an Insurance policy would not figure in any Investment list. We always see an investment in terms of a return while a pure Insurance policy is only a compensation for an uncertain event or risk. In the case of the Insurance policy, we also wish that the event that evokes the return should not strike us. Disaster often strikes when we are most unprepared for it and could ruin us physically, mentally and financially. Insurance policies have been included for the fact that any contribution allows tax benefits in addition to the security cover against accident and unexpected illnesses rather than as return yielding investments. It is more of an investment against the occurrence of an unwanted or unforeseen event in the manner of compensation thereof. In the case of an unexpected accident or illness, the physical, mental and financial trauma could be reduced by taking suitable insurance covers. Hence this is recommended as an essential part of the overall investment portfolio. Over here we are only relating to policies affecting individuals. Transit, Vehicle, Marine and third party insurance is not covered here. (A separate note on filing Insurance claims is prepared by me.)

1. LIC (Life) INSURANCE - Consult an LIC agent about all the policies being offered by LIC. Normally, it is advisable to go in for whole life policies, as the premium to be paid is the least. Life Insurance Policies offer the advantage of tax rebates u/s 88 of the Income Tax Act i.e. 20% of investment can be claimed as rebate against the income tax payable. There are loan facilities against the policy also. If the policy runs the full term then a portion of the premium and bonus is repaid. This is usually higher than the total premiums paid.
2. PERSONAL ACCIDENT INSURANCE - These policies are to protect you against the losses or hospitalisation expenses occurring due to an unfortunate accident.
3. MEDICLAIM INSURANCE POLICIES - These policies protect you and your family members against various hospitalisation expenses occurring due to natural illnesses. Diagnostics expenses, surgical and post surgical expenses, hospital room rentals, cost of medicines and kits are covered in these policies. This is tax deductible u/s 80D up to Rs. 10000 premium paid per annum under the Income Tax Act. However, a large number of commonly occurring illness or hereditary diseases may not be covered under these policies. Read the fine print of the policy manuals before you choose your mediclaim plan.

The Personal Accident Insurance Claim and mediclaim are offered by the subsidiaries of the General Insurance Company of India (GIC) namely The New India Assurance Co. of India Ltd., Oriental Insurance Co. Ltd., National Insurance Company Ltd. and United India Insurance Ltd.

The premium payable on these policies is nominal compared to the risks they cover. The premium provides a tax rebate as the amount paid can be deducted from the taxable amount for calculation of the final tax liability. Covering the whole family entitles you to a discount on the premium and hence it is advisable that all the members of the family be covered through a single policy at the same time. The earlier you buy insurance, the better, since premium rates payable on these policies rise with age. Mediclaim also gets you a no claim discount at the time of renewal of the policy.

9. Some New and Old Options

Did you ever consider how many investment options exist for an investor now? Sometimes there are so many good options that one is out of money to reap all the benefits. In this fast moving, constantly changing progressive world, fresh and enticing avenues have opened that now offer investors amazing returns. The simple bank or company deposit are now too traditional and fails to satisfy the average young urban professional’s needs. Mutual funds have been unsatisfactory and most of them haven’t delivered the promised returns (Canbank, SBIMF, Indbank, Morgan Stanley, Taurus and big list of all the who’s who in the Mutual Fund business). The bond market is for the big players and it too doesn’t offer the small investor good returns at present. The capital markets are sinking everyday after the globalisation phase, the scams and the institution phase in which the small investors have been the worst hit victims.

So, what is the way out for the small investor? Where do we park our money for safe, liquid and yet high returns? There is no single or specific answer to this question.

Yet the investor has a range of traditional and non-traditional investments which do offer interesting alternatives. Metals, Gems and jewellery, Foreign Currency, Teak plantations, holding resort time shares, car time shares, floriculture farms, chicken farms, goat rearing farms, orchards and vegetable plantations are some interesting options that are available. We shall cover as much as we can.

Bullion & Jewellery – Investment in Bullion or jewellery is traditional and though there may be temporary upsets in value, it is primarily a permanent store of value. The upside is that it offers an indefinite store of value free from the vagaries of inflation. It is a relatively safe investment with age. Typically also, the social need for investing in this avenue increases with age. We can see the salient features listed below.

• Can be insured for loss or damage.
• The value is based on the purity and consistency of the metal.
• It is difficult to store and may require safe-keeping.
• Most of it may have to be converted into jewellery to which personal values, sentiments and emotions get attached making it only an investment for return at the last resort.
• Purchase and sale of bullion, metals, jewellery is still not a well defined trade or activity with inconsistent practices, rates and norms within the country.
• There is no predetermined rate of return and this is only in the nature of an ultimate fallback.
• Traditional, customary and religious needs may prompt some investments in this form.

