BASICS OF INVESTMENT PRODUCTS

CHAPTER 1

LEARNING OBJECTIVES
• List investment and savings alternative to the common investor.

CHAPTER TABLE OF CONTENT

1. Definition of investment
2. Various Investment products
• Bank savings
• Govt. schemes
• Retirement savings
• Equity investments
• Debt & Money market investments
• Mutual Funds & ETFs
• Gold & Gold ETFs
• Real Estate & REITS

INTRODUCTION

In the previous module we understood the concepts of banking, basics of financial goals, basic
economic terms and how financial statements help us evaluate businesses to facilitate
investment decisions.

But what do we mean by an "investment"? Is it the same as "saving"?

In the Indian context, we often get confused if we have to consider buying gold/ornaments as
'investment". Why do some kinds of investments give better returns than others? Also, why are
some investment categories are more risky than others?

Who are the different kinds of investors?

There are many such questions that arise in our minds when discussing the topic of investments.
This chapter is designed to help you understand and identify the various investment avenues
available for the common investor.

Let's warm up
Closely observe the picture. The money flows in an endless loop. Households provide the
factors of production to firms and receive income in the form of rent, wages, dividends,
interest and profits. Households use this income to purchase goods and services from the
firms. The government also pays a vital role in the movement of money, by way of collection
of taxes, social transfers and purchases of goods and services from the firms. A part of the
income of households flows back to firms in the form of direct finance or indirect finance by
way of investments.

INVESTMENT

According to the Oxford Dictionary, to invest (verb) means to buy property, shares in a
company, etc. in the hope of making a profit.

Investment is said to be the dedication of an asset to attain an increase in value over a period
of time. The purpose of investment is to generate a return from the invested asset.

Investment may generate income for you in two ways:

1. If you invest in a saleable asset, you may earn income by way of profit (when you sell
the asset).
2. If an investment is made in a return generating plan, then you will earn an income via
the accumulation of the gains.

From the above understanding, we can deduce that investment is primarily aimed at obtaining
an additional source of income or gain from the profit from the investment over a period of
time.

Investments can be made in-

1. Physical assets-like real estate, gold, etc.

2. Financial assets-like stocks, bonds, mutual funds, retirement schemes, etc.
Because investing is oriented toward the potential for future growth or income, there is always
a certain level of risk associated with an investment. An investment may not generate any
income, or may actually lose value over time. For example, it is a possibility that you will
invest in a company that ends up going bankrupt or a project that fails to materialize

This is the primary way that saving can be differentiated from investing: saving is accumulating
money for future use and entails no risk (or at least protected by the regulators to an extent),
whereas investment is the act of leveraging money for a potential future gain and it entails
some risk.

Let's look at a few reasons why we invest

1. To Keep Money Safe

Capital preservation is one of the primary objectives of investment for people. Some
investments help keep hard-earned money safe from being eroded with time. By parking your
funds in these instruments or schemes, you can ensure that you do not outlive your savings.
Fixed deposits, government bonds, and even an ordinary savings account can help keep your
money safe. Although the return on investment may be lower here, the objective of capital
preservation is easily met.

2. To Help Money Grow

Another one of the common objectives of investing money is to ensure that it grows into a
sizable corpus over time. Capital appreciation is generally a long-term goal that helps people
secure their financial future. To make the money you earn grow into wealth, you need to
consider investment objectives and options that offer a significant return on the initial amount
invested. Some of the best investments to achieve growth include real estate, mutual funds,
commodities, and equity. The risk associated with these options may be high, but the return is
also generally significant.

3. To Earn a Steady Stream of Income

Investments can also help you earn a steady source of secondary (or primary) income.
Examples of such investments include fixed deposits that pay out regular interest or stocks of
companies that pay investors dividends consistently. Income generating investments can help
you pay for your everyday expenses after you have retired. Alternatively, they can also ch as
excellent sources of supplementary income during your working years by providing you with
additional money to med outlays like college expenses or EMIs

4. To Minimize the Burden of Tax

Aside from capital growth or preservation, investors also tave ether compelling objectives for
investment. This motivation comes in the form of tax benefits offered by the income Tax Act,
1961. Investing in options such as Unit Linked Insurance Plans (ULIPS), Public Provident
Fund (PPF), and Equity Linked Savings Schemes (ELSS) can be deducted from your total
income. This has the effect of reducing your taxable income, thereby bringing down your tax
liability.

