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Personal financial planning

Comparative analysis of three investment alternatives

Introduction: -

Comparative analysis is very important when anybody decided to invest their money in financial market. As we all know that investment in financial market is very risky and according to the risk analysis where there high risk there will chance of high return also. In this regard comparative analysis is very important to take any financial decision.
There are many investment options available for the people in the market, but there are mainly five investment options, which are considered to be as most popular and most effective investment options available in the current market scenario. In general, almost 95-98% people do invest in these, since the Expected Rate of Return is much higher than any other investment options, irrespective of the amount of risk is very high in some of the cases. These investment options are: This investment option is most popular and safest option available in the market. With almost every working people invest in fixed deposits; this investment option leads the chart of four investment options because of its safety and popularity. Though the amount of return is much lesser than the other three options, this option heads the table as it has almost no risk of losing the invested amount. Also, it is the oldest among the other three, so the trust factor of people is very high.

In this study I have taken three financial investment alternatives for comparative analysis which are as follows
1. 2. 3.

Post Office Monthly Income Scheme 2011 Mutual fund-Motilal Oswal Assets Management Ltd Fixed deposit

1. Post Office Monthly Income Scheme 2011


This scheme appeals to conservative investors with traditional values, and for good reason.

This scheme offers monthly income and is a safe, guaranteed-by-the-government option. For retirees, widows and others looking for a steady income, it can be ideal. The Post Office Monthly Income Scheme, or PO MIS, is offered by Indian Post Offices. A lump sum amount is deposited with the post office and monthly interest earned each month is paid out to you. As the scheme is offered by post offices, it is backed by the government. Thus, the PO MIS is one of the safest investments available. Interest The rate of interest offered on PO MIS is 8% per annum (year). Interest is paid out every month but direct credit to your bank account remains a problem as Post Offices are not that technologically advanced in India, as such one needs to go and collect the monthly income from the PO directly. However if you have a savings account in the same post office then interest can be credited directly to your account. A 5% bonus is paid on maturity of the fund, therefore, the effective yield works out to 8.9% per year. The interest earned is fully taxable. There is no tax deducted at source (TDS). The investment in PO MIS is exempt from wealth tax. Who is eligible to invest? Only individuals can invest in PO MIS. You can either open a single or joint account. A Non Resident Indian (NRI) or Hindu Undivided Family (HUF) cannot open a PO MIS account. Investment Limit There is an upper limit on investment in a PO MIS scheme. You cannot invest more than Rs 4.5 Lakhs in a single account. If you invest jointly (2/3 names), the limit is Rs 9 Lakhs. The minimum investment is Rs 1,500. Duration The tenure of PO MIS is 6 years your investment is locked in for this time period. Number of Accounts Any number of accounts can be opened, but the total investment cannot exceed the upper limit across all the accounts. Nomination You can specify the nominee at the time of opening the account, or at any time later. Premature withdrawal, encashment, closure & Penalty

Premature withdrawal of the invested amount is allowed after 1 year of opening the account. If the account is closed between 1 and 3 years of opening, 2% of the deposited amount is deducted as penalty. If it is closed after 3 years of opening, 1% of the deposited amount is charged as penalty. The bonus amount is forfeited when you close the account early. Risk factor- generally these type of investment has no risk. The people who belong to middle or lover middle class are invest in this scheme because they do not want to take risk on their financial investment Impact of Budget 2011- there is no major impact of budget 2011 on these investment alternatives. Because the interest rates was marginal increased and risk factor is remains constant

2. Mutual fund- Motilal Oswal Assets Management Ltd


Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Mutual Funds in India are financial instruments. These funds are collective investments which gather money from different investors to invest in stocks, short-term money market financial instruments, bonds and other securities and distribute the proceeds as dividends. The Mutual Funds in India are handled by Fund Managers, also referred as the portfolio managers. The Securities Exchange Board of India regulates the Mutual Funds In India. The share value of the Mutual Funds in India is known as net asset value per share (NAV). The NAV is calculated on the total amount of the Mutual Funds in India, by dividing it with the number of shares issued and outstanding shares on daily basis. MUTUAL FUNDS IN INDIA ADVANTAGES:

The Mutual Funds in India offer flexibility by means of dividend reinvestment, systematic investment plans and systematic withdrawal plans. These funds are available in small units, so they are affordable to the small investors. The fees charged for to the custodial, brokerage and others services are very low in case of Mutual Funds in India. These funds have the option of redeeming or withdrawing money at any point of time. The Mutual Funds in India have low risk as it is managed professionally.

