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Q1. Explain the modes of investment. Q1. Explain the modes of investment.


Answer:
There are different types of securities conferring different sets of rights on the investors and different conditions under which these rights can be exercised. The various avenues for investment ranging from riskless to high risk investment opportunities consist of both security and non-security form of investment. As an investor you have a wide variety of investment alternatives available to choose


Security form of investment (Marketable)
• Equity shares 
• Bonds/Debentures        
• Money Market Instruments
• Mutual funds scheme 

Marketable / Security form of investments: 
The term „Security is generally used for those documents evidencing liabilities of the issuer. When you buy a financial instrument say fixed deposit from a bank, you are issued a document called Fixed Deposit Receipt or Certificate. This receipt is a liability to the bank as the bank has to safe guard the investment; provide interest for using the funds and to return back the invested amount on maturity. This document also outlines the rights of the investor and sets conditions under which the investor can exercise his or her rights. Security forms of investment are those instruments which are transferable and traded in any organized financial market.

Equity Shares:  Equity shares represent ownership capital. An equity shareholder enjoys both ownership stake and residual interest in income & wealth. The issue of equity shares could be in the form of initial public offer, rights issue, bonus issue, preferential allotment and private placement.  Investors has a choice to select equity shares which are broadly differentiated as blue chip shares, growth shares, income shares, cyclical shares and speculative 

Bonds/Debentures: Bonds represent long-term debt instruments. The issuer of a bond promises to pay a stipulated payment (interest and principal) to the bond holder. Bond indenture is a contract between the issuer and the bond holder, which specifies the detail of the issue such as par value of the bond, its coupon rate, maturity period, maturity date, call/put options etc. Internationally, a secured corporate debt instrument is called a corporate bond while an unsecured corporate debt instrument is called a corporate debenture. In India, corporate debt instrument is referred as debentures although they are secured.  Government bonds are issued by Central and State Governments. These bonds are called gilt edged securities. There are different types of bond – Straight bonds, Zero coupon bonds, Floating rate bonds, bonds with embedded options, commodity linked bonds etc. These are dealt in detail in the later units.

Money Market Instruments: Debt instruments which have a maturity of less than one year at the time of issue are called M.M Instruments. The important money market instruments are:
a) Treasury Bills
b) Commercial paper
c) Certificate of deposits
d) Repurchase Agreements – Repos & Reverse Repos

Mutual Funds:  Mutual funds are also known as indirect investments. It is an alternative route of buying equity shares or fixed income securities through various schemes floated by mutual funds companies. There are three broad types of mutual fund schemes.
1) Equity schemes
2) Debt schemes
3) Balance schemes
Non Security form of financial Investment: Non security form of investments are neither transferable nor traded in any organized financial market

Non – Security form of investment 
(Non-marketable financial assets) 
• National saving scheme 
• National saving certificate
• Recognized provident fund
• Public provident fund
• Post office saving scheme
• National pension scheme
• Corporate fixed deposit
• LIC
• Unit scheme of UTI
• Bank Fixed deposit / recurring deposit

 Life Insurance Policies: Life insurance may be viewed as an investment which suffices the protection and savings needs of an investor. Policies that provide protection benefits are designed to protect the policy holders from the financial consequences of unwelcome events such as death/long term sickness/accidents/disability etc.  Policies that are designed as savings contracts allow the policyholders to build up funds to meet specific investment objectives such as income for a particular event, retirement planning or repayment of a loan.  The important types of insurance policies in India are Endowment assurance policy, Money back policy, Term assurance policy, Unit linked Plan, Deferred Annuity and Whole life policy.

Bank Deposits: Bank deposits are the simplest and most common form of investment. There are various kinds of deposit accounts: current account, savings account and fixed deposit account. The deposit made in current account does not earn any interest while deposit made in savings account and fixed deposit accounts earn interest. The interest rate depends upon the tenure. Bank deposit enjoys high liquidity due to premature withdrawals. Also loans can be raised on the fixed deposit certificates. Deposit Insurance Corporation provides guarantee to all deposits in schedule bank up to Rs.100000 per depositor of a bank. 

Post office Accounts : There are various types of accounts namely post office savings account, post office time deposit account, Monthly income schemes, Kisan Vikas Patra, National Savings Certificates. Some are pure savings schemes, while others are tax savings schemes.

Corporate Fixed Deposits Certain large and small corporates raise funds through fixed deposits form the public. While fixed deposits mobilized by manufacturing companies are regulated by Company Law board and fixed deposit mobilized by finance companies are regulated by Reserve bank of India. A manufacturing firm can mobilize up to 25 percent of its net worth in the form of fixed deposit from public and an additional 10 percent of its net worth from its shareholders. The interest rates on company deposits are higher than those on bank fixed deposits.

Employee Provident Fund Scheme: Employee Provident Fund is an important component of savings for a salaried person. Each employee has a separate provident fund account in which both the employer and employee are required to contribute a certain sum of money on a monthly basis.  While the contribution made by the employer is fully tax exempt, the contributions made by the employee is eligible for tax deductions under Sec 80C. The provident fund contribution earns compound interest rate that is totally exempt from taxes. The balance in provident fund account is fully exempt from wealth tax and it is not subject to attachment under any order or decree of a court.

Public Provident Fund Scheme This scheme of post office is the most attractive investment option. Individuals and HUFs can invest in this scheme. The investment period is 15 years and the minimum deposit is Rs100 per year and the maximum permissible deposit per year is Rs.70000. Deposits in a PPF account is eligible for tax concession under Sec 80C.The deposit earns a compounded interest rate of 8 percent per annum which is totally exempt from tax. 









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