5. To Save up for Retirement

Saving up for retirement is a necessity. It is essential to have a retirement fund you can fall
back on in your golden years, because you may not be able to continue working forever. By
investing the money you earn during your working years in the right investment options, you
can allow your funds to grow enough to sustain you after you've retired.

6. To Meet your Financial Goals

Investing can also help you achieve your short-term and long-term financial goals without too
much stress or trouble. Some investment options, for instance, come with short lock-in periods
and high liquidity. These investments are ideal instruments to park your funds in if you wish
to save up for short-term targets like funding home improvements or creating an emergency
fund. Other investment options that come with a longer lock-in period are perfect for saving up
for long-term goals.

What Are Investment Goals?

They take various forms, but they ought to be more concrete than generic notions. For instance,
even if you wanted your investment in stocks to generate profit, you would benefit from
addressing more specific questions, such as how much of a return you wanted to see and how
long you wanted to sustain it for.

Other important goals for investing might include:

• Generating income that you can use to supplant your working lifestyle.
• Preserving capital, or making safe decisions that maintain your net worth.
• Maintaining liquidity, or ensuring that you can always move your money around and
have access to it.
• Speculating, or making fast profits to build wealth without being overly concerned
about incurring losses.

While it is tempting to come up with broad goals, specificity has its advantages. Instead of
merely telling yourself that you want to achieve financial stability or to put your kids through
college, translate these objectives into number-based terms to maintain a more realistic
perspective.

Time frame

Big objectives like retiring can be overwhelming. Make things less of a hurdle by forming your
investment goals in parts:

• Pick short-term investment goals based on your current consumer habits. For
instance, you might want to upgrade your old furniture, make a home improvement or
gradually divert some income toward a vehicle down payment.
• Choose long-term goals for investing with an eye on your ideal future. This is where
you think about saving to fund a comfortable retirement, your children's college fund,
or buy a new home.

Do not worry if your investment portfolio goals seem contradictory at first. Effective financial
planning typically involves diversified portfolio strategies that let you achieve multiple ends.
In other words, not every stock, bond, retirement plan or mutual fund that you buy into needs
to do precisely the same thing.

Test Your Understanding 1

Investments made in listed equity stocks provide for _____.
a. Better liquidity
b. Guaranteed capital appreciation
 c. Safety of capital
d. All of the above.

Test Your Understanding 2

In investments, ELSS for ____.
a. Equity Linked Savings Scheme
b. Exceptional Liquid & Safe Scheme
c. Enterprise Linked Social Security
d. All of the above

VARIOUS INVESTMENT PRODUCTS

Bank savings

Savings account is a basic account type that lets you deposit money safely with a bank. It
ensures safety and access to your money whenever you need. You can withdraw your funds,
either digitally or in person, at any point in time.

Having a savings account is a liquid investment, so you have the ease of using your funds any
time for transactions. A savings account also earns decent returns.

To understand the concept of savings account, imagine you and your friend have 500 each.
While your friend kept it with him, you deposited it in a bank that offers an interest rate of 5%
annually. Towards the end of the year, your friend managed to not spend any money and save
1500, whereas you grew it to 8525 because you decide to deposit it in the bank savings account

Fun Learning with English idioms

Idiom: a stitch in time saves nine
The idiom a stitch in time saves nine means that one should not wait to deal with a specific
problem or one would risk it getting much worse later on.
 Example: You should consider getting your car repaired now before you're left stranded on
the side of the road-a stitch in time saves nine

Govt. schemes

These are various schemes that are launched by the government to encourage people to save
money. The government runs these schemes through banks, financial institutions, and post
offices. People investing in these schemes can enjoy tax benefits under Sec 80C of the Income
Tax Act of 1961 and also earn returns at a fixed rate of interest as decided by the government
These rates are usually more than the regular term deposits of banks.