Gems and Stones – All the conditions applying to Bullion apply to gems and stones with the following additional conditions.

• Susceptible to total destruction in fire.
• Gems and stones are subject to individual valuation based on their size, colour, clarity, sparkle, mounting, cutting, finish and age, all of which are non-homogenous.

Property – This could consist of land, land with building, air space, occupancy or tenancy rights in any form.

• Rates differ from place to place and area. It is non-homogeous and dependent upon several extraneous factors including demand and supply.
• Considerable annual expenditure on maintenance, taxes, security and upkeep may be required.
• May involve considerable legal formalities for proper transfer.
• Involves title clearance procedures, payment of stamp duties, legal fees etc.
• The ownership could be freehold or lease-hold wherein the terms could vary.
• There is no pre-determined rate of return.
• The value is to be determined on subjective basis only.

Agri-Investments

These are the investments that deploy resources in agricultural activities and the harvested produce is offered as returns to the investor. Most of the non-traditional investments are agriculture based. Modern scientific farming techniques and agricultural expertise are employed to ensure the proper development and maintenance of the farm.

Teak Plantations

Teak plantations are perhaps the most common and popular among the agriculture-based non-traditional investments. The scheme exploits the scarcity of timber and the resultant appreciation of timber price especially high quality timber such as teak and rose wood. When the investor joins the scheme, he makes a payment (either on an outright basis or through several instalments) and is allotted a specified number of trees, which the company shall grow on behalf of the investor. The investment amount is apportioned towards plantation development, marketing, and cost of plantation upkeep and maintenance over the period of the scheme. The company undertakes scientific growth and maintenance of the trees. At the completion of the scheme, the company offers the investors the tree duly cut ex-plantation or the realised sale proceeds of the tree. Investments are typically made in high cast timber yielding trees and the returns are computed on the basis of expected prices at the end of the scheme.

BENEFITS OF THE SCHEME: These schemes provide for long term capital appreciation. The prices of timber have appreciated manifold and with teakwood becoming scarcer and scarcer, their prices are shooting up.

Expert’s say that chances of prices falling is extremely low. Hence considering the huge requirements for timber and the demand-supply gap, the prices are only expected to appreciate more. Investments in teak plantations or other such high quality timber yielding plantations can be expected to provide long term capital appreciation. INTERIM RETURNS: These schemes also provide for returns after specified periods. Hence the investor is assured of getting back his investment after a certain period without having to wait for the long-term benefits. However, even these interim returns tend to be after a period of 3 to 5 years.

Tax free returns: Since investments in tree plantations are of the nature of agricultural returns, they are exempt from income tax.

However, though these investments provide for attractive returns, the investor has to be careful to ensure that fly-by-night operators do not dupe him.

Check for the following factors before you make your investment.

1. Check if the scheme provides for insurance cover against any natural disasters. This is a very important factor that very few investors consider.
2. Find out if the company maintains any buffer stock of trees at a different geographical location.
3. Ask company representatives if their scheme provides for any specific jurisdiction of Courts.
4. Before you actually sign up, find out if the company provides for any disinvestment facility i.e. an exit option.
5. Check if the scheme allows the investor to transfer his investment.
6. Look around and meet people to find out for how long the scheme has been operational and ask for proof of the existence of the plantation.
7. Check if the company provides for any loan facility against the invested amount.
8. Verify the credibility and reputation of the promoters.
9. Take a good look at the other business activities and success parameters of the promoters.

Risks in the scheme

• ACT OF GOD: Agricultural investments are subject to the vagaries of nature and calamities such as floods, drought and disease. Any such calamity can wreak havoc on the plantations. While some companies have tried to protect the investor by providing for insurance and a separate buffer stock that is located at a distant geographical location, there is always the risk of total loss of the investment.

• ACT OF STATE: With increasing awareness and public concern for the environment, the possibility of government enforcing a ban on cutting down of trees (especially those that fall under the high quality, scarce timber yielding variety) is possible. Since the return out of investments in teak plantations would dependent on the cutting down of the trees, acts of state could affect the returns from the scheme.

• UNRELIABLE PROMOTERS: Investments in teak plantations are of a long-term nature and involve a high level of involvement in nurturing the plantation. Hence, promoters who are not committed to the project could jeopardise your investment. Investments in projects where the promoters have dubious credentials are not advisable.