Like most developed and developing countries the mutual fund cult has been catching on in India. The important reasons for this interesting occurrence are:

Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation. Mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it's such a straightforward concept. A mutual fund is a company that pools the money of many investors, its shareholders to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. For the individual investor, mutual funds propose the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. A mutual fund, by its very nature, is diversified -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your odds to diversify. Benefits of mutual funds: Investing in mutual has various benefits, which makes it an ideal investment avenue. Professional investment management : Diversification : A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. Low Cost : A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000, and sometimes less. Convenience and Flexibility : Investing in mutual funds has its own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family. Liquidity :- In open-ended schemes, you can get your money back promptly at net asset value related prices. Transparency :-Regulations for mutual funds have made the industry very transparent. You can

track the investments that have been made on your behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment. Variety: - There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on bluechip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.

Mutual fund risks:


Having understood the basics of mutual funds the next step is to build a successful investment portfolio. Before you can begin to build a portfolio, one should understand some other elements of mutual fund investing and how they can affect the potential value of your investments over the years. The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than what you started out with. That is the potential of loss is always there. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Here's why. At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run.

Motilal Oswal mutual fund


Motilal Oswal Mutual Fund is one of the leading asset management schemes of India and is

managed by Motilal Oswal Asset Management Company Ltd. Motilal Oswal Mutual Fund is sponsored by Motilal Oswal Securities Limited which was founded in the year 1987 and since then, it has flourished as a major financial company with its core ethics of focus on customer first attitude, ethical and transparent business practices and research based value investing. The company has an expert team of investment professional who will guide you to the best investment solutions. The financial firm offers a wide selection of financial products and services such as Wealth Management, Broking & Distribution, Commodity Broking, Portfolio Management Services, Institutional Equities, Private Equity, Investment Banking Services and Principal Strategies.

Motilal Oswal MOSt Shares M50 ETF


OBJECTIVES:Motilal Oswal MOSt Shares M50 ETF (MOSt Shares M50) seeks investment return that corresponds (before fees and expenses) generally to the performance of the MOSt 50 Basket (Underlying Basket), subject to tracking error. Structure: - Ended Exchange Traded Fund Inception Date: July 27, 2010 Face Value (Rs/Unit):- Rs 10 Minimum Investment: Rs. 10,000 and in multiples of Re. 1 thereafter. Entry Load: Nil Exit Load: Nil.
Latest NAV
Scheme Name NAV (Net Asset Value) Repurchas e Price Sale Price Date

MOSt Shares M50

70.2042

70.2042

70.2042 07-Sep-2011

Motilal Oswal MOSt Shares Midcap 100 ETF

Objective: -Motilal Oswal MOSt Shares Midcap 100 ETF (Most Shares M100) seeks
investment return that corresponds (before fees and expenses) to the performance of CNX Midcap Index (Underlying Index), subject to tracking error. Structure: Open Ended Index Exchange Traded Fund Inception Date: January 31, 2011 Face Value (Rs/Unit): Rs. 10 Minimum Investment: Rs. 10,000 and in multiples of Re. 1 thereafter. Entry Load: Nil. Exit Load: Nil.
Latest NAV
Scheme Name NAV (Net Asset Value) Repurchas e Price Sale Price Date

MOSt Shares M100

7.6040

7.6040

7.6040 07-Sep-2011

Motilal Oswal MOSt Shares NASDAQ-100 ETF


Objective: - Motilal Oswal Most Shares NASDAQ-100 ETF (Most Shares NASDAQ 100)
seeks investment return that corresponds (before fees and expenses) generally to the performance of the NASDAQ-100 Index, subject to tracking error. Structure: Open Ended Index Exchange Traded Fund Inception Date: Rs. 10 Minimum Investment: Rs. 10,000 and in multiples of Re. 1 thereafter. Entry Load: Nil Exit Load: Nil.
Latest NAV
Scheme Name NAV (Net Repurchas Sale Price Date

Asset Value)

e Price

Motilal Oswal MOSt Shares NASDAQ100 ETF (MOSt Shares NASDAQ 100)

99.8579

99.8579

99.8579 07-Sep-2011

Target- Motilal Oswal Asset Management, a Mumbai-based exchange-traded fund boutique