Some of the key government savings schemes are as follows:

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana Scheme was launched with an aim to encourage the parents to
secure the future for their daughters. It was launched in the year 2015 by the Prime Minister of
India Narendra Modi under the 'Beti Bachao, Beti Padhao’ campaign. This scheme is targeted
towards the minor girl child. SSY account can be opened in the name of the girl from her birth
to any time before she turns 10 years old.

The minimum investment amount for this scheme is INR 1,000 to a maximum of INR 1.5 lakh
per year. Sukanya Samriddhi scheme is operative for 21 years from the date of opening.

National Savings Certificate (NSC)

National Saving Certificate was launched by the Government of India to promote the habit of
savings amongst the citizens. The minimum investment amount for this scheme is INR 100 and
there is no maximum investment amount. The interest rate of NSC changes every year.

One can claim tax Deduction of INR 1.5 lakh under Section 80€ of the Income Tax Act. Only
residents of India are eligible to invest in this scheme.

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Pradhan Mantri Jan Dhan Yojana was launched to provide basic banking services like a
Savings Account, deposit account, insurance, pension and so on, to the Indian citizens. The
government of India aimed to provide easy access to financial services such as Savings and
Deposit Accounts, Remittance, Insurance, Credit, Pension to the poor and needy section of our
society.

The minimum age limit in this scheme for a minor is 10 years. Otherwise, any Indian resident
over the age of 18 years is eligible to open this account. An individual can only exit this scheme
after reaching the age of 60 years.

PMVVY or Prime Minister Vaya Vandana Yojana

This investment scheme is meant for the senior citizens aged above 60 years of age. It is known
to offer them the guaranteed return of around 7.4 percent per annum.

The scheme offers access to pension scheme that is payable on a monthly, annually, and
quarterly basis. The minimum amount that is received in the form of pension is INR 1000.

Sovereign Gold Bonds

The Sovereign Gold Bonds were introduced by the Government of India in November 2015. It
aims at offering a lucrative alterative to own and save gold. Moreover, the scheme is known to
belong to the category of Debt fund. Sovereign Gold Bonds or SGBs not only help in tracking
the overall Import-export value of the given asset, but also helps in ensuring transparency
throughout.

SGBS refer to government-based securities. Therefore, these are regarded as completely safe.
The respective value gets denominated in multiple grams of gold. As it serves to be the safest
substitute for physical gold, SGBs have witnessed immense popularity amongst the investors.

Retirement savings

A pension plan or retirement plan is designed to cater to your financial needs & requirements
post-retirement, including medical emergencies, household expenses, and other living costs.

Investing in the best retirement plans is essential to safeguard your golden years. Retirement
and pension plans are financial instruments that can shape your hard-earned income into
savings for your post-retirement life. It comes in various forms to cater to a multitude of savings
and investment goals, enabling a financially stable retired life.

Many funds and life insurance companies offers the following plans towards retirement
savings:

1. Deferred Annuity
2. Immediate Annuity

3. Annuity Certain

4. Life Annuity

5. Life insurance with investment lump-sum pay out.

In addition to these, government has also initiated some of the schemes towards retirement
savings & planning. Few of these schemes are listed below:

National Pension Scheme (NPS)

National Pension Scheme or NPS is one of the famous schemes offered by the Government of
India. It is a retirement saving scheme open to all the Indians, but mandatory for all the
government employees. It aims to provide retirement Income to the citizens of India. Indian
citizens and NRIs in the age group of 18 to 60 can subscribe to this scheme.

Under NPS scheme, you can allocate your funds in equity, corporate Bonds and government
securities. Investments made up to INR 50,000 are liable for deductions under section 80 CCD
(IB), Additional investments up to INR 1,50,000 are tax Deductible under Section 80C of the
Income Tax Act.