PRECAUTIONS

• Do not invest large sums in a single scheme. Spread your investments over a number of schemes and companies.

• Do not invest in first ventures or schemes promoted by inexperienced persons.

• Visit the office premises of the company and clarify your doubts with the staff personally. It is advisable to have a good look at the site of the plantation also. Look for arrangements that have been made by the company personnel. Do they have enough infrastructures support—water resources and plant specialists for example.

Orchards and vegetable plantations

These schemes are similar to tree plantations in that the company undertakes to plant, grow and nurture the fruit trees or plants on behalf of the investor. The vegetables/fruits produce is the returns to the investor. The customer can either opt to take a specified lot of vegetables at specific periods or opt to sell the vegetables/fruits and get his returns in cash. These investments are usually of a smaller duration such as 5 to 7 years unlike tree plantations, which are for a period of 15-20 years. Interim returns also start flowing from a much shorter duration, as the gestation period for such projects is short. However, the overall returns from these schemes might not be as attractive as that from tree plantations. Some promoters have established their own distribution network to ensure a speedy transportation of the vegetables harvested.

BENEFITS OF THE SCHEME

• The investor has the option of home delivery of vegetables of his choice, every week. The investor also has the option of monetary returns.

• These investments are also of a tax-free nature.

Risks in the scheme

(a) ACT OF GOD: These investments are also subject to risks from natural calamities such as floods, earthquake, drought, pests and diseases.

Precautions to be followed

(a) Find out if the scheme has been covered under insurance against any natural disasters.

(b) Verify if the plantation is suitable to the geographical location, climatic conditions etc.

(c) Check for a disinvestment option, if any.

(d)Check if the scheme offers a loan facility against your investment.

(e) Check if transfer of investment is allowed.

(f) Verify the credentials, experience and qualifications of the promoters and managers of the project.

(g) Verify if the project is already operational and if so, at what stage it is in.

All the schemes that have been launched are of recent origin and are yet to complete a cycle. Hence the success of such ventures and the returns from these have not yet been proved. The investor is advised to keep this in mind before deciding on his investment.

Holiday Resort Time Shares

Holiday time shares are unique leisure cum investment packages that have been designed to offer the investor free vacationing facilities at specified locations for a specified period, every year. While holiday time-shares have been a recent phenomenon in India, they have been quite popular in the western countries.

The scheme works as follows. The company builds resorts and maintains these. The ownership of the resort is sold to the investor for a particular unit of time, e.g., a week or multiples thereof. The price of the time-share unit depends on factors such as location of the resort, season or off-season etc. The investor or his nominees can vacation at the resort during the unit of time that he has opted for. This way, the investor gets to won the resort for a particular period without having to invest huge sums of money in buying the whole property. Moreover, the company takes care of the maintenance of the property & facilities. Since most of the companies’ own resorts at various locations; the investor also gets the benefit of owning time-shares at various locations by buying a single unit.

BENEFITS

(i) Holiday resort time-shares don't offer the investor any direct monetary returns. However, they do offer the investor, the opportunity of owning property at various locations, although for specific periods only.

(ii) These investments can reduce the costs of holidays. The ever-increasing hotel tariffs often bloat up vacation bills. Buying time-shares could hedge the cost of vacations. Moreover, some companies offer the investor the facility of managing the facilities required for holidays.

While the concept of time-share holiday resorts has been catching on, the investor has to make a careful choice on his investments. Make a checklist on the following points before making your decision.

(a) Who are the promoters of the company? What is their experience? What are their previous business ventures? How much of capital have they brought in to the venture?

(b) How long has the company been in existence? How many resorts does the company own? What are the various locations where the resorts are situated? What kind of packages is being offered? Does the company have any international tie-up? Check if the company provides any discounts on travel, food etc.

(c) Verify if the time-share can be transferred to others on exchanged with others. Verify if the scheme provides a disinvestment option.

(d) Compare the schemes offered by various companies and check if the pricing is right.

Car Time Shares

Car time-shares are based on the concept of time-share resorts. The investor gets to own a particular model of a car for a particular period in a particular location. The price of the time-share is dependent on the class of car (budget, economy or premium), period of ownership etc. While the concept of this investment is unique, its success hasn't been verified.