specialist and subsidiary of Motilal Oswal Securities, is targeting overseas institutional investors with its India ETFs. The company is focusing on these investors with two India-focused ETFs: the Motilal Oswal Most Shares M50 ETF, launched in June 2010, and the Motilal Oswal Most Shares Midcap 100 ETF, launched in January. The Most Shares M50 ETF is based on the Standard & Poors CNX Nifty 50, which includes 50 of around 1,300 companies listed on Indias National Stock Exchange. Those 50 stocks capture around 60% of that indexs market capitalisation. The fund had Rs1,860bn ($41m) in assets as of end-April and has the largest investors base, estimated at 14,000, among all the ETFs in India. The Most Shares Midcap M100 ETF is based on the CNX (Crisil NSE 50 Index) Midcap Index. The fund has Rs1.190bn in assets as of end-April. Crisil stands for the Credit Rating Information Services of India Limited, while the NSE stands for the National Stock Exchange of India. The two formed a joint venture index service provider called the India Index Services and Products Ltd. Both the S&P CNX Nifty 50 and the CNX Midcap Index are developed and maintained by IISL. Indias ETF business is still in its initial stage. Only around 1% of the total assets in mutual funds is invested in ETFs, lower than 6% in the US and 3.5% in Europe, Rakesh says. Only around 1% of Indias total population has depositary accounts, the owners of which could trade securities and ETFs. There were 25 ETFs listed on the Bombay Stock Exchange and 20 listed on the National Stock Exchange of India, as of May 16. Motilal Oswals major competitor, Benchmark Asset Management, was acquired by Goldman Sachs Asset Management in March, as reported. Motilal Oswal also runs portfolio management services, or managed account services, for 5,000 high-net-worth clients, with aggregate assets under management of 350m. All the managed accounts are invested in long-only equities. The company also provides sub advisory services to some offshore funds investing in India. It is a sub advisor to Gemini Most India Fund, a Units Fund launched in February in the UK with about $10m in assets.

Impact of budget 2011- In his budget speech, our Finance Minister has said Currently,
only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalize the portfolio investment route, it has been decided to permit SEBIregistered Mutual Funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market. After being at the receiving end of rapid regulatory changes, these indeed point to better times, especially because overseas investors are expected to be mature and therefore longer term in their orientation especially considering that the long-term India growth story remains intact. However, I would stop just short of popping the champagne because aspects like KYC, income tax and investor caps have yet to be unraveled. Having said that, the industry should begin with obtaining approvals from overseas regulators so that it can exploit this very substantial opportunity. Now for the not-so-bad news which seems to have had wider coverage. The Section 115(r) of the Income Tax Act has been amended so that with effect June 1, 2011 all persons other than an individual or a Hindu Undivided Family (HUF) will now on be subjected to Dividend Distribution Tax (DDT) at 30 percent instead of 20 percent on income distributed by debt funds defined by SEBI as money market & cash funds and to DDT at 30 percent instead of 25 percent on other debt funds. This change therefore, only impacts investors in the dividend option. However, with effect April 1, 2011 the surcharge of 7.50 percent has been reduced to 5.0 percent which reduces the impact to around 3 percent and 6 percent in the case of cash and other debt funds respectively. There is no change in the position of individuals or HUFs (DDT at 12.5 percent on cash funds and 25 percent on other debt funds).

3.Fixed deposit as a investment alternatives


1. Fixed deposits offered by Banks: Considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means of social development, banks in India have indeed played an important role in not only urban areas, but also in rural upliftment. For an ordinary person though, banks have acted as the safest avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and fixed deposits have been effectively used by one and all.

However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering just above in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, inflammatory pressure in the economy and we have a position where the savings are not earning. The inflation is creeping up almost 8% at times, this means the value of money saved goes down instead of going up. This effectively mars any chance of gaining investments from the banks.

Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. During the first phase of financial reforms, there was a nationalization of 14 major banks in 1969. As far as the present scenario is concerned the banking industry is in a transition phase. The Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for more than 78 per cent of total banking industry assets. On the other hand the Private Sector Banks in India is witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20 percent in the employee strength of the private sector in the wake of the Voluntary Retirement Schemes (VRS).

List of the banks and their fixed deposit rates:

Name of the Banksnnn ABN AMRO Bank Allahabad Bank Andhra Bank Axis Bank Bank of Baroda Bank of India Barclays Bank Canara Bank Citi Bank Corporation Bank Dena Bank Deutsche Bank

Fixed deposit rates 5-6.75% 5.5-6% 5.5-6% 6.5-7.3% 6-7% 6.75-7% 5-5.5% 7-7.5% 4.25-4.5% 5-5.5% 6.75-7.5% 3-4.5%

Dhanalakshmi Bank Federal Bank HDFC Bank Hongkong Sanghai Banking Corp. Ltd. ICICI Bank IDBI Bank Indian Overseas Bank Indusind Bank ING Vysya Bank Jammu and Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Oriental Bank of Commerce Punjab National Bank SBI Standard Chartered Bank State Bank Of B&J State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Travankore Syndicate Bank UCO Bank Union Bank of India United Bank Of India Vijaya Bank YES Bank Source: various banks websites

6.5-8% 6.5-7.5% 5.5-7% 8-8.75% 5.25-7.5% 7-7.75% 6-7.5% 7-8.25% 5.75-7.75% 5.5-6% 7-8% 7-8.25% 6-7% 5.5-6% 5.5-6.5% 6.25-7% 4.5-7.25% 6.75-7.5% 6.5-7.5% 6.75-7.5% 6.5-7.25% 4.25-5.75% 7-7.5% 6.5-7% 5.50% 6.5-7.5% 5.5-6% 7.25-7.75%

2. Fixed deposits offered by Post Offices: Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So the two basic and most sought features, those of return safety and quantum of returns were being handsomely taken care of.