Public Provident Fund (PPF)

PPF is also one of the oldest retirement schemes launched by the Government of India. The
amount invested, interest earned and the amount withdrawn are all exempt from tax. Thus, the
Public Provident Fund is not only safe, but can help you save Taxes at the same time. The
interest rate of the scheme (FY 2021-22) is 7.1% p.a. In PPF, one can claim tax deductions up
to INR 1,50,000 under section 80C of Income Tax Act.

The fund holds a longer tenure of 15 years, the overall influence of compounding interest that
is tax-free tends to be significant-especially during the later years. Moreover, as interest gets
earned and the invested principal gets backed by the respective sovereign guarantee, it is known
to make up for a safe investment. It is important to note that the overall rate of interest on PPF
gets reviewed every quarter by the Indian Government.

Atal Pension Yojana (APY)

Atal Pension Yojana or APY is a social security scheme launched by the Government of India
for the workers in the unorganized sector. An Indian citizen in the age group of 18-40 years
with a valid Bank account is eligible to apply of the scheme. It is launched to encourage
individuals from the weaker section to opt for a pension, which would benefit them during their
old age.

The scheme can also be taken by anyone who is self-employed. One can enrol for APY with
your bank or post office. However, the only condition in this scheme is that the contribution
must be made until the age of 60.

Test Your Understanding 3

Sovereign Gold Bonds scheme was introduced by the government in the year ____.
a. 2001
b. 2020
c. 2015
d. 2022

Test Your Understanding 4

An individual under PMJDY scheme can only exit this scheme after reaching the age of 60
years. True or False?
a. True
b. False

Equity investments

An equity investment is money that is invested in a company by purchasing shares of that

company in the stock market These shares are typically traded on a stock exchange.

Equity investors purchase shares of a company with the expectation that they'll rise in value in
the form of capital gains, and/or generate capital dividends. If an equity investment rises in
value, the investor would receive the monetary difference if they sold liquidated and all its
obligations are met, Equities can strengthen a portfolio's asset allocation by adding
diversification.
For most retail investors, the two main equity investment options are: equity shares and equity
mutual funds.

Equity mutual fund is a type of mutual fund that buys shares of companies in the stock market.
The goal of an equity fund is to invest in businesses that will grow, hence increasing the value
of the fund over time.

Equity derivatives are another type of investments related to equities. Though these
investments are not directly made on the equity shares, these investments are made in
derivatives products based on the underlying equity shares/indices. Mainly. there are two types
of equity derivative products - Futures & Options, popularly referred as the FnO segment.

Debt & Money market investments

When companies or government entities issuing debt instruments want to raise funds, they
'borrow' from investors. In return, they promise a steady and regular interest. This is how debt
instruments work in simple terms.

Buying a debt instrument can be considered as lending money to the entity issuing the
instrument.

Popular fixed-interest generating securities are corporate bonds, government securities,

treasury bills, commercial paper, and other money market instruments. The issuers of
debt instruments pre-decide the interest rate you will receive as well as the maturity period.
Hence, they are also known as 'fixed-income' securities.

In India, till recently, retail investors have not been very active in directly participating in these
debt instruments or government securities (G-Secs). Though RBI had decided to permit retail
investors to directly buy government securities to deepen the bond market, the sheer lack of
awareness about bonds or debt securities is the biggest hindrance. Historically, India has had
an equity culture and almost no direct exposure to bonds. Hence, banks attract the lion's share
of retail savings through fixed deposits However, debt investments are very popular through
the Debt funds of Mutual Fund houses.

The fundamental reason for investing in debt funds is to earn a steady interest income and
capital appreciation. Debt funds invest in a variety of securities, based on their credit ratings.
Debt funds try to optimise returns by investing across all classes of securities. This allows debt
funds to earn decent returns.

Money market investments are highly liquid in nature comprising of Treasury bills, commercial
paper, etc. Debt funds invests in these money market instruments which provide for higher
liquidity of the investments. The short-term debt funds like liquid funds focus on investments
in such money market instruments.