There have been recent ventures advertised lucrative returns from goat, chicken and rabbit farms. However, men with dubious credentials and background have often promoted them. These ventures by their very nature are risky and could ultimately end up in a disaster. While a carefully selected investment can offer returns far above those offered by traditional ones. The chances of losing the total investment always exist. The investor should also check with some experts in the field.

Foreign Currency

This is a good investment only in countries like India where continuous devaluation takes place because of absurd policies of the government. The gains here are on account of exchange rate fluctuation. Typically you can hope to gain only on hard currencies (like the Us $ and the british pound sterling). Prior to 1992, Indian nationals were not permitted to hold any foreign exchange, but now each and every individual is permitted to hold up to 500$. The catch is that foreign exchange is not freely sold to individuals. So you have to acquire it on your jaunts abroad, get FTS released for a foreign trip – collect the funds and then cancel your program returning only the excess over the permitted amount or buy it from the grey market (expensive and you may also land up with dummy or counterfeit currency). You can of course hold Traveller’s cheques as well.

• This is a risky venture in the sense that once we have a committed government, the reverse trend may start and the currency exchange values may not hold.
• If you had bought a dollar in 1987 for Rs. 11 and sell it for Rs. 40 in 1997, the actual return is only around 14%, which by no means is phenomenol. There is great likelihood that the growth in future may not be so spectacular.
• 500$ does not really offer much exposure to individuals to indulge in short-term buys and sell for profit. This really benefits large exporters, Frequent foreign travellers, Oil companies, FII’s, Multinational companies who can hold and transfer large sums.
• The rates keep fluctuating on a daily basis and there are two way quotes. Different rates exist for cash and travellers cheques.
• In future when free buying and selling of foreign currency is allowed, we may see more scope in such trade.

Chit Funds

Some refer to these funds also as ‘Cheat’ funds , brought about by the manner in which most of these funds have operated in this country. Barring some southern / eastern states, such activities are banned in the rest of the country. In fact parliament brought the Prize Chits and Money Circulation Schemes(Banning) Act in 1978. At that time the concept of the chit fund was to have a pool of funds, to have an individual target to fulfil within a time frame and a draw at periodical intervals. The prize chit is essentially a lottery wherein once a member gets the prize his name is dropped from further lot of draws and in most cases no further contribution is required. The James Raj committee under the aegis of UTI and RBI stated that chit funds are prejudicial to the public interests and affect the efficacy of the fiscal and monetary policies of the country. The Committee recommended a total ban on all such funds and hence the bill for issue of the banning act was drafted.

But the bill lapsed as the government fell and in 1982 an act was promulgated to regulate the trade. Now a chit is a transaction ( also referred to as chit, chit fund, chitty, kuri etc.) under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain or goods instead) by way of periodical instalments over a definite period and that each subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount. Usually default in payment of a instalment results in forfeiture.

Shroffs, Money-lenders, Angadias, Nidhis etc.

In the chain of investments the most risky are these lot of concerns. The investor should only opt for such investments if the term is very short and the person to whom the moneys are given is personally known well. The characteristics of such companies are stated below.

• Most of these are non-corporates, often just proprietory concerns, partnership or just a family HUF concern.
• They offer exceedingly high rates of interest, say anything from 18% to 30% p.a.
• They are not governed by any laws and most often clandestinely carry out business.
• The deposits with them are totally unsecured with practically no legal hope of recovery.
• Most of these run similar to a very small bank. In Kerala these are referred to as "Blade Companies".
• These firms employ questionable practices to conduct business i.e. use of physical force to force recoveries, lending in cash (unaccounted sums), physical cash transfers etc.
• These concerns also have some front business or activity to escape legislation. These could range from a travel agency to a courier business.

10. Tax Planning and Associated Investments

Lets us first look into the popular tax saving instruments like the Public Provident Fund (PPF) and the National Savings Certificate (NSC) and equity linked savings schemes. The Public Provident Fund and the National Savings Certificate are managed by the government are thus considered very safe investments though post tax returns could range between 12 to 18%.

Tax savers

The union budget 1997-98 brought lots of cheer to the harassed taxpayer. While the standard deduction for the salaried class was raised to Rs. 20000, the tax rates were slashed to a maximum of just 30 per cent.

While a self-employed individual can write off many revenue expenses incurred by him as being tax deductible, the salaried class has no such advantages. Only, specific investment instruments notified under Section 88 of the Income Tax Act offer tax rebates

The investments under these provisions are:

1. Public Provident Fund - This is the most popular and could be rated as the best tax saving instrument for the salaried class. The PPF account has a life of over 15 years and requires 16 contributions. The minimum annual contribution is Rs. 100 and the last contribution can be made at any time during the 16th year The PPF earns a high interest rate of 12 percent per annum. The interest income is totally exempt from tax under section 10 of the income tax act while contribution to the PPF earns a rebate of 20 per cent on the tax payable (section 88 rebate). PPF comes with two other advantages also.