Though certainly current market position is not the most efficient systems in terms of service standards and liquidity; these have still managed to attract the attention of small, retail investors. However with the government investing its intention of reducing the interest rates in small savings options, this avenue is expected to lose some of the investors. Public Provident Funds act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered.

3. Company fixed deposits: Another oft-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their options and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks are there. Firstly, of all the danger of financial positions of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, dont reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have resulted in low confidence in this option.

Risk Factor- in this alternative the risk factor is very low Impact of budgets 2011- Due to budget 2011 the fixed deposit
changed between 0.25%-1.00%.

rates are slightly

Conclusion
There are allots of investment alternatives are available for investors to choose a medium for their financial investment. Those who are ready to take high risk are getting high return. The government securities and fixed deposits are the investment alternatives where there is no risk or risk is very low and investment in mutual funds and equity market are very risky compare to fixed deposits but returns are very high. So people should always careful about their investment decisions and must analyze the risk factor and their benefits and returns. The following comparable graph and table shows that returns of share markets and fixed deposits or gold.
Investment options Stock market Bank fixed deposits Gold Returns per annum 17% 9% 5.7%

The people invest in share market bcz------Historically shares have outperformed all the other investment instruments and given the maximum returns in the long run. In the twenty-five year period of 1980-2005 while the other

instruments have barely managed to generate returns at a rate higher than the inflation rate (7.10%), on an average shares have given returns of about 17% in a year and that does not even take into account the dividend income from them. Were we to factor in the dividend income as well, the shares would have given even higher returns during the same period.

Suggestions
The followings are the suggestion should be must analyze before taking financial investment decisions How to predict market risk? It is difficult to predict market risks. The only thing we can say here is that start noticing all the small signs early. If the election results are feared to lead to a fall in the stock market, notice the signals beforehand. Read Sebi's bulletins and track companies whose shares prices are very volatile. How people can minimize their risk and maximize their return? Buy when stocks are falling, sell when these are rising. This works well when you are a longterm investor and there is an extended bear or Bull Run. Don't try to second guess or predict that the market will fall today and rise tomorrow. Even seasoned investors cannot do that! 2. Don't try to guess the market's favorites Your instincts might tell you that pharma or technology stocks are hot due to certain policies or events, but remember millions of investors have already guessed that and bought these stocks. The prices of these stocks would therefore be at a higher level when you buy them. Instead focus on the long term and don't get swayed by short-term events. 3. Aim for the long haul Short-term investing is prone to higher risks. When investing in stocks, aim to get good returns after a period of three to five years at the minimum. Also churn your portfolio periodically and based on the progress that a company makes in a quarter or in six months, decide whether to hold the stock or get out of it. 4. Avoid hot tips

You may have overheard some news about a stock or your friend may advise that a particular stock is all geared to move up. Avoid such tips like the plague and your investments will remain safe. 5. Blue-chips are safe bets Blue-chip companies are there because they have done well in the past and have a high market capitalization. It is a likely guess that they will maintain their track record and give you higher returns even in future. Therefore invest in companies that have a good track record. 6. Slow and steady stream of investments Set aside a certain portion of your earnings every month and invest that sum in shares irrespective of the market conditions. This way, over a period of time you can amass a substantial number of shares of the stocks in your portfolio. 7. Think portfolio Don't put all your earnings in a single stock. Try to have a diverse portfolio of stocks. This way even if one stock doesn't do well, you are still well protected. Also invest across sectors, since any problem in one sector would affect all stocks in the sector. As a thumb rule, if you have investments of up to Rs50, 000 invest in two to three stocks. For about Rs150, 000 invest in three to five stocks, for around Rs500, 000 have five to seven stocks and around ten stocks for higher amounts. 8. Dont invest all your savings Always maintain a core set of reserves. You should never touch these reserves for investing, so that even in the worst case you still have some money. Typically these reserves should be your salary of about six months. 9. Be level-headed Invest wisely, don't get swayed by rumors and allow Sharekhan to be your guide at all times. Investment success won't happen overnight, so avoid overreacting to short term market swings.