Mutual Funds & ETFs

Mutual fund investments in India have been gaining popularity in the recent times. I'm sure
many of you might have heard the Ad "Mutual Funds Sahi hai”

Essentially, the money pooled in by a large number of people (or investors) is what makes up
a Mutual Fund. This fund is managed by a professional fund manager.

It is a trust that collects money from a number of investors who share a common investment
objective. Then, it invests the money in equities, bonds, money market instruments and/or other
securities. Each investor owns units, which represent a portion of the holdings of the fund.

The income/gains generated from this collective investment is distributed proportionately

amongst the investors after deducting certain expenses, by calculating a scheme's Net Asset
Value or NAV.

We will learn about Mutual Funds and Exchange Trade Funds (ETFs) in detail in Module 3.

Gold & Gold ETFS

Investments are often made in terms of gold purchase.

Due to some influencing factors such as high liquidity and inflation-beating capacity, gold is
one of the most preferred investments in India. Gold investment can be done in many forms
like buying jewellery, coins, bars, gold exchange-traded funds, gold funds, sovereign gold bond
scheme, etc.
In conventional form, investment in gold was just buying physical gold in the forms of
jewellery, coins, billions, or artifacts It always has a risk of theft and burglary involved if you
are having physical gold with you.

The scenario has changed nowadays and investors have more options to invest such as gold
ETF and gold funds.

Gold ETFs (Exchanged Traded Funds) is similar to buying physical gold but the only
difference is you don't actually buy the physical gold. You don't have to go through the hassles
of storing the physical gold, instead, the gold bought is stored in Demat (paper) format.

On the other hand, gold funds deal with investing in gold mining companies.

Real Estate & REITS

Like gold, investment in real estate is another popular investment avenue by many investors in
India. Unlike gold investment, investments in real estate are relatively illiquid. We may not be
able to find buyers for our real estate property immediately.

Hence, as an alternative to directly investing in real estate, we could consider investing in real
estate funds or Real Estate Investment Trusts (REITs).

A real estate investment trust (REIT) is a corporation, trust, or association that invests directly
in income-producing real estate and is traded like a stock. A real estate fund is a type of mutual
fund that primarily focuses on investing in securities offered by public real estate companies.

Test Your Understanding 5

When you invest in equity shares on the stock exchange, which of these markets are you
dealing with?
a. Primary market
b. Secondary market
c. Tertiary market
d. Commodity market
Did you know?
NSE-World's Largest Derivatives segment
National Stock Exchange was the world's largest derivative exchange in terms of the number
of contracts traded for the year 2019-20 & 2020-21.
NSE Derivative segment deals with Equity Derivatives, Currency Derivatives, Commodity
Derivatives and Interest Rate Derivatives.

Test Your Understanding Solutions

TYU 1

Investments made in listed equity stocks provide for _____.

a. Better liquidity
b. Guaranteed capital appreciation
c. Safety of capital
d. All of the above.
Correct Answer: a. Better liquidity
Remark: Investments in equity stocks never provide any guaranteed returns, nor they
provide for safety of the capital.

TYU 2

In investments, ELSS for ____.

a. Equity Linked Savings Scheme
b. Exceptional Liquid & Safe Scheme
c. Enterprise Linked Social Security
d. All of the above

Correct Answer: a. Equity Linked Savings Scheme

TYU 3

Sovereign Gold Bonds scheme was introduced by the government in the year ____.
a. 2001
b. 2020
c. 2015
d. 2022

Correct Answer: c. 2015

TYU 4

An individual under PMJDY scheme can only exit this scheme after reaching the age of 60
years. True or False?
a. True
b. False

Correct Answer: a. True

TYU 5
When you invest in equity shares on the stock exchange, which of these markets are you
dealing with?
a. Primary market
b. Secondary market
c. Tertiary market
d. Commodity market
Correct Answer: b. Secondary market
Remarks: When you invest in the equity shares of the company through the Initial Public
Offer (IPO) or the Follow-up/Further Public Offer (FPO), then you will be dealing with the
primary market.