• Withdrawal facility: PPF gives the investor the option of regular withdrawal. The first withdrawal is allowed in the seventh financial year. You could withdraw up to 50 per cent of the amount standing to your PPF account's credit at the end of the fourth financial year or immediately preceding the year of withdrawal, whichever is less. In case you have availed of a loan on the PPF account, the loan amount is deducted from the amount you withdraw. The withdrawal facility therefore enables you to draw funds from the PPF account without any loss of tax rebate, even though the amount is for a 15-year tenure. The investor can reinvest the withdrawal amount for further tax rebates without bringing in any fresh investments. The withdrawal is on a 'no questions asked' basis

• Loan facility: You can avail of the loan option from the fourth financial year onwards and is available only up to the sixth financial year. The loan is restricted to 25 per cent of the amount standing to your credit at the end of the second preceding financial year. The loan carries an interest of 13 per cent per annum. The best returns could be obtained from the PPF account by making use of the withdrawal option and reinvesting for further tax rebates. For salaried class whose tax liability keeps increasing every year (assuming an increase in your salary), PPF provides an option of recycling the present investment for future tax rebates. Businessmen could also increase their returns by availing on the loan facility and investing in their business. This is because; the loan comes at a very low rate of 13 per cent per annum. The interest paid on the loan can be offered for tax deduction.

11. Planning Your Investment

The broad facts are as follows:

• Persons in the high salary bracket need PROFESSIONAL advice and assistance more.

• Tax liability cannot be avoided once the income crosses a particular limit.

• The avenues of tax savings are very few and limited for high-salaried persons.

• A salaried employee's effort should be to reduce the tax liability in such a way that the cash in hand should be sufficient to take care of personal and his family's expenses and commitments.

• The general rule is that 'the take home' salary should be somewhere between 65 to 75 per cent of the gross earnings per month.

Proper investment of the surplus funds can bring in attractive benefits. The objective should be twofold:

(a) Reduction in tax liability, and

(b) Higher returns on investments.

• At the pre-retirement stage, tax-planning emphasis should be on

(a) Regular income, and

(b) Adequate cash flow after retirement.

• Space out effective savings in a planned manner during pre-retirement phase.

• Investments in tax-saving schemes are a matter of personal choice. Most of the investments carry identical benefits with only minor variations such as Mutual Fund schemes.

• A salaried person should remember that tax planning is like a weight-lifting exercise. Do not attempt to take on more than you can handle or else you can end up in a problem with your much-needed money blocked for years.
• The reward for saving your money is being able to pay your taxes without borrowing.

Strategy:

In the first phase the investor should take full advantage of tax exemptions. There are several such schemes the most popular being the Public Provident Fund (PPF), National Savings Scheme (NSS) and National Savings Certificate (NSC). After the investor has exhausted his limit for claiming tax deductions he can look out mutual funds where capital gains exemption is available. The third phase is when he can consider investing in fixed-return investments. Finally, the average investor is ready to take more risk and try investments such as equities and real estate where price appreciation is the name of the game.

Selection Parameters

Age Group: In our investment framework we have taken a life-cycle approach while keeping in mind the tax liabilities of a salaried person. The framework was constructed keeping in mind the requirements of an average salaried person but could be modified depending on the risk profile of the individual investor. We assumed five phases in a person's investing life. The first segment (24 to 35 years) is usually starting out professionally. Hence, the emphasis is on building solid assets and / or getting solid, risk-free returns. The second segment (36 to 45 years) has already built a financial base and can afford to take a little more risk. The third segment (46+ years) is fast approaching the end of his / her career and ought to look at investments which offer high returns with little risk. These are assumptions based on average models.

Investible surplus: As the amount increases, there is greater leeway to invest in higher risk—and consequently higher returns. Therefore, a higher proportion of the portfolio would be in high risk-return opportunities. The investible surplus options have been provided for easy reference. These are indicative, and one parameter can be taken to stretch to another i.e. the investible surplus of Rs. 25000 could be taken to mean Rs. 25000 to Rs. 50000 and so on up the scale.

PERSONAL PORTFOLIO*

The When and How of Savings

• Failure of some unknown partnership firms which offer usurious interest rates
• Unwary investors taking investment decisions on the basis of incentive gifts, rates, prize schemes etc.
• Entry of inexperienced people, canvassing deposits for such unknown companies.
• Blatant violation of government regulations by companies.
• Exploitation of greediness of investors by persons / brokers giving misleading and half baked information through newspapers, TV’s etc.
• Attempt by some NBFC’s to advertise RBI certification as the ultimate safety factor. (RBI & SEBI do not ever undertake any responsibility for the financial soundness of the company or for the correctness of any statements or representations made, except to ensure compliances.

• Many fly-by-night operators promise high returns of 24 per cent per annum and above with additional attractions such as gifts and other freebies. Such unincorporated firms invest in highly risky ventures (in case they invest at all) such as firms and plantations, and are therefore very risky. Investors are often fooled by He high profile advertising blitz of these companies.

• Invest only in rated companies: The RBI has made it mandatory for all NBFC’s registered with it to obtain a rating from an approved credit rating agency before accepting public deposits. The three approved credit rating agencies are CRISIL (Credit Rating and Information Services India Ltd.), ICRA (Investment Credit Rating Agency) and CARE (Credit Analysis and Research). These agencies undertake an unbiased, in-depth and scientific analysis of various factors such as company background promoter’ s holding and background, equity holding pattern, company'’ performance vis-�-vis its competitors, inter industry, and inter corporate analysis. The credit rating agencies also look at the future prospects of the industry. The rating parameters though broadly similar vary correspondingly to the instrument being rated i.e., fixed deposits, debentures and equity. For an investor placing FD'’ with a company, a rating of AAA (highest safety) or AA (high safety) is recommended. These rating imply that the investor is fairly assured of getting his principal and interest on the date of maturity clothe deposit. While the investor could consider a company rated A (adequate safety) for his investments, any company with a lower rating than this is fairly risky.

• Invest through reliable consultants – It is safer to invest through investment consultants or brokers. However, do make sure that your broker is reliable, professional and service oriented. Check if he has been in operation for at least a year in your area and what his network is like. Professional investment consultants are in constant interaction with companies and industry. They therefore have greater access to company information and can provide an investor with the right advice on investment. Often the larger brokers negotiate with companies on the brokerage rates and pass on much of it to their regular investors. Me investor is therefore the ultimate beneficiary. But don’t choose your consultant purely on the basis of the brokerage he passes on to you. Also ensure that you make the final decision regarding the company you wish to invest in.

• Reputed companies – Invest in companies that have been in existence for at least 5-10 years and have consistently declared good profits and dividends. Companies that have built up sizeable reserve from accrued profits that are predominantly into fund based activities such as vehicle finance are a safer bet. Check out the promoter’s background, qualifications and experience in the industry, size and area of operation of the company and how investor friendly the company is before placing your deposits. Invest in companies, which have the background of a large and successful corporate group.

• Split your Investment – "Do not put all your eggs in a single basket" is an important dictum Hat should be part of your investment policy. Fixed deposits are ‘unsecured’ investments and in case you have picked the wrong company, your investment could end up as a total write off. It is always possible that a company could go bad because of major bad decisions (remember the Barings Bank collapse that was caused by one rogue trader Nick Leeson), or adverse market conditions. To hedge yourself against such unexpected or unanticipated defaults or failures it is safer to split your deposits and invest in a few good firms rather than invest all your money in a single firm. Splitting your deposits into smaller sums also prevents tax deduction at source.

• Do not invest for very long periods – While companies accept deposits for a maximum period of 5 years, it is better to invest your money for a period of one or two years. In case you wish to reinvest your money, you can renew your deposit’ However, if due to some sudden exigencies or larger investment plans, you foreclose your deposits, you lose out on the interest as foreclosure carries the penalty of reduction. Placing your deposits for one year periods also increase your returns because of the incremental brokerage being paid on the maturity value of your deposit.

• Joint application and nominees: It is advisable to place your deposits with a family member as a joint applicant. Also ensure that you always assign a nominee to your deposit.

• Check for loan facility: - Prefer to invest in a company from which you have availed a loan or plan to take a loan for your car and house.

• Check out the company: Try and visit the premises of the company you wish to invest in and meet the staff of the company before investing in the firm. It might save you a lot of headaches later on.

THE CREDIT RATING CHART

Note:

1. Every credit rating agency has its own parameters for judging and grading risk.
2. Sometimes a company may approach more than one credit rating agency and then use the best projection to advertise risk.